SEC holds Investor Advisory Committee meeting
The SEC Investor Advisory Committee held a meeting on June 9, 2022, that included two panel discussions – one regarding accounting of nontraditional financial information and one addressing climate disclosures. The panel discussion on accounting of nontraditional financial information began with a general overview of the U.S. accounting and auditing infrastructure presented by speakers from the SEC and the Public Company Accounting Oversight Board (PCAOB). Three experts discussed whether the accounting and auditing infrastructure is providing investors with the information they need to make informed decisions and provided their suggestions and strategies to make sure the U.S. capital markets remain the most competitive in the world. The panel discussion on climate disclosures focused on the SEC’s March 2022 proposed rules to enhance and standardize climate-related disclosures.
SEC acting chief accountant issues statement on importance of independence
On June 8, 2022, SEC acting Chief Accountant Paul Munter issued a statement on the importance of auditor independence and an ethical culture for the accounting profession. He identifies the SEC’s auditor independence rule, Rule 2-01 of Regulation S-X, as integral to the SEC’s mandate to protect investors and notes it is fundamental for promoting investor confidence in the quality of financial disclosures. In addition, Munter discusses:
- The importance of the auditor independence framework under Rule 2-01(b) of Regulation S-X. Munter says not to overlook the importance of Rule 2-01(b) when determining whether an accountant is independent and that all relevant circumstances should be considered. The independence evaluation is not just a checklist exercise under Rule 2-01(c), and the general standard requires an evaluation of auditor independence, including an assessment of independence both in fact and appearance from the perspective of a reasonable investor.
- The Office of the Chief Accountant’s (OCA) approach to auditor independence consultations. Munter notes that an important part of consultations is that all relevant circumstances and facts for the specific question are provided to the OCA. Also, Munter warns that relying on previous staff positions might not be appropriate as specific risks, facts, and circumstances might be different even if they appear similar and the OCA will independently access all circumstances.
- Recurring issues on auditor independence consultations. Munter identifies recurring issues in recent independence consultations, including treating independence considerations as a checklist in place of a careful analysis, providing nonaudit services without considering the extent and magnitude of the nonaudit services and business relationships, and initiating complex business arrangements through restructurings and the use of alternative practice structures.
Finally, Munter notes the importance of accounting firms fostering an ethical culture with respect to auditor independence and leading by example.
SEC chair remarks on market structure
In his speech on June 8, 2022, before the Piper Sandler Global Exchange Conference, SEC Chair Gary Gensler discussed market structure and how the playing field is not level across different parts of the market. He concentrated on trading in dark pools and through wholesalers, noting that key aspects of the U.S. national market system rules, including rules related to order handling and execution, have not been updated in almost seven years. Gensler described the requests he has made of staff for recommendations on how to update the rules, specifically in the following six areas:
- Minimum pricing increment
- National best bid and offer
- Disclosure of order execution quality
- Best execution
- Order-by-order competition
- Payment for order flow, exchange rebates, and related access fees
SEC reopens comment period on recovery of erroneously awarded compensation proposal
The SEC, on June 8, 2022, reopened the comment period on proposed rules for listing standards for recovery of erroneously awarded compensation. In conjunction with reopening the comment period, the SEC staff released a memo providing supplemental data and analysis on the voluntary adoption of compensation recovery provisions by issuers and the impact of including “little r” restatements as triggers for a compensation recovery analysis.
The SEC initially proposed the rules in July 2015 to implement Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The comment period for the proposal was first reopened for 30 days in October 2021.
Comments are due July 14, 2022.
SEC and others discuss key matters at conference
On June 2, 2022, the 40th Annual SEC and Financial Reporting Institute Conference was held and included speakers and presentations from the SEC, the FASB, and the PCAOB among others. The opening keynote session with representatives from the FASB and the SEC OCA focused primarily on the FASB agenda consultation and highlighted the 500-plus letters written by investors and stakeholders to the FASB with feedback on recent standards updates. Some of the key areas of feedback centered around the need for further disaggregation of the income statement (additional information about expenses), disclosures on climate regulations and environmental credits, policies related to digital assets, and a review of the income tax provision disclosure requirements (better understanding of complex tax positions). The session also touched on what projects the FASB, the SEC, and the PCAOB are planning to work on in the coming year including standardizing key performance indicators (KPIs), reorganizing consolidation guidance, and the climate disclosure proposal.
Speakers also discussed environmental, social, and governance (ESG) matters throughout the conference, including implementation of new ESG policies and regulations and what the future holds for companies disclosing information related to ESG policies. One presenter emphasized that while ESG disclosure requirements are not fully instituted yet, companies need to be proactive about instituting policies and controls related to ESG disclosures now. Management should consider using the help of specialists, regulators, auditors, and researchers to identify how the ESG disclosure requirements will affect companies.
Other sessions focused on the remote work environment, high employee turnover and the labor shortage and its effect on auditing and accounting, the Russia-Ukraine war and how it is affecting the agencies, the recent increase in the use of non-GAAP adjustments and a plan to release further guidance about when a company can and can’t use them, and PCAOB inspection focus areas.
