By James Bowden
Seeing as how we are in the thick of annual report and proxy season, I’m going to change pace from my usual format and try to offer some tips that are actually applicable to practice and useful to young lawyers. So for those of you who have just had a dense annual report dropped in your lap and been asked to perform a “rule check,” and now have no idea what to do, here are a couple of hints. If you don’t know what the 34 Act is, you might want to consider some CLEs, and a refund of your law school tuition.
- Read the filing cover to cover first. You would think this would go without saying, but sometimes people will start with the rules and try to pick through the filing to match everything up. That’s a bad strategy on several levels, specifically because (i) it’s really hard to know if you are catching everything; (ii) reading the full document gives you a chance to catch typos and question things that don’t make sense, and (iii) reading the filing gets you familiar with your client’s business generally. So spend the time and read the filing.
- Redline the filing against last year’s congruent filing. If it’s a 10-Q, redline against the most recent 10-Q and last year’s 10-Q from the same period. Clients tend to see their previous filings as a form, which is fine – but it can’t be treated as a simple fill-in-the-blanks exercise. The filings need to be updated with new disclosure, responses to SEC comment letters, and changes to disclosure requirements. Redlining will let you see what is recycled and what is updated.
- Check interim filings for required disclosure. The SEC’s website is pretty easy to use. You would be shocked at how frequently something from an 8-K doesn’t get included in a first draft of a 10-K. Make sure it is included in the second draft if the rules require it.
- Don’t go to the CFR – go to a Red Box. You can get a paperback collection of the Red Box, which is expensive but looks good in your office. I use Wolters Kluwer’s Red Box Online, which has the advantage of being updated automatically.
- Make sure that responses to past SEC comments have been included. If your client is using last year’s form and has responded to SEC comments in the past year, they may have neglected to include disclosure that they have explicitly promised the SEC. Don’t let your client fall into this trap for the wary.
- Watch for internal consistency. All the numbers need to match; it doesn’t look good if net interest income is $6.7m in one section and $4.1m in another. Granular attention to detail – that’s what transactional attorneys get paid for [at least, that’s what transactional associates get paid for].
- Read the notes to the rules. Often the notes give away when disclosure can be neglected where the issue has been disclosed in another section of the filing. The notes also give a nice, plain English explanation of disclosure requirements. They’re worth a read.
- Use the Industry Guides. Is your client in oil and gas? Are they a bank holding company? Well, they’ve got a special set of statistical disclosure rules to follow. Don’t neglect them just because their titles don’t begin with “Regulation S-.”
- Watch the updates to disclosure requirements. Every year something is different. Last year the new change was a requirement that an 8-K be filed within four days of a shareholder vote announcing the results of voting. This year, Dodd-Frank’s “Say-On-Pay” requirements have added a couple of required shareholder votes to the proxy. Last year’s form just won’t do.
- Watch the compensation disclosure. In my experience, the SEC really cares about Compensation Discussion and Analysis. They want metrics for how bonuses are calculated, and really care how performance targets are set. This is sensitive disclosure – in a culture that generally thinks it is distasteful to talk dollars and cents when it comes to what a person gets paid, companies required to file periodic disclosures are required to give the names of their top five highest paid employees and list how much they were paid to the cent, broken down by the form of compensation. Filers hate the requirement, too, because often executive pay is tied to metrics that reveal proprietary business strategies. You can refuse to disclose specifics to the extent that you can argue that competitive harm will be suffered, but it isn’t a free pass – there isn’t any magic language, and the SEC will push back.
I hope that helps someone out there. If you have any specific questions, put them in the comments and I’ll be sure to either do my best to answer or punt to someone who actually knows something about this stuff.