It is probably safe to say that most public companies have experienced the difficult situation of needing to issue preliminary financial results after the quarter ends but before the customary date that financial results would otherwise be publicly released.  A number of factors could cause this situation to arise, such as any of the following:

  • A securities offering will be launched during this time period.
  • The most recent quarter is materially different than market expectations (either unusually weak or unusually strong).
  • Management will be participating in a conference and desires to speak about recent results, among other reasons.

In securities offerings, preliminary financial results are often called “flash” numbers or “capsule financial information,” and, outside of offerings, the market may refer to an earnings release containing preliminary financial results as a “pre-release” (i.e., a preliminary earnings release before the actual, final earnings release).


Continue Reading “Actual Results May Differ Materially From These Estimates;” SEC Staff Objects to Disclaimer Language When Giving Preliminary Financial Results

Late last year, the Securities and Exchange Commission (SEC) adopted amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make according to Regulation S-K.  An important component of these updates was the new requirement in Item 101 (Description of Business) of Regulation S-K to require registrants to make certain human capital disclosures to the extent material to an understanding of its business as a whole.

The new rule amended Item 101(c) to require registrants to provide “a description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business.” The disclosure is only required to the extent such information is material to the registrant’s business as a whole, and the SEC in the adopting release stated that each registrant’s disclosure “must be tailored to its unique business, workforce, and facts and circumstances.”

As a result of these amendments, along with disclosing the number of employees, companies must also consider how to comply with the new principle-based rule. The SEC intentionally did not define “human capital,” reasoning that the term “may evolve over time and may be defined by different companies in ways that are industry specific.” The adopted rule states that the required disclosures may include “measures or objectives that address the development, attraction and retention of personnel.” But the SEC made clear that these are just “examples of potentially relevant subjects, not mandates.” Thus, companies have broad discretion in deciding which human capital measures to disclose.


Continue Reading A Survey of Recent SEC Comment Letters on Human Capital Disclosures

On July 28, Securities and Exchange Commission (SEC) Chair Gary Gensler delivered remarks at the Principles for Responsible Investment’s Climate and Global Financial Markets Webinar.  In his remarks, he offered a glimpse of responses received by SEC Commissioner Allison Herren Lee to her March 2021 call for input on climate change disclosures.  (See our recent blog post summarizing recent efforts by the Biden administration.) Chairman Gensler also covered some of the items he has asked the Staff to consider as part of its proposal for mandatory climate risk disclosure to be developed by the end of this year.

Chairman Gensler noted that more than 550 unique comment letters were submitted in response to Commissioner Lee’s statement on climate disclosures in March. He pointed out that three out of every four of these responses supported mandatory climate disclosure rules.

The demand for climate risk disclosure is strong and supports Chairman Gensler’s simple rationale for the SEC’s recent focus on climate risk disclosure – “So why am I talking about climate risk? Simple: because investors are . . . Investors are looking for consistent, comparable, and decision-useful disclosures so they can put their money in companies that fit their needs.”  Required climate risk disclosure might help bring the clarity and consistency that investors have been seeking in this regard.


Continue Reading A Glimpse into Required Climate Risk Disclosure Considerations by the SEC

While we have seen an increased focus on environmental, social and governance (ESG) disclosure the last few years, there has been a whirlwind of activity during the last six months by President Biden, Congress and the Securities and Exchange Commission (SEC) in this regard.

In March 2021, the SEC’s 2021 Examination Priorities Report included ESG-related matters. The same month the SEC also announced the creation of the Climate and ESG Task Force within the Division of Enforcement to focus on climate-related disclosure by U.S. public companies under existing rules and issued a public statement considering far-reaching changes to the SEC’s existing disclosure rules regarding climate change (public comments were due by June 13, 2021).

In April, President Biden announced a new target for the United States to achieve a 50-52% reduction from 2005 levels in economy-wide net greenhouse gas pollution in 2030 to help “tackle the climate crisis.” In May 2021, SEC Chairman Gensler confirmed the Staff was working on recommendations for proposed rules regarding issuer disclosure of climate-related risks and human capital alongside President Biden’s May 2021 Executive Order on Climate-Related Financial Risk.  Among other things, the Executive Order contemplates a government-wide strategy to mitigate climate-related financial risk and calls for assessment of risks that climate change presents to the financial system.


Continue Reading Potential Federal Regulation of ESG Disclosure: A Whirlwind of Activity

The number of frameworks and standards in the environmental, social and governance (ESG) space can be overwhelming.  While various organizations have set up different standards and frameworks, last year five of them — the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), the Global Reporting Initiative (GRI), the Climate Disclosure Standards Board (CDSB), and the Carbon Disclosure Project (CDP) — announced plans to harmonize their standards and frameworks to provide more consistency. (See our blog post for additional information on this initiative).

In December 2020, this “group of five” published a prototype climate-related financial disclosure standard that illustrates how the concepts from their joint paper can be applied to climate disclosure and consolidates content and metrics into a single, practical guide.  Notably, the publication of the prototype coincided with the fifth anniversary of the Paris Agreement.

