Accounting Leadership Conference · 4 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates...

1 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

Beijing / Boston / Brussels / Chicago / Frankfurt / Hong Kong / Houston / London / Los Angeles / Moscow / Munich / New YorkPalo Alto / Paris / São Paulo / Seoul / Shanghai / Singapore / Tokyo / Toronto / Washington, D.C. / Wilmington

June 28, 2017

Accounting Leadership ConferenceCorporate Finance Reform in the Trump Administration

Andrea Nicolas


Contents

Financial CHOICE Act

CEO Pay Ratio Disclosure

Relaxation of Conflict Minerals Rule

Repeal of SEC Payment Disclosure Rule

Non-GAAP Reporting Lessons for Energy Companies

SEC Has No Patience for Fake News on Stocks

Additional Topics of Note

Carbon Capture Financing

President Trump’s Views on the SEC and Financial Regulation


President Trump’s Views on the SEC and Financial Regulation

•Presidential Executive Order on Core Principles for Regulating the United States Financial System (February 3, 2017)

Trump signed an executive order directing the Treasury Secretary to identify laws and regulations inconsistent with the Trump Administration’s “core principles”, which has been widely reported to be an initial step in dismantling Dodd-Frank.

“We think we

can cut

regulations by

75%”

- President Trump’s statement to a meeting

of business leaders (January 23, 2017)


President Trump’s Views on the SEC and Financial Regulation (cont’d)

•“Jay Clayton is a highly talented expert on

many aspects of financial and regulatory law,

and he will ensure our financial institutions can

thrive and create jobs while playing by the rules

at the same time”

•- President Trump

� Sworn in as chairman of the SEC on May 4, 2017

� Partner at Sullivan & Cromwell LLP

� Has not been a litigator or held public office

� Some speculate that the SEC will pursue a more balanced approach, instead of overemphasizing enforcement, or that the SEC’s focus will shift to capital markets to ease fund-raising efforts by companies

Nomination of Jay Clayton


SEC Enforcement Under the Trump Administration

•Division of Enforcement

� Vacant director position

� Unlikely to impact current cases

� Will directly impact the direction of the division going forward

� Broken windows approach of SEC Chair Mary Jo White at risk

� Likely to shift focus from FCPA cases, which is a major component of current enforcement agenda

� Renewed debate regarding waivers

� Unclear impact on whistleblower office; but aggressive position regarding retaliation likely to be reviewed

� Decrease in corporate penalties


Financial CHOICE Act

� The Financial CHOICE Act is a republican led effort to undo much of Barack Obama’s signature financial regulatory reform law, Dodd-Frank.

� In a 233-186 vote, the Financial CHOICE Act cleared the House.

� Passage seems unlikely in the Senate; however it is possible that provisions with a positive impact on the federal deficit may be added to budget legislation later in the year.

“We expect to be

cutting a lot out of

Dodd-Frank, because

frankly, I have so many

people, friends of mine

that had nice

businesses, they can’t

borrow money.”

- President Trump

during a meeting

with business

leaders


Financial CHOICE Act (cont’d)

Financial CHOICE Act outlines potential reform, including:

� Repeal pay ratio rules, hedging disclosure requirements, limit say on pay vote to material compensation changes, modify clawback rule requirements.

� Changes to facilitate securities offerings, including lower requirements for accredited investors, prohibit SEC rules imposing requirements on Reg D offerings.

� Creates Small Business Capital Formation Advisory Committee.

� Repeal conflict minerals, resource extraction and mine safety disclosure requirements.

� Repeal SEC authority to adopt proxy access rules.

� Repeal split chairman/CEO disclosure rules.

� Require proxy advisory firm registration.

� Prohibit DOL from taking further action on fiduciary rules.


� Item 402(u) of Reg S-K would require certain SEC reporting companies to publicly disclose:

– Median annual total compensation of all employees

– Annual total compensation of the CEO; and

– Ratio of the median annual total compensation of all employees to the annual total compensation of the CEO

� Became effective January 1, 2017; disclosures required in 2018 annual meeting proxy statement

•On February 6, 2017, acting SEC chairman Michael Piwowar directed the staff to reconsider the implementation of the rule based on unexpected challenges that issuers have experienced.

CEO Pay Ratio Disclosure


Relaxation of Conflict Minerals Rule

� Pursuant to 1.01(c) on Form SD, some companies must complete extensive and costly due diligence on the source and chain of custody of conflict minerals and to prepare a “Conflicts Minerals Report” describing their findings.

� On April 7, 2017, the Division of Corporate Finance put out a public statement concluding that it will not recommend enforcement action against companies who only comply with 1.01(a) and (b).

� This means companies are still are required to make a good faith effort to determine the country of origin of those minerals and to briefly describe their efforts and findings in a Form SD filed with the SEC and made available on the company's website.

“…it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD”

- Acting Chairman Piwowar (April 7, 2017)


Repeal of SEC Payment Disclosure Rule

� In February, President Trump repealed a new SEC rule requiring oil and gas extraction companies to file reports publicly disclosing payments of more than $100,000 annually made to the U.S. or foreign governments that are connected to the commercial development of oil, natural gas or minerals.

