Tag: Filings

SEC Disclosures by Foreign Firms

Audra Boone is a senior financial economist at the U.S. Securities and Exchange Commission in the Division of Economic and Risk Analysis. This post is based on an article authored by Dr. Boone, Kathryn Schumann, Assistant Professor of Finance at James Madison University, and Joshua White, Assistant Professor of Finance at the University of Georgia. The views expressed in the post are those of Dr. Boone and do not necessarily reflect those of the Securities and Exchange Commission, the Commissioners, or the Staff.

The U.S. Securities and Exchange Commission (SEC) established the ongoing reporting regime for U.S.-listed foreign firms when most of these filers were large, well-known companies that had a primary trading venue on a major foreign exchange. Accordingly, prior work argues that the SEC exempted these firms from producing quarterly and event-driven filings beyond those mandated by their home country or exchange. [1] Specifically, the SEC stipulates that foreign firms must supply ongoing disclosures on a Form 6-K only when they publicly release information outside the U.S. (e.g., updates on earnings, acquisitions, raising capital, or payout structure). [2]

The composition of foreign firms listing in the U.S. has evolved over the years towards one with more firms stemming from less transparent countries and those lacking a primary listing outside the U.S. Notably, foreign firms with these characteristics likely have fewer ongoing reporting mandates, and thus considerable discretion regarding the information they supply to the SEC. Yet, there is little evidence on how the deference to home country requirements affects ongoing reporting and information flows in more recent periods. Studying these issues helps understand the relative trade-offs of creating a competitive landscape for attracting foreign firm listings and ensuring meaningful information flows to investors, thus balancing capital formation and investor protection.

Securities Class Action Filings—2015 Midyear Assessment

John Gould is senior vice president at Cornerstone Research. This post is based on a report from the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research; the full publication is available here.

Plaintiffs brought 85 new federal class action securities cases in the first half of 2015, according to Securities Class Action Filings—2015 Midyear Assessment, a report compiled by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. This represents a decrease from the second half of 2014, when plaintiffs filed 92 securities class actions. The number of filings in the first six months of 2015 remains 10 percent below the semiannual average of 94 observed between 1997 and 2014—the seventh consecutive semiannual period below the historical average.

Despite this period of little overall change in filing activity, securities class actions against companies headquartered outside the United States increased in the first half of 2015. Twenty filings, or 24 percent of the total, targeted foreign firms. Asian firms were named in more than half of these cases.


Regulation A+ Takes Effect

Thomas J. Kim is a partner at Sidley Austin LLP. This post is based on a Sidley Austin publication authored by Mr. Kim, Craig E. Chapman, and John J. Sabl.

On June 19, 2015, the Securities and Exchange Commission’s (SEC) recently adopted rule amendments to Regulation A under the Securities Act of 1933 (the Securities Act)—colloquially known as “Regulation A+”—took effect. Regulation A is intended to ease the burden of Securities Act registration for small public offerings. These rule amendments, among other things, increase the amount of capital that can be raised in Regulation A offerings from $5 million to $50 million over a 12-month period.

The extent to which Regulation A+ will result in issuers and other market participants actually using Regulation A to raise capital will depend on a number of factors—including how it compares to other methods for raising capital, how the SEC Staff will administer the offering process and the market’s acceptance of Regulation A-compliant offering materials.

SEC Dissemination in a High-Frequency World

The following post comes to us from Douglas Skinner and Sarah Zechman, both of the Accounting Area at the University of Chicago, and Jonathan Rogers of the Accounting Division at the University of Colorado at Boulder.

Understanding the mechanics of public dissemination of firm information has become especially critical in a world where trading advantages are now measured in fractions of a second. In our study, Run EDGAR Run: SEC Dissemination in a High-Frequency World, which was recently made publicly available on SSRN, we examine the SEC’s process for disseminating insider trading filings. We find that, in the majority of cases, filings are available to private paying subscribers of the SEC feeds before they are posted to the SEC website, with an average private advantage of 10.5 seconds.


The First Annual Conflict Minerals Filings: Observations and Next Steps

Amy Goodman is a partner and co-chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. The following post is based on a Gibson Dunn alert.

