As we move towards the end of the third-quarter and begin preparations for year-end reporting we are presenting a series of posts focused on common questions and problems in quarterly and annual reports.

One of the interim reporting issues we emphasize in our Workshops deals with the timing of the auditor’s review of the financial statements in Form 10-Q.  Regulation S-X Article 10-01(d) states:

(d) Interim review by independent public accountant. Prior to filing, interim financial statements included in quarterly reports on Form 10-Q (17 CFR 249.308(a)) must be reviewed by an independent public accountant using applicable professional standards and procedures for conducting such reviews, as may be modified or supplemented by the Commission. If, in any filing, the company states that interim financial statements have been reviewed by an independent public accountant, a report of the accountant on the review must be filed with the interim financial statements.

While this requirement may seem fairly innocuous, and it is simple to confirm that the auditors have completed their review, in September 2018 the SEC actually enforced against five companies for not having their reviews performed prior to filing Form 10-Q’s.   You can read the details here.  All five of the companies paid substantial fines.  It is clear that the SEC believes the protections that investors get from interim reviews are very important.

As you read the cases you might begin to wonder “how did the SEC find out that Forms 10-Q had been filed without review?”  In the release the SEC says:

These actions are the Commission’s first enforcement proceedings against an issuer for violating the Regulation S-X interim review requirement and resulted from a review of filings, staff comment letters and other metrics that indicated potential violations.

It would be interesting to know what the “other metrics” are!

As always your thoughts and comments are welcome!

On September 26, 2019 the Division of Corporation Finance announced that they have reorganized into a new streamlined structure with seven industry offices.  In addition, the new structure will support focusing on developing risks and evolving disclosures and include a new office to evaluate the effectiveness of the review program.  You can read the details and find instructions to learn which group your company is in here.

In addition, CorpFin’s Filing Review Process document has been revised and is actually much shorter!

As always, your thoughts and comments are welcome!

Last week we reminded folks that our IPO program will be held on October 25, 2019.  In a timely IPO related development, on September 26, 2019 the SEC finalized a rule to allow all issuers, not just EGC’s, to “test the waters” in the IPO process.  We explored this proposal in this post from last June and discussed the implications of extending this JOB’s Act provisions to all companies.  You can read the details of the final rule in this press release and accompanying Fact Sheet and learn all about its implications in our IPO program.

The IPO market has been in the news the last several months with deals including Uber, Lyft and now WeWork in the headlines.  Interestingly, along with all these high-profile deals there have been several successful deals that have not attracted headlines.  If you are on the offering path now or may be in the future you can learn this process “from start to finish” at our Public Offering program on October 25, 2019.  The program will be presented live in New York and also via webcast.  Details include:

• Focus on drafting key securities offering documentation
• Learn to work effectively with the SEC – including registration, disclosure and publicity restrictions
• Earn up to 2 hours Ethics CLE credit learning the importance of ethics in due diligence in the offering process – comfort letters, 10b-5 statements and in-house counsel considerations

You can get more information and register here.

As always, your thoughts and comments are welcome!

As the debate surrounding the impact of quarterly reporting on company management and investor behavior continues, CFA Institutehas completed a survey of its global membership in a report titled “The Case for Quarterly and Environmental, Social, and Governance Reporting,”  which provides valuable data and insights for this discussion.CFA Institute has more than 164,000 members worldwide and is the not-for-profit organization that awards the Chartered Financial Analyst® (CFA) credential (as well as several others).

The report’s executive summary provides an overview of the survey results:

“Respondents, however, indicate that quarterly reports remain more important to investors than earnings releases. These quarterly reports provide a structured information set that follows accounting standards and regulatory guidelines and include incremental financial statement disclosures and management discussion and analysis. In addition, quarterly reports offer greater investor protections as they are certified by the officers of the company, subject companies to greater legal liability, and are reviewed by company auditors.”

The report also provides a discussion of CFA’s position about long-term versus short-term thinking:

“CFA Institute has long contended that when companies focus on long-term strategy, they are looking at a time horizon of three to five years or longer, not six months. Accordingly, extending the reporting period from three to six months would have little impact. We believe that a better approach to deterring short-termism would be to focus on companies’ incentive structures. Companies interested in encouraging a long-term view should consider adopting five-year performance periods in their incentive plans. In addition to incentives, general corporate leadership, tone at the top, and company culture are important contributors to long- vs. short-termism.”

