United States: What Foreign Private Issuers Can Learn From The SEC’s Comments On Proxy Statements And Annual Reports

Earlier this year, we published our 2014 Proxy Season Field Guide, which provides you with an overview of recent legislative, regulatory and shareholder developments, as well as guidance on how these developments will impact SEC-registered public companies in the 2014 proxy season. Because the focus of the Field Guide is on U.S. proxy rules and related disclosure and corporate governance requirements, the Field Guide is primarily relevant to U.S. public companies. This is because SEC-registered foreign private issuers are not subject to U.S. proxy rules, and are generally exempt from the detailed disclosure requirements regarding executive compensation.

However, a number of discussions in the Field Guide regarding the recent trends in the SEC's comments on proxy statements and periodic reports are relevant to foreign private issuers for two main reasons.

First, the comments from the SEC staff (the "Staff") to SEC-registered foreign private issuers are often similar to the comments issued in respect of U.S. public companies, other than with respect to a limited number of disclosure issues specific to foreign private issuers (such as disclosure by first-time adopters of the International Financial Reporting Standards ("IFRS") and reconciliations of non-U.S. GAAP financial statements to U.S. GAAP). In addition, the requirement under the Sarbanes-Oxley Act of 2002 that the SEC review every three years every U.S. public company's Form 10-K annual reports also applies to every foreign private issuer's Form 20-F annual reports. As a result of the public availability of letters issued by the SEC following their review of periodic reports, the Staff has come to expect that issuers, whether U.S. or non-U.S., are aware of the interpretive positions taken by the SEC in their comment letters, which often reflect nuanced readings of the rules or require more detailed disclosure than might otherwise be expected. It has become increasingly important that issuers make themselves familiar with Staff comment letters that have been issued to other issuers, so that they can respond to the issues raised in those letters when preparing their own filings. The Staff has also noted that issuers should be cognizant of the information provided in response to its comments, given that the public release of those responses makes the responses a part of the issuer's public disclosures.

Second, even for foreign private issuers that are not registered with the SEC, if they conduct exempt U.S. offerings (such as pursuant to Rule 144A), they are generally expected to prepare offering circulars that meet high disclosure standards that are comparable to those applicable to U.S. registered offerings. In such cases, even though none of the SEC's specific disclosure rules, guidance or interpretations may be directly applicable, general materiality considerations often require that foreign private issuers prepare such offering circulars substantially in line with the positions that the SEC has taken with respect to disclosures in periodic reports and proxy statements prepared by U.S. public companies. Quite often, these high disclosure standards are demanded by U.S. counsel involved in those deals where they are asked to deliver negative assurance/disclosure letters (so-called "10b-5" letters).

In light of the foregoing, we highlight below the key disclosure considerations raised in the Field Guide that are relevant to foreign private issuers.



One of the most frequent areas of Staff comment on periodic reports relates to disclosure of goodwill impairment. The Staff may request additional supplemental information or disclosure if an issuer has taken an impairment charge, but it has also raised comments if no impairment charge has been taken but goodwill accounts for a significant portion of total assets and there are downward trends in revenue, income or stock price. In situations where the issuer has already taken a goodwill impairment charge, the Staff may request that issuers discuss the primary drivers in assumptions that resulted in the charge. For example, the issuer may be asked whether it significantly reduced projected future revenues or net cash flows or increased the discount rates, or whether it considered an economic recovery in its cash flow projections. In addition, issuers are frequently asked to disclose expectations regarding future operating results and liquidity as a result of the impairment charge, including a discussion of whether they expect historical operating results to be indicative of future operating results.

If an issuer has not taken an impairment charge but goodwill accounts for a significant portion of total assets and there are downward trends in revenue, income or stock price, the Staff may issue comments related to the issuer's goodwill impairment analysis. For example, the issuer may be asked to provide a more detailed description of the steps it performs to review goodwill for recoverability, describe the nature of the valuation techniques and significant estimates and assumptions employed to determine the fair value in the impairment analysis and discuss whether there have been any changes to the assumptions and methodologies used since the last impairment test. In addition, the issuer may be asked to discuss its estimates of future cash flows, including disclosures related to the cash flow growth rate used to determine the future cash flow projections.

The Staff may also ask issuers to break down goodwill by reporting unit (or, in the case of issuers reporting under IFRS, by cash-generating unit). Issuers may be requested to disclose any changes to reporting units (or, under IFRS, to cash-generating units), or to allocations of goodwill among such units, as well as the reasons for these changes. The Staff may perform a detailed review of documentation related to the reporting structure in order to determine whether there is a basis for the allocation decisions.