As companies prepare for the second year of filings under the Securities and Exchange Commission’s (“SEC”) new conflict minerals rule, many companies are looking for guidance from the first annual filings, which were due June 2, 2014. As expected, the inaugural Form SD and conflict minerals report filings reflect diverse approaches to the new compliance and disclosure requirements. We offer below some observations based on the first round of conflict minerals filings for companies to consider as they address their compliance programs and disclosures for the 2014 calendar year. It is important to note, however, that the shape of future compliance and reporting obligations will be impacted by the outcome of the pending litigation challenging the conflict minerals rule, which also is discussed below, and any subsequent action by the SEC.


SEC Enforcement Actions Over Stock Transaction Reporting Obligations

The following post comes to us from Ronald O. Mueller, partner in the securities regulation and corporate governance practice area of Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert.

On September 10, 2014, the Securities and Exchange Commission announced an unprecedented enforcement sweep against 34 companies and individuals for alleged failures to timely file with the SEC various Section 16(a) filings (Forms 3, 4 and 5) and Schedules 13D and 13G (the “September 10 actions”). [1] The September 10 actions named 13 corporate officers or directors, five individuals and 10 investment firms with beneficial ownership of publicly traded companies, and six public companies; all but one settled the claims without admitting or denying the allegations. The SEC emphasized that the filing requirements may be violated even inadvertently, without any showing of scienter. Notably, among the executives targeted by the SEC were some who had provided their employers with trading information and relied on the company to make the requisite SEC filings on their behalf.


Shift from Voluntary to Mandatory Disclosure of Risk Factors

The following post comes to us from Karen K. Nelson, the Harmon Whittington Professor at Accounting at Rice University, Jones Graduate School of Business, and Adam C. Pritchard, the Frances and George Skestos Professor of Law at University of Michigan Law School.

In our paper, Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors, we investigate public companies’ disclosure of risk factors that are meant to inform investors about risks and uncertainties. We compare risk factor disclosures under the voluntary, incentive-based disclosure regime provided by the safe harbor provision of the Private Securities Litigation Reform Act, adopted in 1995, and the SEC’s subsequent disclosure mandate, adopted in 2005.


Measuring Readability in Financial Disclosures

The following post comes to us from Tim Loughran and Bill McDonald, both of the Department of Finance at the University of Notre Dame.

The Fog Index has become a popular measure of financial disclosure readability in recent accounting and finance research. The SEC has even contemplated the use of the Fog Index to help identify poorly written financial documents. However, the measure has migrated to financial applications without its efficacy in the context of business disclosures having been determined.

In our forthcoming Journal of Finance paper, Measuring Readability in Financial Disclosures, we argue that traditional readability measures like the Fog Index are poorly specified in the realm of business writing. The Fog Index is based on two components: sentence length and word complexity. Although sentence length is a reasonable readability measure, it is difficult to accurately measure in financial documents. More importantly, we show that the count of multisyllabic words in 10-K filings is dominated by common business words that should be easily understood. Frequently used “complex” words like company, operations, and management are not going to confuse consumers of SEC filings. Additionally, the correlation of complex words with alternative measures of readability contradicts its traditional interpretation.


SEC Exempts “Foreign Issuer” From Filing a Preliminary Proxy Statement

The following post comes to us from Yafit Cohn, Associate at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum by Ms. Cohn.

On January 31, 2014, the Securities and Exchange Commission (“SEC”) issued a no-action letter to Schlumberger Ltd. (“Schlumberger” or “the Company”), permitting the Company not to file a preliminary proxy statement under Rule 14a-6(a) when the only matters to be acted upon by stockholders at the Company’s annual meeting were either specifically excluded from the filing requirements by Rule 14a-6(a) or were certain ordinary and routine matters required to be submitted for stockholder approval under Curaçao law on an annual basis.


Regulating the Timing of Disclosure

The following post comes to us from Lisa Bryant-Kutcher of the Department of Accounting at Colorado State University, Emma Peng of the Accounting Area at Fordham, and David Weber of the Department of Accounting at the University of Connecticut.

In our paper, Regulating the Timing of Disclosure: Insights from the Acceleration of 10-K Filing Deadlines, forthcoming in the Journal of Accounting and Public Policy, we examine how regulatory reforms that accelerate 10-K filing deadlines in 2003 affect the reliability of accounting information. The intended purpose of the new deadlines is to improve the efficiency of capital markets by making accounting information available to market participants more quickly. However, accelerating filing deadlines compresses the time available for firms and their auditors to prepare, review, and audit accounting reports, suggesting potential costs in the form of increased misstatements and lower reliability. We provide empirical evidence on the effects of accelerating deadlines by comparing the likelihood of restatement of 10-K filings before and after the rule change.


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