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Financial Reporting and Regulatory Update

Third Quarter 2019

From the SEC

Public statements and announcements

Credit derivatives market

On June 24, 2019, SEC Chairman Jay Clayton, Commodity Futures Trading Commission Chairman J. Christopher Giancarlo, and U.K. Financial Conduct Authority (FCA) Chief Executive Andrew Bailey issued a joint statement concerning the credit derivatives markets:

“The continued pursuit of various opportunistic strategies in the credit derivatives markets, including but not limited to those that have been referred to as ‘manufactured credit events,’ may adversely affect the integrity, confidence and reputation of the credit derivatives markets, as well as markets more generally. These opportunistic strategies raise various issues under securities, derivatives, conduct and antifraud laws, as well as public policy concerns.”

According to the leaders, each of their agencies will work together to prioritize the exploration of avenues to address these concerns and promote transparency, accountability, integrity, good conduct, and investor protection in these markets.

LIBOR transition and potential risks

On July 12, 2019, the SEC staff published a statement on LIBOR transition that encourages market participants to proactively manage their transition away from LIBOR. The statement identifies several areas that warrant increased attention during the transition period and provides guidance on certain items. Areas addressed in the statement include:

  • Identification of existing contracts that extend past 2021 to determine their exposure to LIBOR
  • Consideration of whether contracts entered into in the future should reference an alternative rate to LIBOR or include effective fallback language
  • Guidance for how registrants might respond to other business risks associated with the discontinuation of LIBOR such as those related to strategy, products, processes, and information systems
  • Questions to consider to understand and mitigate the risks related to the transition from LIBOR
  • Potential alternative reference rates that may be used
  • Guidance from several SEC divisions on responding to risks resulting from the impact of the discontinuation of LIBOR

It is expected that parties reporting information used to set LIBOR will stop doing so after 2021. The SEC staff warns, “For many market participants, waiting until all open questions have been answered to begin this important work likely could prove to be too late to accomplish the challenging task required.”

Roundtable on short-termism

Corp Fin hosted a public roundtable on July 18, 2019, to gather information from investors, issuers, and other market participants about the impact of short-termism on capital markets and whether the SEC reporting system and regulations should be modified to address these concerns.

The agenda had these panel discussion topics:

  • “Impact of a Short-Term Focus on Our Capital Markets,” to explore the causes and effects of a short-term focus on capital markets and to identify potential market practices and regulatory changes that could encourage long-term thinking and investment
  • “Our Periodic Reporting System’s Role in Fostering a Long-Term Focus,” to discuss the SEC’s periodic reporting system and what specific regulatory changes could foster a longer-term focus in the system

Cross-border digital assets regulation

On July 30, 2019, SEC Commissioner Peirce spoke at the Singapore University of Social Sciences Convergence Forum: Inclusive Blockchain, Finance, and Emerging Technologies, about opportunities for cross-border cooperation for regulating digital assets. She said that innovation in blockchain and cryptocurrency is challenging us “to think about how better to accommodate innovation in general. Because so much of the activity is taking place outside the United States, we have to think about our regulation with a sensitivity for cross-border considerations, cooperation, and what I call co-learning.”

Peirce said that regulators’ concerns about the cross-border regulation of digital assets in many ways go along with their concerns about regulating all forms of cross-border market activity, including being able to enforce domestic rules, the inability to impose regulations outside U.S. borders, and whether the regulatory structure meets expectations of investors. Peirce warned that international communication and internationalization of markets does not necessarily lead to the internationalization of regulations. She also encouraged jurisdictions to look to regulators for shared consideration of difficult issues and coordination, but not for regulatory directives.

Regulatory reform

SEC Commissioner Peirce discussed SEC regulatory reform efforts in her remarks before the American Chamber of Commerce in Tokyo on Aug. 7, 2019. Peirce said the “regulation of public companies is a part of our jurisdiction that is crying out for reform. We have seen the trend of companies waiting longer to go public and have been asking ourselves what we can do to encourage companies to go public earlier and to remain public. We want to ensure that retail investors can participate in the growth of these companies.”

