Ed Batts

At a recent American Bar Association meeting, a senior Securities and Exchange Commission official reviewed various aspects of interest for public company reporting and compliance purposes. As is customary, such Staff comments were on a non-attribution basis and were represented to be personal views only and not those of the SEC as a whole. Nonetheless, such informal commentary continues to offer contextual perspective on both current matters and, equally important, indicates areas of less current significance at the SEC.

Notably, the Staff has been exceeding the Sarbanes-Oxley-mandated goal of reviewing financial statements at least once every three years. The Corporate Finance division has 500 members, a number that has not changed since before the adoption of Sarbanes-Oxley. The Staff reviews the largest companies annually and, in the case of financial services firms, reviews multiple times per quarter. The growing volume has led to a reduction in the sheer number of comments and an intentional emphasis on the judgment of the professional staff in both accounting and legal reviews.


In terms of substance, the focus remains on consistency, particularly among earnings calls, press releases and actual filings. In addition, the Staff has much greater access to third-party analyst reports. Staff are reviewing such reports when probing disclosure, such as MD&A.


Among the key points:


  • LIBOR risk factor: The Staff member opined that only companies with material exposure to LIBOR-linked credit facilities or derivative instruments should contemplate a risk factor on the recent LIBOR scandal.
  • Loss contingencies: The Staff understands the inherent uncertainty surrounding loss contingencies for pending litigation. At the same time, it views with skepticism sudden announcements of settlements that are not foreshadowed. In other words, having a string of public disclosure documents that goes from a complete lack of boundaries on a potential settlement to a finalized settlement in one fell swoop is problematic.
  • Overseas cash: The Staff believes there needs to be sufficient disclosure of the amount of a reporting company’s cash stationed offshore and the potential tax cost to repatriate such cash back to the US.
  • Cybersecurity: The Staff continues to pay close attention to publicly announced breaches of a reporting company’s computer systems. Once a breach has occurred, disclosures of risk factors should no longer refer to a breach hypothetically. At the same time, the Staff is cognizant of the need to keep disclosure of breaches at a generalized level without revealing potential vulnerabilities.
  • Stockholder proposals at annual meetings: Net neutrality was the only new significant policy issue of this past year (that thus becomes a valid topic for a stockholder proposal). On the subject of verification of ownership for a stockholder’s eligibility to present proposal, the Staff continues to reinforce its existing guidance that a reporting company has a duty to describe in specific detail any potential deficiencies in the stockholder’s proof of stock ownership. For example, if a stockholder proposal presents proof from an introducing broker, rather than a clearing broker as required under current rules, then a reporting company should indicate the lack of a clearing broker, identify the relevant rule for reference and be responsive to attempts from the stockholder to correct the deficiency.
  • Proxy plumbing: The Staff continues to consider an interpretative release regarding proxy advisory firms and, for example, to date has been interested in how such firms compose peer groups for comparison to a reporting company, in addition to any potential conflicts of interest involving such firms. However, beyond this limited area, the lack of bandwidth at the Staff continues to hamper a more thorough examination of the overall US proxy plumbing system.

While the controversial subject of conflicts minerals disclosure was raised, the Staff member demurred, given that the coming SEC meeting on the subject is August 22.