� The final rule passed in June 2016 required companies to file a list of such payments on Form SD, while “a separate public compilation of the payment information submitted in the Form SD filings will be made available online by the Commission’s staff.”

� The rule was challenged by business groups and Republican lawmakers, who argued that the requirements are too burdensome.


Carbon Capture Financing

� A coalition of coal industry, labor and climate change groups have urged President Donald Trump and congressional leaders to make carbon capture and sequestration projects part of any broad infrastructure legislative package, as well as to extend federal tax credits for such projects.

� On April 5, 2017, senators introduced legislation that would help power plants and industrial facilities finance the purchase and use of carbon capture and storage equipment through tax-exempt bonds.

� The bill is drawing support from both industry and environmental groups.

“Carbon capture is a

common-sense

solution that will allow

states like Ohio to

continue to utilize our

natural resources

while protecting our

environment at the

same time.”

- Senator Rob

Portman (R-Ohio)


Non-GAAP Reporting Lessons for Energy Companies

� In May 2016, the Division of Corporation Finance added new CDIs regarding “non-GAAP” financial measures.

� In 2016, numerous energy companies received SEC staff comments addressing their compliance with the non-GAAP financial measures rules and guidance, including the new CDIs.

– Most of these comments addressed non-GAAP measures appearing in companies’ quarterly earnings announcements, further demonstrating the staff’s increasing focus on companies’ disclosures in their press releases and on their websites, in addition to their periodic reports and registration statement filings.

� Beginning in August 2016, a number of companies received inquiries from the SEC’s Division of Enforcement regarding their disclosures of non-GAAP financial measures.


Non-GAAP Reporting Lessons for Energy Companies (cont’d)

Comments to Upstream Companies focused on:

� requirement to include most directly comparable GAAP financial measure with equal or greater prominence and a reconciliation

� what constitutes a “non-GAAP financial measure”

� requirement to disclose the reasons why company management believes the presentation of the non-GAAP measure provides useful information to investors

� Loss-per-share calculation

� Non-GAAP performance measures vs. non-GAAP liquidity measures



•Comments to Midstream Companies focused on:

� non-GAAP measures to quantify midstream companies’ cash generation, such as distributable cash flow, adjusted EBITDA and adjusted net cash flows

− how “maintenance capital expenditures” were calculated

− distributable cash flows as a useful non-GAAP measure

− distributable cash flows as a non-GAAP performance measure vs. liquidity measure

− adjustments to EBITDA, total gross operating margin

� Comments to Downstream Companies focused on:

� Similar comments involving measures such as adjusted EBITDA and segment performance metrics



•Takeaways:

� Adjusting non-GAAP performance measures by excluding recurring items — particularly recurring ordinary cash operating expenses — may draw comments.

� Metrics such as “core earnings,” “PV-10” and “operating margin per BOE” are non-GAAP financial measures requiring presentation of the most-comparable GAAP measures and reconciliations.

� When presenting numerous non-GAAP measures in a filing or press release, re-examine whether each of them are accompanied by the most comparable GAAP measures having the appropriate degree of prominence and reconciliation.

� The continued use of a complex non-GAAP measure that necessitates a complicated explanation and reconciliation should be re-evaluated in light of the staff’s recent comments on potentially misleading measures.

� Adjustments to a non-GAAP performance measure like adjusted earnings per share should not be presented “net of tax”; income taxes should be shown as a separate adjustment that should be clearly presented.

� Entities such as MLPs using per-share metrics such as distributable cash flows per unit should take care to describe their use and relevancy as performance measures, and not as liquidity measures.


SEC Has No Patience for Fake News on Stocks

Scheme

• In April 2017, the SEC brought actions against 27 individuals, companies and firms over schemes using paid promoters to boost stock prices.

• Issuers would hire promotion companies who in turn would hire writers to publish puff pieces.

• The schemes concealed or denied that the promotion was commissioned and paid for by the issuer.

Relevant Law

• Section 17(b) of the Securities Act of 1933 prohibits circulating communications without fully disclosing the receipt of consideration, directly or indirectly, from an issuer.

• Issuer liability usually attaches when they can prove the issuer had “ultimate authority” or directed the promotion.


Additional Topics of Note

1• FINRA looks to ease capital-raising rules and disclosure requirements around underwriting

2• The SEC increased the revenue cap for “Emerging Growth Companies” from $1B to $1.07B.

3• New FASB revenue standard concerning revenue from contracts with customers will take

effect for all public companies with reporting periods beginning after December 15, 2017.

4• Auditing Standard 18 (AS 18) regarding “related-party transactions” has forced some

companies to change existing internal controls and procedures.

5• The SEC adopted a rule (effective September 1, 2017) requiring issuers to hyperlink all

exhibits in SEC filings (including those incorporated by reference).

6• The PCAOB has adopted a new auditing standard to enhance the relevance of the auditor’s

report by providing additional and important information to investors.


Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

Accounting Leadership Conference · 4 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates...

Documents

Transcript of Accounting Leadership Conference · 4 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates...