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There has been significant discussion lately about the need to restrict or improve the disclosure of trades made by corporate executives under 10b5-1 plans. In late 2019, I co-authored a series for Corporate Counsel discussing why public companies should consider updating their insider trading policies and training (see below with links to the article series).  In part three of the series, I discussed the regulatory focus on 10b5-1 plans, the stock trading plans that corporate executives routinely rely on to trade company stock.

Despite the legitimacy and legality of 10b5-1 plans, they have come under scrutiny by the media, academics and government officials for being subject to manipulation by corporate insiders.  My article summarized two pieces of legislation that had been introduced in Congress seeking to require the Securities and Exchange Commission (SEC) to formally review the regulations governing 10b5-1 plans and determine whether additional trading restrictions were warranted.

Executive Trades Under 10b5-1 Plans Scrutinized

While these bills have stalled in Congress, government officials have continued to scrutinize executive trades made under 10b5-1 plans and call for additional restrictions on the scope and use of these plans.  Two seniors SEC officials recently took the time to express concerns about 10b5-1 plans shortly before leaving their posts.  In a speech on November 19, 2020, outgoing SEC Chairman Jay Clayton expressed concern about situations where trading occurs (or does not occur) around times that 10b5-1 plans are implemented, amended or terminated.

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Continue Reading Insider Trading Policies and Training: Time for Another Refresher?

I was quoted in an article published by The Wall Street Journal examining how companies are reporting the financial impact of COVID-19 in disclosures. Regulating bodies have warned they will be closely monitoring disclosures this year to ensure companies are not misleading investors about the true positive and negative financial effects of the pandemic.

According…

Bass, Berry & Sims attorneys Kevin Douglas, Eric Knox and Sehrish Siddiqui were co-presenters alongside Stephanie Bignon, Assistant General Counsel, Delta Air Lines and Priya Galante, Vice President, Assistant General Counsel & Assistant Secretary, AutoZone at the Society for Corporate Governance’s Southeastern Chapter webinar earlier this month.

This program, titled, “Preparing for the Upcoming Proxy…

Since the Bass, Berry & Sims Corporate & Securities Practice hosted its 2nd Annual Corporate & Securities Counsel Public Company Forum in December 2020, the Biden Administration has proposed a new Securities and Exchange Commission (SEC) Chairman. Below is an update from our 2021 Financial Reporting & Disclosure Considerations panel discussion, in which Bass, Berry & Sims member Scott Holley reviews some potential areas of focus for the SEC under the new administration.

On January 18, then-President-elect Biden announced that he intended to nominate Gary Gensler to serve as chair of the SEC. Gensler, a former Goldman Sachs executive, served as the chairman of the Commodity Futures Trading Commission during a portion of the Obama administration. Under Gensler’s leadership, it is expected that the SEC’s efforts will include an increased focus on enforcement efforts as well as disclosures relating to climate change risk and diversity and inclusion efforts of boards of directors. Gensler’s recent service as a professor at MIT, where he taught courses on blockchain technology, digital currencies and financial technology, could also shape his agenda at the SEC.

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Continue Reading Public Company Forum Update: Reg. S-X Investment Test & SEC Focus under New Administration

Following the Securities and Exchange Commission’s (SEC) issuance of interpretive guidance regarding the disclosure of key performance indicators and metrics (KPIs) early last year, we’ve been tracking SEC comments in this area as the SEC fully incorporates the guidance into its disclosure review program. We’ve highlighted a few of the comment letters previously, but several recently issued comment letters caught our attention.

Spotting a KPI

Under the SEC’s KPI guidance, a KPI is one of the key variables through which management evaluates a company’s performance or status, disclosure of which would be material to investors. The SEC guidance states as follows:

“Some companies also disclose non-financial and financial metrics when describing the performance or the status of their business. Those metrics can vary significantly from company to company and industry to industry, depending on various facts and circumstances. For example, some of these metrics relate to external or macro-economic matters, some are company or industry specific, and some are a combination of external and internal information. Some companies voluntarily disclose specialized, company-specific sales metrics, such as same store sales or revenue per subscriber. Some companies also voluntarily disclose environmental metrics, including metrics regarding the observed effect of prior events on their operations.”

The guidance reminds companies that when including metrics in their disclosure companies should consider existing MD&A requirements as well as the extent to which an existing regulatory framework applies, such as GAAP or, for non-GAAP financial measures, Regulation G or Item 10 of Regulation S-K.  Although the SEC guidance instructs companies to consider whether other regulatory disclosure frameworks apply, in practice the lines between a KPI metric and a non-GAAP financial measure can be blurred in some cases.  And because of the SEC Staff’s laser focus on non-GAAP financial measure disclosures the past several years, it is easy to see how some companies may choose to err on the side of categorizing a metric as a non-GAAP financial measure when the metric falls in this blurred area.

