Friday, November 10, 2017

SEC staff reminds registrants of availability of Rule 3-13 waivers

By Jacquelyn Lumb

Chief Accountant Mark Kronforst in the SEC’s Division of Corporation Finance, speaking at the Practising Law Institute’s conference on securities regulation, reminded registrants that the staff is willing to grant waivers from certain disclosures in order to facilitate capital formation. He referred to remarks by Chairman Jay Clayton to the Economic Club of New York last July in which Clayton advised that issuers can request modifications to their financial reporting requirements in certain circumstances under Regulation S-X Rule 3-13 where it may not be material to the total mix of information available to investors. Clayton said the staff is placing a high priority on responding with timely guidance.

The Division of Corporation Finance’s Office of the Chief Accountant has updated its Financial Reporting Manual to include contact information for waiver requests. According to the manual, the staff has the authority, where consistent with investor protection, to permit registrants to omit or to substitute required financial statements. The requests should be submitted via email and a link is provided in the manual.

One of the panelists noted that there was little transparency with respect to waivers that have been granted. Kronforst said to talk to the staff if there is a problem with the reporting requirements, especially if it affects capital formation, such as acquisitions under Rule 3-05. The staff has been responding in about five days. Kronforst reiterated that there is no need for a certified letter or a FedEx delivery for the request. The email link that is provided is fine, he advised.

John White, a former director of the division and now a partner at Cravath, Swaine & Moore, provided an example of a request in which he was involved. A foreign private issuer was seeking an initial listing in the U.S., but its auditor had a conflict from three years back that would impair its independence under the rules. A waiver was granted to permit the company to provide two years of audited IFRS financial statements with the third year’s financial statements provided but unaudited. White said it was a critical waiver in obtaining a listing in the U.S.

Kronforst added that the staff may request financial statements that have not been provided. That is fairly rare but it allows the staff to adapt the rule as it deems appropriate.

New GAAP. The panel discussed what SEC Chief Accountant Wesley Bricker refers to as new GAAP—the standards on revenue recognition, leasing, and financial instruments. Bricker said it is close to “exam time,” and these standards should be at or near the top of registrants’ agendas. Michael Gallagher with PricewaterhouseCoopers reported that most registrants are choosing the modified retrospective approach to the revenue recognition standard. The full retrospective method requires a lot more work, he noted.

The PCAOB issued an audit alert on the revenue recognition rules. Gallagher said the alert does not include any new requirements, but reminders of certain requirements that are relevant to the auditors’ consideration of companies’ implementation of the new standard in upcoming interim reviews and year-end audits, such as the SAB 74 disclosures about the transition. Gallagher said SAB 74 is a useful risk management tool. He emphasized the importance of internal controls and good processes during the transition.

Non-GAAP. Kronforst advised that the staff continues to pay attention to the use of non-GAAP measures, but the comments have slowed to a trickle, a status that he hopes will continue. Bricker noted that if there are any material changes in a company’s GAAP policy, the auditor is briefed about it, and he recommended that audit committees consider doing the same for any material non-GAAP changes.

Segment reporting. The staff continues to issue comments on segment reporting, according to Kronforst, but he predicted it will not be a major topic on this year’s speaking circuit. A lot of people are asking about comments on revenue recognition by early adopters. Kronforst said the sample size is too small at this time to provide any guidance.

In closing, the panelists were asked to provide their takeaways from the discussions. Gallagher said the new standard on leases has lots of sleeper issues and will be a lot of work. Kronforst reiterated the availability of Rule 3-13 waivers. He said there is a lot of lore out there, so rather than relying on guidance from 1992, ask the staff. Bricker highlighted the revised auditor’s report. He suggested that audit committees may want to try a dry run and flesh out their communication strategy.

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