Even with the disruption of the coronavirus the SEC is moving forward with its regulatory agenda.  On March 12, 2020 the SEC finalized a significant part of this agenda by changing the definition of Accelerated Filer.  The rule finalized a proposal made on May 9, 2019.

The Final Rule will be effective 30 days after publication in the Federal Register and applies to all filings due on or after the effective date.

The major change in the Final Rule is that companies with public float of over $75 million but less than $700 million AND less than $100 million in revenues will now be Non-Accelerated Filers.  These companies, which had been Accelerated Filers, will be able to use the longer 90 day and 45 day deadlines for Forms 10-K and 10-Q, respectively, and will not be required to obtain an auditors attestation report on their ICFR.  (As in the existing rules public float will be measured on the last business day of the company’s second fiscal quarter.)

This table from page 53 of the Final Rule summarizes how the definitions of  Non-Accelerated Filer, Accelerated Filer, Large Accelerated Filer and Smaller Reporting Company will fit together:

The Final Rule will also add a check box to the cover page of Form 10-K to indicate if the report includes an auditors attestation report on ICFR.

In the press release accompanying the Final Rule the SEC makes a very important point about ICFR for the population of Non-Accelerated Filers:

 Following the adoption of the amendments, smaller reporting companies with less than $100 million in revenues will continue to be required to establish and maintain effective internal control over financial reporting (ICFR). Their principal executive and financial officers must continue to certify that, among other things, they are responsible for establishing and maintaining ICFR and have evaluated and reported on the effectiveness of the company’s disclosure controls and procedures. In addition, these smaller companies will continue to be subject to a financial statement audit by an independent auditor, who is required to consider ICFR in the performance of that audit. As a result of these amendments, and unlike larger issuers, these smaller companies will no longer be required to obtain a separate attestation of their ICFR from an outside auditor. These smaller issuers will be able to redirect the associated cost savings into growing their businesses. Business development companies will receive analogous treatment as a result of the amendments.

 The Final Rule, on page 81, also provides these estimates of the number of companies expected to be affected:

We estimate that the amendments will result in 527 additional issuers being classified as non-accelerated filers, and therefore no longer subject to the filing deadlines and ICFR auditor attestation requirement applicable to accelerated filers.  Of these, an estimated 154 issuers are EGCs and are thereby already exempt from the ICFR auditor attestation requirement.

Among the total 527 affected issuers, an estimated 492 issuers are accelerated filers (or large accelerated filers that have public float of less than $560 million) that will be newly classified as non-accelerated filers because they have annual revenues of less than $100 million and are eligible to be SRCs.

The Final Rule also changes the public float thresholds to change from Accelerated Filer to Non-Accelerated Filer to $60 million and the threshold to change from Large Accelerated Filer to Accelerated Filer to $560 million.  The Final Rule also adds that a company can exit Accelerated or Large Accelerated Filer status if it meets the definition of a smaller reporting company based on the revenue test in that definition.

As always, your thoughts and comments are welcome!

As you can read in this Announcement it is business as usual for CorpFin, as many staff members are teleworking.  The staff anticipates being able to meet normal time frames for filing reviews and inquires.

As always, your thoughts and comments are welcome!

On March 27, 2020 PLI will present a One-Hour Briefing titled “Coronavirus Considerations: SEC Disclosure, Labor & Employment, Insurance, Litigation, Breach of Contract and Force Majeure Issues”.  The briefing will be conducted by Adele Hogan of Nelson Mullins who is also an SECI workshop leader and speaker at several other PLI programs.  You can get all the details and register here.

As always, your thoughts and comments are welcome!

As we discussed in this post, the Coronavirus 2019 or COVID-19 continues to impact public companies.  On March 4, 2020 the SEC provided conditional relief for companies affected by COVID-19.  The Order  provides an additional 45 days to file certain reports, including Forms 10-K, 10-Q and 20-F.

