On June 13, 2023, the Office of Information and Regulatory Affairs, of the U.S. Government’s Office of Management and Budget, released the “Spring 2023 Unified Agenda of Regulatory and Deregulatory Actions,” which includes the short-term and long-term projects on the SEC’s regulatory agenda.

In a Statement about the agenda, Chair Gary Gensler said:

“Taken together, the items on this agenda would advance our three-part mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

Technology, markets, and business models constantly change. Thus, the nature of the SEC’s work must evolve as the markets we oversee evolve.

In every generation since President Franklin Roosevelt’s, our Commission has updated its ruleset to meet the challenges of a new hour. Consistent with our legal mandate, guided by economic analysis, and informed by public comment, this agenda reflects the latest step in that long tradition. Thus, I am pleased to support it.”

As you review the short-term agenda, you will find that both the SEC’s climate-related disclosures and cybersecurity risk projects are scheduled for the final rule process in October 2023.

As always, your thoughts and comments are welcome!

In the SEC’s December 14, 2022, Final Rule, Insider Trading Arrangements and Related Disclosures, the transition provisions provided:

• • Issuers that are SRCs will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after October 1, 2023.

• • All other issuers will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.

This language is clear with respect to which quarter would start this reporting for Form 10-Q, but was a bit unclear about when an annual report on Form 10-K or 20-F would require the annual disclosures.  On May 25, 2023, the staff issued three Compliance and Disclosure Interpretations to clarify this timing issue and address when proxy statements will require these disclosures and explain when a situation where a person with two plans may create an “effective cooling off period.”

As you read these C&DI’s, you will note that the transition for the quarterly disclosures is in fact different from the transition for annual disclosures.  Generally, the quarterly disclosures include information about officer and director 10b5-1 plans and the annual disclosures include information about insider trading policies and grants of equity awards made close in time to the release of material non-public information.

Question 120.26

Question: When are companies required to begin providing the quarterly Item 408(a) disclosures and the annual Item 402(x) and Item 408(b) disclosures (Item 16J of Form 20-F disclosures for foreign private issuers) in periodic reports?

Answer: Release No. 33-11138 states that companies other than smaller reporting companies will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F “in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.” Therefore, the following compliance dates apply:

• • • December 31 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-Q for the period ended June 30, 2023, and should continue to be provided in the Form 10-Q for the period ended September 30, 2023 and the Form 10-K for the fiscal year ended December 31, 2023.
    • June 30 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended June 30, 2023.
    • December 31 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
    • June 30 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2024.

Smaller reporting companies must comply with these new disclosure and tagging requirements in the first filing that covers the first full fiscal period that begins on or after October 1, 2023. Therefore, the following compliance dates apply:

• • • December 31 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended December 31, 2023.
    • June 30 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-Q for the period ended December 31, 2023.
    • December 31 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
    • June 30 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2025. [May 25, 2023]

Question 120.27 

Question: When are companies required to begin providing the disclosures in proxy or information statements?

Answer: For transition purposes only, companies other than smaller reporting companies must first provide this information in proxy statements for the first annual meeting for the election of directors (or information statements for consent solicitations in lieu thereof) after completion of the first full fiscal year beginning on or after April 1, 2023. Smaller reporting companies must first provide this information in proxy statements for the first annual meeting for the election of directors (or information statements for consent solicitations in lieu thereof) after completion of the first full fiscal year beginning on or after October 1, 2023.[May 25, 2023]

Question 120.28

Question: The Rule 10b5-1(c) affirmative defense generally is not available if a person has multiple Rule 10b5-1 contracts, instructions, or plans in place. However, Rule 10b5-1(c)(1)(ii)(D)(2) permits a person (other than the issuer) to maintain two separate Rule 10b5-1 plans at the same time so long as trading pursuant to the later-commencing plan is not authorized to begin until after all trades under the earlier-commencing plan are completed or have expired without execution. If an individual terminates the earlier-commencing plan (i.e., the earlier-commencing plan does not end by its terms and without any action by the individual), when can trading begin under the later-commencing plan?

Answer: Pursuant to Rule 10b5-1(c)(1)(ii)(D)(2), if an individual terminates the earlier-commencing plan, the later-commencing plan will be subject to an “effective cooling-off period.” The effective cooling-off period will begin on the termination date of the earlier-commencing plan and will last for the time period specified in Rule 10b5-1(c)(1)(ii)(B). On the other hand, if the earlier-commencing plan ends by its terms without action by the individual, the cooling-off period for the later-commencing plan is not reset and trading may begin as soon as the plan’s original cooling-off period is satisfied. Depending on when the later-commencing plan was adopted, this could be as soon as immediately after the earlier-commencing plan ends. See Footnote 180 of Release No. 33-11138.[May 25, 2023]

As a reminder, the Final Rule requires that Section 16 reporting persons comply with the amendments to Forms 4 and 5 filed on or after April 1, 2023.

The staff has prepared a very helpful Small Entity Compliance Guide which provides a good overview of the rule.

As always, your thoughts and comments are welcome!

While the FASB’s current technical agenda does not include landmark projects like revenue recognition and lease accounting, the Board is working on several projects that may significantly impact company reporting.  Four projects to watch are:

Segment Reporting Improvements

On October 6, 2022, the Board issued a proposed Accounting Standard Update to ASC 280 – Segment Reporting, that would expand segment disclosure requirements for public business entities.  While the new standard would not change how operating segments are identified or aggregated, it would require:

• • Disclosure, on an annual and interim basis of significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss,
  • Disclosure, on an annual and interim basis, of an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed under the significant expense principle and each reported measure of segment profit or loss, and
  • Disclosure of all annual information about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods.

