SEC Guidance regarding the Tax Cuts and Jobs Act

You may have heard that the Republican tax overhaul (originally known as the Tax Cuts and Jobs Act of 2017) was signed into law on December 22, 2017. That same day, the SEC staff provided helpful disclosure guidance in the form of Staff Accounting Bulletin No. 118 and C&DI 110.02. Together, this timely guidance clarifies how companies should disclose certain income tax effects of the new law and the extent to which Item 2.06 of Form 8-K (disclosure of asset impairments) is implicated. SAB 118 SAB 118 responds to widespread concern over how to comply with applicable financial and other reporting requirements while companies are still figuring out the impact of the new tax law. SAB 118 specifically addresses, and is limited to, issues related to tax recognition for the current year and deferred tax liabilities and assets for future years in accordance with FASB Accounting Standards Codification Topic 740. The guidance acknowledges that there may be situations where the accounting for certain tax effects of the law will be incomplete by the time financial statements are issued for a company’s reporting period that includes December 22, 2017 and seeks to provide more certainty and consistency of views where a company does not have the necessary information available, prepared or analyzed (including computations) by the applicable filing date. Essentially, SAB 118 allows companies to provide reasonable estimates of the tax effects for the first reporting period in which the company is able to determine the reasonable estimate. If a reasonable estimate has not been determined, then no estimate should be provided, and the company should report based on the...

The DOJ’s Latest Compliance Program Warning

U.S Deputy Attorney General Rod Rosenstein recently announced the Department of Justice’s revised FCPA Corporate Enforcement Policy. The revised Policy is based on the DOJ’s FCPA Pilot Program (in place since April 2016), which provided mitigation credit for voluntary reporting of wrongdoing and specified levels of cooperation and remediation in connection with the resulting investigation. Much has been made about the new Policy provisions that create the presumption of a DOJ enforcement declination and specify percentage reductions from the U.S. Federal Sentencing Guidelines in the event that a company self-discloses, cooperates and/or remediates in accordance with specified Policy requirements. Certainly, these provisions significantly further the shift toward encouraging company cooperation, as well as continue the focus on holding individuals accountable, and deserve careful attention. It was, however, Deputy Attorney General Rosenstein’s third “policy enhancement” that most caught my eye. That provision provides detail about how the DOJ evaluates compliance programs, specifying what he calls “hallmarks of an effective compliance program.” The Policy first states that the criteria for an effective compliance and ethics program may vary based on the size and resources of the organization, which seems fair enough. It then provides a list of criteria (quoted below), which it says will be periodically updated: The company’s culture of compliance, including awareness among employees that any criminal conduct, including the conduct underlying the investigation, will not be tolerated; The resources the company has dedicated to compliance; The quality and experience of the personnel involved in compliance, such that they can understand and identify the transactions and activities that pose a potential risk; The authority and independence of the compliance...

Activist Versus Institutional Investors, and the Role of Sustainability

Sustainability concepts are now widely accepted as legitimate, mainstream considerations for boards of directors and corporate management. (See, for example, this Doug’s Note.) As a result, many companies now routinely consider the long-term impact on their entire universe of stakeholders of various environmental, social and governance (ESG) issues. Conversely, most boards of directors and C-suites no longer solely consider maximizing short-term shareholder profits in their decision-making. A balanced corporate mindset now factors in long-term considerations (see this Doug’s Note) and the interests of employees, business partners, communities and society as a whole. The emergence of sustainability may also be blurring the traditional distinction between “activist” and “institutional” investors. At the risk of over-generalizing, activist investors have historically been associated with maximizing short-term shareholder profits through a variety of often harsh corporate maneuvers. Institutional investors, on the other hand, have often been seen as taking a longer view, which resulted in general support of management accompanied by behind-the-scenes efforts to influence corporate strategy. Those two camps may now be moving toward the middle of that spectrum, driven in significant part not only by the dramatic rise in popularity of sustainability as a corporate principle, but also the increased desire among institutional investors to engage with management on such issues. After a few years of resistance, companies have embraced the concept of regular, substantive shareholder engagement, resulting in lines of communication that are more open than ever, which allows traditionally passive institutional investors more ability to routinely influence management priorities and strategic decisions. Activist investors, on the other hand, now seem more interested in influencing governance policies, as well as management...

Recent SEC Comment Letter Trends

In January, I passed along a list of 12 review and comment priorities distributed at the 48th Annual Institute on Securities Regulation in New York by a panel of speakers that included SEC Chief Accountant Wesley Bricker and Chief Accountant of the Division of Corporation Finance Mark Kronforst (see this Doug’s Note). I won’t repeat the panel’s list here except to note that “MD&A: Results of operations” was at the top, followed next by “Non-GAAP measures.” Lists like this can be useful predictors of hot topics for the coming year and provide helpful guidance for company disclosures. I, therefore, read with interest Deloitte’s recently released, comprehensive 2017 survey of SEC comment letters. The survey contains much valuable information regarding, and analysis of, the SEC staff’s strategic priorities, as gleaned from their recent comment letters. Below are a few items that jumped out at me. Top 10 review topics. Here is Deloitte’s list of the top 10 review topics for the 12 months ended July 31, 2017, which not coincidentally corresponds closely to the panel’s list mentioned above. Non-GAAP measures MD&A Fair value Segment reporting Revenue recognition Intangible assets and goodwill Income taxes State sponsors of terrorism Signatures, exhibits and agreements Acquisitions, mergers and business combinations Other Deloitte survey tidbits. The staff reviewed approximately 56% of public companies during the SEC’s 2016 fiscal year and more than 50% per year since 2013. (Note that not all reviews result in a comment letter.) The number of reviews with comment letters and number of comments per letter have been trending downward over the past five years. The number of filed Forms 10-K...

The SEC’s Disclosure Modernization Proposals

Recent proposed rules to modernize and simplify SEC disclosure requirements have gotten a lot of attention. You may recall that the Fixing America’s Surface Transportation (FAST) Act of 2015  directed the SEC to issue a report recommending amendments to Regulation S-K to accomplish those goals. The SEC issued its report in November 2016. The proposals are the next step in the process. The proposed changes, while helpful, are perhaps only marginally so. The most significant proposal would modify MD&A by allowing companies to forgo discussion of the oldest period being presented if (1) it has been previously reported and (2) the disclosure is no longer material. Although this is not an earth shattering development, eliminating the redundancy of the year-two to year-three comparison would be nice. The materiality qualifier may, however, limit the proposal’s practical effect if companies take a conservative approach to determining materiality. Also helpful would be the proposal to streamline the process for obtaining confidential treatment for commercially sensitive information. The proposed change would permit companies to omit from exhibits confidential information that is not material and would cause competitive harm without having to first request confidential treatment from the SEC staff. Companies also would be permitted to omit “personally identifiable information” in all cases without submitting a request. Exhibits would remain subject to review by the staff, which could issue comments if it determines that redactions were not appropriate. Several other proposed changes are even more minor, mostly just simplifying the forms themselves, tweaking certain disclosure provisions, or clarifying regulation instructions. They include updates and clarifications to: the scope of the property description, the placement...