Category Archives: Hot Topic

Chairman Atkins’ Speech – “Revitalizing America’s Markets at 250”

Hot Topic, SEC News

On December 2, 2025, SEC Chairman Paul S. Atkins delivered a speech at the New York Stock Exchange titled “Revitalizing America’s Markets at 250.”  In his speech he discusses the history of our country and capital markets, addressees the impact of disclosure regulation, and enumerates possible disclosure reforms.

In one section of his remarks Chairman Atkins states:

“Over the years, and particularly over the past two decades, special interest groups, politicians, and—at times—the SEC itself have weaponized the disclosure regime that Congress created for our marketplace, in an effort to advance social and political agendas that stray far from the SEC’s mission of facilitating capital formation; protecting investors; and ensuring fair, orderly, and efficient markets.”

He also states:

“One of my priorities as Chairman is to reform the SEC’s disclosure rules with two goals in mind. First, the SEC must root its disclosure requirements in the concept of financial materiality. Second, these requirements must scale with a company’s size and maturity.”

He then outlines areas for possible reform, including simplifying executive compensation disclosures, scaling disclosure rules based on company size, and expanding the IPO on-ramp.

As always, your thoughts and comments are welcome!

SEC Investor Advisory Committee to Discuss Recommendations for AI Disclosure

Hot Topic, SEC News

On December 4, 2025, at 10:00 a.m. EST, the SEC Investor Advisory Committee (IAC) will hold a virtual public meeting which will include discussion about a draft recommendation to the Commission for disclosure by companies about their use of artificial intelligence.  The draft recommendation would require issuers to:

  • Adopt a definition of “artificial Intelligence”,
  • Disclose board oversight mechanisms, if any, for overseeing the deployment of AI, and
  • Report on how issuers are deploying AI and, if material, the effects of AI deployment on internal business operations, and consumer facing matters.

The meeting will be webcast live on the SEC’s website.  You can find the full agenda for the meeting and learn more in this Press Release.

An Example of Dealing with a Possible Restatement – Whistleblower Information Included!

Hot Topic, Role of the Audit Committee

In our June 11, 2025, One-Hour Briefing “Navigating a Financial Restatement in SEC Reporting,” Kurt Wolfe and Chris Ekimoff, who hosted PLI’s inSecurities podcast, discussed dealing with a possible restatement.  While hopefully none of us ever have to deal with this kind of situation, it is important to be prepared should this kind of problem ever arise.

As a real-world example, you can review this July 1, 2025, Form 8-K disclosure by PetMed Express, Inc. in which the company says:

[T]he Audit Committee has advised management that it has received anonymous reporting through the Company’s third-party-administered whistleblower hotline regarding: the timing of revenue recognition with respect to certain autoship orders in the fiscal fourth quarter of 2025, some of which resulted in customer complaints; a fiscal fourth quarter 2025 $50 coupon promotion to customers and its potential impact on Company key-performance indicators (KPIs) regarding new customers; and the Company’s culture and control environment. The Audit Committee has engaged external legal counsel with other external advisors to investigate these reports. The investigation is still ongoing, no conclusions have been reached, and the Company cannot predict its duration or outcome.

The company filed a Form 12b-25, which appears on its EDGAR list as Form NT10-K, on June 16, 2025.  As of the date of this post, July 9, 2025, the company had not filed its Form 10-K.  As discussed in our briefing, there are a number of related issues that arise in this kind of situation, such as this Form 8-K that discusses the implications of the company receiving a notification about non-compliance with the NASDAQ listing rules requiring timely filing of all SEC reports.

As always, your thoughts and comments are welcome!

Non-GAAP Measures on the SEC Investor Advisory Committee Agenda

Hot Topic, SEC News

On May 29, 2025, the SEC announced that its Investor Advisory Committee will meet on June 5, 2025 and that one of the panels the committee will host is titled “Beyond the GAAP: Market Perspectives on Non-GAAP Financial Disclosures.”  The meeting will be open to the public and webcast.

