All posts by George Wilson

SEC Enforcement Division Announces Fiscal Year 2022 Results

Hot Topic, Reporting

On November 15, 2022, the SEC Enforcement Division issued a press release announcing its fiscal year 2022 results.  As it did last year, the Commission again used this simpler release rather than a glossy annual report.  Highlights for the year include:

    • Money ordered in SEC actions in f/y 2022 actions totaled $6.439 billion, a significant increase over $3.852 billion for f/y 2021,
    • The Division filed 760 enforcement actions in 2022, an increase of 9 percent over the prior year, and
    • Actions included 169 “follow-on” cases to bar or suspend individuals.

You can read more details, including the SEC’s focus on individual accountability, along with commentary by SEC Chair Gary Gensler in this Press Release and accompanying addendum.

If you would like to hear a deeper discussion of the Enforcement Division’s report, you can check out this episode of our inSecurities Podcast where co-hosts Chris Ekimoff and Kurt Wolfe delve into the report with a number of experts and former inSecurities guests.  And, if you would like a deeper dive into accounting-related enforcement issues and the role of the Enforcement Division’s Chief Accountant, check out this episode of inSecurities where Chris and Kurt discuss these issues along with the auditor’s responsibility for identifying fraud with Matt Jacques, a former Chief Accountant for the SEC’s Enforcement Division.

As always, your thoughts and comments are welcome!

PCAOB Proposes New Audit Firm Quality Control Standards

Reporting, Role of the Audit Committee

On November 18, 2022, the PCAOB issued a proposed auditing standard designed to modernize and improve audit firm quality control standards.  The current standards were developed by the AICPA and were part of the interim standards adopted at the time the PCAOB was originally formed in 2002.

The proposed standards incorporate feedback from advisory groups and a 2019 concept release.   According to the PCAOB’s News Release, the proposed quality control standards are “grounded in proactively identifying and managing risks to quality, with a feedback loop from ongoing monitoring and remediation designed to drive continuous improvement.”  In addition, the proposed standards would require that firms annually evaluate their quality control system and report the results on a new Form QC.

The Board has asked for comments by February 1, 2023.

As always, your thoughts and comments are welcome!

Watch for Two New Form 10-K Cover Page Check Boxes

10-K Tips, Reporting

Whenever the SEC changes details such as cover page check boxes or the titles of item numbers in its forms, there is invariably a bit of confusion and inconsistent updating.  While these matters are more minutia than material, not being up to date makes a company look a bit careless in the reporting process.

One area to watch as we approach year-end 2022 is the addition of two new check boxes on the Form 10-K cover page.  These new check boxes will be added by the SEC’s “Compensation Recovery Listing Standards and Disclosure Rules” (or “clawback” rules) adopted on October 26, 2022.  You can read the details of the rules in this Press Release and the related Fact Sheet and Final Rule.

The Final Rule will become effective 60 days after publication in the Federal Register.  If this effective date is prior to a company filing its Form 10-K, the new check boxes will be required on the cover page of that Form 10-K.

The two new check boxes will appear immediately before the text “Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)”.  The check boxes will read as follows:

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. □

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). □

As always, your thoughts and comments are welcome!

Is Form 12b-25 Ever Required?

10-K/10-Q Tips, Reporting

Many companies have been grateful for the extension provided by Form 12b-25.  While the extension period is not long (five calendar days for a quarterly report and 15 calendar days for an annual report), so long as the delayed report is filed within this grace period a company does not lose its timely filer status.  Perhaps most importantly, it also retains its S-3 eligibility.

But what if a company knows that it will not be able to file its report within the extension period provided by Form 12b-25?  Should it still file a Form 12b-25?  Thanks to some research by Gary Brown, Partner at Nelson Mullins Riley & Scarborough LLP and SEC Institute workshop leader, we know the answer to this question is a resounding yes! 

This answer is found in a Compliance and Disclosure Interpretation:

Question 135.02

Question: Is a company required to file a Form 12b-25 even when it anticipates filing a periodic report after the Rule 12b-25 extension period. 

Answer: Yes. Under Rule 12b-25(a), a company must file a Form 12b-25 for a periodic report that is filed after the due date regardless of whether it anticipates filing the periodic report within the extension period. See Exchange Act Release No. 16718 (Apr. 2, 1980). If the company does not anticipate filing the periodic report within the extension period, it should not check the box in Part II of Form 12b-25. [September 30, 2008]

So, even when a company does not expect to be able to file the delayed report within the extension period, Form 12b-25 should still be filed.

Here a few quick notes about Form 12b-25:

Generally, Form 12b-25 is filed the day after the deadline for the periodic report.

This form appears on the EDGAR system as a form NT, either NT 10-K or NT 10-Q.

