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

Alexander May, Charles David Riely, and Amy Inagaki

Summary

  • 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, also known as Form NT. The form is required to be filed pursuant to the Securities Exchange Act of 1934 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.
  • 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.
  • 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 that may indicate otherwise.
Recent SEC Charges Show Division of Enforcement’s Continued Reliance on Data Analytics and Targeted Initiatives
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The Division of Enforcement of the Securities and Exchange Commission (SEC) recently charged eight public companies for failing to provide sufficient information in Form 12b-25 filings as to why their quarterly or annual report could not be filed on time. The crux of the cases was that the public companies failed to disclose, as required, significant changes in results of operations in the reported period. Because each of the public companies announced a restatement less than two weeks later, the SEC charged that this information should have been disclosed pursuant to the requirements of Form 12b-25 at the time of the initial filing. This article describes the settled actions and discusses how these cases highlight the continued importance of data analytics and targeted initiatives in the Enforcement Division’s work.

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, also known as Form NT. The form is required to be filed pursuant to the Securities Exchange Act of 1934 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. The Form 12b-25 must be filed no later than one business day after the due date of the applicable report. The form’s requirements include a representation that the company could not, without unreasonable effort or expense, eliminate the reason or reasons 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. The Form 12b-25 also 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 4 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 and failed to disclose that the anticipated restatements or corrections were among the principal reasons for the company’s late filings.

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 Securities 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 appear 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 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 that may indicate otherwise.

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