The meeting agenda provides details about the members of the panel and the focus of the discussion. According to the agenda, the issues the panel will address include:

    • What areas of current regulations on non-GAAP measures, if any, could be strengthened or clarified?
    • Would greater standardization of certain non-GAAP measures benefit investors?
    • What challenges or benefits exist in implementing industry-specific non-GAAP reporting guidelines?
    • How will AI impact the quality and transparency of non-GAAP reporting?
    • Could AI be used to detect potentially misleading non-GAAP disclosures?

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!

Insider Transaction and Beneficial Ownership Reporting – An Enforcement Reminder

Enforcement, Hot Topic

On September 25, 2024, the Enforcement Division announced settled actions against 23 companies and individuals relating to Section 16 and Section 13 reporting.  The various actions involved:

Failure of individuals to file Section 16 reports;

Failure of companies to report delinquent Section 16 reports; and

Failure of companies to file Forms 13D, 13G, 13F, and Section 16 reports.

The companies and individuals involved paid fines totaling $3.8 million.  The Enforcement Division included a link to a September 27, 2023 announcement of a similar sweep involving 11 cases, making it clear that this continues to be a focus of their work.

As always, your thoughts and comments are welcome.

Still an Enforcement Focus – More Attempts to Limit Whistleblower Protections

Enforcement, Hot Topic

On September 9, 2024, the SEC announced settled charges against seven companies for attempting to limit whistleblower rights through provisions in employment, separation and other agreements.  As you can read in the SEC’s Press Release and the related Orders, one  company tried to force employees to waive their right to whistleblower awards such as those the SEC pays to qualified whistleblowers.

This case is the latest in a litany of recent enforcement actions, including against J.P. Morgan for attempting to limit customers’ ability to blow the whistle and against D.E. Shaw and Co. L.P., Monolith Resources. and CBRE, Inc. for using employee agreements that violated whistleblower protection rules.

All these cases and the related civil penalties send direct and clear reminders to proactively review employment, termination and similar agreements to assure they do not run afoul of the whistleblower protection rules.

As always, your thoughts and comments are welcome!

Yet Another Cybersecurity Enforcement Action

Enforcement, Hot Topic

On June 18, 2024, the SEC announced a settled enforcement action against R.R. Donnelly & Sons Co. focused on both ICFR and disclosure controls and procedures related to cybersecurity risk.  As you can read in the related Order, the company used an outside service provider to help monitor cybersecurity matters.  The service provider notified the company’s security personnel about a “network ransomware intrusion.”  Based in part on input from the service provider, R.R. Donnelly did not take further action or conduct a deeper investigation.  In this case the SEC maintains that R.R. Donnelly did not maintain effective ICFR related to cybersecurity risk because the company did not have appropriate controls to respond to these warnings.  In addition, the Order maintains that the company’s disclosure controls and procedures did not appropriately inform management responsible for making disclosure decisions about cybersecurity incidents.

The company, which cooperated with the SEC in the investigation, entered into a cease-and-desist order and paid a $2.125 million civil penalty.

In reaction to this enforcement, Commissioners Hester M. Peirce and Mark T. Uyeda gave a Statement titled “Hey, look, there’s a hoof cleaner! Statement on R.R. Donnelley & Sons, Co.,” which provides an interesting discussion of administrative versus accounting controls related to cybersecurity issues.

You can read about earlier cybersecurity related enforcement actions in this post which involves a CISO and this post which also mentions disclosure controls and procedures.

As always, your thoughts and comments are welcome!

