On September 10, 2014, the Securities and Exchange Commission announced an unprecedented enforcement sweep against 34 companies and individuals for alleged failures to timely file with the SEC various Section 16(a) filings (Forms 3, 4 and 5) and Schedules 13D and 13G (the “September 10 actions”).  The September 10 actions named 13 corporate officers or directors, five individuals and 10 investment firms with beneficial ownership of publicly traded companies, and six public companies; all but one settled the claims without admitting or denying the allegations. The SEC emphasized that the filing requirements may be violated even inadvertently, without any showing of scienter. Notably, among the executives targeted by the SEC were some who had provided their employers with trading information and relied on the company to make the requisite SEC filings on their behalf.
Posts Tagged ‘Filings’
In our paper, Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors, we investigate public companies’ disclosure of risk factors that are meant to inform investors about risks and uncertainties. We compare risk factor disclosures under the voluntary, incentive-based disclosure regime provided by the safe harbor provision of the Private Securities Litigation Reform Act, adopted in 1995, and the SEC’s subsequent disclosure mandate, adopted in 2005.
The Fog Index has become a popular measure of financial disclosure readability in recent accounting and finance research. The SEC has even contemplated the use of the Fog Index to help identify poorly written financial documents. However, the measure has migrated to financial applications without its efficacy in the context of business disclosures having been determined.
In our forthcoming Journal of Finance paper, Measuring Readability in Financial Disclosures, we argue that traditional readability measures like the Fog Index are poorly specified in the realm of business writing. The Fog Index is based on two components: sentence length and word complexity. Although sentence length is a reasonable readability measure, it is difficult to accurately measure in financial documents. More importantly, we show that the count of multisyllabic words in 10-K filings is dominated by common business words that should be easily understood. Frequently used “complex” words like company, operations, and management are not going to confuse consumers of SEC filings. Additionally, the correlation of complex words with alternative measures of readability contradicts its traditional interpretation.
On January 31, 2014, the Securities and Exchange Commission (“SEC”) issued a no-action letter to Schlumberger Ltd. (“Schlumberger” or “the Company”), permitting the Company not to file a preliminary proxy statement under Rule 14a-6(a) when the only matters to be acted upon by stockholders at the Company’s annual meeting were either specifically excluded from the filing requirements by Rule 14a-6(a) or were certain ordinary and routine matters required to be submitted for stockholder approval under Curaçao law on an annual basis.
In our paper, Regulating the Timing of Disclosure: Insights from the Acceleration of 10-K Filing Deadlines, forthcoming in the Journal of Accounting and Public Policy, we examine how regulatory reforms that accelerate 10-K filing deadlines in 2003 affect the reliability of accounting information. The intended purpose of the new deadlines is to improve the efficiency of capital markets by making accounting information available to market participants more quickly. However, accelerating filing deadlines compresses the time available for firms and their auditors to prepare, review, and audit accounting reports, suggesting potential costs in the form of increased misstatements and lower reliability. We provide empirical evidence on the effects of accelerating deadlines by comparing the likelihood of restatement of 10-K filings before and after the rule change.
A recent decision of the Southern District of New York is noteworthy in its rejection of the plaintiffs’ argument that disclosure of a threatened suit in which the potential loss could have reached $10 billion was required under either the federal securities laws or Accounting Standards Codification 450. See In re Bank of America AIG Disclosure Sec. Litig., C.A. No. 11 Civ. 6678 (JGK) (S.D.N.Y. Nov. 1, 2013).
In January 2011, BofA and AIG entered into an agreement to toll the statute of limitations on fraud and securities claims arising out of BofA’s sale of mortgage-backed securities (“MBS”) to AIG. In February 2011, AIG provided BofA with a detailed analysis of its potential claims in which it claimed to have lost more than $10 billion. Later that month, BofA’s annual report disclosed that it faced “substantial potential legal liability” relating to sales of MBS, which “could have a material adverse effect on [its] cash flow, financial condition, and results of operations,” but cautioned that BofA “could not estimate a range of loss for all matters in which losses were probable or reasonably possible.” BofA did not disclose the tolling agreement with AIG or the magnitude of its potential exposure to AIG. On August 8, 2011, AIG had filed a complaint against BofA seeking damages of at least $10 billion. BofA’s stock price dropped 20% in a single day.
