Financial Reporting Manual Has Been Updated

Yesterday, the SEC posted its updated Financial Reporting Manual, which was revised as of June 30, 2012 (search for the date tag, “Last updated: 6/30/2012,” to view the changes).   The SEC added a note regarding Title I of the Jumpstart Our Business Startups Act (JOBS Act) to the manual, but the note did not add any new guidance regarding the financial reporting and other requirements for emerging growth companies and just referred to the existing SEC guidance regarding the JOBS Act at http://www.sec.gov/divisions/corpfin/cfjobsact.shtml.

The remaining revisions to the Financial Reporting Manual clarify the following matters:

  • proxy statement requirements for the disposal of a business;
  • auditor association with amounts from inception in development stage companies;
  • application of PCAOB auditor requirements in connection with  a reverse merger; and
  • reporting requirements in a reverse acquisition with a domestic registrant that is not a shell company.

NASDAQ Has Proposed Changes to Its Compensation Committee Rules. What Should We Do Now?

If you work for a Nasdaq-listed company, you should pay close attention to Nasdaq’s proposal related to compensation committees rules.  The proposal was issued last week in response to the SEC’s Rule 10C-1 and Section 952 of the Dodd-Frank Act that required the SEC to direct the national securities exchanges to prohibit the listing of any equity security of an issuer, subject to certain exemptions, that does not comply with the Act’s requirements relating to compensation committees and compensation advisers. 

 Summary of Nasdaq’s Proposal

 Generally, Nasdaq has proposed the following changes to its compensation committee rules:

  •  companies must have a compensation committee consisting of at least two members, each of whom must be an independent director as defined in Nasdaq’s current listing rules;
  • compensation committee members must not accept directly or indirectly any consulting, advisory or other compensatory fee, other than for board service, from a company or any subsidiary thereof;
  • in determining whether a director is eligible to serve on a compensation committee, a company’s board of directors must consider whether the director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company; and
  •  companies must adopt a formal, written compensation committee charter that must specify, among other matters, the compensation committee responsibilities and authority as set forth in Rule 10C-1 relating to the: (i) authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers, other than in-house legal counsel.

 Effective Dates

 Proposed Nasdaq Listing Rule 5605(d)(3), which requires compensation committees to have the specific responsibilities and authority relating to compensation consultants, independent legal counsel and other compensation advisers, will be effective immediately upon the SEC’s approval of the Nasdaq’s proposal. 

 Nasdaq-listed companies must comply with the remaining amended listing rules described aboveby the earlier of: (1) their second annual meeting held after the date of approval of the proposed rules; or (2) December 31, 2014.  A company must certify to Nasdaq, no later than 30 days after the implementation deadline applicable to it, that it complied with the amended listing rules on compensation committees (Nasdaq will provide a form for this certification).

 What Should We Do Now?

 Please see below a list of suggested action items in connection with such proposals:

  1.  If you do not have a compensation committee and a majority of independent directors is making, or recommending to the board, compensation decisions related to executive officers of the company, start evaluating potential candidates for compensation committee membership.
  2. If you have a compensation committee consisting of one director, start evaluating potential candidates to expand the compensation committee to two members, as suggested by the SEC, or even to three members in order to avoid giving each director a veto power.
  3. Consider whether existing members of the compensation committee or potential members of the compensation committee are getting any compensatory fees from the company or any of its subsidiaries or are affiliated with the company or a subsidiary of the company or an affiliate of a subsidiary of the company.  Evaluate whether any changes to the current composition of the compensation committee are necessary.
  4. Implement new responsibilities and authority applicable to compensation committees, or independent directors involved in compensation decisions, relating to: (i) authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers through a charter amendment or board resolution.
  5. Draft a new, or revise an existing, compensation committee charter.

 

New PCAOB Standard for Communications with Audit Committees

On August 15, 2012, the Public Company Accounting Oversight Board (PCAOB) adopted Auditing Standard No. 16, Communications with Audit Committees.  This standard sets forth matters that the auditor should discuss with audit committees prior to the issuance of the auditor’s report.  Standard No. 16 supersedes PCAOB’s interim standards AU sec. 380, Communication with Audit Committees, and AU sec. 310, Appointment of the Independent Auditor.  The PCAOB expects Standard No. 16, which is subject to the SEC approval, to be effective for audits of fiscal years beginning on or after December 15, 2012.  In addition, the PCAOB will request, subject to the SEC’s separate determination, that this standard apply to the audits of emerging growth companies established under the JOBS Act.

