Recent SEC Charges Show Division of Enforcement’s Continued Reliance on Data Analytics and Targeted Initiatives

Background

The SEC’s cases were brought as a result of what the SEC referred to as a targeted initiative to find problems in the use of Form 12b-25. The form is required to be filed pursuant to the Securities Exchange Act of 1934 (the Exchange Act) when a company will file a late periodic report and it must provide reasons as to why the company cannot timely file the periodic report. (Public companies are required to file the SEC’s Form 12b-25 “Notification of Late Filing,” or “Form NT,” if they will not be able to timely file a quarterly Form 10-Q or annual Form 10-K. Such Form NT must be filed no later than one (1) business day after the due date of the applicable report. The Form NT’s requirements include a representation that the company could not, without unreasonable effort or expense, eliminate the reason(s) for its failure to make a timely filing, and a representation that the company will file the applicable report no later than the fifteenth calendar day following the prescribed due date, in the case of a Form 10-K, and not later than the fifth calendar day following the prescribed due date, in the case of a Form 10-Q.) Form 12b-25 requires the company to disclose the reasons for its failure to file the periodic report in reasonable detail as well as any anticipated, significant change in results of operations from the corresponding period of the last fiscal year.

The SEC alleged that each of the eight companies failed to make required disclosures. The SEC supported this allegation primarily by alleging that the eight public companies announced restatements or corrections to financial reporting within four to 14 days of filing the Form 12b-25. Such announcements were made despite the fact that the filed Form NTs did not disclose that management anticipated a significant change in quarterly income or revenue.

In bringing the cases, the SEC emphasized that the cases were the result of an initiative that relied on data analytics to identify disclosure violations. Melissa Hodgman, Acting Director of the Enforcement Division said in the press release accompanying the action that “[w]e will continue to use data analytics to uncover difficult to detect disclosure violations” and that “[t]argeted initiatives like this allow us to efficiently address disclosure abuses that have the potential to undermine investor confidence in our markets if left unaddressed.”

The SEC resolved the cases against the eight public companies with relatively modest penalties. More specifically, the charged companies agreed to settle the SEC’s charges and pay civil penalties of $25,000 (for one deficient Form NT and no untimely filed reports) or $50,000 (for either two deficient Form NTs, or one deficient Form NT combined with another untimely filed Exchange Act report) and agreed to cease-and-desist orders. At least two of the companies are no longer public, meaning that the SEC will continue to monitor filings and bring charges notwithstanding the fact that the company may no longer have outstanding securities.

Key Takeaways

The SEC’s action is a reminder that the SEC sometimes uses sweeps and initiatives to address regulatory noncompliance with even technical provisions of the securities laws. The SEC staff appears to have used data analytics to find what they believe to be a common violation in a systematic way. By filing the eight cases on the same day, the SEC was able to emphasize both the importance of filing complete Form 12b-25s and to remind companies that it would use data analytics to find disclosure failings.

The SEC’s action also illustrates the caution that should be used when filing a Form 12b-25. When a public company is not able to meet its required deadline, it is commonly dealing with difficult circumstances and perhaps incomplete information. In such a circumstance, there could be a temptation to provide less than complete information. The SEC’s action, though, shows that such decisions will be judged with the benefit of hindsight and provide an incentive to companies to err on the side of disclosing possible issues. Upon filing a Form NT that does not disclose any anticipated, significant change in the results of operations, companies should expect the SEC to review any announcements that follow the filing which may indicate otherwise.

Charles D. Riely is a partner in Jenner & Block’s New York City, New York, office. Alex May is a partner in Jenner & Block’s Chicago, Illinois, office. Amy Inagaki is an associate with Winston & Strawn in Chicago, Illinois.

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