SEC proposes ESG disclosures for certain investment advisers and investment companies
On May 25, 2022, the SEC proposed amendments to rules and reporting forms to promote consistent and reliable information for investors about funds’ and advisers’ incorporation of ESG factors. Those affected by the changes would include certain registered investment advisers, advisers exempt from registration, registered investment companies, and business development companies.
Funds and advisers would be required to provide more specific disclosures in prospectuses, annual reports, and brochures based on the ESG strategies they pursue. Funds that focus on the environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments. Funds that claim to achieve specific ESG impacts would have to describe the specific impacts and summarize their progress on achieving those impacts. Funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information about their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings. The proposed amendments also include implementing a layered, tabular disclosure approach for ESG funds to allow investors to compare ESG funds at a glance. Additionally, the proposal would require certain ESG reporting on Forms N-CEN and ADV Part 1A.
Comments are due Aug. 16, 2022.
Also on May 25, Chair Gensler issued a statement in support of the proposal, and Commissioners Allison Herren Lee, Caroline Crenshaw, and Hester Peirce all issued statements sharing their positions on the proposed amendments.
SEC proposes changes to Names Rule for funds
To address changes in the fund industry and compliance practices that have developed since the rule was adopted almost 20 years ago, the SEC, on May 25, 2022, proposed amendments to improve and modernize the Investment Company Act “Names Rule” to prevent misleading and deceptive fund names. This proposal addresses public feedback on potential rule reforms received as part of a March 2020 request for comment.
Under the current Names Rule, registered investment companies whose fund names suggest a focus in a particular type of investment (among other areas) must adopt a policy to invest at least 80% of the value of their assets in those investments. The proposed amendments would require more funds to adopt an 80% investment policy by extending the requirement to any fund name with terms suggesting that the fund focuses on investments that have (or whose issuers have) particular characteristics including fund names with terms such as “growth” or “value” or terms indicating that the fund’s investment decisions include one or more environmental, social, or governance factors. The proposed amendments would limit temporary departures from the 80% investment requirement and clarify the rule’s treatment of derivative investments. The proposal also provides new enhanced disclosure and reporting requirements, updates notice requirements, and establishes recordkeeping requirements.
Comments are due Aug. 16, 2022.
Chair Gensler and Commissioners Peirce, Lee, and Crenshaw issued statements on the proposed amendments.
SEC chair provides testimony before Congress
On May 17, 2022, Chair Gensler provided testimony before the Subcommittee on Financial Services and General Government of the U.S. House Appropriations Committee on necessary increases in SEC resources.
Gensler noted that it takes constant vigilance to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation, and he said U.S. securities laws are the gold standard for capital markets around the world. He said that we cannot take U.S. leadership in capital markets for granted as new financial technologies and business models continue to change the face of finance for investors and issuers, more retail investors than ever are accessing our markets, and other countries are developing competitive capital markets. To meet the challenges of maintaining these high standards, the SEC needs to be adequately resourced. Market participation, responsibilities, technologies, and competition have increased, the funding for the SEC has not, and the agency has shrunk in size.
Gensler detailed his budget request for enforcement and examinations, corporate finance, trading and markets, and investment management, among other areas. He shared that the expansive growth and added complexity in the capital markets continue to necessitate increased resources for the SEC. He said, “Markets don’t stand still. The world isn’t standing still. Our resources can’t stand still, either.”
SEC director remarks on enforcement landscape
Gurbir S. Grewal, director of the SEC Division of Enforcement, presented a speech on May 12, 2022, at the Securities Enforcement Forum West 2022. Grewal said a goal of enforcement is to increase public confidence in the U.S. markets and government and to offset the waning trust in institutions. Grewal noted that it is in everyone’s collective interest to ensure that investigations move quickly and efficiently. He discussed the perception of delayed accountability as investigations seem to take a very long time and examined obstacles that are encountered throughout the enforcement process including document production issues; reputational, financial, psychological, and emotional costs; trust between staff and counsel and staff and witnesses; and questionable privilege claims.
With regard to document production, he noted there are problems with delayed or slow production, too many documents being provided, or too few being provided in response to requests. Highlighting the importance of documents, Grewal described them as “the lifeblood of many investigations.” He ended his speech with thoughts on the way forward including discussing cooperation, the ways to cooperate, and the benefits of cooperating.
SEC chair remarks on swaps
On May 11, 2022, SEC Chair Gensler delivered prepared remarks before the International Swaps and Derivatives Association Annual Meeting. Gensler noted that the U.S. economy benefits from a well-functioning swaps market as it is important that companies have the ability to manage their risks. He addressed security-based swaps, which are under the SEC’s jurisdiction. Related to the security-based swap markets, he concentrated his remarks on reducing risk, increasing transparency, and enhancing market integrity. He described recent actions taken by the SEC including rule implementations and proposals to reduce risk, enhance pre-trade and post-trade transparency, and improve market integrity. He added that there is still more work to do.
Gensler closed his speech by discussing crypto assets with derivatives and the use of derivatives within structured and so-called complex products. He described actions that can be taken to improve guidance and regulations over these products.
