Disclosure Requirements

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.

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Exchange Commission adopted amendments to certain disclosure requirements that have become duplicative, overlapping, or outdated.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Fixing America’s Surface Transportation (FAST) Act to undertake a review and make certain recommendations to addressed outdated disclosure requirements.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.

Recently, in connection with the Securities and Exchange Commission’s consideration of proposed amendments to the definition of “smaller reporting company,” the Commission had an opportunity to consider including in the adopting release an exemption from the Section 404(b) auditor attestation.  The Commission deferred a decision on the Section 404(b) auditor attestation.  A number of the Commissioners noted that it would be helpful to have the benefit of statistical data regarding the costs associated with the Section 404(b) process and observed that the commenters on the SRC amendments proposed a few years ago included anecdotal commentary on the burdens imposed by Section 404(b) auditor attestation requirements.  Congress also has considered a number of legislative measures that would provide for exemptions for different issuers from the Section 404(b) auditor attestation requirement.  For example, one measure would provide an exemption for low revenue issuers.  A different legislative proposal would extend the period during which emerging growth issuers are exempt from the requirement from five years to ten years.  Against this backdrop, authors Weili Ge, Allison Koester, and Sarah McVay attempt to quantify the benefits and costs of exempting smaller firms from the auditor attestation requirements and under Section 404(b).  In a paper titled “Benefits and Costs of Sarbanes-Oxley Section 404(b) Exemption:  Evidence from Small Firms’ Internal Control Disclosures,” the authors compare the relative increase in audit fees of exempt firms and non-exempt firms from 2003 to 2014.  The authors quantify the benefit of the exemption as a savings of $388 million in Section 404(b)-related audit fee savings for the 5,302 exempt firms sampled.  The authors then consider internal control misreporting, which critics of the exemption point to as the principal concern.  The authors conclude approximately 9.3 percent of the exempt firms that disclose effective internal controls actually have ineffective internal controls.  These are, according the authors, evidence of misreporting.  Section 404(b) compliance lowers misreporting of internal controls from 9.3 percent to 5.8 percent.  The authors also assess the costs of internal control misreporting attributed to the Section 404(b) exemption, lower operating performance due to non-remediation and market values that fail to reflect a firm’s underlying internal control status by looking at changes in future earnings and future stock returns for suspected internal control misreporting.  The authors estimate that the costs of a Section 404(b) exemption for suspected internal control misreporting as $719 million in lower operating performance due to non-remediation and $935 million delay in aggregate market value decline due to the failure to disclose ineffective internal controls.

The Securities and Exchange Commission recently published guidance providing some useful clarifications related to the Commission’s recent changes to the definition of “smaller reporting company” (see our prior posts, here and here).  In the guidance, the Commission confirms that foreign issuers can qualify as SRCs; however, investment companies (including BDCs), ABS issuers and majority-owned subsidiaries of non-SRC parent companies cannot. The new definition of SRC becomes effective on September 10, 2018.

Assessing SRC Status.  A company assesses whether it qualifies as an SRC annually as of the last business day of its second fiscal quarter.  If it qualifies as an SRC on that date, it may elect to use the SRC scaled disclosure accommodations in its subsequent filings, beginning with its second quarter Form 10-Q.  A company must reflect its SRC status in its Form 10-Q for the first fiscal quarter of the next year.  Reporting companies calculate their public float annually as of the last business day of their second fiscal quarter. A reporting company that does not qualify under the “public float” test would determine whether it qualifies as an SRC based on its annual revenues in its most recent fiscal year completed before the last business day of the second fiscal quarter.

Assessing SRC Status in connection with Initial Registration Statement.  A company filing its initial registration statement for shares of common equity will make its initial SRC determination in connection with the filing of its registration statement.  Public float is measured as of a date within 30 days of the date of the filing of the registration statement and is computed by multiplying the aggregate worldwide number of shares of voting and non-voting common equity held by non-affiliates before the registration plus, in the case of a Securities Act registration statement, the number of shares of voting and non-voting common equity included in the registration statement by the estimated public offering price of the shares.  In the case of a determination based on an initial Securities Act registration statement, a company that determined it was not an SRC has the option to re-determine its status under the “public float” test at the conclusion of the offering covered by the registration statement based on the actual offering price and number of shares sold.  A company filing its initial registration statement for common equity that does not qualify under the “public float” test would determine whether it qualifies as an SRC based on its annual revenues in its most recent audited financial statements available on the initial public float calculation date.

Changes in Float/Revenue and Qualification as an SRCThe Commission provides a chart showing how a company can transition and qualify as an SRC depending on changes in its float and/or revenues.