Another area of increased Staff comments on periodic reports has been in the liquidity disclosure in the MD&A. The primary focus of Staff comments has been on how the economy has impacted the availability of cash and credit. Comments have reflected a concern that an issuer's risk factors and its MD&A disclosure be consistent, and that the MD&A disclosure provide a sufficient level of detail about known trends, demands, events and uncertainties. The SEC has also released interpretive guidance related to liquidity disclosure in the MD&A, which is described below in "Additional SEC Interpretive Guidance – Liquidity and Capital Resource Disclosure."

Staff comments related to liquidity also address the disclosure of financial covenants related to debt instruments. Issuers have been asked to disclose the specific terms of material financial covenants in both the footnotes to financial statements and the MD&A. Typically, this disclosure must include any required ratios, as well as actual ratios, as of the end of the period. As described below, the SEC has also issued interpretive guidance that provides that when management believes a financial covenant is material to the issuer's financial condition and/or liquidity, the financial covenant should be disclosed even if it relies on a non-GAAP measure. The disclosure around the non-GAAP measure should address the material terms of the credit agreement, the amount or limit required for compliance with the covenant, and the actual or reasonably likely effects of compliance or non-compliance with the covenant on the issuer's financial condition and liquidity. Issuers must also provide a reconciliation to GAAP.


At the end of 2010, the Staff of the Division of Corporation Finance announced an increased focus on disclosures made in financial statements, financial statement footnotes and in related disclosures when the Staff reviews periodic reports in its regular review process. Consistent with this goal, the Staff has in recent years frequently issued comments on topics such as fair value measurements, deferred tax assets, presentation of other comprehensive income, segment reporting, classification of cash flow items, and loss contingencies. We highlight below the Staff's comments on loss contingency disclosures, whether the issuer reports under U.S. GAAP or IFRS. In general, the Staff continues to focus on whether issuers are in compliance with the existing requirements of the applicable GAAP. Furthermore, with respect to U.S. GAAP, the Staff has often sought further disclosure with regard to why a contingency is not reasonably estimable, though such disclosure is not required by Accounting Standards Codification 450-20 (referred to as "ASC 450-20," formerly known as Statement of Financial Accounting Standards No. 5), which sets the standards for loss contingency disclosure under U.S. GAAP. With respect to IFRS, the Staff has from time to time requested further disclosure of the issuer's materiality assessment regarding the effect of a contingency on its financial statements.

The Staff has focused on often generic risk factor disclosure regarding the potential material adverse effects of pending or future litigation, as well as legal proceedings disclosure which states that the issuer has no pending material litigation and no disclosure regarding contingencies in their financial statements or the footnotes to those financial statements. In these circumstances, the Staff has requested an explanation as to how these disclosures are consistent. Moreover, the Staff has raised comments where issuers do not use the specific language of ASC 450-20, and as a result, issuers should specifically include disclosures regarding "contingencies," rather than "liabilities" or "results," and issuers should indicate that management believes that any contingencies would not have a material effect on "the issuer's financial statements," rather than "the issuer's results of operations" or "the issuer's financial condition."

The Staff's comments have also focused on announcements of significant settlements of litigation or regulatory actions and the Staff will review loss contingency disclosures in the periods prior to those settlements. The Staff will under these circumstances review the disclosures of the issuer, as well as any disclosures made by the co-parties or counter-parties to the litigation. The Staff also regularly seeks background information regarding the basis for "not reasonably estimable" determinations.


Recent Staff comments on risk factor disclosure in periodic reports have focused on the following areas: reliance on customers, suppliers, governments and key employees; the market for an issuer's products and services; the impact of regulatory changes; cybersecurity risks; ineffective disclosure and internal controls; legal exposures and reliance on legal positions; conflicts of interest and related party transactions; a history of operating losses; and going concern issues. Issuers should review their risk factors to ensure that they provide adequate disclosure of these issues, to the extent they are applicable. In addition, issuers should ensure that they updated their forward-looking statements disclaimer in conjunction with changes to their risk factors.


Staff comments have recently addressed the practice of omitting schedules and exhibits to material agreements other than merger agreements. Staff comments have highlighted that the exception permitting issuers to exclude schedules to a merger agreement does not apply to other material agreements. Issuers have been asked to either provide a materiality analysis indicating that the omitted schedules and exhibits are not material, or to file the schedules and exhibits to the agreement as part of the agreement.