Standard No. 16 enhances certain existing auditor communication requirements and adds new communication requirements that provide the audit committee with additional information about the audit, including the following:

  • an overview of the overall audit strategy, including timing of the audit, significant risks the auditor identified, and significant changes to the planned audit strategy or identified risks;
  • information about the nature and extent of specialized skill or knowledge needed in the audit, the extent of the planned use of internal auditors, company personnel or other third parties, and other independent public accounting firms, or other persons not employed by the auditor that are involved in the audit;
  • the basis for the auditor’s determination that he or she can serve as principal auditor, if significant parts of the audit will be performed by other auditors;
  • situations in which the auditor identified a concern regarding management’s anticipated application of accounting pronouncements that have been issued but are not yet effective and might have a significant effect on future financial reporting;
  • difficult or contentious matters for which the auditor consulted outside the engagement team;
  • the auditor’s evaluation of going concern;
  • departure from the auditor’s standard report; and
  • other matters arising from the audit that are significant to the oversight of the company’s financial reporting process, including complaints or concerns regarding accounting or auditing matters that have come to the auditor’s attention during the audit.

How should companies evaluate whether there is a conflict of interest related to the compensation consultant’s work?

Tomorrow, on July 27, 2012, a new Regulation S-K, Item 407(e)(3)(iv), disclosure requirement focusing on the conflicts of interest of compensation consultants will become effective.  Item 407(e)(3)(iv) disclosure should be addressed in any proxy or information statement for a meeting of shareholders at which directors will be elected occurring on or after January 1, 2013.

Pursuant to the new requirement, public companies will have to disclose the nature of the conflict of interest, if any, related to the compensation consultant’s work on executive and director compensation and how the conflict of interest is being addressed.  To comply with this requirement, one of the threshold questions that a public company should ask is whether there is a conflict of interest.

In order to evaluate whether such conflict of interest exists, public companies should act now to establish controls and procedures for obtaining conflict of interest information. For example, the company should:

1. Establish internal procedures and processes to track:

(i)  all services provided to the company by the compensation consultant and the entity that employs the consultant starting from the last completed fiscal year; and

(ii) the amount of fees paid by the company to the entity that employs the compensation consultant.

2. Request from the compensation consultant, or from the entity that employs the consultant, the following information:

(i) the percentage that the amount of fees received from the company by the entity that employs the compensation consultant represents to the total revenue of such entit; and 

(ii) direct or indirect ownership of the company’s stock by the compensation consultant, and

(iii) policies and procedures of the entity that employs the compensation consultant that are designed to prevent conflicts of interest.

3. Add the following question to the company’s Directors’ and Officers’ Questionnaire:

Do you have a business or personal relationship with the compensation consultant or the entity employing the compensation consultant?   ___ Yes  ___ No         

If “yes,” please describe:

                                                                                                          

                                                                                                          

 

Stay Tuned for SEC Announcements About Registration Statement Submissions for Confidential and Non-Public Review Via an EDGAR-Based System Instead of a Secure Email System

Since May 2012, the SEC has been accepting draft registration statements via a secure email system from emerging growth companies for confidential, non-public review under the JOBS Act and from certain foreign private issuers for non-public review process under the SEC’s policy.  

The SEC has announced today that it intends to replace the secure email system with an EDGAR-based system for confidential and non-public submissions of draft registration statements.  Some of the necessary modifications will be in place beginning July 2, 2012. However, the SEC is still working on implementing the EDGAR-based system, and companies should continue to use the secure email system until the SEC announces that the new EDGAR functionality is available. 

 

What has changed in compensation committee requirements and disclosures after the issuance of the new SEC release last week? What should we do now?

Due to the SEC’s adoption of a new Rule 10C-1, Listing Standards Relating to Compensation Committees, we are one step closer to having the mandate of Section 952 of the Dodd-Frank Act fully implemented and to securities exchanges adopting listing standards relating to the independence of the compensation committee members, the committee’s authority to retain compensation advisers, and the committee’s responsibility for the appointment, compensation and oversight of the work of a compensation adviser. Each national securities exchange must provide to the SEC proposed rules that comply with Rule 10C-1 no later than September 25, 2012 and must have final rules that comply with Rule 10C-1 no later than June 27, 2013.

