Filing problems? SEC invites companies to ask for help

Where one entity’s financial statements get impossibly tangled up with another’s, the Securities and Exchange Commission is inviting companies to reach out and ask for some relief.

Seriously—the staff is taking calls from companies that are asking: “Can you cut me some slack on this reporting obligation?” And increasingly, the answer is yes.

One Big 4 firm even issued an alert recently telling its clients to look for opportunities to ask for relief. Before whipping up a wish list, however, companies should understand there’s a limit to what the SEC staff can do.

The relief is only available under Rule 3-13 of Regulation S-X, which governs filings companies must provide when they become attached to other entities, like through a merger or acquisition, an equity method investment, or other similar transaction. Rule 3-13 gives the SEC staff some latitude to waive requirements under Regulation S-X if providing the information would be burdensome, if missing information is not material to the total mix of information and, if waiving it would be consistent with investor protection.

The relief effectively applies to the financial statement of the other entities that must be included in a given company’s filing under S-X, not the registrant’s own financial statements. That’s an important distinction to understand up front, says Steven Jacobs, a partner at EY. “There does tend to be a little confusion over this messaging,” he says.

Jacobs says he’s heard questions like whether a Rule 3-13 waiver could apply to segment reporting under Accounting Standards Codification Topic 280, or whether a particular disclosure requirement under Generally Accepted Accounting Principles can be omitted. “No,” he says. “The SEC doesn’t have the ability to waive GAAP. That’s not what this is trying to capture.”

Consistent with the presidential administration’s promises of regulatory rollback, SEC Chairman Jay Clayton’s first public speech opened the door on greater consideration of Rule 3-13 waiver requests. “I want to encourage companies to consider whether such modifications may be helpful in connection with their capital-raising activities,” he said, with assurance the staff would place a high priority on timely responses.

The message has been repeated frequently in the months that followed, says Rich Davisson, a partner and SEC regulations leader at audit firm RSM. Whether through staff speeches, interaction with the Center for Audit Quality’s SEC Regulations Committee, and even through its own Financial Reporting Manual, the SEC is saying it wants to waive some of its own written requirements under Regulation S-X.

“The SEC has continuously been trying to get this message out,” he says. “They want people to reach out to them on things that don’t seem reasonable.”

“The SEC has continuously been trying to get this message out. They want people to reach out to them on things that don’t seem reasonable.”
Rich Davisson, Partner and SEC Regulations Leader, RSM

The most common cause for a request for relief under Rule 3-13 is when a company buys another business but can’t provide a complete set of financial statements for the newly acquired entity, says Christine Davine, a partner at Deloitte. That’s a transaction under Rule 3-05 of S-X.

The regulation requires anywhere from one to three years’ worth of financial statements for that target entity, depending on how significant it is to the newly combined company, says Davine. “Frequently, registrants may have difficulty getting historical financial statements,” she says. “Particularly for earlier periods, that second year back or that third year back may not be readily available.”

Companies in that predicament might appeal to the SEC staff to waive an entire year of financial information, as long as they can show investors will not suffer as a result. “Registrants might say that information is not relevant or material to investors,” says Davine.

Requests associated with an acquired entity are common because it’s not unusual for a company with flat income or in a loss position to buy a profitable business, which inflates the importance of the income under SEC rules for testing the significance of a transaction, says Paula Hamric, a partner at audit firm BDO USA.

“The tests are all very prescriptive,” says Hamric. “Significant charges and gains in profit and loss can significantly skew the income test. If you’re a registrant that breaks even, it doesn’t matter how much the target made. It’s really significant.”

Requesting relief

The SEC staff has recommended that when a registrant prepares a pre-filing letter to request a waiver, the registrant should consider the following to facilitate a prompt response:
Be concise and focus on relevant facts and circumstances.
Propose solutions and adequate support for the proposals.
Show the letter to the registrant’s auditors and have them weigh in before sending.
The SEC staff has also indicated that it is available to discuss potential waiver fact patterns by phone in advance of a registrant’s submission of a written request.
Examples of waiver requests under Rule 3-13 include:
Provision of abbreviated financial statements (e.g., statement of revenues and direct expenses) in lieu of full financial statements for a recently acquired business under Regulation S-X, Rule 3-05.
Omission of one or more years of historical financial statements for a recently acquired business subject to Rule 3-05.
Omission of certain financial statements of an equity method investment under Regulation S-X, Rule 3-09.
Separately, registrants may also be faced with complex accounting matters. Registrants are encouraged to submit a pre-filing letter to the Office of the Chief Accountant (OCA) on the proposed application of U.S. GAAP to resolve these complex issues before filing. For best practices related to consulting with the OCA, see the guidance on the SEC’s Website. ?
The SEC staff has authority, where consistent with investor protection, to permit registrants to omit, or substitute for, required financial statements. Requests for this relief should be submitted by e-mail. Call (202) 551-3111 and ask for the appropriate person listed below to discuss questions about potential relief:
Rule 3-05 – Patrick Gilmore
Article 11 – Todd Hardiman
Rules 3-09 and 4-08(g) – Christy Adams
Rules 3-10 and 3-16 – Tricia Armelin
Rule 3-14 – Jessica Barberich
Source: Deloitte; SEC

When large entities acquire smaller entities, they sometimes encounter problems getting complete financial histories on those entities to satisfy SEC filing requirements, says Hamric. Companies might also run into obstacles when an entity they’re acquiring has experienced changes in ownership, complicating the search for historic financials.

Another instance that might prompt a waiver request is a company’s equity investment in another entity without acquiring a controlling ownership, covered by Rule 3-09 of S-X. If a company has difficulty obtaining financial information otherwise required for that entity in which it is invested, it might ask the SEC for relief. The SEC similarly invites waivers for problems under Rule 3-14 regarding real estate operations and Rule 4-08(g) regarding other non-consolidated entities.

Mark Shannon, managing director at Crowe Horwath, says SEC staff have reported at accounting conferences that they are granting some 90 percent of all waiver requests they receive. “That might lead you to believe there are other waiver requests out there they might grant that have not been submitted,” he says.

Companies might consider asking for a waiver if their reporting requirements under S-X are unreasonably burdensome, or if it considers the cost of compliance to outweigh the benefits, says Shannon. “People have seen if they can put forth a reasonable, persuasive, qualitative argument, the staff seems to be more open to considering those requests,” he says. “I have not seen a waiver request flat out denied in quite some time.”

To get the ball rolling on a waiver request, Shannon says a phone call to the SEC is the right place to start. The SEC has even designated specific staff members to field questions on specific types of requests, and it has published the list in its Financial Reporting Manual.

“Call the staff, lay out the facts and circumstances, explain the qualitative reasons why you believe a waiver would be consistent with capital formation and protection of investors,” says Shannon. “That goes a long way toward streamlining the process.”

Sometimes the SEC staff will look for alternative information registrants might provide in lieu of required information that’s missing. “Is there other reasonably available information you can provide?” says Shannon. That will help, he says.

When constructing the formal written request for a waiver following SEC staff tips, it also helps to consider any future filings to which the same waiver request might apply, says Shannon. Companies should include that in the letter as well, so the process won’t need to be repeated for a future filing, he says.

Jacobs predicts the SEC’s ongoing examination of disclosure effectiveness may address some of the present-day reasons companies may need to request waivers. “A lot of the driver of these requests is rules written decades ago with little revision that warrant some fresh thinking,” he says.