Clayton expected to be confirmed as SEC chair Jay Clayton, a partner in the law firm Sullivan & Cromwell LLP, has been nominated as chairman of the Securities and Exchange Commission (SEC or the Commission). His nomination was approved by the Senate Banking Committee and is expected to be confirmed by the full Senate.

In his opening statement at his confirmation hearing, Mr. Clayton said, “All Americans should have the opportunity to participate in, and benefit from, our capital markets on a fair basis, including being provided accurate information about what they are buying when they invest.”

He added, “There is zero room for bad actors in our capital markets. I am 100 percent committed to rooting out any fraud and shady practices in our financial system. I recognize that bad actors undermine the hard-earned confidence that is essential to the efficient operation of our capital markets. I pledge to you and the American people that I will show no favoritism to anyone.”

Mr. Clayton also observed, “In recent years, our markets have faced growing competition from abroad. U.S.-listed IPOs by non-U.S. companies have slowed dramatically. More significantly, it is clear that our public capital markets are less attractive to business than in the past. As a result, investment opportunities for Main Street investors are more limited. Here, I see meaningful room for improvement.”

In his testimony, Mr. Clayton said that, while the Jumpstart Our Business Startups Act (JOBS Act) has made it easier for companies to go public, more needs to be done to make public markets more attractive, particularly for medium-sized companies. One of his goals will be to encourage private companies to undertake IPOs at earlier stages of their growth.

Issue 2, 6 April 2017

SEC in Focus Quarterly summary of current SEC activities

In this issue:

Clayton expected to be confirmed as SEC chair ............................... 1

New push to ease SEC rules under the Dodd-Frank Act .................... 2

SEC rulemaking and implementation . 3 Final rules on exhibit hyperlinks

and HTML format ..................... 3 Final rules on inflation

adjustments to EGC and crowdfunding thresholds .......... 3

Proposed rule on Inline XBRL filing of tagged data .................. 3

Possible changes to Industry Guide 3 bank disclosure requirements ........................... 4

Our feedback on the SEC’s annual review under the Regulatory Flexibility Act .......... 4

Recent updates to SEC staff guidance ..................................... 4 Compliance and Disclosure

Interpretations ......................... 4 Other SEC activities ....................... 5 Current practice matters ............... 6

Recent trends in SEC staff comments ................................ 6

SEC staff focus on SAB Topic 11.M disclosures during filing reviews .. 6

2017 shareholder proposal landscape................................. 7

2017 XBRL US GAAP taxonomy available for use ....................... 7

Securities markets ......................... 7 Personnel changes ......................... 8 Enforcement activities ................... 8

Jay Clayton

EY AccountingLink | ey.com/us/accountinglink

2 | SEC in Focus Issue 2, 6 April 2017

In response to questions about whether companies should make disclosures about topics such as political contributions, climate change or cybersecurity, Mr. Clayton said his touchstone for disclosure is materiality: “What a reasonable investor would think is important.” He also noted that shareholders can use the shareholder proposal process to seek those disclosures if desired.

In response to a question about the SEC’s rulemaking process, Mr. Clayton said considering the economic effects of rules (both quantitatively and qualitatively) is an important aspect of rulemaking. Mr. Clayton also emphasized the importance of rigorously performing a retrospective review of the economic effects of rules. Mr. Clayton said that he believes SEC rules, including rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), should be reviewed to assess whether they are effectively achieving their intended objectives.

New push to ease SEC rules under the Dodd-Frank Act The Trump administration has signaled its intention to roll back regulations, including financial regulations mandated by the 2010 Dodd-Frank Act, and directed executive agencies to review their regulatory requirements.

Though the SEC is an independent agency and not bound to follow President Trump’s recent executive order on deregulation, Acting SEC Chairman Michael Piwowar has asked the SEC staff to consider whether relief is needed from the SEC’s conflict minerals and pay ratio rules. Congress, meanwhile, has eliminated SEC rules that would have required disclosures of payments made by resource extraction issuers to domestic and foreign governments for the commercial development of oil, natural gas or minerals. These are among the 67 rules the SEC adopted to fulfill Dodd-Frank Act mandates.