Last week, the European Commission announced proposed amendments to the notification forms that companies must complete to report mergers subject to antitrust review in the EU, with the stated intention of reducing burdens on filing parties. If adopted, the proposed changes would reduce the amount of information parties must provide in transactions that are unlikely to raise competitive concerns.
The EC proposes to expand the categories of mergers that are eligible for review under a simplified procedure that allows companies to file “short form” notifications with more limited information requirements. Under the proposed changes, the simplified procedure would apply to all mergers that result in the combined firm holding a market share of less than 20% in any market in which both parties are active, up from the current threshold of 15%. In addition, at the EC’s discretion, filing parties would be permitted to use the “short form” when a merger results in a small market share increase, even if the combined firm’s market share exceeds 20%. For vertical mergers, the market share threshold for the simplified procedure would increase from 25% to 30%. The EC estimates that, as a result of these changes, an additional 10% of all reportable mergers could be reviewed under the simplified procedure, with significant benefits—in terms of both time and costs—for companies no longer required to complete the full notification.
On December 3, 2012, FINRA’s new Rule 5123 went into effect.  The Rule requires members selling securities issued by non-members in a private placement to file the private placement memorandum, term sheet or other offering documents with FINRA within 15 days of the date of the first sale of securities, or indicate that there were no offering documents used. In connection with the effectiveness of the Rule, FINRA issued frequently asked questions (the “Private Placement FAQs”) on the process as well as rolled out the Private Placement Filing System in the FINRA Firm Gateway.
Private Placement FAQs
The Private Placement FAQs are a mix of technical filing requirements and substantive guidance. The technical questions address how firms gain access to the Private Placement Filing System, the use of third parties, such as law firms and consultants, to make the required filings, the requirement that offering documents be filed in searchable PDF format, and the maximum size of individual documents. In addition, while a firm can designate another member participating in the private placement to file on its behalf, it should arrange to receive confirmation from the designated filer in order to satisfy its own filing obligation.
The substantive FAQs include the following:
The ability of U.S. banking organizations, as well as non-U.S. organizations that are subject to U.S. bank regulation (“banking organizations”), to obtain required U.S. bank regulatory approvals for acquisition transactions on a timely basis is absolutely critical to both buyers and sellers in such transactions. For a buyer, a failure to obtain the necessary approvals for an announced transaction can mean public embarrassment, a loss of confidence in management, shareholder ire, difficult disclosure issues, substantial unproductive expense, lost management time and even litigation with the seller or others. Depending on the nature and significance of the transaction, it can also mean the failure of a buyer’s strategic plan and result in the buyer itself becoming vulnerable to a takeover. For a seller, a failed transaction can often be even more deleterious, as it can result in the loss of a premium to the seller’s shareholders (which may not otherwise be currently available), damage the seller’s ongoing business, client relationships and employee relationships and morale, make it very difficult to continue as an independent organization, and leave the seller vulnerable to takeover in unfavorable circumstances.
To assist buyers to avoid a failed transaction, we recommend that:
In January 2011, FINRA proposed to amend Rule 5122 (“Private Placements of Securities Issued by Members”) so that its disclosure and filing requirements, which currently apply only to private placements of securities issued by a FINRA member or a “control entity” of a member, would apply to all private placements, including those of unaffiliated issuers, covered by the rule.  On October 18, 2011 and in response to comments on the January proposal, FINRA withdrew its proposal to amend Rule 5122 and instead submitted new proposed Rule 5123 (“Private Placements of Securities”) to the Securities and Exchange Commission for adoption.  Rule 5122 would remain unchanged.
Proposed Rule 5123 would prohibit members and persons associated with a member from offering or selling a security in reliance on an exemption from registration under the Securities Act of 1933 (which the proposed rule defines as a “private placement”), or from participating in the preparation of a private placement memorandum, term sheet or other disclosure document in connection with such a private placement, unless the member or associated person provides to each investor, prior to sale, information about the anticipated use of the offering proceeds and the amount and type of offering compensation and expenses. This required information must be included in a private placement memorandum or term sheet or, if none is prepared, in a separate disclosure document. Although the rule’s definition of “private placement” is literally quite broad, it is unclear whether FINRA intends the rule to apply outside the context of non-public offerings generally effected pursuant to Section 4(2) or Regulation D.