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.
Posts Tagged ‘Filings’
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.
On March 28, 2011, the Final Regulations, issued by the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (“Treasury”) relating to the filing of Reports of Foreign Bank and Financial Accounts (“FBAR”) became effective. Notably, the Final Regulations do not require ownership interests in, or signing or other authority over, private investment funds, such as hedge funds and private equity funds, to be reported on FBARs, although Treasury will continue to study the issue.
The Final Regulations apply to FBARs required to be filed by June 30, 2011 with respect to foreign financial accounts maintained in the calendar year 2010, and for all subsequent years. United States persons who deferred FBAR filings for prior reporting years in accordance with guidance issued by Treasury,  may apply the provisions of the Final Regulations in determining their FBAR filing requirements for any deferred reports due June 30, 2011.
A revised FBAR form (Form TD-F-90-22.1) and General Instructions, which should be used for the June 30, 2011 filing deadline, were also recently released.
Over the last several days, there has been a raft of SEC filings in which companies have disclosed “reasonably possible” litigation losses. These filings are the result of SEC pressure and an interpretative position advanced by the Staff. In recent speeches, the Chief Accountant of the SEC’s Division of Corporation Finance has questioned whether companies are complying with the existing disclosure standards applicable to litigation contingencies. ASC 450 (formerly known as SFAS 5) requires the disclosure of a litigation contingency if there is at least a “reasonable possibility” that a loss has been incurred, and the disclosure must include an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made. The Chief Accountant has stated that the Staff is “seeing a lack of disclosure with respect to ‘reasonably possible’ losses.” Moreover, in comment letters sent to various financial services companies, the Division of Corporation Finance has questioned the adequacy of litigation-related disclosures that do not either set forth estimates of possible losses or range of losses or explain why such estimates cannot be provided.
The U.S. Court of Appeals for the Second Circuit recently decided Litwin v. Blackstone Group, L.P. (2d Cir. 2011), addressing “trend disclosure” requirements under Item 303 of Regulation S-K, 17 C.F.R. § 229.303(a)(3)(ii). This decision highlights the importance of giving appropriate consideration to trend disclosures in public filings, including registration statements as well as annual and quarterly reports.
By arguing that the SEC’s EDGAR system provides instantaneous access to information in periodic SEC filings, recent studies document significant stock price reactions surrounding both 10-K and 10-Q filings. In our forthcoming The Accounting Review paper Market Reaction Surrounding the Filing of Periodic SEC Reports, we scrutinize these findings by taking into consideration the following facts: (1) 22.7% (16.4%) of interim (annual) SEC filing dates coincide with the first release of earnings information; (2) about a quarter of the 10-K filings are made within five days surrounding calendar quarter-ends when money managers report their quarterly holding; and (3) earnings announcements are increasingly preempting financial statement disclosures in periodic SEC filings.
Our analysis provides new evidence regarding circumstances in which a market reaction is observed surrounding the filing of periodic reports. First, we find significant price and volume reactions when periodic SEC reports coincide with earnings releases. However, with the exception of 10-K reports, we find no evidence of significant market reactions for the other periodic reports (i.e., 10-Q, 10KSB, and 10QSB) that follow earnings announcements. Second, we document that the market reaction to 10-K reports is limited to those filed around calendar quarter-ends. Consistent with the incentives of money managers to window dress and to “lean for the tape” for quarterly reporting purposes, we find a calendar quarter-end effect in both price and volume reactions that is generally unrelated to the filing of 10-K reports. However, while volume reactions for calendar quarter-ends with a 10-K filing are statistically indistinguishable from those without a filing, there is some evidence of an incremental price reaction to 10-K filing after the Sarbanes-Oxley Act, possibly due to the new disclosures required under the statute. Third, while we find support for information transfer from quarter-end 10-K filers to the other firms, we find no significant equity analyst forecast revisions around any type of periodic SEC filings, and no evidence of a calendar quarter-end effect in analyst reactions, suggesting that analyst actions do not contribute to the information transfer. The results for analyst reactions corroborate our findings regarding muted price and volume reactions.
While our study finds no pervasive evidence of market reaction to periodic SEC filings (especially the 10-Q filings), we are not suggesting that SEC filings have no economic or informational value. First, the circumstances in which researchers expect significant new information in periodic reports may also be the same circumstances in which firms may have incentives to provide complementary disclosures through a different medium. For instance, we show that when firms report a lower earnings number in their periodic filings compared to the figure reported in the earnings press releases, they almost invariably provide preemptive or concurrent press releases highlighting the downward revision to mitigate disclosure risk. Consequently, although the information is valuable, the concurrent price or volume reaction may be triggered by the more salient contemporaneous disclosure rather than the periodic SEC reports. Future research using market microstructure data can provide additional insights regarding the role of different disclosure channels. Second, the demand for the services of data aggregators such as Standard & Poor’s, FactSet, and Bloomberg indicate that various market participants such as money managers, other institutional investors, and credit analysts must consider the information in periodic SEC filings collected by data aggregators to be valuable for sophisticated investment and other economic decisions. Future research examining the role of information intermediaries in spreading corporate accounting information is likely to add to our understanding of the capital market information infrastructure.
The full paper is available here.