SEC Amends NYSE’s After Market Announcement Rule

The SEC recently approved an amendment to NYSE’s Listed Company Manual prohibiting companies from issuing material news after NYSE closes for trading – 4:00 p.m. Eastern time on normal trading days – until the earlier of (a) publication of the company’s official closing price by NYSE and (b) five minutes after NYSE’s official closing time. An important exception permits companies to publicly disclose material information immediately following a non-intentional disclosure if necessary to comply with Regulation FD. According to the SEC’s final rule release, the amendment is designed to address the fact that trading occurs after 4:00 p.m. Eastern time on other securities exchanges and non-exchange venues (known as “away markets”). Therefore, if a company issues material news before NYSE completes its trading process and posts the company’s closing price, there can be material differences between NYSE’s closing price and trading prices on away markets, potentially creating “significant investor confusion.” As a practical matter, this means that NYSE-listed companies should wait at least five minutes before releasing news after the market closes in order to comply with the new rule. This is a change from the old advisory text to Section 202.06 of NYSE’s Listed Company Manual, which requested that listed companies wait until the earlier of publication of their security’s official closing price on NYSE and 15 minutes after NYSE’s closing time before releasing material news. Note also that this is another installment in NYSE’s ongoing tinkering with its market notification rules. For example: An August 2017 rule change requires listed companies to give notice to NYSE’s Market Watch team at least 10 minutes prior to – rather...

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 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...

The New Auditor Reporting Standards

Late last month, the SEC approved the new auditing standards adopted by the PCAOB back in June, which substantially modify the content of the auditor’s report. They also raise various concerns that public companies and the SEC will need to closely monitor going forward. Critical audit matters disclosure. By far the biggest and most controversial change to the old standards is the requirement that the auditors include in a separate section of their report “critical audit matters” applicable to the current period covered by the report. CAMs are defined as: “any matter … that was communicated or required to be communicated to the audit committee and that relates to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective, or complex auditor judgment.” The auditor must identify the CAM, describe the principal considerations that led the auditor to determine it was a CAM, describe how the CAM was addressed in the audit, and reference the accounts or disclosures related to the CAM. In the unlikely event that a report contains no CAMs, it must affirmatively so state. Though the determination of a CAM is supposed to be principles-based, the new rules provide a nonexclusive list of factors for the auditor to consider in its determination. Even so, the standards emphasize that disclosure must be tailored to the particular company and audit, meaning that it should not be boilerplate. Emerging growth companies and employee stock purchase plans, savings plans and similar plans are excluded from the CAM disclosure requirements. Additional changes. The modified auditor’s report also must: State the year the auditor began serving as...

An Unexpected Free Cash Flow Comment from the SEC Staff

It is surprising how much attention free cash flow continues to generate in SEC disclosures. After all, it’s been used for decades as a non-GAAP financial measure. In fact, back in 2003, the SEC’s non-GAAP financial measure FAQs stated that companies should be “cautious” when using it, noting that it does not have a uniform definition and might inappropriately imply that it represents residual cash flow available for discretionary expenditures. Fast forward to the much-scrutinized 2016 non-GAAP financial measures C&DIs, which essentially repeated the old free cash flow FAQ, though now companies need only be “aware” of, rather than “cautious” about, the absence of a uniform definition. This softer language presumably reflects the staff’s general softening toward non-GAAP measures, which it now sees as helpful disclosure so long as it’s done properly. Then unexpectedly (at least to me), Monsanto Company received the following comment in a February letter that appears to have resulted from the staff’s routine review of Monsanto’s Form 10-K: “We note you define free cash flow as the total of net cash provided or required by operating activities and net cash provided or required by investing activities. Pursuant to Question No. 102.07 of the Staff’s Compliance & Disclosure Interpretations (“C&DIs”) on Non-GAAP Financial Measures, issued May 17, 2016, please advise of your consideration given to redefining this measure or its computation as the typical calculation of free cash flow (i.e., cash flows from operating activities less capital expenditures). Please provide us with any proposed revisions to your disclosure of free cash flow to be included in future filings.” The comment seems inconsistent with the staff’s position...

What’s Happening with Pay Ratio Disclosures?

Well, we’re more than half-way through the year, Independence Day has come and gone, the 2018 proxy season is closer than it used to be, and we still don’t know whether pay ratio disclosures will go away. A brief background. Dodd-Frank Act Section 953(b) requires that the SEC amend Item 402 of Regulation S-K to mandate pay ratio disclosures. In 2015, the SEC dutifully adopted the mandated rules, which state that all companies required to provide executive compensation disclosure under Item 402(c) of Regulation S-K must provide new executive compensation disclosure regarding: the median of annual total compensation of all employees, the annual total compensation of the CEO, and the ratio of those two amounts. The new rules, which are complex and involve much time-consuming preparation, require companies to report the pay ratio disclosure for their first fiscal year beginning on or after January 1, 2017. This means that, for calendar-year companies, the new disclosures are required in 2018 proxy statements. Companies generally reacted with an initial howl of outrage over the perceived arbitrary uselessness of these disclosures, observed that the implementation date was nearly three years away, and then studiously ignored the issue, hoping that in the meantime Section 953(b) would be modified or repealed. Yet, as 2017 rounded into view, the Division of Corporation Finance issued guidance regarding some of the rule’s vaguer points, seemingly in part to remind companies that the rule was still out there and that much work was required to comply with its provisions. But just as companies reluctantly began to gear up (or to think about gearing up) to collect the necessary compensation...