Friday, June 14, 2019

Disclosure issues dominate PLI panel on SEC Corp Fin issues

By Amanda Maine, J.D.

This year’s Practising Law Institute 34th Midyear SEC Reporting & FASB Forum featured a discussion on recent developments at the Division of Corporation Finance from the regulatory and private practice perspectives. The panelists tackled topics such as the Commission’s proposal to adjust accelerated filer definitions to relieve certain companies from the auditor attestation requirement for internal controls and the implementation of amendments under the FAST Act.

FAST Act. Melissa Raminpour, accounting branch chief in the SEC’s Division of Corporation Finance, outlined amendments implementing the FAST Act’s provisions modernizing and simplifying certain disclosure requirements in Regulation S-K, which the Commission approved on March 20, 2019. One of the amendments generally permits exclusion of discussion of the earliest of the three years financials in MD&A if the discussion was included in a prior SEC filing.

The FAST Act rule amendments also included a new rule on redacted exhibits, Raminpour said. Unlike the confidential treatment request (CTR) process that preceded it, the new rule does not require writing to the staff for permission to redact certain exhibits. Instead, issuers can redact it, and the staff will review the redaction when the filing is received, Raminpour explained. The new process also protects redacted material from being subject to FOIA requests and eases the SEC’s record retention burdens. Raminpour noted that the redacted exhibits process will be separate from the regular comment letter process, which helps protect information from being inadvertently disclosed. She added that issuers should not send the staff information unless they ask for it and that comments on the redacted exhibits will be addressed orally over the phone.

Proposal on acquired and disposed business disclosures. Kendra Decker, who leads the SEC Regulatory Matters group at Grant Thornton, discussed the Commission’s May 3 proposal concerning financial disclosures about acquired and disposed businesses. One aspect of the proposed rules is updating the significance tests under Regulation S-X Rule 102(w). While the asset test for significance will remain the same, under the proposed amendments, the revised investment test would compare investment in acquired business to aggregate worldwide market value of registrant's voting and non-voting common equity. According to Decker, this revision is a result of waiver requests from companies who say that their total assets aren’t a reflection of the market value of the company. In addition, the income significance test would simplify net income component calculation by using income or loss from continuing operations after income taxes. The proposed rule would also include a new provision relating to investment company acquisitions, which are currently treated the same way as other companies.

Other aspects of the proposal include an amendment to S-X Rule 3-05, which would, inter alia, permit registrants to provide the acquired business’s audited abbreviated financial statements without first seeking relief from the Commission in certain circumstances. It would also expand the use financial statements prepared according to IFRS and simplify pro forma financial information, Decker said.

Decker recommended reading Commissioner Robert Jackson’s statement on the proposal, noting that while he did vote in favor of issuing the proposing release, he expressed concern that it could lead to companies painting a better picture of acquisitions to investors even when it may not be in the interest of the long-term investor.

Proposed changes to definitions of accelerated filer and large accelerated filer. Decker also drew attention to the Commission’s proposed amendments to the definitions of accelerated filer and large accelerated filer. The proposal was approved for comment by a 3-to-1 vote at an open meeting on May 9 with Commissioner Jackson dissenting. The proposal is aimed at tailoring these definitions to exclude certain companies from the auditor attestation for internal controls requirement under the Sarbanes-Oxley Act. The premise, according to Decker, is meant to include “pre-revenue” companies that are growing but feel that capital would be better spent on operations rather than expenses related to an ICFR audit. These companies tend to include a lot of biotech and pharmaceutical companies that spend a great deal of resources on research and development, Decker explained.

Frequency of quarterly reporting. The SEC, possibly in response to an August 2018 tweet by President Trump, issued a request for comment on the nature and timing on quarterly reporting by public companies and its impact on earnings releases and guidance. Decker pointed out that the SEC has in the past solicited comments on streamlining SEC reporting, including the value of quarterly reporting, which it addressed in a 2016 concept release.

Decker noted that the SEC has received around 70 comment letters on the Commission’s request for comment, which was significant because it is in the “pre-proposal” stage. Most stakeholders would wait until it hits the proposal stage to send a comment letter, she said. The staff is currently poring through the letters, but it is not currently on the Commission’s regulatory flexibility agenda, so Decker does not anticipate new activity on the issue for a while.

Reporting considerations and practice issues. Raminpour advised that issues the staff considers when reviewing financial statements include cybersecurity and the impact of current events. Regarding cybersecurity, the staff will expect companies to disclose in MD&A if a cyber breach has resulted in material costs to the company. The company should also consider disclosing the magnitude of the breach, whether remedial actions were taken, and if it implicated the company’s internal controls. According to Raminpour, it is more likely that the staff will have comments if there is an actual cyber breach as opposed to just outlining the risk of a cyber breach.

Current events that companies should take into consideration when disclosing risk factors include Brexit, interest rate changes, and tariffs, Raminpour advised. Regarding Brexit, Raminpour recommended consulting Corporation Finance Director Bill Hinman’s March 2019 speech in London where he outlined six Brexit-related disclosure questions that the staff will have in mind when evaluating annual reports. Companies should also disclose how they are impacted by interest rate changes, including the impact on liquidity and the not-to-distant future demise of LIBOR. Raminpour also said that companies should disclose how recently-imposed tariffs might impact operations, including the cost impact on the company.