Next week, on December 16, 2020, at 10am ET, at an open meeting, which likely will be the last for Chair Clayton, the Securities and Exchange Commission will consider several interesting matters.

The SEC will consider final rules regarding resource extraction payment disclosures.  This is a Dodd-Frank Act requirement pursuant to Section 1504.  These rules were originally adopted in 2012.  Then, faced a court challenge.  Then, were vacated by a US District Court.  Then, new rules were adopted.  But then, those new rules faced a Congressional Review Act challenge.

Another matter, not without some controversy, also appears on the agenda.  The SEC will consider whether to approve a proposed rule change by the New York Stock Exchange relating to direct listings.  The SEC had approved the plan, which allowed for a primary offering component, but then stayed the approval order to consider a petition to review the SEC approval order.

Finally, the SEC will consider whether to adopt amendments under the Advisers Act to update the advertising rules.  See the meeting notice here.

The Association of International Certified Professional Accountants (AICPA) hosted the 2020 AICPA Conference on Current SEC and PCAOB Developments this past week at which a number of SEC accountants participated, either delivering speeches or contributing to panel discussions.

Sagar Teotia, the SEC’s Chief Accountant gave remarks reflecting on the past year, and commenting on the priorities of the Office of the Chief Accountant (OCA) for next year.  The speech provides a helpful overview of the role of OCA within the SEC as well as recent actions OCA has taken to assist market participants during the COVID-19 pandemic.  Chief Accountant Teotia’s remarks serve as a reminder of the importance of high-quality financial reporting and the critical role of a company’s audit committee, especially during times of uncertainty in our capital markets.  He also reminded companies that in fulfilling their financial reporting responsibilities, they are required to make significant judgments and estimates to address accounting and financial reporting matters, and these can be made increasingly more challenging in this pandemic environment.  The OCA staff, he reiterated, echoing earlier such statements, will not object to well-reasoned judgments.  Also, he noted that companies should ensure these judgments and estimates are disclosed in a way that is understandable and useful to investors.

In addition to summarizing his office’s efforts this past year, Chief Accountant Teotia identified the following activities that OCA will continue to prioritize in the new year:

  • Engagement with stakeholders
  • Rulemaking
  • Oversight of the FASB
  • Oversight of the PCAOB
  • International accounting, audit, and disclosure matters

In addition to the SEC Chief Accountant’s speech, several Professional Accounting Fellows in OCA also posted their speeches to the SEC website. These speeches discuss OCA staff observations on specific accounting topics and fact patterns, including principal versus agent guidance and the expected discontinuation of LIBOR. These publicly available remarks provide helpful insight into OCA’s thinking on a variety of subjects.

Foreign public companies listed in the United States may soon face delisting if their auditors cannot comply with US investor protection laws. On December 2, 2020, the US House of Representatives passed by voice vote the Holding Foreign Companies Accountable Act (HFCAA), which would require auditors of foreign public companies to allow the Public Company Accounting Oversight Board (PCAOB) to inspect their audit work papers for audits of non-US operations as required by the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). If a company’s auditors fail to comply for three consecutive years, then the company’s shares would be prohibited from trading in the United States. The legislation passed the Senate in May and is now being sent to President Donald Trump, who is expected to sign it into law.

Read the full Legal Update.

The SEC has brought its first enforcement action against a public company relating to disclosure of the financial effect of the pandemic. The Cheesecake Factory Incorporated, without admitting or denying the SEC’s findings, agreed to a cease-and-desist order and payment of a $125,000 civil penalty, settling charges of making misleading disclosures in two Form 8-Ks:

  • In both reports, dated March 23 and April 3, 2020, the company stated that in adopting an “off-premises model” for its restaurants (shifting to “to-go” and delivery offerings) it would be able to operate “sustainably.” Separately, the company informed prospective lenders and private equity investors that it was losing about $6 million per week and had about 16 weeks of cash remaining, even after fully drawing down its credit facility.
  • The March 23 report detailed plans to address the pandemic and noted the company was evaluating additional measures, but the report did not disclose that the company had notified its landlords of insufficient cash flow to pay rent in the next month. After media reported on the notice to landlords, the company furnished information in a March 27 Form 8-K about ongoing discussions with landlords.

The SEC determined the March 23 and April 3 reports were materially false and misleading in violation of Exchange Act Section 13(a) and Rules 13a-11 and 12b-20. This serves as a reminder that companies must take care to proactively and accurately keep investors informed of current and anticipated material impacts of COVID-19.

The SEC order is available here, and the press release is available here.