Over the last several years, the SEC has also provided interpretive guidance outside of the comment process in several areas, which continues to be relevant today for both U.S. public companies and foreign private issuers.

Use of Non-GAAP Measures

On January 15, 2010, the Staff issued new Compliance and Disclosure Interpretations regarding the use of non-GAAP financial measures under Item 10(e) of Regulation S-K. SEC-registered foreign private issuers are subject to Item 10(e) because Form 20-F references this item as part of its general instructions. These revised interpretations related to the use of non-GAAP measures arise out of the Staff's concern that periodic reports have become "compliance documents" that do not sufficiently communicate issuers' operating performance and financial condition in a manner that is consistent with the disclosure made by issuers outside of their SEC filings. According to the Staff, the new interpretations are not intended to encourage an increased use of non-GAAP measures, but rather to improve disclosure in SEC filings. By providing more flexibility to use non-GAAP measures in periodic reports, the SEC is expecting issuers to provide a consistent message across their SEC filings and other public communications. The Staff has also made clear that it reviews an issuer's statements outside of SEC filings to determine whether an issuer's public statements, including those using non-GAAP financial measures, are consistent with disclosure in its SEC filings.

While the Staff has indicated that it is not seeking to require that issuers put non-GAAP measures in filings, some of the key Non-GAAP Financial Measures Compliance and Disclosure Interpretations provide additional flexibility that will facilitate inclusion of some non-GAAP measures in filings in compliance with Item 10(e) of Regulation S-K. The key interpretations are as follows:

  • Permitting Adjustments for Recurring Items. A frequent area of Staff comment has been with respect to Item 10(e)'s prohibition on adjustments that "eliminate or smooth items identified as non-recurring, infrequent or unusual" if the item occurred in the past two years or is reasonably likely to occur in the next two years. The Staff's comments have discouraged non-GAAP adjustments for what it views as recurring items even if there were sufficient additional disclosure to explain the nature of the item. Non-GAAP Financial Measures Compliance and Disclosure Interpretations Question 102.03 now permits the presentation of a non-GAAP measure that excludes a gain or charge that is recurring, as long as the issuer does not attempt to represent that particular item as non-recurring, infrequent or unusual.
  • Business Purpose Not Required for Use of Non-GAAP Measures. Non-GAAP Financial Measures Compliance and Disclosure Interpretations Question 102.04 clarifies that a non-GAAP measure may be included in an SEC filing even when management does not use the measure for the purpose of managing its business or for other purposes. The Staff focuses now on the fact that Item 10(e)(1)(i)(D) of Regulation S-K provides that a statement of additional purposes is required "if material" and that an issuer is to disclose additional purposes, "if any," for using the measure. This reverses a prior trend in the comment process, using this provision in Item 10(e) as one of the bases for objecting as to whether there is a legitimate purpose for presenting the non-GAAP measure. However, the interpretation does not alter the requirement in Item 10(e)(1)(i)(C) to describe the reasons why management believes that presentation of the non-GAAP measure provides useful information to investors regarding the issuer's financial condition and results of operations.
  • Per Share Performance Measures Permitted. Non-GAAP Financial Measures Compliance and Disclosure Interpretations Question 102.05 clarifies that, while the SEC continues to prohibit per share non-GAAP liquidity measures in any documents filed with or furnished to the SEC, the Staff will not object to a per share non-GAAP measure used to present financial performance.
  • Free Cash Flow Permitted. Non-GAAP Financial Measures Compliance and Disclosure Interpretations Question 102.07 indicates that Item 10(e) of Regulation S-K does not prohibit the presentation in SEC filings of a "free cash flow" measure, which is usually defined as cash flow from operating activities less capital expenditures. The Staff's guidance cautions that the free cash flow measure must be accompanied by a clear description of the way in which it is calculated as well as the necessary GAAP reconciliation, and that issuers should avoid "inappropriate or potentially misleading inferences about its usefulness," such as implying that the amounts represent "residual cash flow."
  • Adjusted EBITDA under Financial Covenants. Non-GAAP Financial Measures Compliance and Disclosure Interpretations Question 102.09 indicates that the prohibitions in Item 10(e) on the presentation of adjusted EBIT and EBITDA has prevented issuers from fully addressing in the MD&A the financial covenants of their credit agreements. The Staff states that, "the prohibition in Item 10(e) notwithstanding," when management believes that the credit agreement is material and that an adjusted EBIT/EBITDA financial covenant is material to understanding the agreement and the issuer's financial condition and/or liquidity, then the issuer may be required to disclose the measure in the MD&A. The interpretation also provides that the disclosure around the measure should probably also address: (1) the material terms of the credit agreement, including the covenant; (2) the amount or limit required for compliance with the covenant; and (3) the actual or reasonably likely effects of compliance or non-compliance with the covenant on the issuer's financial condition and liquidity.

