Even before the Trump tweet, discussions regarding interim reporting requirements for U.S. public companies had been ongoing for several years.  In fact, going back to 2015, the Securities and Exchange Commission’s Advisory Committee on Small and Emerging Companies considered the advantages and disadvantages associated with discontinuing quarterly reporting.  In 2016, the Director of the Commission’s Division of Corporation Finance addressed the issue in a speech in Europe, noting that, “The United Kingdom has stopped mandating that companies provide quarterly financial reports to investors. Lately, some commentators have asked the Commission to re-think the need for quarterly reporting by U.S. issuers, which has been a staple of the U.S. regulatory system since 1970, advocating that this frequency leads to short-term thinking by investors and company management. These commentators note that financial reporting that focuses on short-term performance is not conducive to building sustainable businesses because it steers management to focus on short-term goals and performance.”  Flash forward a few years, and Title XXII Section 2201 of the JOBS Act 3.0 requires that the Securities and Exchange Commission conduct an analysis regarding the costs and benefits of quarterly reporting on Form 10-Q, especially for emerging growth companies.  This provision may have been influenced by a report published by various trade groups, including SIFMA, about which we recently blogged.  In that trade group report, a recommendation is made that emerging growth companies be given the option to issue a press release with their quarterly results rather than be required to file a quarterly report on Form 10-Q.  The trade group report states that quarterly reports have become longer and more detailed, and therefore producing such reports has become more expensive.  In the trade group report, the focus was on costs and reporting burdens.

At the same time, the debate relating to quarterly earnings guidance has been reinvigorated.  Some have argued that quarterly reporting distracts managers from focusing on long-term goals and observe that public companies are all too concerned with short-term gains at the expense of long-term investments. The same commentators have focused in particular on the potential detrimental effects of providing quarterly earnings guidance.  Perhaps these concerns are overstated.  It seems that over time, fewer and fewer companies continue to provide quarterly earnings guidance.  According to a recent study, approximately one-third of public companies issue quarterly earnings guidance.  Nonetheless, in a piece titled “Short-Termism is Harming the Economy,” Jamie Dimon and Warren Buffett joined the Business Roundtable in calling for companies to refrain from giving quarterly guidance. The National Association of Corporate Directors and the National Investor Relations Institute joined in the call to eliminate earnings guidance. However, the Business Roundtable report does not advocate terminating the filing of quarterly reports on Form 10-Q.  Regardless of whether quarterly reports on Form 10-Q are mandated or not, it would still be the case that companies would report quarterly results.  The two issues—quarterly filings and quarterly guidance—appear to have been conflated making it more difficult to parse the real issues.

Thursday, October 4, 2018
8:00 a.m. – 8:30 a.m. Registration & Breakfast
8:30 a.m. – 4:30 p.m. Program
4:30 p.m. – 5:30 p.m. Cocktail Reception

Location
Mayer Brown
71 South Wacker Drive
Chicago, IL 60606

Please join Mayer Brown in Chicago for our 1st Annual Executive Compensation University.

During this full-day program, we will explore tax and securities issues impacting executive compensation and hear from leading Mayer Brown lawyers about the changing regulatory landscape as they provide practical, business-focused guidance on dealing with these challenges. This program will cover such areas as the taxation of equity awards, disclosure issues and hot topics and current trends in executive compensation, including updates on issues related to say on pay, proxy disclosure, institutional shareholders and tax reform. The event will include an ethics program focused on issues relevant to in-house counsel dealing with executive compensation and securities issues. We plan to conclude the day with a cocktail reception.

We look forward to open dialogues with our guests.

A detailed program agenda can be found here.

Registration is available here.

CLE credit is pending.

As we previously blogged, a Trump tweet called on the Securities and Exchange Commission to undertake a study regarding the costs and benefits of quarterly versus semi-annual filings.  Though no particular connection was drawn in the tweet between semi-annual periodic reports and a focus on long-term investment, the Commission responded with a statement from Chair Clayton titled, “Statement on Investing in America for the Long Term,” that refocuses the discussion and is reprinted below in its entirety:

“The President has highlighted a key consideration for American companies and, importantly, American investors and their families — encouraging long-term investment in our country. Many investors and market participants share this perspective on the importance of long-term investing. Recently, the SEC has implemented — and continues to consider — a variety of regulatory changes that encourage long-term capital formation while preserving and, in many instances, enhancing key investor protections. In addition, the SEC’s Division of Corporation Finance continues to study public company reporting requirements, including the frequency of reporting. As always, the SEC welcomes input from companies, investors, and other market participants as our staff considers these important matters.”

Today, the Securities and Exchange Commission adopted amendments to certain disclosure requirements that have become duplicative, overlapping, or outdated. In July 2016, the Commission proposed amendments for this purpose and also solicited comments on disclosure requirements that overlap with, but require information incremental to, U.S. GAAP. The Commission also was required pursuant to title LXXII, section 72002(2) of the Fixing America’s Surface Transportation (FAST) Act to undertake a review and make certain recommendations to addressed outdated disclosure requirements. In its adopting release, the Commission notes that it is adopting most of the proposed amendments substantially as proposed in 2016. The adopting release notes that in certain instances the Commission is making modifications to the 2016 proposed amendments, and in other cases, the Commission is not adopting the proposed amendments. In a few instances, the Commission is adopting additional changes to make technical corrections. The amendments will be effective 30 days from publication in the Federal Register. The full text of the adopting release is available here. The fact sheet is available here.