SASB and IIRC

SASB and the IIRC also announced plans to combine under the oversight of a new organization to be called the Value Reporting Foundation.  The official merger was formalized just this month.  The merger of two entities focused on enterprise value creation represents meaningful progress toward simplifying ESG reporting.


Continue Reading ESG Organizations: The Journey Toward Consolidation and Collaboration Continues

It should come as no surprise to readers of our blog that public companies often expend significant resources each year on managing litigation matters.  As a result, perhaps it is natural that some companies might want to convey financial results that exclude (or adjust out) these litigation expenses from their GAAP results as they arguably do not relate to the core performance of the company’s business.

When considering whether to include an adjustment for litigation expenses in non-GAAP measures, companies should be mindful of how they identify and disclose such expenses (e.g., outside of the ordinary course of business (non-recurring)).  In monitoring recent Securities and Exchange Commission (SEC) comment letters, we found a letter exchange that we believe demonstrates the principal disclosure considerations at issue.

Background

As background, Item 10(e) of Regulation S-K provides that a registrant must not “adjust a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years.” (Emphasis added.)


Continue Reading Adjusting for Litigation Expenses in a Non-GAAP Financial Measure

The market has seen a boom in the last two years for emerging companies going public through the use of special-purpose acquisition companies (SPACs).  SPACs are attractive vehicles for allowing a private company to gain quicker access to public capital and avoid the traditional initial public offering (IPO) process.  A SPAC starts as a public company through a traditional IPO but has no operations.  The SPAC raises public funds under the premise that it will use those funds to find a target private company in which to invest.  Once the target is identified, the SPAC goes through a business combination transaction (called a de-SPAC transaction) whereby the SPAC and private target engage in a merger transaction, with the result being the target survives as a public company.

The recent dramatic increase in using SPACs, however, has faced increased scrutiny.  More recently, this trend has raised the attention of the U.S. Securities and Exchange Commission (SEC) along with plaintiff stockholder class action law firms.  Directors and officers (D&O) insurance carriers are also adjusting their premiums and policy terms to account for these increased risks in using SPACs.  Such rising concerns are only heightened by recent news reports of gaps in certain deals between returns for insiders versus later investors who suffer losses after a company becomes public via a SPAC.

This post highlights recent SPAC-related issues raised by the SEC and litigation filings, including potential conflicts with SPAC sponsors, accounting controls for targets, and the financial projections companies use when attracting support for a SPAC transaction.  SPAC sponsors and potential SPAC target companies should be aware of these developments as they consider the booming SPAC market.  Notwithstanding these headwinds, it is likely the SPAC market (particularly the de-SPAC market) will continue to be strong in 2021 as valuations continue to be attractive and given the reality that so many SPACs are in the market competing for targets.


Continue Reading Hot SPAC Market Increases SEC Scrutiny and Litigation Risks

I, along with Delta Air Lines Assistant General Counsel Stephanie Bignon, recently authored an article for Corporate Compliance Insights addressing the latest developments impacting SEC periodic reporting disclosure practices.

“Public companies have been monitoring and rapidly adapting to a wide array of developments impacting periodic reporting disclosure practices over the last year,” we wrote in the article.

In addition to various SEC rules changes that have been adopted over the last year, we provided an extensive overview of four key areas which are anticipated to impact periodic reporting for the remainder of 2021:


Continue Reading Periodic Reporting for Public Companies in 2021: What Lies Ahead

Institutional investors and proxy advisory firms continue to develop and refine their policies regarding board diversity. While gender diversity on public company boards has been in focus for some time now, institutional investors and proxy advisory firms are also increasingly focusing on racial and ethnic diversity as part of their evolving approach to board diversity.

This post is a summary of published board diversity policies of certain institutional investors and proxy advisory firms into a singular resource for ease of reference. Below the initial breakdown, certain policies concerning board diversity shareholder proposals are described. 


Continue Reading A Summary of Certain Proxy Advisory Firm and Institutional Investor Board Diversity Policies

Fittingly, the Securities and Exchange Commission (SEC) came into March like a lion. In addition to numerous SEC enforcement actions being filed this month, there were important developments with respect to the SEC’s enforcement and examination programs.  This notice briefly describes three of these SEC developments.

March 3:  SEC Division of Examinations Releases 2021 Examination Priorities

The SEC’s Division of Examinations (formerly the Division of Compliance and Examinations) released its 2021 Examination Priorities.  The Division publishes examination priorities annually to provide insights into its current approach to conducting examinations of registered broker-dealers and investment advisers and to highlight the areas it believes present potential risks to investors and market integrity.

Some of the key SEC examination priorities identified in the release are:

  • Compliance with Regulation Best Interest and whether registered investment advisers have fulfilled their fiduciary duties of care and loyalty.
  • Whether firm business continuity and disaster recovery plans are accounting for the growing risks associated with climate change.
  • Adequacy of the compliance programs of registered investment advisers.
  • Compliance with anti-money laundering requirements.
  • Firm exposure to LIBOR and firm preparations for the discontinuation of LIBOR.


Continue Reading SEC Roars Into March With Significant Enforcement Developments