Liquidity and Capital Resources Disclosures

Effective September 28, 2010, the Staff provided interpretive guidance intended to improve the discussion of liquidity and funding risks in the MD&A for all public issuers, including SEC-registered foreign private issuers. This guidance focuses on disclosures related to liquidity, leverage ratios and the contractual obligations table. The Staff has also proposed amendments to disclosure requirements related to short-term borrowings, but these amendments have not yet been adopted. The SEC's interpretive release, Release No. 33-9144 (September 17, 2010), emphasizes that issuers are required to disclose known trends or demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, a material change in the issuer's liquidity. The release highlights a number of trends and uncertainties relating to liquidity that issuers should consider including in their MD&A, including: difficulties in accessing the debt markets; reliance on commercial paper or other short-term financing arrangements; maturity mismatches between borrowing sources and the assets funded by those sources; changes in terms requested by counterparties; changes in the valuation of collateral; and counterparty risk. Issuers should provide disclosure of any intra-period variations if their disclosure does not otherwise adequately convey their financing arrangements. In addition, if a repurchase transaction is reasonably likely to result in the use of a material amount of cash or other liquid assets, it may be required to be disclosed in the MD&A. The SEC also suggests that issuers consider describing cash management and risk management policies that are relevant to an assessment of their financial condition.

The interpretive release also addresses the inclusion of capital and leverage ratios in the MD&A. If a capital or leverage ratio financial measure is presented, the issuer should clearly state why the measure is useful to understanding its financial condition and the measure should be accompanied by a clear explanation of the calculation methodology. This explanation should include a discussion of any unusual, infrequent or non-recurring inputs, or any inputs that are adjusted so that the ratio is calculated differently from directly comparable measures. Issuers should also consider whether the measure differs from other measures used in their industry; if so, additional discussion may be required to ensure that the disclosure is not misleading. Any non-GAAP financial measure, including any non-GAAP capital or leverage ratio, that is disclosed in an issuer's filing should comply with SEC rules and guidance related to the inclusion of non-GAAP financial measures.

In its interpretive release, the SEC recognizes that different approaches to the contractual obligations table have developed. The SEC declines to provide specific presentation requirements or guidance on the treatment of certain items; instead, it states that issuers should provide a presentation that is clear, understandable and not misleading, and that appropriately reflects the obligations that are meaningful to the issuer. The format and content of the disclosure should support the purpose of the disclosure in this section, which is to provide aggregated information about contractual obligations in a single location in order to improve transparency of an issuer's liquidity and capital resource needs, and to provide context for assessing the role of off-balance sheet arrangements. Issuers should use footnotes, in the SEC's view, to provide information necessary for an understanding of the timing and amount of specified contractual obligations. Additional narrative disclosure should be provided if necessary to explain what the table does and does not include and to promote understanding of the information provided in the table.

Cybersecurity Disclosure

On October 13, 2011, the SEC's Division of Corporation Finance issued disclosure guidance to assist SEC-registered public companies, including SEC-registered foreign private issuers, "in assessing what, if any, disclosures should be provided about cybersecurity matters in light of each registrant's specific facts and circumstances." CF Disclosure Guidance Topic No. 2 reviews the applicability of existing SEC disclosure requirements to today's cybersecurity concerns, noting that: (i) businesses increasingly focus or rely on internet communications and remote data storage; (ii) risks and potential costs associated with cyber attacks and inadequate cyber security are increasing; and (iii) as with other operational and financial risks and events, companies should on an ongoing basis review the adequacy of disclosure relating to cybersecurity risks and other cyber incidents. The Staff further notes that the guidance is meant to be consistent with disclosure considerations for any business risk, and that any disclosure should not compromise cybersecurity efforts. The Staff highlights a number of critical considerations, including: (i) potential costs and other negative consequences, such as increased protection costs (e.g., additional personnel, training, third party consultants), remediation costs, liability for stolen assets or information, the repair of damaged systems and incentives for customers to maintain the business relationship after a cyber attack; (ii) lost revenues arising from the unauthorized use of proprietary information, and the failure to retain or attract customers; (iii) litigation; and (iv) reputational damage.

