Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. DST SYSTEMS INC (714603) 10-K published on Feb 28, 2018 at 5:29 pm
Reporting Period: Dec 30, 2017
The SEC or other regulatory agencies may issue regulations impacting third-party service providers of mutual funds and other fund-types products, such as distributors, administrators, or custodians, (collectively referred to as “mutual funds”), which
could adversely affect our business. The SEC may issue additional regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) or other legislative authority that would require brokers and financial intermediaries that distribute mutual funds to make more detailed fee disclosures at the point-of-sale. Additionally, many brokers and financial intermediaries have become subject to a new DOL-imposed fiduciary standard-of-care that is causing them to review, and may impact, their methods of distribution, share class structures, and/or wholesaling activities. Although the DOL rule is fully effective, the current administration has delayed implementation of the best interest contract exemption, providing an extended transition period for distributors to address their new fiduciary status. It remains unclear whether the regulations will be replaced by an SEC standard, repealed or substantially altered within the near future. We cannot predict all of the requirements the SEC or FINRA may impose. Additionally, we cannot predict whether the SEC or FINRA proposal will provide a unified standard with the DOL rule, or whether it will provide a patchwork of standards that depend on the type of account in which the retirement assets are invested. Additionally, while the industry would prefer a united federal fiduciary standard, individual states such as Nevada, New York and Maryland have recently begun to explore their own legislative options to provide a fiduciary standard for investment advice. Regulations that cause current distribution channels or interest in mutual fund investing to change could decrease the number of accounts on our systems as a result of changes in client offerings or the attractiveness of offerings to customers of our clients. The fiduciary regulations are expected to primarily impact brokers and registered investment advisers who give individualized non-discretionary advice in the “retail” marketplace, but discretionary investment managers in the “institutional” space are also expected to be affected, primarily in connection with the sale of investment products and services. To the extent that our business units, clients, unaffiliated intermediary partners and retirement plan service providers fit into these categories, this could adversely affect our business and operating results. Additionally, to the extent the Dodd-Frank Act and/or DOL regulations impact the operations, financial condition, liquidity and capital requirements of unaffiliated financial institutions with whom we transact business, those institutions may seek to pass through increased costs to us or they may reduce their transactional volume which is a primary source of our revenues.
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), resulting in significant modifications to existing U.S. tax law, including but not limited to, (1) lowering the corporate federal income tax rate from 35% to 21% effective January 1, 2018; (2) eliminating the domestic production activity deduction; (3) implementing a territorial tax system; and (4) imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries. The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”) which provides additional clarification in situations where we do not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act for the reporting period in which the Tax Act was enacted. We have recognized the provisional tax impacts, based on reasonable estimates, related to the one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits through the year ended December 31, 2017 (“Transition Tax”) and the revaluation of deferred tax assets and liabilities and has included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act. We intend to complete our accounting under the Tax Act within the measurement period set forth in SAB 118.
On February 21, 2018, a putative class action complaint was filed against DST and the members of our board of directors in the United States District Court for the Western District of Missouri under the caption Pratt v. DST Systems, Inc., et al. The complaint alleges that the preliminary proxy statement issued in connection with the Merger omitted material information in violation of Sections 14(a) and 20(a) of the Exchange Act. Specifically, the complaint alleges that the preliminary proxy statement does not disclose the line items used to calculate certain non-GAAP measures or a reconciliation of such non-GAAP measures to our most comparable GAAP measures; does not disclose actual projected values of unlevered free cash flow (“UFCF”), the values of the line items utilized to calculate UFCF, the terminal values for DST, or the inputs for the perpetuity growth rates and discount rates; does not disclose the multiples and metrics for the Publicly Traded Companies Analyses; and does not disclose the multiples and metrics for the Selected Precedent Transactions Analyses, rendering the preliminary proxy statement false and misleading. The complaint seeks an order (1) declaring that the action is properly maintainable as a class action and certifying the plaintiff as class representative and his counsel as class counsel; (2) enjoining us from proceeding with the shareholder vote on the Merger or consummating the Merger, unless and until we issue additional disclosures; (3) directing us to disseminate a materially complete and accurate proxy statement; (4) awarding damages; (5) awarding costs and disbursements of this action, including reasonable attorneys’ and expert fees and expenses; (6) declaring that we violated Sections 14(a) and/or 20(a) of the Exchange Act, as well as Rule 14a-9; and (7) granting such other and further relief as the Court may deem just and proper. We believe the lawsuit is without merit and intend to defend vigorously against these allegations, and, because it is still in its preliminary stages, we have not yet determined what effect this lawsuit will have, if any, on our financial position or results of operations.
In 2015, the Board adopted a voluntary Directors’ Deferred Fee Plan (the “Directors’ Deferred Fee Plan”) that permits electing directors to receive deferred shares of DST common stock in lieu of: (i) cash directors’ fees and (ii) stock directors’ fees. The payment of the deferred shares received under the Directors’ Deferred Fee Plan are deferred for tax purposes until a director’s service from the Board ends. Before any deferred shares are delivered to a participating director, the director does not have any right to vote any of his or her deferred shares nor to receive any cash dividends on the deferred shares to the extent dividends are payable on shares of DST common stock. If and when DST pays a cash dividend on its shares, additional deferred shares are credited to a participating director’s account. The additional shares credited have a value equal to the dividends that otherwise would have been payable to a plan account if the hypothetical shares then credited were actual shares of DST common stock. All credited whole deferred shares will be settled in actual shares of DST common stock and such shares will be issued to a director upon the director’s termination from Board service. Any fractional deferred share will be rounded up to a whole share. Most directors were initially eligible to participate in the Directors’ Deferred Fee Plan as of May 2015, and the plan applies only to eligible director compensation earned after that date.
Engagement Procedures. Audit Committee procedures prohibit the Committee from engaging an independent registered public accounting firm to perform any service it may not perform under the securities laws. The Audit Committee must pre‑approve the independent registered public accounting firm’s annual audit of our consolidated financial statements. The procedures require the Committee or its Chairperson to pre‑approve or reject any other audit or non‑audit services the independent registered public accounting firm is to perform. The Committee has directed that its Chairperson, with the assistance of our Chief Financial Officer, present and describe at regularly scheduled Audit Committee meetings all pre‑approved services. The Committee has required management to present services for pre‑approval within a specified period in advance of the date the services are to commence. The Committee regularly examines whether the fees for audit services exceed estimates. Securities regulations waive pre‑approval requirements for certain non‑audit services if their aggregate amount does not exceed specified amounts we pay to the independent registered public accounting firm. The procedures require the Committee or its Chairperson to approve, prior to completion of the audit, any services subject to this waiver. The Committee has not applied the waiver to a non‑audit service. The Audit Committee pre‑approved all services PWC rendered to us and our subsidiaries for 2017.