Speaking at the recent SEC Speaks conference hosted by the Practising Law Institute (PLI), Mr. Piwowar said, “the Dodd-Frank Act is rife with examples of burdens ultimately borne by the Forgotten Investor through shareholder money and company resources being expended to provide non-material disclosures — the conflict minerals, pay ratio, and resource extraction provisions to name a few.”

The SEC staff is currently reviewing comments the SEC received on the conflict minerals and pay ratio rules. The Commission cannot revoke final rules that were mandated by Congress, but it can amend final rules to provide additional relief. In addition, the SEC staff could provide relief by issuing interpretive guidance.

The SEC’s final resource extraction payments rule was eliminated under the Congressional Review Act (CRA), which allows recently finalized regulations to be overturned by a simple majority vote in the House and Senate and approval by the president. The Dodd-Frank Act mandate requiring the SEC to have such a disclosure rule still stands, however. Unless Congress takes action to overturn that provision of the Dodd-Frank Act, the SEC is required to propose a new resource extraction payments rule, although under the CRA, that new rule must differ substantially from the rule repealed by Congress.

How we see it Companies should closely monitor developments related to the conflict minerals and pay ratio rules and the Dodd-Frank Act more broadly. Until the Commission or Congress acts, however, companies need to comply with the SEC’s existing regulations.

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3 | SEC in Focus Issue 2, 6 April 2017

SEC rulemaking and implementation Final rules on exhibit hyperlinks and HTML format The SEC adopted a final rule that will require registrants to include a hyperlink to each exhibit listed in the exhibit index of nearly all filings subject to Item 601 of Regulation S-K as well as in Form F-10 and Form 20-F filings. To enable the inclusion of such hyperlinks, the rule requires registrants to submit such filings in HTML. The rule is effective 1 September 2017 for accelerated filers and large accelerated filers and 1 September 2018 for smaller reporting companies and non-accelerated filers.

Final rules on inflation adjustments to EGC and crowdfunding thresholds The SEC amended the definition of an emerging growth company (EGC) to increase the annual gross revenue threshold for new or existing EGCs to $1.07 billion from $1 billion to reflect inflation as required by the JOBS Act every five years.

The final rule also makes inflation adjustments in the thresholds specified under the crowdfunding rules for the maximum offering amount allowed in a 12-month period by a company, the investment limits for individual investors and the financial statement requirements for offerings.

The final rule also amends the cover pages of various SEC forms (e.g., Forms S-1, S-3, 10-K, 10-Q, 20-F) to add check boxes for issuers to indicate whether, at the time of the filing, they are EGCs and whether they have elected not to use the extended transition period relief available to EGCs under the JOBS Act for complying with any new or revised financial accounting standards.

The rule is effective upon publication in the Federal Register.

Proposed rule on Inline XBRL filing of tagged data The SEC proposed a rule that would require operating companies and mutual funds to use Inline XBRL and embed tags in their financial statements and their risk/return summaries, respectively, rather than provide this data in separate XBRL exhibits. The requirement would be phased in over three years for operating companies based on their filing status and over two years for mutual funds based on their net assets. As is the case for XBRL exhibits, officers would not have to certify the Inline XBRL information, and companies would not need to involve their auditors with the Inline XBRL information.

The proposal would not offer any exceptions. That is, it would apply to emerging growth companies, smaller reporting companies and foreign private issuers that prepare financial statements in accordance with IFRS as issued by the International Accounting Standards Board (IASB).

The proposal does not suggest an effective date, but compliance under the phase-in schedule would begin one year after the rule’s effective date. Comments are due by 16 May 2017.

In a related development, the SEC published an IFRS Taxonomy. Foreign private issuers that prepare financial statements in accordance with IFRS as issued by the IASB are required to file XBRL-tagged financial statements in annual reports for fiscal periods ending on or after 15 December 2017.

How we see it If the rule is finalized as proposed, foreign private issuers that will have to begin filing XBRL data should consider voluntarily using Inline XBRL in their initial submissions to avoid the cost of changing from XBRL exhibits to Inline XBRL when it becomes mandatory.