Specifically with respect to risk factors disclosure, the Staff notes that issuers should consider the probability that cyber incidents will occur in the future, and the potential costs and other consequences that could result. In this regard, issuers must evaluate prior cyber incidents, including the severity and frequency of such incidents, as well as the probability of cyber attacks occurring in the future. To the extent material, risk factor disclosure of potential cyber incidents may be necessary and may include aspects of a company's operations that give rise to or mitigate these cyber risks. The Staff indicates that issuers should not disclose "boilerplate" risks that generally apply to all public companies, and should not disclose any information in a risk factor that would increase a company's cybersecurity risks.

With regard to disclosures in the MD&A, the Staff indicates that issuers should address cybersecurity risks or incidents if the costs or other impact of a known cyber risk or incident represents a material event, trend or uncertainty that is reasonably likely to have a material effect on the company's results of operations, financial condition or liquidity. MD&A disclosure may be required even if a past cyber incident did not have a material effect on the company's financial condition if the incident caused the company to materially increase its cybersecurity expenditures.

As for business disclosures, the Staff indicates that issuers should evaluate the impact of cyber incidents or cybersecurity risks on each reportable business segment, and if a cyber incident or cybersecurity risk materially impacts a company's (or business segment's) relationships with customers or suppliers, or materially impacts the competitive landscape, a company should summarize the cyber risk or incident and its impact in the description of that company's business. In the context of legal proceedings disclosure, issuers should discuss any material pending legal proceeding related to a cyber incident to which a company is a party.

The Staff notes that with regard to disclosure controls and procedures, issuers should evaluate the extent to which cyber incidents pose a risk to the company's ability to record, process, summarize and report information that is required to be disclosed in SEC filings. If it is reasonably possible that information would not be properly recorded, processed, summarized or reported due to a cyber incident, issuers must evaluate how cybersecurity risks impact the company's disclosure controls and procedures, whether these controls and procedures are effective and whether any remedial measures are required.

With respect to an issuer's financial statement disclosures, issuers should consider accounting principles that may be important when summarizing the impact of a cyber incident on the company's financial statements, including: (i) costs incurred to prevent cyber incidents; (ii) costs incurred to mitigate damages from a cyber incident; (iii) loss contingencies related to cyber incidents; (iv) impairment of certain assets; and (v) subsequent event disclosures.

Cybersecurity continues to be an area of interest for members of Congress, and they continue to look for opportunities to mandate disclosure or escalate the SEC Staff guidance to Commission guidance. In May 2013, Senator Rockefeller (Chairman of the Committee on Commerce, Science and Transportation) and SEC Chair White exchanged letters on the topic of cybersecurity disclosure, and Chair White indicated that this issue continues to be a disclosure priority for the Division of Corporation Finance. She further indicated that, at that time, the Staff had issued about fifty comment letters to issuers asking about their cybersecurity disclosure. The Staff's comments have focused on circumstances where a cybersecurity incident has occurred, but the issuer has not adequately addressed the incident in its disclosures. The comments have focused on the information about the incident, as well as the present and future consequences of that incident and the likelihood of future incidents. The Staff has also questioned the use of terms such as "unlikely" when referring to the possibility of a cyber incident, or indicating that such incidents "could" or "may" occur, particularly if there has been a history of one or more incidents.

Guidance on European Debt Exposures

On January 6, 2012, the SEC's Division of Corporation Finance issued guidance regarding disclosures about exposure to the debt of sovereign and non-sovereign issuers in Europe. Topic No. 4 of the SEC Staff's new "CF Disclosure Guidance" series addresses specific concerns about the adequacy of public disclosures made principally by financial institutions regarding their European debt exposures, and the potential consequences of such exposures on those issuers. The Staff encourages affected issuers to consider this guidance in preparing their SEC reports, including in the upcoming annual reports for calendar year-end issuers.

