Speech by White regarding 2008 agenda for Corp Fin

By Cydney Posner

In a speech yesterday to the Securities Regulation Institute, John White, the Director of Corp Fin, outlined a number of items on the Division's agenda for 2008. Among the items of particular interest are:

• XBRL. Look for possible rulemaking proposals in the Spring and possible final action in the Fall.
• Advisory Committee on Improvements to Financial Reporting (CIFiR). This committee was formed by the SEC to study the causes of financial reporting complexity and to make recommendations regarding ways to make financial reports clearer, better, less costly and less burdensome. The committee has already released a 110-page draft decision memo, addressing a number of topics, such as setting financial accounting and reporting standards and improvement of the process of regulating compliance with accounting and reporting standards. But one of the topics addressed in the Memo that we most frequently encounter (and fret about) is the concept of materiality and the correction and disclosure of accounting errors, particularly as related to restatements. White notes that, in the Committee's view, whether a material accounting error should lead to a financial restatement depends upon the viewpoint of current investors. Moreover, materiality should be judged based upon "how an error impacts the total mix of information available to a reasonable investor, and the evaluation of errors should be made on a 'sliding scale,' recognizing that qualitative factors can lead to a determination that a quantitatively significant error may not be material (just as qualitative factors can be used to lead to a conclusion that a quantitatively small error is material)." (Manna from heaven to those of us who have dealt with restatements that did not seem to be especially valuable or worthwhile.) The Draft Decision Memo also discusses an alternative to the approach in SAB 108 under which errors that are not material to the prior annual periods in which they occurred, but would be material if corrected in the current annual period, could be corrected in the current annual period with appropriate disclosure. There is also discussion regarding the application of materiality concepts to errors identified in prior interim periods and how to correct those errors.
• SEC staff consultations regarding restatements. White notes that the staff have become aware of perhaps unnecessary restatements undertaken upon the advice of accounting and legal experts based upon expectations of the staff's conclusions regarding materiality, without actually verifying with the staff. White urges practitioners not to presume the staff's conclusions regarding materiality and the need to restate financial statements, but rather to discuss the matter with the staff. In this regard, he has asked Wayne Carnall, the Chief Accountant in Corp Fin, to focus on this process.
• Restatements and Item 4.02 of Form 8-K. White again emphasizes the staff's displeasure with stealth restatements not reported in a separate 8-K filing. Rulemaking is in the offing on this topic.
• Corporate Websites. Another very welcome endeavor will be new staff efforts to update the 2000 interpretive guidance on use of electronic media, particularly concerning the use of corporate websites for disclosure of information, including treatment of hyperlinked information on a company's website, liability for disclosures, Reg FD and public availability of information.
• International Financial Reporting Standards (IFRS). The global movement is toward a single set of high-quality, globally accepted accounting standards. However, White observed, it is an "inconvenient truth" for many in the U.S. that the rest of the world is heading in the direction of IFRS — not U.S. GAAP: "There was little consideration given to the idea that U.S. GAAP could become the uniform global standard…. [t]he possible future use of IFRS by U.S. issuers would require a multifaceted transition process and, as such, requires a comprehensive plan to make the transition to IFRS reporting successful." Any transition could involve issues such as mechanics, timing, investor education, auditor education, regulatory, contractual and legal implications and impact on private companies.
• Upcoming international initiatives. Potential rulemaking may involve issues such as the 12(g) entrance rules, automatic shelf registrations, annual report filing deadlines, the definition of "foreign private issuer," cross-border tender offer rules and mutual recognition.
• Small business capital raising and private offering reform. The proposed revisions of the Reg D limited offering exemptions should be up for a vote before the SEC in the near future. Another possible area for further rulemaking or guidance is the application of the rules to "voluntary filers."
• PIPEs. Two recent cases dismissed charges brought by the SEC against PIPE investors for violating Section 5 by using shares that the investors purchased from issuers in PIPE transactions and then reselling them pursuant to resale registration statements to cover short positions created prior to the filing and effectiveness of those registration statements. Notwithstanding those cases, the SEC's position continues to be that, with respect to short sales, "the time of the sale is when the seller of the securities establishes its short position." Accordingly, if an investor "takes the shares it is selling off the resale registration statement to settle the short (or to return shares to the lender when borrowed shares were used to settle the short sale), that violates Section 5 because the short sale was completed before the registration statement for those shares was effective."
• E-Proxy. There has been only cautious use thus far of e-proxy. Generally, reports are that, while there have been cost savings, the level of retail vote has declined.
• Shareholder Director Nominations. The staff is continuing to consider the broad (and controversial) question of director nominations by shareholders.