All posts by George Wilson

A Proxy Reminder – Enforcement Focus on Perks Disclosure Continues!

Enforcement, SEC Hot Topic

As companies prepare for their next proxy statement, the SEC Enforcement Division has sent a reminder to focus carefully on perks disclosures.  In the latest of its on-going series of perks related enforcement actions, on December 17, 2024, Express, Inc. was charged with failure to disclose $979,269 worth of perks paid to its CEO.  (You can read about earlier cases in this blog post.)

A majority of the undisclosed perks were related to the CEO’s authorized personal use of chartered aircraft.  The company did not use the appropriate definition of perks when analyzing these costs, which resulted in the disclosure failure.

In the related Accounting and Auditing Enforcement Release, the SEC noted that its 2006 amendments to executive compensation disclosure requirements in S-K Item 402 clarify that:

 “An item is not a perquisite or personal benefit, if it is integrally and directly related to the performance of the executive’s duties. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.”

The 2006 amendments also state that the idea of a benefit that is “integrally and directly related” to job performance is intended to be very narrow and distinguishes between something provided because the executive needs it to do their job (thus making it integrally and directly related to the performance of duties), and something provided for some other reason, even where that other reason can involve “both company benefit and personal benefit.”

According to the SEC, Express “incorrectly applied a standard whereby a business purpose would be sufficient to determine that certain items were not perquisites or personal benefits that required disclosure.”  This is very similar to the issue in an earlier case involving Dow Chemical.

Express self-reported and cooperated extensively with the Enforcement Division.  Based on these actions the company was not fined but did enter into a cease-and-desist order.  Express was delisted from the NYSE in March 2024 and in April 2024 filed for bankruptcy and terminated its registration.

As always, your thoughts and comments are welcome.

SEC Updates Shareholder Proposal Guidance

SEC News

On February 12, 2025, the SEC issued Staff Legal Bulletin 14M, addressing several matters related to the shareholder proposal process.  Staff Legal Bulletin 14M rescinds SLB 14L and addresses the scope and application of certain parts of Rule 14a-8, including the economic relevance exclusion in Rule 14a-8(i)(5), the ordinary business exclusion in Rule 14a-8(i)(7), and issues of micromanagement.  It presents the SEC’s current views on several other issues, including proof of ownership letters and the use of email. It also includes a section of frequently asked questions.

As always, your thoughts and comments are welcome!

Commissioner Peirce Addresses Potential Regulatory Directions

SEC News

On January 27, 2025, SEC Commissioner Hester M. Peirce delivered the Alan B. Levenson Keynote Address at the Northwestern Securities Regulation Institute.  Continuing her practice of devising engaging titles for her speeches, these remarks are titled Sheep in the Steep.  She begins with a description of how the Sierra Nevada bighorn sheep “navigate the treacherous alpine terrains of their habitat.”  She then compares “the bighorn—making their way in a terrain that is steep, varied, and fraught with danger, including predators, avalanches, and disease” to “public companies navigating the hazardous regulatory, political, and societal landscape of today.”

Commissioner Peirce suggests seven steps to “offer a path toward more level, predictable terrain” for public companies.  Each of the seven steps, along with her thoughtful discussion behind each step, make for interesting reading.  Her step six is particularly relevant for professionals involved in public company reporting:

“A sixth step in bringing companies back to normal is for the Commission staff in our Division of Corporation Finance and Office of the Chief Accountant to re-double efforts to provide guidance to companies about the many disclosure issues that arise in the normal course of business. In the registration statement review process, staff should communicate early and often so new and seasoned issuers alike can have increased confidence in offering timelines. Of course, engagement on timing alone is not enough. The Commission also should encourage the expert staff to engage with public companies and their lawyers and accountants on difficult questions about the application of new and existing rules. This engagement should be dynamic and interactive, not formulaic. Commission staff time is well spent on these fundamental functions of a disclosure regulator, which in recent years have languished due to other Commission priorities.”

As always, your thoughts and comments are welcome!

Acting SEC Chairman Uyeda Statement on Climate-Related Disclosure Rules

SEC Hot Topic, SEC News

On February 11, 2025, Acting SEC Chairman Mark T. Uyeda issued a Statement announcing that he has directed the SEC staff to request that the Eighth Circuit not schedule arguments for the consolidated litigation challenging the SEC’s climate-related disclosure rules.  According to the Statement this will “provide time for the Commission to deliberate and determine the appropriate next steps in these cases.”

