Speaking at an Financial Executives International (FEI) webinar, Brian J. Lane, partner at Gibson Dunn & Crutcher and a former director of the SEC’s Division of Corporation Finance, and James J. Moloney, a partner and co-chair of the firm's Securities Regulation and Corporate Governance Practice Group, said SEC staffers are calling for more explicit descriptions of risk factors in financial reports.
For example, Moloney said, trying to cover a variety of contingencies with vague boilerplate descriptions -- such as a statement reading "other risks unknown to management" -- is likely to generate SEC attention.
"If the staff sees that, that's an automatic 'take it out' or 'get more specific'," Moloney said.
Similarly, according to Lane, the SEC and recent case law are saying companies can't cite the possibility of "future" risks, such as shifts in market conditions or the potential of product defects that pose material risks, if the company is aware it is being effected by adverse developments in those areas.
"You can't get credit for warning about future risks if it's already happening," Lane said.
Non-GAAP Financials
Another area likely to attract additional SEC attention this year is the use of non-GAAP financial metrics, which many companies prepare to provide supplementary information they feel can better explain their financial performance to investors.
Moloney said the SEC doesn't object to the use of non-GAAP financial data, but is likely to raise concerns if non-GAAP data is presented in a format that makes it look like a complete income statement or balance sheet.
"Even if you have a reconciliation [table] right there, they may still object and say [the non-GAAP data] is too prominent."
Eye on Trends
The identification of trends in the Management Discussion and Analysis section of 10-Ks is also attracting closer attention. Lane said Division of Corporate Finance staffers are going beyond broader trends that affect many organizations, such as macroeconomic conditions, to question company-specific issues such as declining revenue in consecutive quarters.
"I don't recall so many comments regarding whether something is a trend," Lane said.
He said his firm is seeing a higher number of SEC comments regarding whether changes in financial performance should be called out as trends, and expects additional enforcement cases for failure to identify trends.
CEO Pay
CEO compensation, and comparisons with lower-paid staff members, is another topic generating SEC and political interest as companies file 10-Ks and proxy statements.
"This is really a political issue, and it's attracted a lot of attention among those who want to be able to say a CEO makes X times what the average employee is paid," Lane said. "People already have access to that information."
A proposal to tighten compensation requirements has been delayed by the SEC in the face of more than 130,000 comment letters highlighting the complexity of calculating comparisons between executive pay and the wages of those further down the organizational chart.
But despite the delay, financial executives should be aware the pressure to enhance compensation disclosure remains in place, and is likely to trigger additional implications.
For instance, Lane said, similar efforts in 1992 to require more compensation disclosures in proxy statements were intended to "shame" companies into reducing executive pay, but had the opposite effect as CEOs demanded more equality with higher-paid peers.