If companies need to use this regulatory relief, they must file a current report on Form 8-K or Form 6-K by the later of March 16 or the original deadline for the filing.  This current report must include details of why the affected report cannot be filed on time.  The relief includes other requirements such as consideration of a risk factor explaining the impact of COVID-19 on the company and, if other parties are contributing to the delay, a statement from that other party.  The Order provides details about how use of the relief generally will not affect S-3 eligibility and WKSI status.

The Order also includes relief for furnishing proxy statements to shareholders in areas affected by COVID-19.

The SEC is continuing to monitor this situation and may provide additional relief as events unfold.

You can read all the details in this announcement and the related Order.

As always, your thoughts and comments are welcome!

In this post we explored an SEC enforcement case related to ICFR.  In that case MetLife reported that they had two material weaknesses and that as a result their ICFR was not effective.  The relevant section of their December 31, 2017 Form 10-K ICFR report said:

 Management evaluated the design and operating effectiveness of the Company’s internal control over financial reporting based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”). Solely because of the material weaknesses in internal control over financial reporting described below, in the opinion of management, MetLife, Inc. did not maintain effective internal control over financial reporting as of December 31, 2017.

 A related question that must be addressed when there is a material weakness in ICFR is whether or not the company’s Disclosure Controls and Procedures (DCP) are effective.  As a reminder, Exchange Act Rule 13a-15 defines DCP:

(e) For purposes of this section, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

DCP clearly applies to an entire report.  In a Form 10-K or 10-Q DCP applies to all the non-financial statement disclosures but also to the financial statements.  This means that ICFR is essentially a subset of DCP.  If a company has a material weakness in ICFR, and ICFR is a subset of DCP, how does that material weakness affect the effectiveness of DCP?  Most likely, unless you can demonstrate otherwise with compensating controls or other factors, the company’s DCP are not effective either.  Hence, this was MetLife’s DCP report in their December 31, 2017 Form 10-K:

 Evaluation of Disclosure Controls and Procedures

 The Company maintains disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, and that such information is accumulated and communicated to Company management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 Company management, including the CEO and CFO, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act as of December 31, 2017, the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, the CEO and CFO concluded that the disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting described below.

As always, your thoughts and comments are welcome!

Disclosure considerations for risks and impacts of the Coronavirus are evolving at a fast pace.  On February 19, 2020, the SEC Chairman, CorpFin Director and Chief Accountant and the PCAOB Chairman issued a Statement addressing reporting considerations and potential reporting relief about this rapidly evolving situation.  (The Statement also addresses certain multinational auditing considerations.)  The Statement includes this suggestion:

“we urge issuers to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements.”

The Statement also specifically mentions subsequent event disclosure considerations.

Another resource that companies may find valuable is this memo from Nelson Mullins which addresses areas beyond financial reporting, including:

• the SEC’s forward-looking disclosure obligations and decision-making matrix when outcomes are uncertain but a known trend or uncertainty will be (or is “likely to cause” under the proposed SEC rules issued January 30, 2020) a material change

• selected disclosure considerations by industry

• environmental, social and governance (“ESG”) considerations

• the role Board members and executives have in SEC disclosure

• enhanced labor and employment law, data privacy and cybersecurity considerations

As always, your thoughts and comments are welcome!

As many of you may know, SEC Institute’s Associate Director Bob Laux, who is instrumental in making SECI’s Midyear and Annual Forums such great programs, actually wore two professional hats for many years.  In addition to his position at SECI, Bob was also the North American Lead of the International Integrated Reporting Counsel.  With this wealth of experience Bob helps us all understand more about integrated reporting and how it is more than just “ESG” disclosures, this proposed addition to S-K Item 101(c), in the SEC’s August 9, 2019 proposed rule to modernize certain parts of Regulation S-K, caught our attention:

A description of the registrant’s human capital resources, including in such description any human capital measures or objectives that management focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel).