And, as an interesting final note, the survey respondents also weighed in on ESG reporting issues with this overall summary of the results:

“…survey respondents and roundtable participants say that they incorporate governance factors into their investment analysis to a greater extent than they incorporate environmental and social factors. Investors, however, note that ESG means different things to different people. Hence, clear definitions of the terms and related metrics are needed. They also believe that specific ESG and sustainability disclosures should be a regulatory requirement for public companies and that securities regulators should either develop ESG disclosure standards or support an independent standards setter (i.e., a single, global standards setter in this field) to develop such standards.

You can read all the details here, and out thanks to CFA Institute for providing this valuable report and permission to pass it on to you in this post.

As always, your thoughts and comments are welcome!

Without going back into a lot of history, the “scandal” in the early 2000’s surrounding several banks manipulating LIBOR has resulted in a very real likelihood that when the obligation banks have to provide information to determine LIBOR expires, this index rate may “disappear”.  Given the number of instruments and number of markets that use LIBOR, the transition from this rate to some other reference rate has the potential to create significant risks and cause significant disruption.

Both the SEC and the FASB have been working on guidance to assist companies in their disclosure and reporting obligations before, during, and after this potential transition.

On July 12, 2019, the SEC published a “Staff Statement on LIBOR Transition”.  The Staff Statement addresses several issues companies may want to consider in managing this transition including addressing risks in existing contracts, processes for new contracts, IT considerations, and impact on risk management practices.  The Staff Statement also reviews disclosure considerations for companies before, during, and after a transition.

In addition, the FASB has undertaken a project and on September 5, 2029 issued a proposed ASU to provide accounting and reporting relief will be appropriate for this transition.  The project summary is available here, and the proposed ASU is available here.  While no decisions are final, the Board is considering relief for hedging relationships and whether such a change in reference rate could be a debt modification.

In case you are not familiar with one of the likely new reference rates, “SOFR” or Secured Overnight Financing Rate, here is information about this rate from the Federal Reserve Bank of New York.

As we approach third quarter-end and year-end, these resources hopefully  provide helpful information as we evaluate the impact of this risk of change.

As always, your thoughts and comments are welcome!

On August 8, 2019 the SEC issued a proposed rule to continue its disclosure modernization, update and simplification process.  Interestingly, this rule was issued without an open meeting for discussion.  Continuing the work of the SEC’s 2018 Disclosure Update and Simplification Final Rule and the March 2019 Disclosure Modernization and Simplification Final Rule, this proposed rule would update disclosures in three parts of Regulation S-K:

            S-K Item 101 – Description of the Business

            S-K Item 103 – Legal Proceedings

            S-K Item 105 – Risk Factors

According to the proposed rule release:

“The proposed amendments are intended to update our rules to account for developments since their adoption or last amendment, to improve these disclosures for investors, and to simplify compliance efforts for registrants. Specifically, the proposed amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material.”

Here is a list of details from the proposed rule organized by S-K Item.  You can read more about each proposed change starting at page 10 of the release.

Revise Item 101(a) to be largely principles-based, requiring:

Disclosure of information material to an understanding of the general development of the business and eliminating a prescribed timeframe for this disclosure; and

In filings made after a registrant’s initial filing, only an update of the general development of the business with a focus on material developments in the reporting period with a hyperlink to the registrant’s most recent filing (e.g., initial registration statement or more recent filing if one exists) that, together with the update, would contain the full discussion of the general development of the registrant’s business.

Revise Item 101(c) to:

Clarify and expand its principles-based approach, with disclosure topics drawn from a subset of the topics currently contained in Item 101(c);

Include, as a disclosure topic, human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business; and

Refocus the regulatory compliance requirement by including material government regulations, not just environmental laws, as a topic.

Revise Item 103 to:

Expressly state that the required information may be provided by including hyperlinksor cross-references to legal proceedings disclosure located elsewhere in the document in an effort to encourage registrants to avoid duplicative disclosure; and

Revise the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000 to adjust for inflation.

Revise Item 105 to:

Require summary risk factor disclosure if the risk factor section exceeds 15 pages;

Refine the principles-based approach of Item 105 by changing the disclosure standard from the “most significant” factors to the “material” factors; and

Require risk factors to be organized under relevant headings, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption.

It is interesting to note that may of the changes emphasize the principles-based nature of the SEC’s disclosure requirements, and the proposed rule contains an interesting discussion about using this principles-based model.

As a last note, if you want to dig deeply into the proposed revised wording in Regulation S-K, you can find the proposed changes beginning at page 108 of the proposed rule.

As always, your thoughts and comments are welcome!