EY resources

► To the Point, SEC proposes requiring the use of Inline XBRL (SCORE No. 00974-171US)

EY AccountingLink | ey.com/us/accountinglink

4 | SEC in Focus Issue 2, 6 April 2017

Possible changes to Industry Guide 3 bank disclosure requirements The SEC is seeking public comment on statistical and other disclosures required by Industry Guide 3, Statistical Disclosure by Bank Holding Companies. The request seeks comment on potential improvements to the disclosure regime, including consideration of overlaps with US GAAP and other regulatory requirements. Comments are due by 7 May 2017.

Our feedback on the SEC’s annual review under the Regulatory Flexibility Act In our comment letter on the SEC’s periodic review of final rules that have a significant economic effect on most small entities, we recommended that the Commission consider making its review more transparent and more robust to encourage broader and more meaningful participation by constituents.

The reviews, which are required by the Regulatory Flexibility Act (RFA), are intended to assess whether rules should be revised or rescinded or whether they should remain in effect. The RFA requires that a review be performed within 10 years of a final rule’s publication.

We believe an effective post-implementation review process should determine whether a rule has accomplished its objective, evaluate the compliance cost for all issuers and the benefits for investors, and inform and improve the rulemaking process.

Recent updates to SEC staff guidance Compliance and Disclosure Interpretations Form 20-F: The SEC staff issued Compliance and Disclosure Interpretations (C&DIs) to clarify that:

• A foreign private issuer (FPI) may use an F-Series registration statement when it guarantees securities of non-FPI subsidiaries or issues securities guaranteed by non-FPI subsidiaries. The FPI may use Form 20-F with respect to any reporting obligations associated with that registration statement if certain requirements of Rule 3-10 of Regulation S-X are met.

• A wholly owned subsidiary of an FPI may omit certain information from its Form 20-F annual report if it meets the requirements in General Instruction I to Form 10-K, in the same manner that a wholly owned subsidiary may omit certain information from a Form 10-K.

• An FPI’s annual report on Form 20-F is due on the last day of the fourth month after its fiscal year end if its fiscal year ends on the last day of a month. If an FPI’s fiscal year ends on a date other than the last day of the month, its Form 20-F annual report is due on the same date four months after its fiscal year end.

• An FPI may incorporate by reference into a Form 20-F annual report information that was previously filed on Form 6-K.

Regulation A: The SEC staff issued C&DIs to clarify that:

• The staff will not object if a Regulation A issuer does not include an auditor’s consent to use its auditor’s report on the financial statements in Form 1-K.

• An issuer of a Regulation A Tier 2 offering may follow the age of financial statements requirements specified in paragraph (b)(3)-(4) of Part F/S of Form 1-A, which permit the annual financial statements to be up to nine months old before requiring interim financial statements.

EY resources

► EY Comments — SEC’s annual review under the Regulatory Flexibility Act (SCORE No. CL00260-171US)

EY AccountingLink | ey.com/us/accountinglink

5 | SEC in Focus Issue 2, 6 April 2017

Other SEC activities SEC Advisory Committee recommends board diversity disclosures The SEC’s Advisory Committee on Small and Emerging Companies (ACSEC) approved a recommendation that the Commission require issuers to disclose the race, gender and ethnicity of each board member and nominee to the board. ACSEC recommended allowing issuers to report the information board members and nominees use to describe themselves.

Current proxy rules require companies to disclose how diversity is considered in identifying and evaluating director nominees, but the SEC does not require companies to disclose diversity information about board members and nominees.

CAQ SEC Regulations Committee meeting The Center for Audit Quality (CAQ) SEC Regulations Committee met with SEC staff on 23 March 2017 and discussed topics that included the staff’s views on:

• Disclosures included in recent annual reports about the pending effects of new accounting standards on the financial statements, as well as developments related to disclosures of non-GAAP financial measures

• The effects of accounting changes by a successor entity on the predecessor period financial statements

• The effective date for adoption of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, for an emerging growth company (EGC) that elected private company adoption dates and then ceases to qualify as an EGC

Meeting highlights will be released in the second quarter.

