The SEC has issued a comment release soliciting input on many questions related to quarterly reporting. The release covers a lot of possible scenarios, any or none of which may occur. The format, as with many releases of this nature, has some limited analysis but is more dominated by questions as to which the public is invited to comment. As expected, there are some questions on whether quarterly reporting should be eliminated or changed to semi-annual, and if so, if this should only be for certain types of issuers (such as smaller reporting companies or emerging growth companies). Perhaps more interesting, there are a lot more questions and discussion of potential ways to combine quarterly earnings releases with Quarterly Reports on 10-Q, given their overlap and proximity in release/filing times. The thrust of many of the questions seems to be if there are ways to reduce redundancy without delaying the process.
Yesterday (without a meeting), the SEC approved final rules to require companies to disclose in proxy or information statements for the election of directors any practices or policies regarding the ability of employees or directors to engage in certain hedging transactions with respect to company equity securities. This rulemaking had been mandated by the Dodd-Frank Act in 2010 and had sat in proposal form for several years.
Under the new rules, new Item 407(i) of Regulation S-K will require a company to describe any practices or policies it has adopted regarding the ability of its employees (including officers) or directors to purchase securities or other financial instruments, or otherwise engage in transactions, that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities granted as compensation, or held directly or indirectly by the employee or director. A company could satisfy this requirement by either providing a fair and accurate summary of the practices or policies that apply, including the categories of persons they affect and any categories of hedging transactions that are specifically permitted or specifically disallowed, or, alternatively, by disclosing the practices or policies in full. If the company does not have any such practices or policies, the rule will require the company to disclose that fact or state that hedging transactions are generally permitted.
Companies generally must comply with the new disclosure requirements in proxy and information statements for the election of directors during fiscal years beginning on or after July 1, 2019. However, smaller reporting companies and emerging growth companies do not have to comply until their proxy and information statements for the election of directors during fiscal years beginning on or after July 1, 2020. Listed closed-end funds and foreign private issuers will not be subject to the new disclosure requirements.
ISS has announced its 2019 updates to its proxy voting policies, which are generally applicable to shareholder meetings to be held on or after February 1, 2019.
Most notably, starting in 2020, for Russell 3000 and S&P 1500 companies, ISS will generally recommend (subject to mitigating factors) a vote against or withhold from the chair of the nominating committee at companies where there are no women on the board of directors.
Also of note, ISS will now recommend a vote against or withhold from the chair of the nominating committee at companies with three years of poor director attendance (generally any directors attending less than 75% of meetings without certain excused reasons).
The full updates can be found here.
The SEC today issued final rules to amend Securities Act Rule 701, which provides an exemption from registration for securities issued by private companies pursuant to compensatory arrangements, such as equity plans. As mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, the amendment increases from $5 million to $10 million the aggregate sales price or amount of securities sold during any consecutive 12-month period in excess of which a company is required to deliver additional disclosures to investors/grantees. This will allow private companies to make more grants without having to meet more extensive disclosure requirements.
In addition, the SEC approved a "concept release" soliciting comment on possible ways to modernize rules related to compensatory arrangements in light of the significant evolution in both the types of compensatory offerings and the composition of the workforce since the SEC last substantively amended these rules in 1999. The SEC is soliciting comment on possible ways to update the requirements of Rule 701 and Form S-8 (which provides a simplified registration form for companies to use to issue securities pursuant to employee equity plans). Among other things, the concept release solicits comment on:
- "Gig economy" relationships, in light of issuers using internet platforms to provide workers the opportunity to sell goods and services, to better understand how they work and determine what attributes of these relationships potentially may provide a basis for extending eligibility for the Rule 701 exemption;
- Whether the SEC should further revise the disclosure content and timing requirements of Rule 701(e); and
- Whether the use of Form S-8 to register the offering of securities pursuant to employee benefit plans should be further streamlined.
The amendment to Rule 701 to increase the threshold will be immediately effective. The Concept Release is merely soliciting comments, and further action by the SEC will depend on many factors, including comments received and competing items on its regulatory agenda.
The SEC today approved amendments to the "smaller reporting company" definition to expand the number of companies that qualify for certain existing scaled disclosure accommodations. The new smaller reporting company definition enables a company with less than $250 million of public float to provide scaled disclosures, as compared to the $75 million threshold under the prior definition. The scaled disclosures for smaller reporting companies include, among other things, fewer disclosure requirements regarding executive compensation and financial statements.
The final rules also expand the definition to include companies with less than $100 million in annual revenues if they also have either no public float or a public float that is less than $700 million. This reflects a change from the revenue test in the prior definition, which allowed companies to provide scaled disclosure only if they had no public float and less than $50 million in annual revenues. The $700 million threshold in particular may help biotech and other development companies developing new drugs and products that have significant public floats but have not yet recognized significant revenues.
Notably, the amendments do not change the threshold in the somewhat overlapping "accelerated filer" definition that requires, among other things, that filers provide the auditor's attestation of management's assessment of internal control over financial reporting. So companies between the $75 million and $250 million threshold will still need to provide a SOX 404 audit report even if they take advantage of the scaled disclosures in other areas. However, the SEC has begun to formulate recommendations for possible additional changes to the "accelerated filer" definition, so stay tuned.
The rules will become effective 60 days after publication in the Federal Register.
Today the SEC adopted amendments to eXtensible Business Reporting Language (XBRL) requirements for operating companies and funds. The amendments are intended to improve the quality and accessibility of XBRL data by replacing the existing requirements for tagged data to be filed as exhibits to certain SEC filings and posted as separate files on companies’ websites. The amendments, which will go into effect in phases, require the use of Inline XBRL for financial statement information and risk/return summaries.
While the amendments modify existing XBRL requirements, they do not change the categories of filers or scope of disclosures subject to XBRL requirements, nor do they change the relevant liability standards.
Operating companies that are currently required to submit financial statement information in XBRL will be required, on a phased basis, to transition to Inline XBRL, with large accelerated filers that use U.S. GAAP being required to comply beginning with fiscal periods ending on or after June 15, 2019, accelerated filers that use U.S. GAAP being required to comply beginning with fiscal periods ending on or after June 15, 2020, and all other filers being required to comply beginning with fiscal periods ending on or after June 15, 2021. Filers will be required to comply beginning with their first Form 10-Q (not 10-K) filed for a fiscal period ending on or after the applicable compliance date.
Funds that are currently required to submit risk/return summary information in XBRL will be required, on a phased basis, to transition to Inline XBRL, with large fund groups (net assets of $1 billion or more as of the end of their most recent fiscal year) being required to comply two years after the effective date of the amendments and all other funds being required to comply three years after the effective date of the amendments. The amendments also eliminate the 15 business day filing period for risk/return summary XBRL data, so that the data will be more timely available to the public.
The Bureau of Economic Analysis (the “BEA”) is a branch of the U.S. Department of Commerce that collects statistical information about the American economy. One function of the BEA is to record statistics for all foreign direct investment in the United States, as authorized by the International Investment and Trade in Services Survey Act.
Ongoing Reporting Obligation
The BEA requires U.S. business enterprises to report foreign direct investment in the United States on Form BE-13. As a general rule, Form BE-13 must be filed by any U.S. business enterprise within 45 days after:
(i) the acquisition by a foreign parent of at least a 10% direct or indirect voting interest in such U.S. business enterprise;
(ii) the establishment of such U.S. business enterprise by a foreign parent with at least a 10% direct or indirect voting interest therein; or
(iii) an expansion of a foreign parent’s business in the United States (each, a “Reportable Event”).
If a Reportable Event in which a foreign parent invests less than $3 million in the United States occurs, the affected U.S. business enterprise may file a Form BE-13 Claim for Exemption. No filing is required upon the occurrence of a Reportable Event if there is no foreign parent who holds at least a 10% direct or indirect voting interest in the U.S. business enterprise.
Periodic Reporting Obligations
In addition to the ongoing reporting obligations imposed by the BEA, U.S. business enterprises in which a foreign parent holds at least a 10% direct or indirect voting interest may be required to file quarterly reports on Form BE-605 or annual reports on Form BE-15 in order to update their earlier filings. Fortunately, no U.S. business enterprises have quarterly or annual BEA filing obligations unless they are specifically requested by the BEA.
Finally, the BEA also conducts a five-year benchmark survey of all foreign direct investment in the United States. Unlike the BEA’s quarterly and annual surveys, each U.S. business enterprise in which at least a 10% voting interest could be traced to a foreign parent at the end of fiscal year 2017, regardless of whether such entity was contacted by the BEA, has an affirmative obligation to complete and file the benchmark survey on Form BE-12.
Form BE-12 must be filed with the BEA by May 31, 2018, however the filing deadline is automatically extended to June 30, 2018 for respondents who use the BEA’s eFile system.
Similar to the ongoing Form BE-13 filing obligations, any U.S. business entity in which a foreign parent owned at least a 10% voting interest (directly or indirectly) at the end of fiscal year 2017 must file Form BE-12.
The BEA only tracks the control of a U.S. business enterprise by a foreign parent, not in a foreign parent’s beneficial interest therein. In determining voting interest, the BEA deems that (i) voting interest in a corporation is apportioned based on voting securities; (ii) voting interest in a limited liability company is apportioned based on membership interests; and (iii) voting interest in a partnership is apportioned 100% with the General Partner unless the Partnership Agreement specifically gives voting control to the Limited Partners.
A private fund is exempt from reporting as long as (i) it does not own, directly or indirectly through another business enterprise, an operating company in which a foreign parent owns at least 10% of the voting interest therein, and (ii) if the foreign parent owns a private fund indirectly (through one or more other U.S. business enterprises), there are no U.S. operating companies between the foreign parent and the indirectly-owned private fund.
