United States: Looking Ahead To The New Reporting Season: Tips, Updates And Trends For SEC Filers

The dawn of a new year marks an important time for companies with SEC reporting obligations to prepare for the upcoming reporting season. This memorandum highlights a variety of important topics that companies should be mindful of as the new year begins and includes reviews of and updates on, among other topics, certain existing and new disclosure obligations (including a discussion of the use of social media), annual eligibility assessments and other reminders, NYSE and NASDAQ rule changes, executive compensation matters relevant to the upcoming proxy season and top trends in regulatory and SEC enforcement. In addition, a convenient SEC reporting calendar highlighting due dates for key filings and other important information is attached to this memorandum.

  • Regulation FD Compliance. SEC Regulation Fair Disclosure ("Reg. FD") remains a challenge for the management of every reporting company. Reg. FD regulates the constant informal contacts between companies and investors – investor conferences, "one-on-one" meetings, day-to-day telephone calls and other informal contacts. Reg. FD restricts investor relations contacts for public companies from selectively disclosing material, nonpublic information to investors. Looking at the year ahead, recent SEC Reg. FD developments underscore two practical issues:
    • Management Training. In bringing a September 2013 settled action alleging Reg. FD violations against Lawrence Polizzotto, the SEC announced that no proceeding would be initiated against his former employer, First Solar Inc., due to its cooperation and a number of other factors, including the SEC‟s observation that "First Solar cultivated an environment of compliance" through its disclosure committee and Reg. FD training. See SEC Release 2013-174 (Sept. 6, 2013). Many public company managers have to learn "real time" reporting skills to make quick materiality assessments and disclosure judgments. These are skills different from those honed through financial reporting obligations. Even the most experienced management team benefits from a "refresher" on the Reg. FD rules and the constant potential pitfalls.
    • Social Media as Disclosure Tools. The most closely-watched SEC Reg. FD investigation in recent memory focused on an alleged 2012 disclosure of material corporate information on the Facebook page of Netflix, Inc. CEO Reed Hastings. The SEC closed the investigation with an April 2013 report specifying that social media channels – such as Facebook or Twitter – can serve as appropriate vehicles to disclose material information if companies have previously alerted investors that these channels will be used for these purposes. See Exchange Act Release No. 69279 (Apr. 2, 2013). For the vast majority of companies, established tools (like the press release and SEC Form 8-K) remain the best channels for disclosure of material corporate information. At the same time, social media channels provide a useful tool to supplement public company disclosures.
  • Revisiting Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"). The beginning of a new year for many companies means it‟s time to dust off last year‟s Form 10-K or Form 20-F and start preparing the company‟s annual report for the recently completed fiscal year. Although MD&A is nothing new in the landscape of disclosure, it continues to embody a critical source of information for investors. With this in mind, it is helpful to revisit the purpose, focus and other aspects of MD&A as companies begin the process of drafting the upcoming annual report.
    • The purpose of MD&A is to satisfy three objectives: (1) to provide a narrative explanation of a company‟s financial statements that enables investors to see the company through the eyes of management, (2) to enhance the overall financial disclosure and provide a context for investors to analyze financial information, and (3) to disclose information about the quality and variability of a company‟s earnings and cash flow, so that investors can judge whether past performance is indicative of future performance.
    • Companies should focus on providing material information, disclosing key performance metrics (both financial and non-financial performance indicators) used by management to run the business and that are material to investors, identifying known trends and uncertainties that are reasonably likely to have a material effect on the company‟s financial condition and operating performance and including an analysis that explains management's view of the implications and significance of the information required by the rules.
    • When drafting MD&A, companies should collectively review Item 303 of Regulation S-K, Item 5 of Form 20-F (in the case of foreign private issuers) and a series of SEC interpretive releases, which together set forth the disclosure requirements and the SEC‟s expectations on the purpose, form, content and approach to MD&A. Companies should also make sure to continue to reflect disclosure arising from past SEC comment letters that affect MD&A disclosure, to the extent still applicable.
    • We encourage companies to use the opportunity of a new reporting season to approach drafting and improving MD&A as they would in connection with drafting a prospectus for an IPO or other securities offerings.
  • Revisiting Risk Factors. Including a robust and current risk factor section in periodic reports serves the dual purpose of satisfying express form requirements and protecting against potential antifraud liability for forward-looking statements. When reviewing the risk factor section, it is important to make sure that the section is up-to-date with respect to both the selection of risks included as well as the description of the risks. Risk factors should be specifically tailored to the company‟s business and circumstances rather than reflecting generic risks that could apply to any company. Other questions to consider when revisiting the risk factor section include:
    • Are the risks logically grouped and ordered? It is helpful to group risks into categories (e.g., business risks, industry risks and risks relating to debt and common stock) and to list risks in order of priority with the most critical risks appearing first.
    • Does the caption for each risk factor adequately describe the risk presented in the accompanying text? Risk factor captions should not only serve as sub-headings but should also stand alone as a succinct summary of the risk being discussed.
    • Are the risk factors written in plain English? The SEC requires that the risk factor sections of disclosure documents comply with the SEC‟s plain English writing principles.
    • Do any of the risk factors contain mitigating language? Mitigating language may diminish the value of the warning that the risk factor is intended to convey and should be eliminated. The staff of the SEC frequently raises this point when providing comments on a company‟s risk factors.
    • Has the company issued a prospectus or private offering document since filing its latest periodic report? Companies should make sure to update their annual reports to reflect any new or revised risk factors included in offering documents issued since the prior year‟s annual report. The same principle applies to Form 10-Qs, which are required to include any material changes from the risk factors disclosed in the most recent Form 10-K.
  • Revisiting Forward-looking Statements. The forward-looking statements disclaimer that companies typically include in their SEC filings and press releases is designed to protect against antifraud liability by complying with the safe harbor under Section 21E of the Exchange Act.1 This safe harbor protects against antifraud liability for any forward-looking statement that is (1) identified as a forward-looking statement and (2) accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.2 In order for the forward-looking statements disclaimer to be effective, it is important that it is both well-tailored and up-to-date. Accordingly, companies should review the disclaimer and consider the following:
    • Is the portion of the disclaimer that is intended to identify the forward-looking statements consistent with the actual forward-looking statements made throughout the document? If the disclaimer is set up to include a list of topics about which forward-looking statements are being made, the company should update this list for any relevant changes in its business (e.g., expectations concerning the anticipated success of a new major product line or the projected effects of a recent or proposed material business combination). In particular, the material trends and uncertainties discussed in MD&A should be captured by the forward-looking statements disclaimer.
    • If the disclaimer lists meaningful cautionary statements, is it consistent with the risk factors described elsewhere or incorporated by reference in the document? In particular, the list of factors that could cause actual results to differ materially from those in the forward-looking statements should track very closely the risks presented in the risk factor section.
  • Conflict Minerals Disclosure – Form SD due May 31, 2014. The 2014 reporting season brings with it a new reporting obligation for covered companies – Form SD. Pursuant to Rule 13p-1 adopted by the SEC on August 22, 2012, implementing the "conflict minerals" disclosure requirements in Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), companies that file reports with the SEC under Exchange Act Sections 13(a) or 15(d) – including foreign private issuers – for which conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that company will be required to file a specialized disclosure report on Form SD for the first time by May 31, 20143 disclosing, among other matters, whether its necessary conflict minerals originated in the Democratic Republic of Congo or adjoining countries (the "Conflict Countries"). At a minimum and regardless of the conclusion, a company is required to disclose on Form SD the determination and the reasonable "country of origin" inquiry process it used in reaching the determination, make the same information publicly available on its website and provide the address of that website in the Form SD. In addition, a company that determines both that (a) it knows or has reason to believe that the minerals may have originated in the Conflict Countries and (b) it knows or has reason to believe that the minerals may not be from scrap or recycled sources is required to undertake "due diligence" on the source and chain of custody of its conflict minerals, file, as an exhibit to its Form SD, a separate report that describes, among other matters, the measures taken to exercise due diligence on the source and chain of custody of its conflict minerals (the "Conflict Minerals Report"), make the Conflict Minerals Report publicly available on its website and provide the address of that website in its Form SD. In addition, under certain circumstances, Rule 13p-1 requires that the company obtain an independent private sector audit of the processes described in the company‟s Conflict Minerals Report. As a general matter, companies will need to, depending on each successive determination: (1) determine whether the company is subject to Rule 13p-1, (2) conduct a reasonable country of origin inquiry, (3) conduct supply chain due diligence, and (4) prepare and file a Form SD and, if applicable, a Conflict Minerals Report. With the first filing date quickly approaching, any affected company should consider placing renewed attention on the Form SD requirements and make sure that the compliance policies and procedures in place are working as planned and that the company is on schedule in meeting its first filing deadline.4