Remarks at the PLI’s SEC Speaks conference In his remarks at the SEC Speaks conference, Mr. Piwowar said he believes the SEC should no longer distinguish between “accredited investors” who can purchase securities that are exempt from the SEC registration requirements and non-accredited investors who can’t make these purchases. He said the current requirements limit opportunities for non-accredited investors to earn high returns and diversify their investments.

Commissioner Kara Stein highlighted some of the more significant changes in the capital markets and said the Commission needs to address new challenges to protect investors. “We need to assess whether our current [regulatory] structure is sufficient to withstand the changes we face,” she said. “Are there better ways for us to address the challenges of a computerized market? Are anti-manipulation laws passed in an era of floor trading sufficient for an electronic marketplace? Do these laws need to be amended?” Ms. Stein also stressed that the Commission should not rush to eliminate disclosures but should embrace the chance to use technology to improve them.

The SEC staff from the Office of the Chief Accountant (OCA) and Division of Corporation Finance participated in a panel discussion and shared views similar to those the staff discussed at the 2016 AICPA National Conference on Current SEC and PCAOB Developments on the implementation of significant new accounting standards, related transition disclosures and non-GAAP measures, among other topics.

Chief Accountant Bricker discusses the effectiveness of audit committees In a recent speech, SEC Chief Accountant Wesley Bricker said audit committees “play a critical role in contributing to financial statement credibility through their oversight and resulting impact on the integrity of a company’s culture and internal control over financial reporting.”

EY resources

► Compendium of significant accounting and reporting issues, 2016 AICPA National Conference on Current SEC and PCAOB Developments (SCORE No. 04331-161US)

EY AccountingLink | ey.com/us/accountinglink

6 | SEC in Focus Issue 2, 6 April 2017

Mr. Bricker expressed concerns about the capacity of audit committees to balance their workload, saying: “While audit committees may be equipped to play a role in overseeing risks that extend beyond financial reporting, such as cybersecurity and portions of enterprise risk management, I believe it is important for audit committees to not lose focus on their core roles and responsibilities.”

To increase the effectiveness of their oversight, Mr. Bricker said audit committees should:

• Understand changes in the business, the operating environment and accounting standards that may create different financial reporting risks

• Include members with diverse backgrounds and skills to effectively oversee financial reporting and consider training and education programs to keep members current on accounting and financial reporting developments

• Set a positive tone at the top to support a strong internal control environment

• Understand management’s disclosure controls and procedures over the accuracy of non-GAAP and key operational measures and related policies, including how such policies are administered

• Monitor any cost reduction initiatives that could adversely affect management’s ability to meet its financial reporting responsibilities or inappropriately limit the scope of its external audit

• Consider providing additional voluntary disclosures about how the audit committee performs its oversight responsibilities, particularly its oversight of the external auditor and financial reporting process

Current practice matters Recent trends in SEC staff comments Non-GAAP financial measures moved into the number 1 spot in our compilation of SEC staff comment letters issued in the six months ended 31 December 2016, but the top five most frequent areas for staff comments remained the same as in the 12 months ended 30 June 2016.

Ranking Comment area 6 months ended 31

December 2016 12 months ended

30 June 2016 Non-GAAP financial measures 1 2 Management’s discussion and analysis 2 1 Fair value measurements 3 3 Segment reporting 4 5 Revenue recognition 5 4

We expect the SEC staff to continue to focus on these topics in 2017.

SEC staff focus on SAB Topic 11.M disclosures during filing reviews The SEC staff has also indicated that it is closely monitoring company disclosures required under Staff Accounting Bulletin (SAB) Topic 11.M about the effects the new accounting standards on revenue recognition, leases and financial instruments will have on financial statements when they are adopted. Below is an example of a comment letter that the SEC staff recently sent a registrant about its SAB Topic 11.M disclosures on the new revenue recognition standard.