You can read more, including concerns about the lack of statutory authority for the Commission to promulgate these rules, in the Statement.

As always, your thoughts and comments are welcome!

Another Channel Stuffing Disclosure Enforcement

Enforcement, Hot Topic

On November 12, 2024, the SEC announced yet another enforcement action focused on using sales incentives and similar strategies to achieve revenue targets without appropriate disclosure to investors about the use and impact of such strategies.  This action focuses on Elanco Animal Health Inc. (Elanco), which was spun off by Eli Lilly and Company in 2018. (You can read about earlier cases in this blog post.)

As is typical of this kind of case, it began with a surprise stock drop.  According to the SEC’s  Order:

“On May 7, 2020, Elaco announced an expected $160 million decline in revenue for the first and second quarters of 2020 that caused its share price to drop by over 13%. The statement cited the uncertainty of the COVID-19 pandemic and a ‘strategic change’ in Elanco’s inventory management practices – including reductions in channel inventory – as the reason for the decline. Elanco publicly stated that it had not anticipated a strategic change to reduce channel inventory levels when it started the year.”

What the company did not disclose was that from the first quarter of 2019 to the first quarter of 2020 it had relied on incentives to generate sales to distributors to meet revenue targets.  Internally Elanco referred to these sales as the “Quarter-End Incentivized Sales” or “Incentivized Sales.”   Achieving revenue targets was particularly important for Elanco as a newly public company.  As is usually the case, this practice could not go on indefinitely because inventory channels had become overstocked.

When management knows there is a potential problem on the horizon (e.g., failing to meet sales growth expectations, as in this case), the known-trend MD&A requirements of S-K Item 303 require that companies disclose:

“Known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.”

Again, from the SEC’s Order:

“From May 2019 through May 2020, Elanco’s public disclosures misled investors by attributing its revenue and revenue growth to strong consumer demand for its products while failing to disclose the material impact of its Quarter-End Incentivized Sales and the reasonably likely risk that such sales practices could have a negative impact on revenue in future quarters.

Elanco’s use of Quarter-End Incentivized Sales created an uncertainty or event that was known to Elanco’s senior management and reasonably expected to have a material effect on its future revenues.”

The SEC also included the failure of Elanco’s disclosure controls and procedures in the enforcement.

One important aspect of this case relates to revenue recognition accounting.  There was no issue with how and when Elanco recognized revenue.  No accounting issues were raised in the AAER.  This enforcement is all about disclosure.

Elanco entered into a Cease-and-Desist Order and paid a $15,000,000 civil money penalty.

As always, your thoughts and comments are welcome!

Enforcement Division 2024 Results

Enforcement, SEC News

On November 22, 2024, the SEC published a summary of the Enforcement Division’s fiscal-year 2024 results.  As it has in prior years, the results were published in a Press Release and accompanying Addendum where you can find all the details about types and numbers of cases.

In fiscal year 2024 the Division filed 583 total enforcement actions, a 26 percent decline from 2023.  The 583 total actions included 431 “stand-alone” actions and 93 “follow-on” administrative proceedings to bar or suspend individuals.

Continuing its focus on gatekeepers, during 2024 the SEC obtained 124 officer and director bars.

The SEC obtained orders for $8.2 billion in financial remedies in 2024, the highest amount in SEC history.

If you would like to get in in-depth perspective on the report, you can listen to our InSecurities podcast episode in which hosts Chris Ekimoff and Kurt Wolfe discuss the results with former SEC Enforcement Director Gurbir Grewal.

As always, your thoughts and comments are welcome!

Enforcement for Cybersecurity Risk Disclosure Shortfalls

Enforcement

On October 22, 2024, the SEC announced settled enforcement actions against four companies focused on disclosures about cybersecurity risks and actual cybersecurity intrusions.  The four companies were Avaya Holdings Corp., Check Point Software Technologies Ltd, Mimecast Limited, and Unisys Corp.  All four of the cases have their roots in the SolarWind’s Orion software cybersecurity hack.