Public companies will also have to comply with a new disclosure requirement related to the conflicts of interest of compensation consultants in any proxy statement for a meeting of shareholders at which directors will be elected occurring on or after January 1, 2013.  Pursuant to this new requirement under Item 407(e)(3)(iv) of Regulation S-K,  public companies will have to disclose the nature of the conflict of interest, if any, related to the compensation consultant’s work on executive and director compensation and how the conflict is being addressed. 

In addition to monitoring the rulemaking of national securities exchanges related to the implementation of Rule 10C-1 directives, public companies should consider taking the following actions in connection with the required analysis of the conflicts of interest related to the work of a compensation consultant:

  • establish procedures for obtaining information about (i) all services provided to the company by the compensation consultant and the entity that employs the consultant during the last completed fiscal year, (ii) the amount of fees received from the company by the entity that employs the compensation consultant as a percentage of the total revenue of such entity, and (iii) any stock of the company owned by the compensation consultant;
  • request and review the policies and procedures of the entity that employs the compensation consultant that are designed to prevent conflicts of interest; and
  • update directors’ and officers’ questionnaires to include questions related to the business or personal relationships of (i) the compensation consultant with a member of the compensation committee; and (ii) the compensation consultant, or the entity employing the compensation consultant, with an executive officer of the company.

Form PF Filing Fees

The SEC has approved filing fees for investment advisers registered with the SEC filing Form PF.  Fees are charged for Annual Reports and Quarterly Reports to Form PF ($150 for each Annual Report and Quarterly Report). Fees must be credited to the firm’s IARD Daily Account before the filing can be submitted. No fee is charged for filing an electronic amendment to Form PF, a final Form PF filing, or a transition to annual reporting filing.

Social Media and Regulation FD

Given the role that social media is playing in our lives now, would a tweet or a message posted on LinkedIn or Facebook qualify as “public disclosure” under Regulation FD? 

Regulation FD states that dissemination of information through a method (or combination of methods) of disclosure that is “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” would qualify as public disclosure of previously conveyed material nonpublic information regarding the company.

To follow the SEC’s logic described in its 2008 interpretative release regarding the use of company web sites, it seems that company tweets or LinkedIn/Facebook disclosure would qualify as broad and non-exclusionary distribution of information only if: (i) a company’s presence on these social media web sites is viewed as a recognized channel of distribution for information about the company, its business, financial condition and operations, and (ii) disclosure of information through social media tools disseminates the information in a manner making it available to the securities marketplace in general.  It remains to be seen whether social media web sites will become an appropriate FD disclosure vehicle.   

 

SEC Issued Guidance on MD&A and Accounting Policy Disclosures of Smaller Financial Institutions

On April 20, 2012, the SEC issued CF Disclosure Guidance: Topic No. 5, providing examples of comments it may issue to smaller financial institutions on Management’s Discussion and Analysis and accounting policy disclosures related to asset quality and loan accounting issues (for example, allowance for loan losses, charge-off and nonaccrual policies, commercial real estate loans, loans measured for impairment based on collateral value, credit risk concentrations, troubled debt restructurings and modifications, and other real estate owned).  In addition, the SEC provided examples of comments that may be issued to companies that acquired material assets in FDIC – Assisted Transactions.  This guidance is very timely for the current 10-Q season.

SEC Starts Posting Its Orders Revoking Exchange Act Registration and Stop Orders on EDGAR

Today, the SEC will begin to republish through the EDGAR system its orders revoking a company’s Exchange Act registration pursuant to Exchange Act Section 12(j) and SEC stop orders pursuant to Securities Act Section 8.  Currently, these orders are posted on the SEC web site, but they are not part of the EDGAR database.  The SEC will begin republishing most recently issued orders first going back to orders issued in 2004, and it will be publishing new orders as they are issued. The order revoking Exchange Act registration will appear as the document type “REVOKED,” and stop orders will appear as the document type “STOP ORDER,” in the company’s filing history. In addition, when the SEC republishes its order revoking Exchange Act registration on EDGAR, it will modify the company information at the top of a company’s EDGAR search results to include the phrase “This company’s Exchange Act registration has been revoked.”  As a result of this change, information about the status of the company’s Exchange Act registration or existence of stop orders suspending the effectiveness of a registration statement will be much more transparent and easier to search.