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US Securities and Exchange Commission

Is your SEC filer status being redefined?

Tobi Carter Richards  

Tobi Carter Richards  

The SEC is expected to reach another milestone soon on its path towards advancing small business capital formation with the finalization of a rule that would expand the number of registrants qualifying as non-accelerated filers—a rule with important implications for registrants’ reporting and disclosure practices.

Is your SEC filer status being redefined?  What does this mean for you?

According to the latest regulatory agenda, the SEC is slated to adopt its proposed revisions to the “accelerated filer” and “large accelerated filer” definitions by April 2020. This is a response to recent amendments to the “smaller reporting company” (SRC) definition that essentially broke the link between SRCs and non-accelerated filers by increasing the number of registrants qualifying as SRCs without making similar changes to the accelerated filer and large accelerated filer statuses, the result being SRCs that remain non-accelerated filers and SRCs that share a status with accelerated filers. This blog post offers you guidance on how to carry out your reporting and disclosure responsibilities amid these changing guidelines on SEC filer status.

The evolution

Effective September 10, 2018, the SEC adopted amendments to the SRC definition—originally established in 2008—that expanded the number of registrants qualifying as SRCs, estimating that number to be nearly 1,000 during the first year under the new definition (available on Thomson Reuters Checkpoint). But the SEC didn’t make any corresponding changes to the thresholds for qualifying as an “accelerated filer” and a “large accelerated filer.” So, whereas before SRCs were automatically non-accelerated filers, you can now have a dual status as both SRC and accelerated filer, meaning that you are eligible to provide scaled disclosures found in Regulations S-K and S-X like SRCs but are also subject to certain heightened requirements that apply to accelerated filers.

When the SEC issued this revised SRC definition, Chairman Clayton instructed Staff to put forth recommendations for possible changes to the “accelerated filer” definition that would reduce the number of registrants qualifying as accelerated filers, in an effort to better align SRCs with non-accelerated filers and reduce compliance burdens. The SEC did just that in May 2019 when it proposed to amend accelerated and large accelerated filer status in such a way as to reduce the number of registrants qualifying as both SRCs and accelerated filers by making more of them non-accelerated filers. If this proposal is adopted, the number of these dual-status registrants will decrease but won’t be eliminated.

So, when the time comes registrants, you should carefully evaluate your filer status and be mindful of how it affects your reporting obligations and securities disclosures.

What do the changing guidelines on SEC filer status mean for you?

Registrants, particularly dual-status registrants, keep top of mind where you fall on the filer status spectrum because it impacts your filing deadlines and responsibilities for internal control over financial reporting (ICFR), and has practical implications in relation to scaled disclosures.

1) Filing deadlines

Today, for example, if the market value of your publicly-traded common stock is more than $250 million but less than $700 million and you have annual revenues of less than $100 million, then you have dual status as both SRC and accelerated filer. However, if the May 2019 proposal is adopted, you’d be considered a non-accelerated filer. This distinction is important because dual-status registrants must comply with the periodic report filing deadlines for accelerated filers, and accelerated filers have shorter deadlines than non-accelerated filers for these reports.

Also, dual-status registrants are subject to the accelerated deadlines for complying with new disclosure requirements. For example, when it comes to the new employee and director hedging disclosures, accelerated filers must disclose their hedging policies in proxy and information statements for fiscal years beginning on or after July 1, 2019—one year earlier than SRCs (see my blog post titled Developments in SEC reporting and disclosures — 4 things to know for more discussion of the new standard).

2) ICFR obligations

If the May 2019 proposal is finalized, some of you dual-status registrants would newly qualify as non-accelerated filers and would no longer be required to have your auditors provide attestation reports on ICFR under Section 404(b) of Sarbanes-Oxley (SOX). That, however, shouldn’t be an invitation to skimp on the accuracy and reliability of your corporate disclosures. After all, the proposed rule wouldn’t relieve your management of its obligation to establish, maintain and assess the effectiveness of ICFR. Nor would it relieve your auditor of its responsibility under PCAOB standards (available on Thomson Reuters Checkpoint) to consider ICFR in the performance of your financial statement audit, even though you wouldn’t be subject to the ICFR auditor attestation requirement.

And let’s not forget other SOX checks and balances, including CEO and CFO certifications of financial reports and independent audit committee requirements.

3) Scaled disclosures

Dual-status registrants, even though you’re free to provide scaled disclosures, you may find that it’s not practical to do so. For instance, a review of material contracts, such as credit agreements, may reveal that you’re obligated to comply with the more detailed disclosure requirements for accelerated filers.  In other cases, investor pressure may push you to comply with the more detailed disclosure requirements, such as providing three years of audited financial statements when you’re required to provide only two or providing a description of your general business developments for the last five years when you’re only required to provide a description for the last three.

As for risk factors, you aren’t required to include them in your periodic filings, but you may find it useful to do so since the 1995 Private Securities Litigation Reform Act offers a safe harbor for forward-looking statements only if they’re accompanied by cautionary language. And though you aren’t required to include a CD&A in your proxy statements, you still have to solicit say-on-pay votes at least once every three years.  So, it’s worthwhile to provide a CD&A, or something similar, to explain your executive compensation structure and practices in the hope of receiving favorable shareholder votes and favorable recommendations from proxy advisory firms.

In determining whether to provide scaled disclosures, you should consider such things as the filer status of your competitors and whether doing so may be damaging to your market perception.

Takeaway

As you navigate the shifting filer status landscape, you may experience some confusion. I urge you to monitor the finalization of the May 2019 proposal and any related updates to know where you fall along the filer status spectrum so that you can better understand what it all means for you.

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