The SEC Staff has been focused on disclosures by reporting companies related to:

Cybersecurity Risks: Since the SEC Staff’s release of disclosure guidance on cybersecurity risks in 2011, cybersecurity issues and breaches have become even more significant. The SEC guidance was intended to assist companies in assessing the type of disclosure that would be expected regarding the risks associated with the occurrence of a cybersecurity incident. 

Sanctions related Issues: The SEC Staff also has become more focused on disclosures relating to the activities of reporting companies in sanction countries, including Cuba, Iran, Sudan and Syria. 

Non-GAAP Measures: As noted above, the SEC Staff remains focused on the types of non-GAAP measures used by SEC reporting companies. In reviewing annual reports on Form 20-F, the Staff is sure to evaluate the prominence of non-GAAP measures, the reconciliation to GAAP of non-GAAP measures, MD&A disclosures relating to non-GAAP measures and the manner in which the reporting company employs non-GAAP measures relative to peer companies in the industry sector.

Oftentimes, we find it helpful to review trends in SEC comment letters as we prepare or assist clients in preparing their annual reports on Form 20-F. While in recent years, the number of SEC comment letters issued to SEC-reporting companies has declined, there has been a focus on reviewing filings of larger issuers. In addition to the focus on the use of non-GAAP measures, SEC comment letters have concentrated on some of the following issues:

  • Management's Discussion and Analysis: the SEC Staff continues to emphasize the need for SEC reporting companies to provide insight for investors regarding changes in line items, the reason for the changes, known trends, material uncertainties, and loss contingencies.
  • Critical Accounting Policies: the SEC Staff has begun to comment on "repetition" and "duplicative" disclosures, especially as it relates to critical accounting policies.
  • Quantification: the SEC Staff has urged registrants to quantify and explain fully the impact of factors that cause fluctuations in line items from period within the discussion of results of operations.
  • Loss Contingencies: the SEC Staff has commented on whether the registrant is able to make a reasonable estimate of the amount or range of possible losses
  • Segment Reporting: the SEC Staff has commented on the identification of segments and analysis underlying the SEC reporting company's characterization of its segments and has required more transparent and detailed disclosures by segment.
  • Taxes: The SEC Staff has commented on tax policy, treatment of foreign earnings, repatriation of foreign earnings, deferred tax assets.
  • Internal Control Over Financial Reporting: The SEC Staff has commented on management's assessment of control deficiencies, remediation, disclosures relating to the impact of material weaknesses, restatements and disclosures relating to ICFR following a restatement.
  • Acquisitions: the SEC Staff has focused on purchase price allocations, the inclusion of pro forma financial information, the presentation of pro forma financial information and the appropriateness of pro forma adjustments.

Reporting companies also should consider rules adopted by the securities exchanges during 2016, including the following:

  • On February 19, 2016, the NYSE’s final rule adding new Section 203.03 to its Listed Company Manual became effective, which requires NYSE-listed FPIs to submit to the SEC on Form 6-K, at a minimum: (1) an interim balance sheet as of the end of its second fiscal quarter; and (2) a semi-annual income statement that covers its first two fiscal quarters.
  • Nasdaq Rule 5250(b)(3) became effective on August 1, 2016, which requires Nasdaqlisted companies, including FPIs, to publicly disclose thirdparty compensation arrangements for board members and board nominees (these are commonly referred to as “golden leash arrangements”). Rule 5250(b)(3) requires, among other things, each Nasdaqlisted company to disclose, by the date the company files its definitive proxy statement for its next annual meeting, the material terms of all agreements and arrangements between any director or nominee, and any person or entity other than the company, relating to compensation or other payments related to that person’s candidacy or service as a director of the board.