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

Yesterday, the Senate, in a vote largely along party lines, approved the nomination of Gary Gensler to be the new chair of the Securities and Exchange Commission (SEC).  Gensler, a former Goldman Sachs executive who also ran the Commodities Futures Trading Commission during the Obama administration, is expected to lead the SEC in a different direction from that of former chair Jay Clayton.

Gensler’s appointment as the chair of the SEC breaks the 2-2 deadlock that resulted when Clayton stepped down following the presidential election in 2020. Somewhat interestingly, Gensler’s appointment was approved only for the remaining portion of Clayton’s term – which ends June 5, 2021, though under existing rules, he may remain in the position without further Senate approval for up to 18 months following the end of that term.  I don’t believe this signals that Gensler’s term will be a short one though, as the Senate has already calendared a vote on his appointment through June 5, 2026, and the Senate Banking Committee has approved him serving through that date also.


Continue Reading Gary Gensler Will Be New Securities and Exchange Commission Chair

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

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.


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

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.


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

In one of her first official actions as Acting Chair of the Securities and Exchange Commission (SEC or Commission), Allison Herren Lee reversed a major policy implemented by recently departed SEC Chairman Jay Clayton involving the SEC enforcement settlement process.  This decision could significantly impact the SEC settlement process by causing uncertainty for settling entities as to the business consequences of a settlement.  In a rare rebuke, two fellow SEC Commissioners promptly issued a statement decrying the Acting Chair’s decision.

Collateral Consequences of SEC Settlements

The federal securities laws contain provisions that impose restrictions on entities found to have violated certain statutes or regulations or that become subject to certain court-imposed injunctions or administrative orders.  These restrictions, commonly referred to as “collateral consequences,” range from prohibiting a settling entity (and possibly its affiliates) from taking advantage of certain exemptions under the federal securities laws to disqualifying an entity from engaging in specific business activities.  SEC settlements regularly trigger collateral consequences against settling SEC-regulated entities, like broker-dealers, hedge funds, investment advisers, and public companies.  For example, a public company issuer that settles with the SEC could be automatically disqualified from being considered a Well-Known Seasoned Issuer under Rule 405 of Regulation C.  Alternatively, a settlement could prohibit a settling investment adviser from providing advisory services to an investment company or from receiving cash fees for solicitations.

Given the serious collateral consequences an SEC settlement can trigger, and the fact that such consequences often are unrelated to the misconduct at issue in the corresponding SEC settlement, the SEC is authorized to grant disqualification waivers.  The SEC routinely grants waivers to prevent disproportionate and unintended consequences resulting from a settlement.


Continue Reading SEC Commissioners Square Off Over Enforcement Settlement Process

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.


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