Transitioning to the Amended SRC Definition.  For purposes of the first determination of SRC status after September 10, 2018, a company will qualify as an SRC if it meets the initial qualification thresholds in the revised definition as of the date it is required to measure its public float and, if applicable, had annual revenues of less than $100 million in its most recently completed fiscal year, even if such company previously did not qualify as an SRC.  A company that completed its initial public offering since the end of its most recent second fiscal quarter may elect to determine whether it qualifies as an SRC based on its public float as of the date it estimated its public float prior to filing or as of the conclusion of the offering based on the actual offering price and number of shares sold.  A company newly qualifying as an SRC under the amended definition after September 10, 2018, regardless of whether it qualified under the previous definition, has the option to use the SRC scaled disclosure accommodations in its next periodic or current report due after September 10, 2018, or, for transactional filings without a due date, in filings or amended filings made on or after September 10, 2018.

See the full guidance, including the charts, here.

On July 24, 2018, the Securities and Exchange Commission (SEC) proposed amendments to the financial disclosure requirements in Rules 3-10 and 3-16 of Regulation S-X, in an effort to simplify and streamline disclosures by registrants in registered debt offerings with respect to guaranteed or collateralized debt securities. Rule 3-10 addresses the financial disclosure requirements for guarantors and issuers of guaranteed securities, while Rule 3-16 focuses on financial disclosure requirements for affiliates whose securities constitute a substantial portion of the collateral for securities offered. Both sets of disclosure requirements affect not only the issuer’s offering documents, but also its periodic filings. The SEC stated that the proposed amendments are “intended to provide investors with material information given the specific facts and circumstances, make the disclosures easier to understand, and reduce the costs and burdens to registrants.” The review of the requirements and proposed amendments to Rule 3-10 and 3-16 stem from the SEC’s Disclosure Effectiveness Initiative. The proposed rules follow the SEC’s 2015 request for comments on these requirements. This Legal Update summarizes the SEC’s proposed amendments.

Thursday, August 2, 2018
1:00 p.m. – 2:00 p.m. EDT

With companies remaining private longer, their stockholder base often becomes more widely dispersed. More and more privately held companies are facing interesting challenges in communicating effectively with various stakeholders, without violating securities laws. During this session, Partner Anna Pinedo will address the following:

  • Private company information rights;
  • Rule 701 disclosures for employees;
  • Information requirements in connection with stockholder liquidity programs;
  • Sharing company information in connection with financing rounds;
  • Communicating with investment professionals;
  • Communications and social media policies for private companies; and
  • Blackout/insider trading policies for private companies.

For more information, or to register for this session, please visit the event website.

Wednesday, August 1, 2018
1:30 p.m. – 2:00 p.m. EDT

During this session, the speakers will address some of the topics that should be among the principal areas of focus for disclosure committees, audit committees and others with responsibility for, or oversight of, reporting company disclosures.  We will focus on:

  • Reviewing risk factor disclosures in light of current areas of staff focus;
  • Policies and procedures related to the use of non-GAAP financial measures;
  • Cyber related disclosures;
  • Perk disclosures; and
  • Implementing recently adopted or new accounting standards.

Speakers:

  • Michael L. Hermsen
    Partner, Mayer Brown LLP
  • Anna T. Pinedo
    Partner, Mayer Brown LLP

For more information, or to register for this session, please visit the event website.

At last week’s open meeting, the Securities and Exchange Commission originally had been scheduled to consider a proposed amendment to Regulation S-X Rules 3-10 and 3-16, as we had previously blogged.  The agenda for the open meeting was amended shortly prior to the meeting to remove consideration of the Regulation S-X rule changes that originally had been considered in 2015.

Yesterday, the Commission voted to propose amendments.  The amendments would affect disclosures relating to guarantors and affiliates the securities of which are pledged as collateral.

The link to the press release is here.

The link to the proposed rules is here.

A client alert is available here.

In a paper titled, “The Importance of Inferior Voting Rights in Dual-Class Firms,” author Dov Solomon focuses on companies with a class of non-voting stock.  By offering non-voting stock to the public and listing that class of securities on a national securities exchange, an issuer is not subject to a number of disclosure and related securities law requirements that are tied to voting rights.  For example, an issuer with non-voting stock is not subject to the proxy rules. Holders of the class of non-voting stock are not entitled to vote on matters that typically would be raised at stockholders’ meetings or to put forward stockholder proposals for consideration at such a meeting.  An issuer with non-voting stock also would not be subject to Schedule 13D or 13G filings for that class of shares.  Holders, including insiders, also would not be subject to Section 16 filing requirements.  The author suggests that the Securities and Exchange Commission impose such disclosure and governance requirements on issuers with a class of non-voting stock.