The New York Stock Exchange LLC (“NYSE”) proposes to amend Rule 2 to remove the FINRA or other national securities exchange membership requirement for member organizations.  Rule 2 was previously amended in 2007 to require FINRA membership as part of the transition plan for the consolidation of NYSE Regulation, Inc. and the National Association of Securities Dealers (“NASD”).  During this transition period, FINRA provided regulatory surveillance and enforcement services to NYSE, including with respect to NYSE rules, while the harmonization of NYSE and NASD rules was completed.  The proposed rule change reflects the end of the transition period and related regulatory outsourcing as NYSE resumed direct performance of certain previously outsourced regulatory functions on January 1, 2016.  Going forward, common members will continue to be regulated pursuant to the current allocation plan between FINRA and NYSE, and FINRA will continue to perform certain regulatory services under the oversight of NYSE’s regulatory unit pursuant to the existing Regulatory Services Agreement.  The full notice may be found here and the full text of the proposed revisions may be found here.

Read our full REVERSEinquiries issue here.

 

In a very early morning tweet, the President chose to comment on the requirement to file quarterly reports on Form 10-Q. (See the tweet here.)  We noted in a prior post that the House JOBS Act 3.0 bill already included a requirement that the Securities and Exchange Commission conduct a study regarding the costs and benefits associated with quarterly filing requirements, especially for emerging growth companies. Not clear whether a tweet asking the Commission to study this will change the dynamic.

Last month’s announcement by FINRA marks the completion of the consolidation of FINRA’s enforcement functions under the leadership of Susan Schroeder.  One of the key outcomes of FINRA360,  the new structure is designed to ensure a more consistent enforcement program.  Schroeder noted, “The consolidation of our enforcement function enables us to better target developing issues that can harm investors and market integrity, and ensure a uniform approach to charging and sanctions.”  Under the new structure, the Department of Enforcement contains two new centralized units, Investigations and the Office of the Counsel to the Head of Enforcement, and three specialized teams, Main Enforcement, Sales Practice Enforcement and Market Regulation Enforcement.  The groups will be headed by Terrence Bohan, Lara Thyagarajan, Jessica Hopper, Christopher Kelly and Elizabeth Hogan, respectively.  See the full announcement here.

Read our full REVERSEinquiries issue here.

The Ninth Circuit recently decided a case, Automotive Industries Pension Trust Fund v. Toshiba Corp., in which the Circuit court considered the application of the Supreme Court’s territoriality standard in the Morrison v. National Australia Bank Ltd. case.  The court considered whether purchasers of Toshiba unsponsored ADRs on the over-the-counter market were precluded from bringing Section 10(b) and 10b-5 claims under the Securities Exchange Act of 1934.  The Ninth Circuit concluded that the Morrison standard did not preclude the claims.  Finding that the OTC market does not constitute an exchange, the Circuit court nonetheless concluded that under Morrison one would look to where purchasers incurred the liability to take and pay for the securities and where the sellers incurred the liability to deliver the securities to the purchasers.  To the extent that these elements took place in the United States, the transaction would be deemed to be a domestic transaction and Exchange Act claims arising in connection with the transaction can be brought in the United States.  Although, in this particular instance, the Ninth Circuit determined that plaintiffs failed to show that the relevant transactions were “domestic” and remanded to the district court on this matter, the Circuit court decision stands for the proposition that concluding that a transaction is “domestic” is enough to bring a securities claim in the United States.  For issuers that have unsponsored ADR programs and had no role in setting up the ADR program and derive no benefit from the unsponsored ADR program, the decision may raise serious concerns.  So, at least in the Ninth Circuit, there no longer seems to be a difference between a sponsored and an unsponsored ADR program for purposes of liability.

2018 has seen an increase in private companies accessing the private markets through private company liquidity programs.  Nasdaq Private Markets recently released a report showing an increase of 74% in total number of private liquidity programs between 1H2017 and 1H2018.  The 33 programs completed in the first half of 2018 have a total program volume of $10 billion.  This is a 37% increase in total program volume over the first half of 2017.  Twenty of these private liquidity programs were structured as third-party tender offers, while the remaining 13 were share buybacks.

Breaking down the programs by number of eligible shareholders shows that 33% of programs are completed by companies with less than 100 eligible shareholders, 33% by companies with 100-250 eligible shareholders, 24% by companies with 250-500 eligible shareholders, and 10% by companies with over 500 eligible shareholders.  Additionally, 50% of companies completing private liquidity programs are valued at over $1 billion.  Nasdaq’s report leads us to conclude that a broader range of companies have turned to private liquidity programs than in recent years.

Nasdaq’s report is available here.