The Staff has focused its attention on disclosure about European debt exposure included (or required to be included) in the risk factors, the MD&A, qualitative and quantitative disclosure about market risks ("Market Risk Disclosure"), as well as Industry Guide 3 disclosures required of bank holding companies and similar lending and deposit-taking financial institutions ("Guide 3"). The Staff's guidance in Topic No. 4 is directed at both U.S. and non-U.S. financial institutions, and the Staff notes that, to date, disclosures about the nature and extent of direct or indirect exposure to European sovereign debt "have been inconsistent in both substance and presentation." For this reason, the Staff lays out a very specific structure for evaluating what disclosures may be necessary regarding these exposures, based on the Staff's own experience in commenting on those disclosures that it has, to date, found to be lacking.

In providing its guidance, the Staff has not specifically identified the countries in Europe that are of principal concern, noting that the specific countries may change over time. However, the Staff does indicate that issuers should focus on those countries experiencing "significant economic, fiscal and/or political strains such that the likelihood of default would be higher than would be anticipated when such factors do not exist." The Staff encourages issuers to identify the basis for determining which countries are included in the disclosure.

In recent comments issued by the Staff in its review of periodic reports filed in 2011, enhanced disclosure was requested, separately by country, as to: (i) gross sovereign, financial institutions, and non-financial corporations' exposure; (ii) quantified disclosure explaining how gross exposures are hedged; and (iii) a discussion of the circumstances under which losses may not be covered by purchased credit protection.

In addition to providing the disclosure separately by country as indicated above, the Staff has requested that issuers segregate between sovereign debt and non-sovereign debt exposures, and by financial statement category, in order to arrive at the gross funded exposure. In addition, the Staff has asked that issuers consider separately providing disclosure of gross unfunded commitments made. Further, the Staff suggests that information regarding hedges be provided in order to present an amount of net funded exposure. As discussed below, the Staff has provided a wide-ranging outline for assessing what qualitative and quantitative disclosures may be necessary regarding direct or indirect exposures to the European debt crisis.

The Staff believes that the disclosures outlined in Topic No. 4 are called for under existing, principles-based disclosure requirements. In this regard, the Staff notes the following applicable disclosure requirements and how they should be interpreted when evaluating what disclosure is necessary regarding European debt exposures:

  • MD&A. Issuers must identify known trends or known demands, commitments, events or uncertainties that will result, or that are reasonably likely to result, in a material increase or decrease in liquidity, and issuers must also discuss any known trends or uncertainties that have had, or that the issuer reasonably expects may have, a material favorable or unfavorable impact on income.
  • Guide 3. Item III.C.3 of Guide 3 calls for issuers to identify cross-border outstandings to borrowers in each foreign country where the exposures exceed one percent of total assets, as well as disclosure where "current conditions in a foreign country give rise to liquidity problems which are expected to have a material impact on the timely repayment of principal or interest on the country's private or public sector debt," including tabular disclosure of changes in outstandings, and in some situations tabular disclosure of restructured outstandings.
  • Risk Factors and Market Risk Disclosure. Issuers must provide disclosure of material risks, including in risk factors disclosure and in specific Market Risk Disclosures, and the Staff indicates that such disclosures should not be generic "boilerplate" and should rather be tailored to the issuer's specific facts and circumstances.
  • In Topic No. 4, the Staff provides a highly detailed outline for preparing the types of disclosure called for by the guidance. This outline provides considerations to be used when determining, in light of an issuer's specific facts, what disclosure should be provided in a manner that is consistent with the guidance. The outline is as follows:

I. Gross Funded Exposure

a. Countries

i. The basis for the countries selected for disclosure.

ii. The basis for determining the domicile of the exposure.

b. Type of Counterparty

i. Separate categories of exposure to sovereign and non-sovereign counterparties.

1. Sovereign exposures consist of financial instruments entered into with sovereign and local governments.

2. Non-sovereign exposures comprise exposure to corporations and financial institutions. To the extent material, separate disclosure may be required between financial and non-financial institutions.

c. Categories of Financial Instruments

i. Categories to be considered for disclosure include loans and leases, held-to-maturity securities, available-for-sale securities, trading securities, derivatives, and other financial exposures to arrive at gross-funded exposure.

1. For loans and leases, the gross amount prior to the deduction of the impairment provision and the net amount after the impairment provision.

2. For held-to-maturity securities, the amortized cost basis and the fair value.

3. For available-for-sale securities, the fair value, and if material, the amortized cost basis.

4. For trading securities, the fair value.

5. For derivative assets, the fair value, except that amount could be offset by the amount of cash collateral applied if separate footnote disclosure quantifying the amount of the offset is provided.