A NOTE FROM THE AUTHOR

This blog generally reports on securities and capital markets developments and stays away from opinion and personal commentary.  But, I am making an exception for an exceptional reason.  When I began practicing, the managing partner of my then firm, who became and remains my mentor, gifted me a copy of a book that had been published just a couple of years earlier, Corporate Finance and the Securities Laws.  It was then one volume.  I still have it, though it is now dog-eared, Diet Coke- and coffee-stained, and all the worse for the wear.  He told me it was the only thing worth reading if I wanted to be a “real deal lawyer.”  Being a committed nerd, I took it home that weekend and read it cover to cover.  Later, I joined the bar association.  At a regular meeting of the ABA’s Federal Regulation of Securities Committee, as a very young associate I met one of the book’s authors, Joe McLaughlin.  Joe is one of a group of leading securities lawyers that I have been fortunate enough to meet over the years through the bar association and who have generously shared their time and advice.  At least for me, the bar association fulfilled an important role.  It connected me with people like Joe.  Over the years, whether working on SEC comment letter drafts or through regular bar association meetings, we all got to know one another.  I continued to refer to the book when I had questions, though I now recognized the writer’s voice from many conversations.  Many more years later, when I decided to write something that was specifically focused on exempt offerings and hybrid offerings like PIPE transactions and registered direct offerings, which had become central to my practice, I set out to model it on Charlie and Joe’s book in terms of its practical approach.  It was a compliment when Joe agreed to write a recommendation for that book in 2009.  And now, I am enormously pleased to be able to contribute to the book as Joe’s co-author.  Our first update is available today, December 8th, see the book’s dedicated page on our blog.  I hope to continue Charlie and Joe’s example going forward.

In this microtalk video, PIPE Transactions in Connection with SPAC Business Combinations, Brian Hirshberg discusses private investment in public equity (PIPE) transactions consummated by SPACs in connection with their initial business combinations, or de-SPACing transactions.

Visit our MB Microtalk page for more topics and talks.

December 10, 2020 Webinar
12:00pm – 12:30pm EST
Register here.

Nearly one month after the US Securities and Exchange Commission (SEC) announced a settled action In the Matter of Andeavor LLC, two SEC commissioners issued a rare dissenting statement on November 13, 2020. The commissioners disagreed with the majority’s application of Exchange Act Section 13(b)(2)(B) as a broad “internal controls” provision rather than as a more narrowly defined “internal accounting controls” requirement that would be more consistent with the statutory language.

Register for this event to join our discussion exploring the importance of this dissent as it relates to Section 13, a provision of law passed in 1977 as part of the Foreign Corrupt Practices Act that impacts global issuers, their boards and management, and what this may mean for future enforcement.

In this interview organized around 10 quick-hitting questions, Mayer Brown’s Audrey Harris (former Chief Compliance Officer of BHP) will set the stage by delving into what the dissent said, the significance attached to the word “accounting” and other key points with partner Michael Levy, a former assistant US attorney and the author of an article cited by the dissenting SEC commissioners. Jason Linder, a partner and former senior DOJ FCPA prosecutor, will round out the discussion by analyzing how enforcers view Section 13. Finally, Audrey will highlight takeaways for in-house compliance programs.

On November 24, 2020, the US Securities and Exchange Commission (SEC) proposed for comment amendments to Rule 701 under the Securities Act of 1933, which is the exemption from the registration requirements relied upon most frequently by non-reporting companies in connection with their issuances of stock-based compensation to employees, as well as amendments to the Form S-8 registration statement, which is used to register compensatory offerings by reporting companies. In a separate release also issued on November 24, 2020, the SEC has proposed to expand Rule 701 and the use of Form S-8 to facilitate compensatory transactions with platform workers for a five-year period.

Read the full Legal Update.

On December 2, 2020, the U.S. House of Representatives (“House”) passed the Holding Foreign Companies Accountable Act, Senate Bill No. 945 (the “bill”). A copy of the bill may be viewed here.

The bill seeks to amend Section 104 of the Sarbanes-Oxley Act of 2002 to require certain issuers to disclose to the Securities and Exchange Commission information regarding foreign jurisdictions that prevent the Public Company Accounting Oversight Board (“PCAOB”) from performing inspections, and for other purposes. The bill would require certain Chinese companies that have a class of securities listed or quoted on stock exchanges in the United States be delisted by such exchanges for, among other things, a failure to comply with the PCAOB audit requirements for three consecutive years.

In prior posts, we have blogged when the bill was unanimously approved by the U.S. Senate and about a bipartisan legislation that was introduced with substantially the same intent.

The House will send the bill to the White House and President Trump is expected to sign it into law.