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SEC Issues Rare Whistleblower Award to Audit Professional

On December 14, 2020, the Securities and Exchange Commission announced an award of more than $300,000 to a whistleblower who uncovered potential securities law violations in connection with audit-related responsibilities.  The whistleblower met with the SEC more than a dozen times and provided “high quality information and continuing assistance,” including identifying additional witnesses.  This is only the fourth time that the SEC has issued an award to an audit or compliance professional.

In announcing the award, Jane Norberg, Chief of the SEC’s Office of the Whistleblower, stated: “This award is an example of the important role that audit and compliance professionals can play in assisting the Commission’s enforcement efforts, especially when the entity is attempting to thwart an investigation.”  Compliance and audit professionals often have access to information that may evidence legal violations, as well as responsibilities to prevent or mitigate such violations.  While compliance and internal audit professionals generally are not considered eligible for whistleblower awards under the Program, there are three exceptions in which such personnel may become eligible whistleblowers:

  • when the whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the entity or investors;
  • when the whistleblower believes that the entity is engaging in conduct that will impede an investigation; or
  • when at least 120 days have elapsed since the whistleblower reported the information to his or her supervisor or the entity’s audit committee, chief legal officer, chief compliance officer – or at least 120 days have elapsed since the whistleblower received
  • SEC Shows no Goodwill for Issuer

    December 16, 2020

    Categories

    SEC Shows no Goodwill for Issuer

    December 16, 2020

    Authored by: Ashley Ebersole

    The SEC sued Sequential Brands on December 11 in Manhattan federal court, alleging that it failed to accurately calculate and disclose impairments to its goodwill in 2016 and early 2017.  According to the Complaint, this resulted in Sequential’s misleading investors by filing incomplete periodic reports, and failing to maintain both accurate books and records or a system of accounting controls to assure accurate transaction reporting.      

    Goodwill is an intangible asset recorded when one company pays more than net fair value to purchase another company.  GAAP mandates that acquiring companies assess potential impairments to their goodwill at least once a year and after any “triggering events,” and that any impairments to goodwill be recorded.  As alleged in the SEC’s Complaint, Sequential‘s annual goodwill testing beginning in fall 2016 that identified no goodwill impairment.  But weeks later, the company performed two additional internal calculations in December 2016 using the same methodology employed in its annual testing (and described in public filings).  These calculations indicated that Sequential’s goodwill was likely impaired, but the company did not share these results with its auditor.  The SEC alleges that rather than recording this impairment, Sequential performed a third, qualitative assessment that concluded goodwill was not impaired, but failed to account for internal fair value calculations and significant negative developments in its business.  Sequential thus avoided recording any goodwill impairment in 2016, which the Complaint says preserved its operating income at an inflated level, conveyed a false impression of financial health, and led to its filing

    SEC Penalizes Public Company for Misleading Disclosures of COVID-19 Impact

    In its first enforcement action against a public company for misleading disclosures regarding COVID-19’s business impact, the SEC released a December 4 Order Instituting Proceedings against The Cheesecake Factory Inc. and accepted its offer of settlement for a civil penalty of $125,000.  The charges arose from conduct in the period as the COVID-19 pandemic was first spreading across the United States.

    As recounted in the SEC’s Order, Cheesecake Factory repeatedly made 8-K current report filings in March and April 2020.  Those disclosures presented a misleading optimistic assessment that its restaurants were “operating sustainably at present” under an off-premises (takeout and delivery) dining model.  The Order further detailed that the restaurant chain’s “operating sustainably” assessment failed to account for corporate expenses, and its misleadingly positive portrayal was contrary to the reality that Cheesecake Factory was losing $6 million cash per week and its cash on hand could support only a few more months of operations.  Finally, in the latest iteration of “you cannot characterize as a possibility that which has already occurred,” Cheesecake Factory was penalized for the March disclosure that it was “evaluating additional measures to further preserve financial flexibility.”  This omitted that the company had already determined to take some measures, as exemplified by its late March notification to landlords that it would not be making April rent payments.