EY resources

► SEC comments and trends – An analysis of current reporting issues, September 2016 (SCORE No. 03100-161US)

► Technical Line, 2016 trends in SEC comment letters (SCORE No. 03099-161US)

EY AccountingLink | ey.com/us/accountinglink

7 | SEC in Focus Issue 2, 6 April 2017

Example SEC staff comment: Accounting transition disclosures under SAB Topic 11.M You state that you are in the process of evaluating the impact that the amended revenue recognition guidance in Topic 606 will have on your consolidated financial statements. Please revise to provide a qualitative discussion of the potential impact that this standard will have on your financial statements when adopted. In this regard, include a description of the effects of the standard’s provisions that you expect to apply and a comparison to your current revenue recognition policies. Describe the status of your process to implement the new standard and the significant implementation matters yet to be addressed. In addition, to the extent that you determine the quantitative impact that adoption of Topic 606 will have on your results, please also disclose such amounts. Please refer to ASC 250-10-S99-6 and SAB Topic 11.M.

While providing his views on SAB Topic 11.M disclosures included in recent SEC filings, Mr. Bricker said at the 2017 Annual Life Sciences Accounting & Reporting Congress that some companies have disclosed they don’t expect the effects of the new revenue standard to be material. Mr. Bricker cautioned companies that even if they determine that the quantitative effect on their financial results will not be material, they need to consider whether the new disclosures they will have to make under ASC 606 are material. “The basis of any statement that the impact of the new standard is immaterial should reflect consideration of the full scope of the new standard, which covers recognition, measurement, presentation, and disclosure for revenue transactions,” Mr. Bricker said.

2017 shareholder proposal landscape Proxy access is once again the number 1 topic for shareholder proposals, according to a review of nearly 650 proposals by our EY Center for Board Matters. Proxy access refers to the right to include shareholder-nominated board candidates on a company’s ballot. The investor campaign for proxy access has led a majority of S&P 500 companies to adopt proxy access bylaws over the past three years. Nearly 20% of shareholder proposals this year focus on environmental sustainability, with climate risk emerging as one of the top topics. Other hot topics include political and lobbying spending, gender pay equality and board and workforce diversity.

2017 XBRL US GAAP taxonomy available for use The SEC staff has updated the EDGAR system to allow companies to use the 2017 XBRL US GAAP taxonomy, which adds tags for Accounting Standards Updates and makes certain industry-related changes and other revisions. The SEC staff strongly encourages companies to transition to the 2017 taxonomy for their first reporting period ending after 6 March 2017 (i.e., the first quarter Form 10-Q for calendar-year registrants). Companies also may continue to use the 2016 or 2015 taxonomies. The staff does not expect to remove the 2015 taxonomy before June 2017.

Securities markets NYSE changes listing standards for SPACs The SEC approved rule changes by the New York Stock Exchange (NYSE or Exchange) that will allow a special-purpose acquisition company (SPAC) listed on the Exchange to make a tender offer to its shareholders in lieu of holding a shareholder vote on a proposed acquisition. That tender offer must provide information about a proposed acquisition and an option for SPAC shareholders who disagree with the proposed acquisition to exercise their redemption rights to receive cash for their stock. The rule changes also eliminate a requirement that prevented a SPAC from completing a business acquisition if a specified percentage of its shareholders (not to exceed 40%) reject the proposed business acquisition and instead redeem their stock for cash. The NYSE changes also lower the initial and continued market capitalization thresholds required for SPAC listings.

EY AccountingLink | ey.com/us/accountinglink

8 | SEC in Focus Issue 2, 6 April 2017

Personnel changes Sagar Teotia is new OCA Deputy Chief Accountant The SEC named Sagar Teotia as the Deputy Chief Accountant overseeing the Accounting Group in OCA. Before joining the SEC, Mr. Teotia was a partner at Deloitte & Touche LLP in its National Office Accounting Consultations Group. He previously served as a professional accounting fellow in OCA.

Other changes Jennifer Minke-Girard has assumed the role of Interim Deputy Chief Accountant overseeing the International Group in OCA. Her predecessor, Julie Erhardt, continues to serve as a deputy chief accountant in OCA, focusing on emerging trends and accounting and auditing developments.