6. For credit default contracts sold, the fair value and the notional value of protection sold, along with a description of the events that would trigger payout under the contracts.

7. For other financial exposures, to the extent carried at fair value, the fair value. To the extent carried at amortized cost, the gross amount prior to the deduction of impairment and the net amount after impairment.

II. Unfunded Exposure

a. The amount of unfunded commitments by type of counterparty and by country.

b. The key terms and any potential limitations of the counterparty being able to draw down on the facilities.

III. Total Gross Exposure (Funded and Unfunded)

a. The effect of gross funded exposure and total unfunded exposure should be subtotaled to arrive at total gross exposure as of the balance sheet date, separated between type of counterparty and by country.

b. Appropriate footnote disclosure may be provided highlighting additional key details, such as maturity information for the exposures.

IV. Effects of Credit Default Protection to Arrive at Net Exposures.

a. The effects of credit default protection purchased separately by counterparty or country.

b. The fair value and notional value of the purchased credit protection.

c. The nature of payout or trigger events under the purchased credit protection contracts.

d. The types of counterparties that the credit protection was purchased from and an indication of the counterparty's credit quality.

e. Whether credit protection purchased has a shorter maturity date than the bonds or other exposure against which the protection was purchased. If the credit protection has a shorter maturity date, clarifying disclosure should be provided about this fact, as well as the risks presented by the mismatch of the maturity.

V. Other Risk Management Disclosures

a. How management is monitoring and/or mitigating exposures to selected countries, including any stress testing that is being performed.

b. How management is monitoring and/or mitigating the effects of indirect exposure in the analysis of risk. Disclosure should explain how the issuer identifies their indirect exposures, provide examples of the identified exposures, along with the level of the indirect exposures.

c. Current developments (rating downgrades, financial relief plans for impacted countries, widening credit spreads, etc.) of the identified countries, how those developments, or changes to them, could impact the issuer's financial condition, results of operations, liquidity or capital resources.

VI. Post-Reporting Date Events

a. Significant developments since the reporting date and the effects of those events on the reported amounts.

As noted in the "Supplementary Information" section of Topic No. 4, the statements in the CF Disclosure Guidance represent views of the Staff, and do not constitute a new rule, regulation or statement of the SEC. Nonetheless, financial institutions preparing disclosure for their SEC reports should carefully consider the disclosure that should be provided in response to the Staff's expectations, as the Staff's outline included in Topic No. 4 will likely serve as a roadmap for the type of comments that the Staff will issue when reviewing the annual reports of any issuers with European credit exposure in 2012. While the Staff has not sought to provide a "one-size-fits-all" approach for these disclosures, Topic No. 4 does seek to provide key principles that need to be considered when evaluating and describing European debt exposures in upcoming SEC reports.

Iran Threat Reduction and Syria Human Rights Act of 2012

The Iran Threat Reduction and Syria Human Rights Act of 2012 (the "ITR Act"), was enacted on August 10, 2012. This law added new Exchange Act Section 13(r), requiring disclosure by issuers in their periodic reports and the filing of a notice with the SEC. For SEC-registered foreign private issuers, such disclosure is required on Form 20-F, but not on Form 6-K, whereas U.S. issuers are required to make such disclosure not only on Form10-K but also on Form 8-K. If an issuer or any of its affiliates have engaged in any of the activities referenced in Section 13(r), the issuer's periodic reports must include disclosure of: (i) the nature and extent of the activity; (ii) the gross revenues and net profits, if any, attributable to the activity; and (iii) whether the issuer or affiliate intends to continue to engage in the activity. If an issuer or an affiliate of the issuer has knowingly engaged in any of the subject activities, then, in addition to the required disclosure, the issuer must submit a publicly-available notice to the SEC under the new EDGAR form type "IRANNOTICE." The SEC must send the notice to the President and certain Congressional committees.

The activities referenced in Section 13(r) focus in particular on transactions and investments relating to the petrochemical, petroleum and marine transport industries, activities relating to weapons of mass destruction and other military capabilities, financial and other transactions with those whose assets are frozen and certain specified Iranian entities, activities relating to the transfer of goods, technologies or services likely to be used by the government of Iran (as defined in U.S. sanctions laws) to commit human rights abuses, and any transactions or dealings with the government of Iran without the specific authorization of a federal department or agency.