    While just the first of its kind, this action is consistent with the Division of Corporation Finance’s March 25, 2020 Disclosure Guidance that cautioned reporting companies regarding disclosure

    The SEC Experiments: Proposed Amendments to Include Certain Gig Workers in Compensatory Offerings under Rule 701 and Form S-8

    The SEC recently voted to approve proposed amendments to Rule 701 and Form S-8 governing the offer or sale of securities to employees through compensation programs.  The proposed amendments provide for a temporary, five-year expansion of Rule 701 and Form S-8 to permit public and private companies to issue securities as compensation to certain “platform,” or “gig” workers, subject to various conditions.

    Rule 701 provides an exemption from registration under the Securities Act of 1933, as amended, for the sale of securities by privately held companies to compensate employees, consultants, advisors and certain others under written compensatory benefit plans or written agreements.  Form S-8 is used by SEC reporting companies to register the sale of public company securities to employees, consultants and advisors.  Neither Rule 701 nor Form S-8 currently covers issuances to platform workers.

    The proposed amendments to Rule 701 would allow a non-reporting company to offer and sell securities to “platform workers,” who are defined in the amended rules as workers who, pursuant to a written contract or agreement, provide services to an issuer or a third party through the issuer’s “internet-based marketplace platform or through another widespread, technology-based marketplace platform or system.”  The proposed amendments to Form S-8 would permit a reporting issuer to include that same category of workers in compensatory offerings registered on Form S-8.  The proposed amendments also include conditions that are designed to limit the possibility that the amended rules could result in offers and sales of securities for capital-raising, rather than

    New Nasdaq Listing Proposal: Add Diverse Directors or Explain Why Not

    Nasdaq yesterday announced a proposed new listing rule that would require all Nasdaq-listed companies to publicly disclose consistent, transparent board diversity statistics in a specified form of matrix.  In addition, the proposed rule would require Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors:  one woman and one person who self-identifies as either an underrepresented minority or LGBTQ.

    Nasdaq believes its proposal would benefit investors and the public interest, citing in its SEC filing numerous empirical studies as support for its finding that diverse boards “are positively associated with improved corporate governance and financial performance.”  It also noted calls for diversity from institutional investors, corporate stakeholders and legislators.

    If the rule is approved by the SEC, companies would be required to disclose board-level diversity statistics within one year of the SEC’s approval of the listing rule.  In addition:

    • All operating companies will be expected to have one diverse director within two years of the SEC’s approval of the listing rule (non-operating companies, such as asset-backed issuers, cooperatives, limited partnerships and investment management companies, as well as certain specified issuers of non-equity securities, would be exempt from the proposed rule).
    • Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market will be expected to have a second diverse director within four years of the SEC’s approval.
    • Companies listed on the Nasdaq Capital Market will be expected to have a second diverse director within five years of the SEC’s

    SEC Proposes Significant Amendments to Rule 701 and Form S-8 to Better Align with Current Employment Practices

    The SEC recently approved proposed amendments to rules governing the offer or sale of securities to employees through compensation programs. The proposed changes to Rule 701 — which exempts sales of securities by privately held companies made to compensate employees, consultants and advisors — and Form S-8 – which is the form used to register the sale of public company securities to employees and others — are designed to modernize the framework for compensatory securities offerings in light of the significant evolution in such offerings and the composition of today’s workforce.

    We have prepared a client alert describing the amendments that can be found here.

    Good News: SEC Allows Electronic Signatures in Authentication Documents

    The SEC recently approved amendments to Rule 302(b) of Regulation S-T, which governs the signing of “authentication documents” relating to typewritten signatures included in documents that are filed with the SEC electronically via EDGAR.  Current Rule 302(b) requires that, prior to or at the time of such a filing, each signatory manually sign a signature page (or other document) “authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing.”  Rule 302(b), as amended, will for the first time allow a signatory to use an electronic signature (as an alternative to a manual signature) on any such authentication document, provided certain requirements are met, as described below.

    Effective Date.  The amendments will become effective upon publication in the Federal Register.  Following approval of the amendments, however, the SEC staff issued a statement indicating that, in light of COVID-19 concerns, early reliance on and compliance with amended Rule 302(b) is permitted.