Enforcement activities Non-GAAP disclosure rules A marketing company settled charges with the SEC that it had violated non-GAAP disclosure rules, as well as that it failed to disclose certain perquisites and benefits paid to its chief executive officer (CEO).

The company didn’t admit or deny the SEC’s findings that it failed to give US GAAP metrics prominence equal to or greater than non-GAAP measures in its earnings releases and that it had changed the way it calculated its non-GAAP measure of “organic revenue growth” in 2012 without informing investors. According to the SEC, the company said organic revenue growth excluded the effects of two items (“acquisitions and foreign exchange impacts”), but it actually excluded a third item (i.e., the impact of gross vs. net revenue adjustments) beginning in 2012, which was not disclosed. The company’s organic revenue growth would have been lower if the company had calculated the measure consistently, the SEC concluded.

The SEC also found that the company did not disclose perquisites provided to its CEO that included private aircraft usage, club memberships, cosmetic surgery, yacht and sports car expenses, jewelry, charitable donations, pet care and personal travel expenses. The CEO later resigned and agreed to repay to the company more than $21.8 million in cash bonuses and personal benefits received between 2009 and 2014.

The company agreed to take remedial actions and pay penalties of $1.5 million to settle the charges.

Fictitious revenues A Mexico-based homebuilder agreed to settle charges that it recorded fictitious sales of over 100,000 units and overstated its revenues by $3.3 billion from 2010 to 2012. In 2013, the company began defaulting on its debt obligations, and it filed for the Mexican equivalent of bankruptcy reorganization in 2014. The company emerged from bankruptcy in 2015. In settling the case, the SEC said it took into account that the fraud occurred under previous management and ownership, and the new owner has taken appropriate remedial actions and significantly cooperated with the SEC during the investigation. No monetary penalties were imposed as part of the settlement.

Understating income tax expense and liability The SEC charged a shipping conglomerate and its former chief financial officer (CFO) with failing to recognize approximately $512 million of income tax liabilities over nearly 12 years. Certain terms in the company’s credit agreement made its controlled foreign subsidiary “jointly and severally” liable for the company’s debt, meaning the company should have

EY AccountingLink | ey.com/us/accountinglink

9 | SEC in Focus Issue 2, 6 April 2017

considered the guaranteed amount taxable income because it was a “deemed dividend” under the US tax code. The CFO did not consider these facts in determining the company’s income tax provision. The company filed for bankruptcy court protection after it discovered the understatement. The company agreed to pay a $5 million penalty, subject to bankruptcy court approval, and the former CFO agreed to pay a $75,000 penalty.

Fictitious expense reimbursements and claims for incentive compensation The SEC charged two former senior executives of a credit card processing company and three others with falsifying expense reimbursements, receiving kickbacks on overpayments to third parties and inappropriately claiming commissions or bonuses on existing customer accounts. The executives allegedly colluded, overrode internal controls and lied to the outside auditor. The alleged fraud was uncovered in August 2012 based on an employee tip and totaled $11.6 million since it began in 2008. A company investigation resulted in the termination of the senior executives. The company also restated its financial statements for the affected periods. The SEC is seeking penalties, disgorgement and other prohibitions against the defendants.

Impeding whistleblowers The SEC settled charges against an asset management company and a financial services company for impeding their former employees’ communications with the SEC staff about possible securities law violations.

The SEC found that the asset management company violated the whistleblower protections available under the Dodd-Frank Act by requiring departing employees to waive recovery of incentives for reporting misconduct available under the rule, among other things, in exchange for separation payments. The company voluntarily revised its separation agreements last year to prevent any such future violation.

In connection with an SEC investigation of a financial services company’s hedge accounting, the SEC found that the company similarly violated the whistleblower protections through language in its severance agreements. As part of remedial actions, the company also changed its severance agreements last year.

What’s next at the SEC? Mr. Clayton’s confirmation as SEC Chairman would allow him to provide direction to the Commission and its staff and fill key staff positions. However, even if Mr. Clayton is confirmed, one of the other two commissioners still could block a rule by not participating, potentially limiting how active the Commission can be on rulemaking activities until either of the other two remaining vacancies is filled.

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SCORE No. 01607-171US

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