Lastly, as an important reminder, remember that Instruction II(a) and Part III of Form 12b-25 require disclosure of the reason the report cannot be filed on time:

PART III — NARRATIVE

State below in reasonable detail why Forms 10-K, 20-F, 11-K, 10-Q, 10-D, N-CEN, N-CSR, or the transition report or portion thereof, could not be filed within the prescribed time period.

(Attach extra Sheets if Needed)

This disclosure should be complete and accurate, as this SEC Enforcement Press Release against eight companies demonstrates.  These companies failed to appropriately disclose that the causes for their late filings were possible or anticipated financial statement restatements.

As always, your thoughts and comments are welcome!

FASB Exposure Draft Addresses Joint Venture Formation 

Hot Topic, Reporting

Accounting for joint venture formation has never been formally addressed in the accounting literature.  As a result, the complexities of accounting for contributed assets and services and related issues have created diversity in practice.  Some joint ventures account for contributed assets at fair value while others have carried over the historical cost of the entities contributing the assets.

To address these issues, on October 27, 2022, the FASB issued a Proposed Accounting Standards Update titled “Business Combinations—Joint Venture Formations (Subtopic 805-60).”  The proposed ASU would require joint ventures as defined in the codification to apply the principles of business combination accounting to the formation process.  This would result in most assets and liabilities being measured at fair value, with certain exceptions that are consistent with existing exceptions in the business combination accounting guidance.  One important note, while the term “joint venture” is used to describe many types of entities, the definition of joint venture in the codification is narrow and would not include many entities colloquially referred to as joint ventures:

Corporate Joint Venture

A corporation owned and operated by a small group of entities (the joint venturers) as a separate and specific business or project for the mutual benefit of the members of the group. A government may also be a member of the group. The purpose of a corporate joint venture frequently is to share risks and rewards in developing a new market, product or technology; to combine complementary technological knowledge; or to pool resources in developing production or other facilities. A corporate joint venture also usually provides an arrangement under which each joint venturer may participate, directly or indirectly, in the overall management of the joint venture. Joint venturers thus have an interest or relationship other than as passive investors. An entity that is a subsidiary of one of the joint venturers is not a corporate joint venture. The ownership of a corporate joint venture seldom changes, and its stock is usually not traded publicly. A noncontrolling interest held by public ownership, however, does not preclude a corporation from being a corporate joint venture.

While the proposed ASU would not apply to all entities referred to as joint ventures, for entities that meet this definition the proposed ASU would hopefully reduce diversity in practice.

The FASB asks that comments be submitted by December 27, 2022.

As always, your thoughts and comments are welcome!

SEC Adopts Final Pay Versus Performance Disclosure Requirements

Uncategorized

On August 25, 2022, the SEC adopted a final rule to implement the pay versus performance disclosure requirements mandated by the Dodd-Frank Act.  The rules are intended to provide insight into the relationship between compensation “actually” paid to senior executives and financial performance.

The rules will apply to all reporting companies, except foreign private issuers, registered investment companies, and Emerging Growth Companies.  Smaller Reporting Companies will be permitted to provide scaled disclosures.

The disclosures are included in new Item 402(v) of Regulation S-K.  The disclosures will start with a table that will include specified executive compensation and financial performance measures.  The form of the table in new Item 402(v) is:

The information will be provided for five years.  As the above column headings illustrate, the information required in the table will be provided for the company’s principal executive officer (“PEO”) and, as an average, for the other named executive officers (“NEOs”).  Included in the disclosure will be the Summary Compensation Table measure of total compensation.  It will also include a new measure, “executive compensation actually paid.”  The computation of “executive compensation actually paid” is specified in the rule, and in general starts with total compensation from the Summary Compensation Table, adjusted for certain pension and share-based payment benefits.

The financial performance measures to be included in the table are:

  • Total shareholder return (“TSR”) for the company;
  • TSR for the company’s peer group;
  • The company’s net income; and
  • A “Company-Selected Measure” that should represent “the most important financial performance measure used to link compensation actually paid to the NEOs to company performance for the most recently completed fiscal year.”

The new disclosure must include “a clear description of the relationships between each of the financial performance measures included in the table and the executive compensation actually paid to its PEO and, on average, to its other NEOs over the five most recently completed fiscal years.”

The relationship between TSR and peer group TSR must also be discussed.

The new disclosure will also include other financial performance measures that a company determines are its most important measures of performance.

This information must be tagged with Inline XBRL.

You can find details in the accompanying Fact Sheet and final rule.

The new rules will be effective 30 days after publication in the Federal Register.  Companies will be required to make these new disclosures in proxy and information statements that include Item 402 executive compensation disclosure for fiscal years ending on or after December 16, 2022.

You can read statements from Chair Gary Gensler and other Commissioners at the “Speeches and Statements” section of sec.gov.