    Attestation Document (New).  Before using an electronic signature in an authentication document for the first time, a signatory will be required to manually sign a document attesting that he or she agrees that the use of an electronic signature in any authentication document will be the legal equivalent of such individual’s manual signature.

    Electronic Signature Procedures.  In connection with the amendments, the SEC updated the EDGAR Filer Manual to set out the procedures that are required to be followed before an electronic signature may be used in an authentication document.  The electronic signing

    Modernizing Regulation S-K Amendments – Transitional FAQs from the SEC

    As covered in our blog post dated August 26, 2020, the SEC recently adopted amendments to Regulation S-K Items 101 (business description), 103 (legal proceedings), and 105 (risk factors) aimed at modernizing disclosure requirements.  The amended rules became effective on November 9, 2020.

    The SEC Staff (the “Staff”) recently published three transitional FAQs addressing questions that have arisen regarding the amendments:

    FAQ (1) – Applicability of Amended Items 101, 103 and 105 to Form S-3 Prospectus Supplements Filed on or after November 9, 2020.

    • The Staff confirmed that because Form S-3 requires only incorporation by reference – and not express disclosure – under Items 101 and 103, a registrant is not required to comply with amended Items 101 and 103 when, on or after November 9, 2020, it files a prospectus supplement to a Form S-3 registration statement that became effective prior to November 9, 2020. The registrant also is not required to amend the Form 10-K that is incorporated by reference into the Form S-3 to comply with amended Items 101 and 103.
    • The Staff noted that because Form S-3 requires that Item 105 disclosure be expressly included (i.e., the disclosure cannot be incorporated by reference), Securities Act Rule 401(a) would ordinarily require that the prospectus supplement comply with amended Item 105. The Staff indicated that it will not object, however, if the prospectus supplement is filed without amending the Form S-3 to comply with amended Item 105.  The registrant will, however, be required to comply with amended

    New SEC Enforcement Priorities Likely Under Biden Administration

    November 18, 2020

    Categories

    BCLP Washington Partner Ashley Ebersole was quoted Nov. 13 by Compliance Week regarding possible new enforcement priorities at the Securities and Exchange Commission under a Biden administration. Much will hinge on selection of a new SEC chairman, as current Chairman Jay Clayton has announced his intent to step down at year end before his term officially is scheduled to end in June 2021. “Selection of the new SEC chair, whether from inside the agency or outside, will signal much in terms of the likely approach,” said Ebersole, a former SEC attorney. He also noted that compliance officers “should be prepared for a continued SEC enforcement focus on pursuing fraud involving Main Street investors, but also a likely redoubling of efforts to sanction conduct by financial institutions.”

    SEC Modernizes Auditor Independence Rules to Focus on Actual Threats to Objectivity

    The Securities and Exchange Commission (the “SEC”) recently adopted final amendments to the auditor independence requirements set forth in Rule 2-01 of Regulation S-X.  The SEC stated that the final amendments were based on recurring fact patterns that the SEC staff has observed over the years in which certain relationships and services triggered technical independence rule violations without necessarily impairing an auditor’s objectivity and impartiality.  These relationships either triggered non-substantive rule breaches or required potentially time-consuming audit committee review of non-substantive matters, thereby diverting time, attention, and other resources of audit clients, auditors, and audit committees from other investor protection efforts.

    In the adopting release, the SEC stated that the amendments “…maintain the bedrock principle that auditors must be independent in fact and in appearance while…more effectively focusing the independence analysis on those relationships or services that are more likely to threaten an auditor’s objectivity and impartiality.”  The SEC anticipates that Rule 2-01, as amended, will make the auditor independence rules easier to apply and appropriately limit the situations in which auditors are not deemed to be independent.

    The amendments include, among others:

    • In connection with determining whether auditor independence exists in the context of initial public offerings, an amendment shortening the applicable look-back period to cover the immediately preceding fiscal year (rather than the period covered by the registration statement, which can be up to three years);
    • In connection with identifying relationships that may preclude a finding of auditor independence, an amendment providing that a sister entity
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