Form BE-12 must be filed on a consolidated basis by the highest U.S. affiliate of a foreign parent that cannot be consolidated into another U.S. affiliate of such foreign parent. Each U.S. business enterprise will need to file a different Form BE-12 based on its size and ownership structure. The most basic Form BE-12C may be filed by any U.S. business enterprise that is an affiliate of a foreign parent and has total assets, sales or gross operating revenues, or net income of $60 million or less. The more in-depth Form BE-12B must be filed by affiliates of foreign parents with total assets, sales or gross operating revenues, or net income between $60 million and $300 million, and the most burdensome Form BE-12A must be filed by U.S. business enterprises that are majority owned by foreign parents and which have total assets, sales or gross operating revenues, or net income of more than $300 million.
A Form BE-12 Claim for Not Filing may only be filed by a U.S. business enterprise who is asked by the BEA to file Form BE-12 but who is not at least 10% directly or indirectly owned by a foreign parent, or who is otherwise not subject to Form BE-12 filing requirements. Unlike with respect to Form BE-13, there is no de minimis $3 million investment below which an exemption from filing may be claimed.
Any failure to report shall be subject to a civil penalty of not less than $4,527 and not more than $45,268, and to injunctive relief commanding such person to comply, or both. Whoever willfully fails to report shall be fined not more than $10,000 and, if an individual, may be imprisoned for not more than one year, or both. Any officer, director, employee, or agent of any corporation who knowingly participates in such violations, upon conviction, may be punished by a like fine, imprisonment or both.
Survey data collected by the BEA is confidential and may only be used for statistical and analytical purposes, and the BEA is prohibited from granting other agencies access to its data for tax, investigative, or other regulatory purposes. Statistical data reported on Form BE-12 is not subject to Freedom of Information Act requests.
For more information on Form BE-12 or other BEA reporting obligations, please visit the BEA’s website at https://www.bea.gov/index.htm.
The SEC posted today an interpretive release regarding its latest guidance public companies’ disclosure obligations under existing law with respect to matters involving cybersecurity risk and incidents. It also addresses the importance of cybersecurity policies and procedures and the application of disclosure controls and procedures, insider trading prohibitions, and Regulation FD and selective disclosure prohibitions in the cybersecurity context.
The timing of the release was a bit unusual. Initially, the SEC was scheduled to consider the guidance at an open meeting on February 21st. It abruptly cancelled the meeting and instead put out a press release saying the interpretive guidance had been approved on February 20th. Sounds like the SEC may be having its own issues with disclosure controls and procedures!
The SEC has approved a NYSE rule that will prohibit listed companies from issuing material news after the official closing time of trading until at least 5 minutes after closing (unless the company’s official closing price is published sooner).
The SEC has proposed a series of amendments to modernize and simplify disclosure requirements for public companies, investment advisers and investment companies, particularly those disclosure requirements under Regulation S-K. Such amendments include proposed changes to, among others, Item 102 (Description of Property), Item 303 (Management’s Discussion and Analysis), Item 401 (Directors, Executive Officers, Promoters, and Control Persons), Item 405 (Compliance with Section 16(a) of the Exchange Act), Item 501(b) (Outside Front Cover Page of the Prospectus), Item 503(c) (Risk Factors), Item 508 (Plan of Distribution), Item 601(b)(10) (Material Contracts) and various rules related to incorporation by reference.
Among the most impactful proposed changes are:
- Limiting the period-to-period comparison required by Item 303 (Management’s Discussion and Analysis) to only the two most recent fiscal years rather than the currently required three most recent fiscal years. The comparison to the third fiscal year would still be required if material to the understanding of the company’s financial statements and if not included in the company’s Form 10-K for the previous year.
- Limiting the disclosure required by Item 102 (Description of Property) to only those properties that are material.
- With respect to exhibits to SEC filings (Item 601):
- Allowing companies to omit schedules that don't contain material information from all
exhibits, rather than only from acquisition agreements.
- Eliminating the requirement (other than for newly reporting companies) under Item
601(b)(10) to file as exhibits material contracts that were entered into less than two
years before that filing but that have been fully performed at the time of the filing.
- Permitting companies to omit or redact from material agreements filed as exhibits to
SEC filings confidential information that is not material and would cause competitive
harm if made public, without requiring companies to first file a confidential treatment
request. Companies would be required to mark their filings to indicate omitted items.
- Permitting companies to omit disclosure about Section 16 reports if all reports have been timely filed (and eliminating the box on the cover of Form 10-Ks regarding Section 16 disclosure).
In contrast, the proposals would add a few requirements regarding descriptions of securities and XBRL tagging of cover pages, among others.
In addition, the proposals would eliminate certain other outdated disclosure requirements and make various conforming updates to forms and rules with outdated references.
The proposals, which can be found here, are subject to a public comment period, following which time, the SEC will further consider whether or not to approve them as final rules.