Bruce Mann, Partner at Morrison & Foerster LLP, opined that the SEC not only fulfilled its rulemaking obligations under Sarbanes-Oxley in record time, but was also responsive to the concerns of the bar in the comment process. "The basic approach of the SEC used to be: 'we aren't going to give people guidance because someone may take advantage of it, and that will disadvantage the Division of Enforcement.' Today, the attitude is quite different. The SEC recognizes the reality that there are more lawyers in each of the ten largest law firms in the U.S. than in the national office of the SEC. The SEC has to depend on the private bar for enforcement."
As an example of the role of the private bar, Mr. Mann pointed out that, while Sarbanes-Oxley prohibits loans to certain officers and directors, Congress decided that "loan" was better left undefined. As a result, "the private bar got together and decided to adopt a comparable rational position as to what does and does not constitute a loan." As a reaction to this ad hoc process, the SEC could either initiate a proceeding against all corporations being advised by the major law firms in the U.S., or it could go along with what they were doing."
As finance disclosure standards become more clearly-defined in the near future, Mr. Mann predicts that the expansion of Form 8-K disclosure requirements will be the next step in increasing transparency to investors. Additionally, recent SEC proposals suggest that "the SEC may involve itself in the director nomination process in ways formerly left to state law."
In a later discussion, Mr. Mann spoke on Regulation G and non-GAAP Financial Rulemaking, proclaiming that the adoption of Regulation G and its integration with Regulation FD will cause major changes in how companies deal with analysts and the investing public.
Looking at Regulation G, Mr. Mann suggested counsel bear in mind that not all financial information is non-GAAP information. "While there are non-GAAP financial measures that are recognized as being perfectly appropriate, there are some things that you are not permitted to do, such as take the position that any 'special charge' item that has appeared in the last two years is a non-recurring item." Mr. Mann pointed out that litigation is a good example of the kind of gray area where rational decisions must be made. "If it is routine litigation or a recurring type, you can't present non-GAAP financial information that excludes it. However, a major piece of litigation that is not expected to produce charges over an extended period of time can probably by excluded in presenting proforma financial information."
Most of these "gray area" items are properly disclosable as part of the "known trend" analysis in the Management's Discussion & Analysis (MD&A). Summing up, Mr. Mann reminded counsel that "the SEC is committed to leveling the playing field by requiring more transparency and more prompt disclosure of material information. The MD&A disclosure has become the focal point for meaningful disclosure."
 | Bruce Mann, Partner at Morrison & Foerster LLP, discussed SEC corporation finance disclosure developments at FindLaw Corporate Counsel Center's Corporate Governance seminar at Stanford University. |