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US Securities and Corporate Governance

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SEC proposes $3.4 billion increase to current $100 million reporting threshold for Form 13F

On Friday, July 10, the SEC proposed amendments to Form 13F to substantially increase the reporting threshold to $3.5 billion from the current level of $100 million and make certain other changes.  This would be the first change to the threshold since the form was adopted in 1978.

SEC rules require institutional investment managers to file a Form 13F for each quarter if the accounts over which they exercise investment discretion hold more than $100 million of “13(f) securities”, which primarily consist of U.S. exchange-traded stocks, shares of closed-end investment companies and shares of ETFs.  The form was adopted to promote greater visibility into the investment activities and holdings of larger investment managers.

According to the SEC, the new threshold would reflect proportionally the same market value of U.S. equities that $100 million represented in 1975, when Congress directed the SEC to develop a reporting regime.  The SEC believes the change would result in disclosure of over 90% of the dollar value of the holdings data currently reported while eliminating the Form 13F filing requirement and its attendant costs for the nearly 90% of filers that are smaller managers. Further, the aggregate value of section 13(f) securities reported by managers would represent approximately 75% of the U.S. equities market as a whole, as compared with 40% in 1981, the earliest year for which Form 13F data is available.

At the same time, the SEC acknowledges that some of the holdings data that would no longer be reported relates

80% of U.S. S&P 500 Companies Fail to Provide Guidance in Last Three Months

As U.S. public companies prepare to kick off the Q2 2020 financial reporting season, a clear trend is emerging, with 80% of S&P 500 companies refusing to provide earnings guidance during the last three months, according to a recent Bloomberg article.  That translates to more than 400 companies who failed to provide guidance to investors, with nearly all stating that they lack visibility because of COVID-19, based on a recent Seeking Alpha report.

For those companies that have issued guidance, Factset.com recently reported that during Q2 2020, 27 S&P 500 companies issued negative EPS guidance and 22 S&P 500 companies issued positive EPS guidance. Only 49 S&P 500 companies issued EPS guidance for Q2, which was well below the 5-year average of 106 for a quarter.

While the numbers and percentages reported above differ slightly, the trend toward withholding guidance is clear and understandable in the current environment.  The health and economic effects of COVID-19 remain uncertain and depend on the duration of the crisis.  Absent a vaccine for the virus, companies – particularly those in the consumer discretionary sector – grapple with how to profitably run a business where social distancing and avoidance of large crowds are the new norms.

On the other hand, the conservative position of failing to provide guidance seems at odds with investors’ desire for greater transparency and more insight into the range of potential outcomes and the ability of companies to manage through different scenarios during this period of pandemic and

A Detailed Analysis of the SEC’s Amendments to Financial Statement Requirements for Business Acquisitions and Dispositions

As we previously posted, the SEC recently adopted a number of amendments to the financial disclosure requirements for business acquisitions and dispositions by U.S. public companies including to (i) revise the requirements for financial statements and pro forma financial information for acquired businesses, (ii) revise the tests used to determine significance of acquisitions and dispositions giving rise to required financials, and (iii) permit certain expense omissions in those financial statements.

We have now prepared a client alert providing a more detailed analysis of the amendments, including descriptions of a number of changes incorporated in the final rule that differ from the SEC’s initial rule proposal.

The SEC stated in its adopting release that the amendments are intended to reduce the complexity of financial disclosure requirements for business acquisitions and dispositions, facilitate more timely access to capital, and reduce the complexity and costs to registrants to prepare the required disclosure.  As we note in our client alert, the result is that, as a practical matter, there will likely be fewer “significance” determinations and thus fewer historical and pro forma financial statement disclosures about acquired businesses.  And although the amendments are intended to streamline and simplify various aspects of the rules and filing requirements, these provisions of Regulation S-X remain highly complex. Registrants are advised to take great care in analyzing them in connection with the consummation of corporate transactions.

Public Companies Beware of SEC’s Continuing Interest in Accounting and Disclosure Cases

As the end of the quarter approaches for most public companies, it is important to keep in mind that the SEC’s Enforcement Division has brought numerous cases alleging financial and disclosure fraud in the past year.  Many of the cases stem from efforts to meet analysts’ earnings expectations by recognizing revenue prematurely or underreporting expenses and reserves.  Some of the notable matters include:

  • a case against a technology company alleging that it accelerated sales originally scheduled for future quarters, thereby masking declining market conditions,
  • a case against a large insurance company alleging that it underreported reserves, and
  • a case against a publicly traded REIT, alleging that it improperly adjusted “same property net operating income,” a non-GAAP metric.

Allegations in some of the other cases involved:

  • recognizing revenue when there were undisclosed side agreements enabling distributors to return product, or when getting paid was conditioned on the distributor’s sale to an end user,
  • inflating the value of a portfolio of complex reverse mortgage bonds, and
  • failing to correct an error in accounting for FX losses.

The cases are usually accompanied by allegations of books and records violations and significant deficiencies in internal controls.  The SEC almost always imposes multi-million dollar penalties on the companies and brings charges against the individuals the SEC deems responsible for the misstatements, which usually includes CEOs, CFOs and Controllers.

Financial reporting involves judgment calls that can be difficult to make.  It is important that the company’s motivation is accuracy and transparency in

SEC Amends Acquired Business Financial Statement Requirements

On May 21, 2020 the Securities and Exchange Commission adopted a number of amendments intended to reduce the complexity of financial disclosures required for business acquisitions and dispositions by U.S. public companies. These amendments will, among other things, (i) revise the requirements for financial statements and pro forma financial information for acquired businesses, (ii) revise the tests used to determine significance of acquisitions and dispositions, and (iii) for certain acquisitions of a component of a business, allow financial statements to omit certain expenses. The amendments are effective January 1, 2021, but registrants may voluntarily comply with the rules as amended prior to the effective date.

When a registrant acquires a business that is “significant,” other than a real estate operation, Rule 3-05 of Regulation S-X generally requires a registrant to provide separate audited financial statements of that business and pro forma financial information under Article 11 of Regulation S-X. The number of years of financial information that must be provided depends on the relative significance of the acquisition to the registrant. Similarly, Rule 3-14 of Regulation S-X addresses the unique nature of real estate operations and requires a registrant that has acquired a significant real estate operation to file financial statements with respect to such acquired operation.

The significance of an acquisition or disposition is based on an Investment Test, an Asset Test, and an Income Test. The amendments revise the Investment Test to compare a registrant’s investments in and advances to the acquired or disposed business to the

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