1. SEC Charges Company CEO and Former CFO With Hiding Internal Controls Deficiencies and Violating Sarbanes-Oxley Requirements
On July 30, 2014, the SEC announced charges against the CEO and former CFO of QSGI Inc., a Florida-based computer equipment company for misrepresenting to external auditors and the investing public the state of its internal controls over financial reporting. The SEC’s Enforcement Division alleges that CEO Marc Sherman and former CFO Edward L. Cummings (i) misrepresented in a management’s report accompanying the fiscal year 2008 annual report for QSGI Inc. that Sherman participated in management’s assessment of the internal controls, (ii) improperly certified that they had disclosed all significant deficiencies in internal controls to the outside auditors, and (iii) withheld from auditors and investors that Sherman and Cummings participated in a series of maneuvers to accelerate the recognition of certain inventory and accounts receivables in QSGI’s books and records by up to a week at a time.
2. Chamber Releases Disclosure Effectiveness Recommendations
On July 30, 2014, the U.S Chamber of Commerce’s Center for Capital Markets Competitiveness released a set of recommendations for the SEC as the agency considers how to make disclosure more effective. The report contains both near-term and long-term recommendations for improvement, and among the near-term recommendations are suggestions to address identified reporting requirements that are obsolete or duplicative of other disclosures (e.g., Item 101 of S-K disclosure of acquisitions, financial disclosure by geographic region, disclosure of where an investor can get copies of filings). Longer-term improvements suggested by the Center include addressing the problem of duplication among SEC filings, modernizing the presentation and delivery of public company reports, and reforming disclosures for CD&A and MD&A.
3. SEC Adopts Money Market Fund Reform Rules
On July 23, 2014, the SEC adopted amendments to the rules that govern money market mutual funds. The new rules require a floating net asset value (NAV) for institutional prime money market funds, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets and provide non-government money market fund boards new tools – liquidity fees and redemption gates – to address runs.
4. ISS Releases Survey for 2015 Policy Updates
On July 17, 2014, Institutional Shareholder Services Inc. (ISS), the most influential proxy advisory firm, opened its annual survey ahead of updating its policies. The survey closes on August 29th – and then the results are released a few weeks later. There is also an open 30-day comment period in October, with the final policy updates arriving sometime in November.
5. FASB Publishes Proposal to Eliminate Extraordinary Items from US GAAP
On July 15, 2014, the Financial Accounting Standards Board (FASB), issued an exposure draft of a proposed Accounting Standards Update (ASU) that would eliminate the concept of extraordinary items from US GAAP. The proposed ASU is part of a simplification initiative by the FASB to identify, evaluate and improve areas of US GAAP for which cost and complexity can be reduced, while maintaining or improving the usefulness of the information provided to users of financial statements.
6. SEC Charges Ernst & Young With Violating Auditor Independence Rules in Lobbying Activities
On July 14, 2014, the SEC charged Ernst & Young LLP with violations of auditor independence rules. The SEC’s order instituting a settled administrative proceeding found that an Ernst & Young subsidiary lobbied congressional staff on behalf of two audit clients. Such lobbying activities were impermissible under the SEC’s auditor independence rules because they put the firm in the position of being an advocate for those audit clients. Despite providing the prohibited legislative advisory services on behalf of the clients, Ernst & Young repeatedly represented that it was “independent” in audit reports issued on the clients’ financial statements. Ernst & Young agreed to pay more than $4 million to settle the charges.
7. FINRA Clarifies Filing Requirements under Rule 2210 for Certain Research Reports and FWPs
On July 11, 2014, FINRA issued Regulatory Notice 14-30, announcing that the SEC has approved amendments to FINRA Rule 2210 (Communications with the Public) that: (i) exclude from Rule 2210’s filing requirements research reports concerning only securities listed on a national securities exchange and (ii) clarify that free writing prospectuses that are exempt from filing with the SEC are not subject to Rule 2210’s filing or content standards, while the filing and content requirements of Rule 2210 do apply to free writing prospectuses required to be filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii). These amendments were effective immediately.
8. SEC Issues New C&DIs on Accredited Investor Definition and Rule 506(c) “Reasonable Steps” Verification Safe Harbors
On July 3, 2014, the SEC issued new compliance and disclosure interpretations (C&DIs) on the definition of accredited investor under Rule 501(a) and the safe harbors for taking “reasonable steps” to verify accredited investor status under Rule 506(c).
9. NASAA Proposes Model State Rule for Electronic Filing of Form D and Other Documents with State Securities Regulators
The North American Securities Administrators Association (NASAA) sought comment on a proposed model rule that would require issuers to electronically file SEC Form D and other state securities registration and notice filing materials with state securities administrators through a new multi-state electronic filing system currently being developed by NASAA.