March 01, 2021

MONTH-IN-BRIEF: Securities Law

Alan J. Wilson, Rani Doyle

Securities Regulation

PCAOB Reports on Audit Committee Conversations

By Thomas W. White, Retired Partner, WilmerHale

As part of its strategic objective to increase outreach to audit committees, the Public Company Accounting Oversight Board spoke to nearly 300 audit committee chairs during its 2020 inspections of registered public accounting firms.  The PCAOB recently released a report on the feedback it received from audit committee chairs.  The PCAOB’s conversations with auditors covered three general areas.  Noteworthy comments include:

  • The Auditor and Communications with the Audit Committee: Most audit committee chairs commended their auditors’ communications.  They noted various areas in which auditors performed well and some areas for improvement.  Some chairs praised their auditors for innovation and partner rotation, but others flagged these areas as needing improvement.  Other areas for improvement included managing global audit operations; helping more junior audit team members learn the company’s business; independence communications; guidance around auditing of certain controls for third party vendors; “over-auditing” and/or “over-documentation;” and increased visibility into discussion around fee changes.  Many chairs noted that they routinely assess the performance of their auditors, sometimes annually or in connection with ratification of the auditors or even quarterly or real time if the need for feedback arises.
  • New Auditing and Accounting Standards. Implementation of new accounting standards, especially revenue recognition, leases and current expected credit losses (CECL), were particularly challenging and time consuming for many chairs.  By contrast, implementation of the critical audit matter (CAM) requirement in auditors’ reports was generally viewed as smooth.
  • Emerging Technology. Many chairs cited the potential benefits from the use of emerging technologies, notably to improve both the audit and overall financial reporting quality.  These benefits including allowing auditors to reduce manual work, obtain better evidence and become more efficient.  The benefits also included cutting down on opportunities to manipulate or falsify financial information and providing auditors with the ability to more easily identify anomalies.   However, chairs also noted that the new technologies presented numerous challenges, risks and concerns.  These included cybersecurity risks and concerns that an overreliance on technology “leading to less attention or emphasis on preparer and auditor judgment, experience or professional skepticism.”

Securities Regulation

New Disclosure Considerations for Capital Raising During Periods of Market Volatility

By Alan J. Wilson, WilmerHale

Recognizing the ongoing importance of capital formation during times of market volatility, the SEC Division of Corporation Finance issued a sample comment letter for companies to consider when conducting securities offerings during periods with recent stock run-ups or divergences in valuation ratios as compared to traditional markets, high short interest or reported short squeezes, and reports of strong and atypical retail investor interest.

The illustrative comment letter serves as a mechanism to provide comments on disclosure documents that may not typically be subject to Division of Corporation Finance review, such as automatically effective registration statements or prospectus supplements for takedowns from an existing shelf registration statement. 

The eight sample comments are divided into three disclosure sections of the offering document – prospectus cover page, risk factors and use of proceeds.  The sample comments suggest disclosures regarding recent price volatility in a company’s stock, the risks associated with that volatility (e.g., impacts on the number of shares offered, the effects of a short squeeze, etc.), and limitations on the ability to raise the maximum offering amount.

Securities Regulation

SEC Makes Enforcement-Related Changes

By Alan J. Wilson, WilmerHale

Since the recent change in administration, the SEC has announced a few notable developments regarding its enforcement activities.  On February 9, Acting Chair Lee announced that, in consultation with Division of Enforcement Acting Director Melissa Hodgman, she “restored a vital tool to [the SEC’s] enforcement program to better protect investors by authorizing senior officers in the division to approve the issuance of a Formal Order of Investigation.”  Senior officers of the SEC may now authorize staff to subpoena documents and take sworn testimony, enabling swifter action by investigative staff “to detect and stop ongoing frauds, preserve assets, and protect vulnerable investors.”

With regards to settlement offers, “the Division of Enforcement will no longer recommend to the Commission a settlement offer that is conditioned on granting a waiver” from disqualifications that may result from violations of certain federal securities laws.  These disqualifications include the loss of certain privileges, including Well-Known Seasoned Issuer status, engaging in certain private offerings under Regulation D Rule 506 and serving in certain investment company capacities.  Acting Chair Lee announced on February 11 that this return to the Division of Enforcement’s “long-standing practice” would ensure that “the consideration of waivers is forward looking and focused on protecting investors, the market, and market participants from those who fail to comply with the law.”  Waiver requests will be reviewed by the Division of Corporation Finance and Investment Management through a “separate and distinct” process from the SEC’s law enforcement mandate.  Commissioners Peirce and Roisman released a statement on February 12, noting that they “continue to support the policy of considering and accepting contingent settlement offers” and indicating that the policy change will result in “a longer period between the initiation and resolution of enforcement matters.”

Securities Regulation

SEC Enhances Focus on Climate-Related Disclosure

By Alan J. Wilson, WilmerHale

As ESG matters remain a point of focus for many investors and other stakeholders, on February 24, SEC Acting Chair Lee directed the Division of Corporation Finance to increase its focus on climate-related disclosures.  In 2010, the SEC issued guidance to public companies regarding disclosure considerations around climate change.  To update that guidance, the Division staff will be reviewing public company filings to assess “the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks.”  Updating the guidance is viewed as an immediate step that the SEC can take toward “developing a more comprehensive framework that produces consistent, comparable, and reliable climate-related disclosures.”

Alan J. Wilson

Senior Associate, WilmerHale

Alan J. Wilson is a Senior Associate in WilmerHale’s Transactional Department who routinely counsels public company clients on a variety of matters concerning corporate governance and compliance with federal securities laws, particularly with regards to the intersection between law and accounting.  He also advises public and private companies from a range of industries on navigating transactional and strategic matters, including securities offerings, mergers and acquisitions, joint ventures, and activist shareholder engagement.

Rani Doyle

Executive Director, EY Center for Board Matters

Rani is an executive director in the EY Center for Board Matters.  She has extensive experience working with executive management and boards at public and private companies on a wide range of corporate governance and business matters.