Corporate Counsel serves up a mostly excellent article, Securities Law Disclosure Checklist for Alleged (or Confirmed) Misconduct. It outlines disclosures that public companies should consider regarding alleged misconduct by employees, directors, or officers (e.g., “accounting improprieties, disclosure failures, criminal or civil actions involving the company and/or management, scandalous personal indiscretions, threatened disciplinary actions, fraud, false statements, or omissions, bribery or forgery”).
I say “mostly excellent” because, while the checklist is comprehensive and helpful to both companies and prospective whistleblowers, it unfortunately perpetuates the oddly popular myth that SEC Staff Accounting Bulletins (a.k.a. “SABs”), like SAB No. 99 dealing with materiality, are promulgated by the SEC and, therefore, are binding legal rules:
“In Staff Accounting Bulletin 99, the SEC also noted. . .” blah, blah, blah.
The SEC noted no such thing. As each and every SAB bears explicit witness, SABs are not binding partly because the SEC specifically disavows each of them with this preface:
The statements in the staff accounting bulletins are not rules or interpretations of the Commission, nor are they published as bearing the Commission’s official approval. They represent interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the Federal securities laws.*
Under the Fifth Amendment and the Administrative Procedure Act, so-called legislative regulations can only come into being through due process development that includes public notice and opportunity to comment. If the SEC were to so decide, it might be able to sneak by with interpretative regulations, thanks in no small part to the Supreme Court’s 2015 decision in Perez v. Mortgage Bankers Assoc. So far, however, on a number of important disclosure topics, including materiality and revenue recognition, the SEC has studiously avoided promulgating any regulations at all.
Thus, left to their own devices, SEC staff have taken the easy way out, engaging in a form of extra-legal self-help by drafting SABs, which they cook up behind closed doors with zero input from financial market constituents (investors and registrants). This is why SABs are called “Staff Accounting Bulletins.”
The distinction between legitimate SEC rules and ersatz SABs is not trivial. Rules that emerge from the crucible of notice and comment would undoubtedly differ significantly from the contents of the SABs, Wanda Wallace observed in 2007.** Investors and SEC registrants need and deserve better, legitimate regulatory guidance than the SABs. Meanwhile, the SEC should get no credit for binding regulations it has not drafted.
* See, e.g., SAB No. 99, https://www.sec.gov/interps/account/sab99.htm. See also Kurt S. Schulzke, Wink, Wink, Nudge Judge: Persuading U.S. Courts to Take Accountants Seriously in Federal Securities Cases with Help from the U.K. Companies Act, 16 Tenn. J. Bus. L. 231, 267 (2015) , (noting the disturbing appearance of this SEC mythology during Jeff Skilling’s Enron trial and in other securities cases); Kurt S. Schulzke, Gerlinde Berger-Walliser & Pier Luigi Marchini, Lexis Nexus Complexus: Comparative Contract Law and International Accounting Collide in the IASB–FASB Revenue Recognition Exposure Draft, 46 Vand. J. Trans. L. 515, 524 (2013) (similar).
** Wanda A. Wallace, Commentary: With or without due process?, ACCT. TODAY, Nov. 26, 2007, n.p. (decrying multiple SABs for their negative impact on the quality of financial information).