Companies should also be aware that Form SDs are filed, not furnished, with the SEC, subjecting them to potential liability under Exchange Act Section 18 for false or misleading statements. However, the failure to timely file a Form SD relating to Conflict Minerals will not impact a company‟s eligibility to use the short-form registration statement on Form S-3. See "Checking Shelf Eligibility" below.

  • Disclosure of Payments by Resource Extraction Issuers – Delayed. Pursuant to Section 1504 of Dodd-Frank, the SEC adopted Rule 13q-1 on August 22, 2012 (concurrently with the adoption of Rule 13p-1 described above), which would have required resource extraction issuers5 – including foreign private issuers – to publicly file annually with the SEC a specialized disclosure report also on Form SD beginning with fiscal years ending after September 30, 2013. The Form SD would have required the disclosure of information relating to any payment made by the company, or by a subsidiary or another entity controlled by the company, to a foreign government or the U.S. federal government for the purpose of the commercial development of oil, natural gas or minerals, including details regarding the total amount of payments, the governments that received the payments and the projects to which the payments related. In response to claims made challenging the validity of the rule by a group of plaintiffs, which included trade and other associations representing the interests of companies that would have been directly affected by the rule, a U.S. federal court vacated Rule 13q-1 on July 2, 2013 on grounds the court characterized as "substantial errors," thereby delaying the implementation of Section 1504 of Dodd-Frank.6 For companies with calendar year ends, this disclosure obligation would have been first required in 2014. Although resource extraction issuers should benefit from efforts already taken to comply with Rule 13q-1, until the SEC adopts a revised version of the rule implementing Section 1504, which it is obligated to do, resource extraction issuers will not have to comply with the rule. We will continue to keep you informed of the SEC‟s next steps and proposals relating to the implementation of Section 1504 in 2014.
  • Disclosure of Certain Activities Associated with Iran. 2014 marks the second year SEC filers are required to comply with the disclosure obligations set forth in Exchange Act Section 13(r), which imposes an obligation on a company to disclose certain information about activities it or any of its affiliates engaged in that are associated with Iran. Specifically, the disclosure requirements apply to any company required to file an annual or quarterly report – including foreign private issuers whose home jurisdictions may not restrict or prohibit business dealings with Iran – and applies to, and must be included in, any annual or quarterly report required to be filed with the SEC after February 6, 2013. To the extent a company or any of its affiliates has engaged in or conducted any of the covered activities during the period covered by the relevant annual or quarterly report being filed with the SEC, the company must disclose a detailed description of the nature and extent of the activity, the gross revenues and net profits, if any, attributable to the activity and whether the company or its affiliate intends to continue the activity. Given the seriousness of conducting business with sanctioned nations and the severe consequences that could follow, companies should continue to make sure that their organizations, in particular foreign subsidiaries and affiliates, are periodically reminded of these disclosure requirements and the potential implications involved and that any failure to timely make the required disclosures could result in the company violating the U.S. securities laws.
  • Disclosure Committees. The beginning of the year is a good time to review the objectives and composition of a company‟s disclosure committee and set the schedule of meetings for 2014.

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