As always, your thoughts and comments are welcome!

When Is a 10b5-1 Trading Plan Not a 10b5-1 Trading Plan?

Hot Topic

How company executives and others use Rule 10b5-1 trading plans has created controversy and in fact been the subject of SEC rule making.  A recent indication that the SEC Enforcement Division is scrutinizing these plans is this September 21, 2022, Press Release announcing an enforcement action against two executives of Cheetah Mobil related to the use of a 10b5-1 plan.

The case centers on this provision of Rule 10b5-1:

Affirmative defenses.

(1)

(i) Subject to paragraph (c)(1)(ii) of this section, a person’s purchase or sale is not “on the basis of” material nonpublic information if the person making the purchase or sale demonstrates that:

(A) Before becoming aware of the information, the person had:

(1) Entered into a binding contract to purchase or sell the security,

(2) Instructed another person to purchase or sell the security for the instructing person’s account, or

(3) Adopted a written plan for trading securities;

According to the SEC Order:

“At both the time they established the March Trading Plan and when they sold Cheetah Mobile securities pursuant to it, Sheng Fu and Ming Xu knew about the material negative trend in revenues from the Advertising Partner relationship. Sheng Fu and Ming Xu knew or recklessly disregarded that this information was material and nonpublic. Moreover, because both Sheng Fu and Ming Xu were aware of this material nonpublic information when they created the March Trading Plan, the March Trading Plan did not comport with the requirements of Exchange Act Rule 10b5-1.”

Both officers paid civil money penalties and agreed to several conditions to trading in Cheetah Mobile’s securities, including requirements that they provide notice to an independent third party about any trading activity and any new 10b5-1 plans, to observe a 120-day “cooling off” period before trading under any new 10b5-1 plan, and to only have one such plan at any time.  These requirements will sound familiar if you have read the SEC’s proposed rule.

As always, your thoughts and comments are welcome!

FASB Moves Its Crypto Asset Project Forward

Hot Topic

When the FASB added Accounting for and Disclosure of Crypto Assets to its technical agenda, investors, auditors, preparers, regulators and other constituents were glad that the Board would address the complex and challenging accounting issues presented by crypto assets.  At its October 12, 2022 meeting, as you can read in this Tentative Board Decisions report, the FASB addressed perhaps the most complex issue surrounding crypto assets, measurement basis. 

Most believe that crypto assets fall into the current accounting framework for indefinite-lived intangible assets.  Many of the FASB’s constituents believe the historical cost with impairment testing approach provided in this model does not communicate the most relevant information about crypto assets.  It would appear that the FASB agrees.  The Board reached a tentative conclusion that crypto assets should be carried at fair value with gains and losses included in comprehensive income.  Many would agree that this is a much more reasonable and relevant approach for these kinds of volatile assets.

As always, your thoughts and comments are welcome!

SEC Extends Several Rulemaking Comment Periods

Reporting, SEC Hot Topic

On October 7, 2022, the SEC announced that it was extending the comment periods for eleven rulemaking releases and one request for comment.  The affected rulemakings include the SEC’s proposed rules for disclosures related to climate matters, stock repurchases and cybersecurity.  It also applies to the SEC’s SPAC proposal.

The extensions were made because of a technical problem in the Commission’s internet comment form.  The affected comment periods will be open until 14 days after the publication of the related release in the Federal Register.

As you can read in the related Press Release and Reopening Release, anyone who submitted a public comment related to the proposed rulemakings between June 2021 and August 2022 should check to see that their comment is included in the comment file at sec.gov.  If it is not included, it should be resubmitted.

As always, your thoughts and comments are welcome.

SEC Releases Draft Strategic Plan for Fiscal Years 2022-2026

Reporting

On August 24, 2022, the SEC released its Draft Strategic Plan for Fiscal Years 2022-2026.  The plan is based on the three-part mission of the SEC:

The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

The draft plan begins with three goals to work towards accomplishing this mission:

  1. Protect working families against fraud, manipulation, and misconduct; 
  2. Develop and implement a robust regulatory framework that keeps pace with evolving markets, business models, and technologies; and 
  3. Support a skilled workforce that is diverse, equitable, and inclusive and is fully equipped to advance agency objectives. 

The plan describes the SEC’s vision and values along with the steps the organization will take to accomplish each goal.  Included in the planned steps are:

For Goal 1:

Pursue enforcement and examination initiatives focused on identifying and addressing risks and misconduct that affects individual investors.

For Goal 2:

Update existing SEC rules and approaches to reflect evolving technologies, business models, and capital markets

A review of all the steps included in the plan provides many insights into the future direction of the SEC.

The related request for comments on the draft strategic plan can be found here.

As always, your thoughts and comments are welcome!