Section 13(r) does not require any SEC rulemaking. On December 4, 2012, Staff updated its Exchange Act Sections Compliance and Disclosure Interpretations to include seven new interpretations to address the implementation of Section 13(r).

The Staff notes in Exchange Act Sections Compliance and Disclosure Interpretations Question 147.01 that if a periodic report is due after February 6, 2013 but the issuer chooses to file the report prior to that date, the issuer is still subject to the Section 13(r) disclosure requirements for that report, and, as noted in Exchange Act Sections Compliance and Disclosure Interpretations Question 147.02, the disclosure must cover activities that took place over the entire fiscal year (e.g., January 1 through December 31, 2012), even if those activities pre-dated the August 10, 2012 enactment date of Section 13(r).

In the event an issuer has not identified any reportable activities during the relevant period, the Staff indicates in Exchange Act Sections Compliance and Disclosure Interpretations Question 147.04 that an issuer is not required to include disclosure in its periodic reports. Disclosure is only required if any of the covered activities occurred during the reporting period.

One of the requirements of Exchange Act Section 13(r) is that issuers must disclose any dealings by the issuer or its affiliates with the government of Iran, even if those activities are not sanctionable, unless the activity is conducted under a specific authorization from a U.S. federal government department or agency. The Staff stated in Exchange Act Sections Compliance and Disclosure Interpretations Question 147.05 that this exception is only available when the activity was authorized by a U.S. government agency or department, not an equivalent foreign governmental authority. Both general and specific licenses from the Office of Foreign Assets Control (OFAC) for transactions can qualify, so long as all of the conditions of the license are strictly observed, as noted in Exchange Act Sections Compliance and Disclosure Interpretations Question 147.06.

In Exchange Act Sections Compliance and Disclosure Interpretations Question 147.07, the Staff notes that the disclosure made under Section 13(r) is public when filed with the SEC, and that the notice of the disclosure that is filed on EDGAR would also be publicly available upon filing (as noted in the SEC's notice regarding the new EDGAR form type). The SEC has not prescribed the form of the notice, other than to say that that notice should be a separate document that includes the information required by Section 13(r).

The Staff stated in Exchange Act Sections Compliance and Disclosure Interpretations Question 147.03 that Section 13(r) applies to both the issuer and its affiliates, and for this purpose "affiliate" has the same meaning as in 1934 Act Rule 12b-2. Rule 12b-2's definition of affiliate is typically read to include directors and officers. Therefore, issuers must determine whether any such persons have engaged in the activities regarding Iran that are specified in Section 13(r). While no consensus has emerged as to whether specific questions about Iran activities should be included in the D&O questionnaire, some issuers have included questions with varying degrees of detail regarding this disclosure item.


In 2010, the SEC announced a restructuring of the Division of Corporate Finance that created three new offices, including an office for large and significant financial services companies. Although most public companies will not be subject to review by this new office, it is important to note that the office may become the archetype for a new "continuous review" approach that the Division of Corporation Finance has been developing over the past few years. Institutions covered by the new office will be subject to enhanced and continuous review of their filings and other disclosures, including press releases, presentations, websites and analyst reports, rather than just a periodic review of documents filed with the SEC. The restructuring also suggests that the SEC is focusing on ensuring that its Staff has expertise within an industry and knowledge of trends within that industry.

In addition to the shift towards continuous review, the Staff has indicated that it will begin reviewing documents outside of an issuer's filings. This has been made clear in the updates to the Staff's statements in connection with the non-GAAP measures guidance discussed above. The Staff has expressed concern that issuers' SEC filings seem to have become "compliance" documents, rather than communicative tools that provide useful information to shareholders, and has suggested that it will look outside of an issuer's filings in its review of the issuer's risk factors and MD&A. The Staff has stated that it will focus on ensuring that the story an issuer is telling in its SEC filings is consistent with the story being told elsewhere, including in earnings releases, presentations, statements, news coverage and analyst reports. As a result, issuers are now more likely to see comments that reference disclosure made in other forums that raise questions or issues about the disclosures in filings.

In 2012, the Division of Corporation Finance announced the establishment of an Office of Disclosure Standards. The stated responsibilities of this office include evaluating the outcomes of the Division's selective review of various materials filed under the federal securities laws, with a view towards enhancing the standards and policies for those reviews to enhance their effectiveness and efficiency, and conducting ongoing program assessments to evaluate the effectiveness of the internal supervisory controls, and to ensure the Division's filing reviews are consistently performed with professional competence and integrity.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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