Here are some of Bob’s thoughts on this issue:

This proposed change is a perfect example of moving beyond the traditional reporting model to a more complete reporting model.  As described in The Conference Board Report, “The Emergence of Integrated Reporting”:

Over the last 30 years, intangible assets have moved from 20 percent to over 80 percent of the value of public companies, yet decision making within companies has failed to keep pace. Financial reporting has made even less progress in addressing these changes. As they take ESG impacts ever more seriously, US investors are urging management and the board to adopt a reporting method that accounts for both tangible and intangible assets. “Integrated reporting” is such a method: it provides a framework that highlights all the ways a company creates and will continue to create value.

 For instance, human capital – people’s competencies, capabilities, experience, and motivation to innovate – is often the most significant asset an organization has as business models become centered on people and technology.  The SEC rule proposal is consistent with the concept of integrated reporting and previous comments from SEC Chairman Jay Clayton, where he indicated:

Today, human capital and intellectual property often represent an essential resource and driver of performance for many companies.  This is a shift from human capital being viewed, at least from an income statement perspective, as a cost . . . I think investors would be better served by understanding the lens through which each company looks at their human capital.   Does management focus on the rate of turnover, the percentage of their workforce with advanced degrees or relevant experience, the ease or difficulty of filling open positions, or some other factors?

As always, your thoughts and comments are welcome!

In this post we discussed the SEC’s new Release about the use of metrics.  One of the points the SEC emphasized in this release was consistency.  If a company changes how a metric is computed or changes its presentation to discontinue use of a previously presented metric, it should make appropriate disclosure about the change and the reasons for the change.

This Investor FAQ Document from Square provides an example of such a disclosure.  While this example is about a non-GAAP measure rather than a pure metric, it is an example of making disclosures about changes in the presentation of information outside the financial statements.

You will see that this document starts with two fundamental questions:

What change is being made to Square’s reporting?

Why were you using the Adjusted Revenue measure?

While there is no formal standard about such disclosure, it is clearly important to tell investors about such changes in a full and forthright manner.

As always, your thoughts and comments are welcome.

On January 30, 2020 the SEC issued formal guidance in a Financial Release about the use of key performance indicators and metrics.  This new Release, number 33-10751 or FR 87, was issued at the same time as a proposed rule to amend the MD&A requirements and eliminate S-K Item 301 Selected Financial Data and the quarterly information required by S-K Item 302.

While the MD&A changes and elimination of S-K Items 301 and 302 are all proposed, the new guidance about the use of metrics is not a proposed rule and its requirements will be effective when it is published in the Federal Register.

(We will put up a post when the Release is published in the Federal Register.)

Its imminent effectiveness makes becoming familiar with the Release important when preparing earnings releases as it may well apply to key performance indicators and metrics in year-end earnings releases and will almost certainly apply to such measures used in first quarter earnings releases.

As a brief review the SEC addressed Key Performance Indicators in its 2003 MD&A release, (33-8350 – FR 72):

1. Focus on Key Indicators of Financial Condition and Operating Performance

As discussed, one of the principal objectives of MD&A is to give readers a view of the company through the eyes of management by providing both a short and long-term analysis of the business.   To do this, companies should “identify and address those key variables and other qualitative and quantitative factors which are peculiar to and necessary for an understanding and evaluation of the individual company.”

Financial measures generally are the starting point in ascertaining these key variables and other factors. However, financial measures often tell only part of how a company manages its business. Therefore, when preparing MD&A, companies should consider whether disclosure of all key variables and other factors that management uses to manage the business would be material to investors, and therefore required.   These key variables and other factors may be non-financial, and companies should consider whether that non-financial information should be disclosed.

Over the years the staff has asked companies to provide additional information about their use of metrics in the comment process.  You can find some examples in this post which provides deeper background about metrics, this post with example SEC comments on the use of metrics and this post about an enforcement case focused on metrics.