According to the SEC all four of the companies downplayed the impact of cybersecurity events.  In the SEC’s Press Release Jorge G. Tenreiro, Acting Chief of the Crypto Assets and Cyber Unit, stated, “In two of these cases, the relevant cybersecurity risk factors were framed hypothetically or generically when the companies knew the warned of risks had already materialized.”  This is a recurring issue in cybersecurity cases and SEC comments.  In another of the cases the company described a breach as having involved access to a limited number of email messages when in fact the company knew that 145 files, some of which involved sensitive company information, had been breached.  The Unisys Corp. case also focused on deficient disclosure controls and procedures.

You can read more details about each case and find links to each Order in the SEC’s Press Release.

All the companies entered into cease-and-desist orders and paid fines ranging from $990,000 to $4 million.

As always, your thoughts and comments are welcome!

SECI’s Period-End Reporting Programs – Register Now!

Reporting, SECI News

As we approach December 31, 2024, SECI is presenting several One-Hour Briefings focused on period-end reporting:

Eleventh Annual Form 10-K/Proxy Tune-Up – December 9, 2024

Tenth Annual Dealing With MD&A Hot Topics  – December 10, 2024

Fifth Annual Form 20-F Tune-Up – February 14, 2025

Fifth Annual Disclosure Committee Tune-Up – January 28, 2025

SECI’s Annual SEC Reporting and FASB Forum (the 40th edition!), is another great resource for keeping current with new rules and regulations emanating from the SEC, FASB, and PCAOB as you prepare for year end.  Attend in-person or view the webcasts scheduled for December 5-6, 2024, in San Francisco and December 19-20, 2024, in New York.

Also be sure to check out SECI’s One-Hour Briefing series focused on frequent SEC comment areas:

SEC Management’s Discussion and Analysis Comments (on-demand)

SEC Non-GAAP Measures and Metrics Comments (on-demand)

SEC Operating Segment Comments (on-demand)

SEC Revenue Recognition Comments (on-demand)

SEC Climate-Related Comments – December 2, 2024

Lastly, be sure to visit our Blog often as we will be exploring frequently encountered problems in Forms 10-K and 20-F in an upcoming series.

To view SECI’s full  curriculum, including our new Operating Segment Disclosures Workshop and our comprehensive two-day SEC Reporting Skills for Financial Professionals, visit us at: https://www.pli.edu/programs/seci

As always, your thoughts and comments are welcome!

SECI’s New Form 20-F Workshops – Register Now!

SECI News

Don’t miss SEC Institute’s two new Form 20-F workshops for foreign private issuers.  To learn more and to register for these interactive virtual workshops click the links below:

Form 20-F (Part One): Key Information, Risk Factors & Part I Disclosures Essentials Workshop 2024

Form 20-F (Part Two): Parts II & III Disclosures Essentials Workshop 2024

You can find our entire curriculum of conferences and workshops here.

As always, your thoughts and comments are welcome!

CorpFin Updates SPAC Co-Registrant Details in FAQs for Voluntary Submission of Draft Registration Statements

SEC News

On September 16, 2024, CorpFin updated its FAQs for companies that submit draft registration statements for nonpublic review. The JOBS Act provided this nonpublic review process for Emerging Growth Companies, and in 2017 CorpFin announced it would provide a nonpublic review option for many other companies.  The current update to the related FAQs makes a change for SPAC transactions.

The SECs Final Rules for SPACs created a requirement for companies acquired by a SPAC to be a co-registrant in a de-SPAC transaction registration statement.  The update addresses when a co-registrant’s CIK and related information should be included in the EDGAR process:

(19) Question:

If a registrant uses the confidential submission process to submit a draft registration statement in connection with a de-SPAC transaction, when should it include any co-registrant’s CIK and related submission information in the EDGAR Filing Interface?

Answer:

In EDGAR Release 24.3, EDGAR was enhanced to allow co-registrants on draft registration statement submissions. See Section 7.2.1 Accessing the EDGARLink Online Submission of the EDGAR Filer Manual. The primary registrant must include the co-registrant’s CIK and related submission information in EDGAR when it submits the draft registration statement. See Section 7.3.3.1 Entering Submission Information of the EDGAR Filer Manual. The draft registration statement must also contain the information required by the applicable registration statement form, including required information about the target company. Co-registrants do not need to separately submit the draft registration statements or related correspondence in EDGAR.

One interesting aspect of these FAQs is that finding them is a bit of a treasure hunt.  Beyond the “What’s New” notice on September 16, this Announcement, most recently updated on June 24, 2020, has a link to the FAQs.

As always, your thoughts and comments are welcome.