In addition, the proposed ASU would clarify that multiple measures of segment profit or loss may be disclosed in certain circumstances and require all current and proposed disclosures for a public entity that has a single reportable segment

Enhanced Income Tax Disclosures

The Board’s tax project has evolved over time and is now focused on two key disclosure areas for public business entities:

• • The effective tax rate reconciliation, and
  • Cash paid for income taxes.

The FASB’s deliberations have focused on providing detailed information in each of these areas.  The proposed disclosures for the effective rate reconciliation include addressing eight specific categories and related qualitative disclosures.  For taxes paid the proposals focus on providing disaggregated information about taxes paid by jurisdiction.  Developing appropriate disclosures, particularly for companies that operate in multiple tax jurisdictions could be challenging.  In March of 2023 the FASB issued this Proposed ASU and you can read more in this Tentative Board Decisions document.  The Proposed ASU would also require certain new disclosures for private entities.

Disaggregated Expense Disclosure

This project is now focused on “improving the decision usefulness of business entities’ income statements through the disaggregation of any relevant expense line items.”  As you can read in this Tentative Board Decisions document, it is likely a proposed standard would focus on disclosures about selling expenses, costs capitalized to inventory, employee compensation, depreciation, amortization and other details.  In March 2023, the Board directed the FASB staff to draft a proposed ASU and decided on a 90-day comment period.  This new standard would apply to public business entities.  Companies may face challenges to accumulate this information and provide appropriate controls for these disclosures.

Accounting and Disclosure for Crypto Assets

While this project may not affect as many companies as the three discussed above, for companies that hold crypto assets its impact could be significant.  This project would require that crypto assets, as defined by the Board, would be accounted for at fair value with unrealized gains and losses recognized in income.  This would be a major change from the existing indefinite lived intangible asset accounting model currently applied to these assets.  You can read more in this March 23, 2023, Proposed Accounting Standards Update and this Tentative Board Decisions document.

While these projects are in process companies can certainly provide their thoughts and input to the Board.  In addition, given how each of these projects would present challenges to gather information and build appropriate controls, putting them on the planning horizon now likely makes sense.

The board is working on several other projects, and you can find the Board’s current Technical Agenda here.

As always, your thoughts and comments are welcome!

As we enter financial reporting periods beginning on or after April 1, 2023, here is a hopefully helpful reminder to include the new Rule 10b5-1 plan disclosures in your next quarterly report.  As a reminder, the SEC’s December 2022 Final Rule implementing changes to how individuals use 10b5-1 plans, also requires new disclosures about:

• • Officer and director plans, and
  • Company insider trading policies.

The rule became effective on February 27, 2023.

The new officer and director plan disclosures are required quarterly in both the 10-Q and 10-K.  The mechanics of this process is that S-K Item 408(a) disclosure requirements have been added to the Form 10-K Instructions in Item 9B and the Form 10-Q Instructions in Part II – Item 5.  These disclosures include details of adoption, modification and termination and material terms (other than pricing) of both 10b5-1 plans and “non 10b5-1 trading arrangements.”  You can find all the details in S-K Item 408.

For non-Smaller Reporting Companies, the new officer and director plan disclosures are required for fiscal periods, including quarters, that begin on or after April 1, 2023.  The transition date for Smaller Reporting Companies is periods that begin on or after October 1, 2023 .

These disclosures must be tagged with iXBRL.

The new annual requirements include disclosure of insider trading policies and procedures and disclosures surrounding option awards made to executives where the timing of the award is close in time to the release of material non-public information.

The timing for the new annual disclosures is a bit uncertain.  The Final Rule states that non-Smaller Reporting Companies:

“…will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.”

While this is clear for quarterly fiscal periods, it could be read to mean that the annual disclosures would not be required for years that end on December 31, 2023, but rather the year after that.  If this was indeed the intent of the rule, that will hopefully be clarified at some point by the staff.

As always, your thoughts and comments are welcome!

Almost two years ago, on July 15, 2021, the SEC charged the former CEO and CFO of FTE Networks, Inc. with perpetrating a multi-year accounting fraud.  The allegations included multiple misstatements, including overstating revenues and concealing the existence of conversion features in notes payable.  The SEC also alleged that the former officers stole money from the company.  The Department of Justice brought criminal charges.

In cases like this, the question of where were the auditors invariably arises.  In many cases the auditors were as much victims of the fraud as any other parties.  Audit procedures designed to find fraud provide “reasonable” rather than “absolute” assurance that fraud will be detected.  When the PCAOB and the SEC Enforcement Division investigate these kinds of situations and find that audits were conducted in accordance with Generally Accepted Auditing Standards (GAAS), no action is brought against the auditors and there is no public announcement of any kind.

In other cases, auditors may not have appropriately designed their audit to detect material fraud or not followed GAAS in other ways.  In these cases, there will be public announcements by the PCAOB or the SEC Enforcement Division.

The FTE case falls into the second of these categories and is an example of how separate cases against companies and their auditors move at different rates.  On February 28, 2023, almost two years after the original charges, the SEC instituted public administrative and cease-and-desist proceedings against the company’s auditor.  As you can read in the related Accounting and Auditing Enforcement Release, the proceedings allege several audit failures.

This auditor focused enforcement is particularly important as it fits together with the Chief Accountant’s October 2022 Statement about the auditors’ responsibilities for fraud detection.  You can read more in this blog post.

As always, your thoughts and comments are welcome!