In this new Release the SEC builds on and formalizes what it did in FR 72 and its comments about metrics in filing reviews.  The major points the SEC focuses on in the new Release include:

1. Metrics should be used with care to assure they are not misleading.

The release states:

“When including metrics in their disclosure, companies should consider existing MD&A requirements and the need to include such further material information, if any, as may be necessary in order to make the presentation of the metric, in light of the circumstances under which it is presented, not misleading.”

This language harkens back to Exchange Act Rule 12b-20:

12b-20   Additional information.

In addition to the information expressly required to be included in a statement or report, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading.

A perhaps extreme example of this situation would be presenting a metric that shows a business as improving and getting stronger when on a GAAP basis it is experiencing widening losses and potential liquidity issues.

2.  When presenting a metric companies should consider whether an existing set of requirements such as GAAP, IFRS or the SEC’s non-GAAP measure guidance in Regulation G or Regulation S-K Item 10(e) applies.

3.  When presenting a metric, companies should consider what additional information should be presented to “provide adequate context” for investors to understand the metric and the information it conveys. The Release indicates that the SEC would “generally expect” these disclosures:

“A clear definition of the metric and how it is calculated;

A statement indicating the reasons why the metric provides useful information to investors; and

A statement indicating how management uses the metric in managing or monitoring the performance of the business.”

The release also notes that if there are “estimates or assumptions underlying the metric or its calculation careful consideration should be given to disclosure of such items to assure the metric is not materially misleading”.

4.  The release emphasizes consistency in the preparation and presentation of metrics, an issue that the SEC has dealt with in the comment process. For example, when a company changes how a metric is computed it likely should explain why the change was made and what the impact of the change was. Additionally, if a new metric is presented or a previously presented metric is discontinued, this should likely be discussed and the metric for previous periods may need to be recomputed.

The Release states:

“If a company changes the method by which it calculates or presents the metric from one period to another or otherwise, the company should consider the need to disclose, to the extent material:

(1) the differences in the way the metric is calculated or presented compared to prior periods,

(2) the reasons for such changes,

(3) the effects of any such change on the amounts or

(4) such other differences in methodology and results that would reasonably be expected to be relevant to an understanding of the company’s performance or prospects.

Depending on the significance of the change(s) in methodology and results, the company should consider whether it is necessary to recast prior metrics to conform to the current presentation and place the current disclosure in an appropriate context.”

5.  FR 87 also emphasizes that metrics should be considered in a company’s disclosure controls and procedures. Disclosure controls and procedures (DCP) are defined in Exchange Act Rule 13(a)-15:

(e) For purposes of this section, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Since DCP are applicable in reports “filed or submitted” and earnings releases are furnished to the SEC in an Item 2.02 Form 8-K it is important that metrics that provide material information be considered in the DCP process.  A likely starting point in this consideration is: are metrics included in your disclosure committee’s discussions?

Clearly the SEC will begin to focus on how companies use metrics and the adequacy of disclosures around metrics.  As an example of issues to consider, you could review this section at the beginning of Facebook’s most recent Form 10-K titled “Limitations of Key Metrics and Other Data” or the section about metrics at the beginning of Twitter’s 2018 Form 10-K.

In our next post we will review an example of the disclosures a company made when they decided to change their presentation of a metric like non-GAAP measure.

As always, your thoughts and comments are welcome.

ICFR is clearly a hot topic on the SEC and PCAOB agendas as the recent MetLife enforcement and other developments demonstrate.  And, ICFR over unusual transactions and new accounting standard implementation present significant challenges.  Reed Wilson, one of the workshop leaders of our Form 10-K In-Depth Workshop, who is also a member of the FEI Committee on Corporate Reporting (Yes, that is CCR! How about “Down on the Corner” as a theme song?), alerted us to some very useful preparer build ICFR aids from CCR at FEI.  The first deals with ICFR over the business combinations process:

A Guide to Designing and Operating an Effective System of Internal Control Over Business Combinations

CCR also published two Insight Guides dealing with ICFR considerations for the Lease Accounting Standardand CECL.

Thanks to Reed and FEI and, as always, your thoughts and comments are welcome!