Focus on SEC Comments – Another Common Non-GAAP Comment

Hot Topic, SEC Comment of the Week

Levi Strauss & Co. included the following “schedule” to reconcile various non-GAAP measures to the most directly comparable GAAP measures in its Form 10-K for the year ended November 27, 2022:

As you review this schedule (also take note of the very last line, it has a sort of hidden non-GAAP measure problem), it is apparent that the company did not follow a long-standing position of the staff as stated in this Compliance and Disclosure Interpretation (C&DI):

Question 102.10

Question 102.10(a): Item 10(e)(1)(i)(A) of Regulation S-K requires that when a registrant presents a non-GAAP measure it must present the most directly comparable GAAP measure with equal or greater prominence. This requirement applies to non-GAAP measures presented in documents filed with the Commission and also earnings releases furnished under Item 2.02 of Form 8-K. Are there examples of disclosures that would cause a non-GAAP measure to be more prominent?

Answer: Yes. This requirement applies to the presentation of, and any related discussion and analysis of, a non-GAAP measure. Whether a non-GAAP measure is more prominent than the comparable GAAP measure generally depends on the facts and circumstances in which the disclosure is made. The staff would consider the following to be examples of non-GAAP measures that are more prominent than the comparable GAAP measures:

      • Presenting an income statement of non-GAAP measures. See Question 102.10(c).

(Note:  Balance of the C&DI is omitted)

The above C&DI works in tandem with this incremental discussion of what is considered a non-GAAP income statement:

Question 102.10(c): The staff considers the presentation of a non-GAAP income statement, alone or as part of the required non-GAAP reconciliation, as giving undue prominence to non-GAAP measures. What is considered to be a non-GAAP income statement?

Answer: The staff considers a non-GAAP income statement to be one that is comprised of non-GAAP measures and includes all or most of the line items and subtotals found in a GAAP income statement. [December 13, 2022]

As you would expect, the prominence of this information in Levi Strauss and Co.’s Form 10-K resulted in a comment based on the above C&DIs:

Form 10-K for the Fiscal Year Ended November 27, 2022

Management’s Discussion and Analysis of Financial Condition and Results of Operations Non-GAAP Financial Measures

Adjusted Gross Profit, Adjusted SG&A, Adjusted Net Income and Adjusted Diluted Earnings per Share, page 58

    1. We note that you appear to present full income statements to reconcile your non-GAAP measures on pages 58 and 59. Please tell us your consideration of Questions 102.10(a), 102.10(b), and 102.10(c) of the Compliance and Disclosure Interpretations on Non-GAAP Financial Measures and Item 10(e)(1)(i)(A) of Regulation S-K. This comment also applies to your Form 10-Q for the quarter ended February 26, 2023 and Exhibit 99.1 to Form 8-K furnished on January 25, 2023.

The company’s response was direct and to the point, but unfortunately did not address the presentation of the last line in the schedule above:

The Company respectfully acknowledges the Staff’s comment and confirms that in future filings it will reconcile its non-GAAP measures to the most directly comparable GAAP measures without presenting a non-GAAP income statement. The Company expects that this will be substantially similar to the reconciliation included in Appendix A, which has been illustratively amended for the Staff’s reference.

Appendix A provided individual reconciliations for the non-GAAP measures in the original non-GAAP income statement.  Here is an example of one of the schedules:

However, this was not the end of the comment process.  Because the information presented by Levi Strauss includes a non-GAAP EPS amount, the SEC issued this follow-on comment:

  1. We note that on the last page of Appendix A, you disclose Adjusted Diluted Earnings Per Share at the bottom of your reconciliation of net income to Adjusted Net Income. Please revise to present a reconciliation of diluted EPS to Adjusted Diluted EPS. Additionally, wherever you present a Non GAAP margin measure in Appendix A, please revise to disclose the most comparable margin presented in accordance with GAAP.

The company’s response included an appropriate reconciliation:

The Company respectfully acknowledges the Staff’s comment and confirms that the Company will present a reconciliation of diluted EPS to Adjusted Diluted EPS and include comparable margins presented in accordance with GAAP whenever we present a non-GAAP margin measure in future periodic filings. The Company expects that this will be substantially similar to the reconciliation included in Appendix A, which has been illustratively amended for the Staff’s reference.

After this response the staff sent Levi Strauss and Co. a closing letter.

As always, your thoughts and comments are welcome!