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Continue Reading Are You Sure That Metric is a Non-GAAP Financial Measure? SEC’s Focus on Key Performance Indicators Continues

Following up on our prior blog post regarding 2020 first quarter COVID-19 adjustments in connection with the presentation of non-GAAP financial measures, we surveyed 102 S&P 500 companies who presented Adjusted EBITDA in their earnings release filed from October 1, 2020, to December 31, 2020.

We focused on Adjusted EBITDA in this survey (recognizing that such measure is utilized more frequently in some industries than others) because such measure is commonly utilized by public companies to measure their operational performance and frequently includes adjustments for items that are believed not to reflect the ongoing operational performance of the company.  While we limited our survey to S&P 500 companies that presented Adjusted EBITDA, we believe that the survey results have relevance for companies that present other types of non-GAAP performance measures that are adjusted for special items or items outside of the ordinary course of business.

Survey Results

Of the surveyed companies, 16 companies, or approximately 16%, included an adjustment in their calculation of Adjusted EBITDA related in some form to the COVID-19 pandemic, and 84% did not. The companies that included a COVID-19 adjustment in their Adjusted EBITDA calculation span across various industries, including, but not limited to, oil & gas, real estate, telecom services, lodging/hotel, and medical/scientific instruments.…
Continue Reading Adjusting for COVID-19 in Non-GAAP Financial Measures: A Survey of 2020 Fourth Quarter Disclosure Practices

On November 19, the Securities and Exchange Commission (SEC) continued its brisk pace of end-of-year rulemaking by approving amendments to Items 301, 302 and 303 of Regulation S-K, which collectively govern the disclosures of Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) as well as other selected financial data.  These amendments were initially proposed in January 2020 as part of the SEC’s ongoing effort to improve and modernize the current disclosure regime for both investors and companies.

The amendments will become effective 30 days after they are published in the Federal Register, which means they will probably be effective around the end of January assuming the typical timing for rule publication. At that time voluntary compliance is permitted, so long as registrants provide disclosure responsive to an amended item in its entirety. Compliance is not mandatory until a registrant reports on its first fiscal year ending on or after 210 days following publication, which means that for a calendar year-end filer, the Form 10-K filed in 2022 with respect to the fiscal year ended December 31, 2021.  However, we expect that many companies will welcome the new rules (particularly the elimination of the contractual obligations table and five-year selected financial table, among others) and begin complying sooner.

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Continue Reading SEC Adopts Amendments to MD&A and Other Financial Disclosures

In a prelude of things to come for public companies, on December 4 the Securities and Exchange Commission (SEC) sued restaurant operator The Cheesecake Factory Incorporated for making misleading disclosures regarding the impact of the COVID-19 pandemic on its financial conditions and operations. After issuing warnings and guidance to public companies since the early stages of the pandemic, this is the SEC’s first time charging a public company for misleading disclosures relating to the pandemic.

Allegations Against The Cheesecake Factory

The allegations against The Cheesecake Factory are straight forward. Early in the pandemic, The Cheesecake Factory disclosed in SEC filings that its restaurants were “operating sustainably.” The SEC alleged this disclosure contradicted internal company documents, which showed that due to the pandemic the company was losing approximately $6 million in cash per week, was projected to run out of cash in 16 weeks, and had notified its landlords that it would not pay rent in April.

The inadequacy of The Cheesecake Factory’s SEC filings was further confirmed according to the SEC when the company later shared the undisclosed financial information with potential private equity investors and lenders in connection with an effort to seek additional liquidity.

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Continue Reading SEC Files First Charges for Inadequate Public Company COVID-19 Disclosures

From a focus on climate change to a push for diverse corporate boards, ESG matters – those related to environmental, social and corporate governance – have become the focus of corporations and investors alike.  Regarding ESG-related disclosure standards in particular, investors and corporations are both anxious to adopt and challenged to choose a standard that is both comprehensive and relevant to the respective company or industry.

Though the CDP (formerly the Carbon Disclosure Project), Climate Disclosure Standards Board (CDSB), Global Reporting Initiative (GRI), International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) have gained a great amount of attention and influence in recent years, they often appear to be multiple attempts toward the shared goal of integrated and comprehensive sustainability reporting.  Investors and corporations alike have called for simplifying corporate reporting in this space.

In September 2020, all five of these framework and standard-setting institutions issued a joint statement reflecting a vision to develop a comprehensive global corporate reporting system for sustainability disclosure.  While that statement did not specify the precise form of such collaboration and did not include a specific timeframe, a recent announcement brought this vision one step closer to actualization.

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Continue Reading One Step Closer Toward Consolidating Corporate Sustainability Reporting Standards

Register NowJoin our corporate and securities attorneys for our 2nd Annual Corporate & Securities Counsel Public Company Forum. This virtual program will feature timely and practical guidance on the latest developments in corporate and securities matters impacting public company in-house counsel.

Panels will include speakers from AutoZone, BNY Mellon, Brown-Forman, Farmer Brothers…