She noted that there are various reasons that companies might not go public, including the Sarbanes-Oxley Act requirement that auditors attest to the effectiveness of the company’s internal controls, which has been a deterrent for smaller companies. As such, the SEC recently proposed to eliminate this requirement for certain pre-revenue companies. Additionally, she highlighted other efforts by the SEC to cut unnecessary costs, to modernize and simplify disclosure requirements, to streamline exemptions from registration, and to allow all issuers to “test the waters” with potential investors to gauge their interest, among other efforts.

Corp Fin disclosure program realignment

On Sept. 27, 2019, Corp Fin announced the realignment of the work of its disclosure program. The new structure is aimed at fostering collaboration, transparency, and efficiency. Under the new disclosure program structure, efforts of the Corp Fin staff will be focused in the following groups:

  • Disclosure Review Program. This group will conduct the majority of its selective and required filing reviews in seven industry-focused offices.
  • Specialized Policy and Disclosure. The work of the offices of International Corporate Finance, Mergers and Acquisitions, and Structured Finance as well as corporate governance policy matters across Corp Fin will be included in this group.
  • Office of Risk and Strategy. This office will provide filing review teams with guidance on developing risks and evolving disclosures.
  • Office of Assessment and Continuous Improvement. This new office has been established to evaluate the effectiveness of the disclosure review program.

Staffing updates

The SEC released, on June 26, 2019, a roster of Chairman Jay Clayton’s executive staff, including several individuals who have joined the office recently. The executive staff advises the chairman on all matters before the SEC, works with agency staff, and helps Clayton perform all day-to-day operations needed to fulfill the SEC’s mission. Positions listed in the announcement include chief of staff, deputy chief of staff, director of administration, chief counsel, and several senior advisers.

On July 3, 2019, the SEC announced that it has named Sagar Teotia to be chief accountant, after he has recently served as acting chief accountant. In the position, Teotia will be the principal adviser on accounting and auditing matters, and he will direct the 45 staff members in the SEC’s Office of the Chief Accountant. He will also assist the SEC in its oversight of the FASB and the PCAOB. Prior to this position, Teotia served as deputy chief accountant since 2017.

The SEC announced that on July 8, 2019, Allison Herren Lee was sworn into office as an SEC commissioner with a term ending June 5, 2022. President Donald Trump nominated Lee, who was unanimously confirmed by the U.S. Senate. Chairman Jay Clayton said that Lee’s “expertise in securities law, including from her prior tenure at the Commission, will be invaluable to our efforts to advance the interests of investors and our markets.” Commissioner Lee has more than 20 years of experience practicing securities law and has written, lectured, and taught courses internationally on financial regulation and corporate law. She served previously for more than 10 years in several roles at the SEC, including as counsel to Commissioner Kara Stein and as senior counsel in the Division of Enforcement’s Complex Financial Instruments Unit.

The SEC announced, on July 9, 2019, that Julie A. Erhardt, deputy chief accountant (technology and innovation) in the Office of the Chief Accountant, plans to leave the SEC in July. During her 14 years at the SEC, Erhardt worked on high-quality international accounting, auditing, and disclosure standards through policy-making, interpretative, consultative, and outreach activities. In addition, she assessed and advised on financial reporting risk and internal SEC risk.

Rules and guidance

Recordkeeping and reporting requirements for security-based swap dealers

The SEC, on Sept. 19, 2019, adopted a package of rules and rule amendments under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules and amendments institute recordkeeping and reporting requirements for security-based swap dealers and major security-based swap participants, and they modify the requirements for broker-dealers. The rules require companies to create and maintain certain business records to document and track their security-based swap operations and are designed to make it easier for the SEC to monitor compliance and reduce market risk. Among other changes, the rules establish or amend periodic reporting and annual audit requirements, establish early warning notification requirements, and amend the SEC’s existing cross-border rule.

Proposal to revise statistical disclosures for banking registrants

On Sept. 17, 2019, the SEC approved a proposed rule, “Update of Statistical Disclosures for Bank and Savings and Loan Registrants,” to update statistical disclosures of banking registrants currently provided under Industry Guide 3, “Statistical Disclosure by Bank Holding Companies.” The proposal clarifies the types of entities within its scope and carries over, updates, or eliminates various current Guide 3 disclosures. In addition, the proposal rescinds Guide 3 and relocates required disclosures to new Subpart 1400 of Regulation S-K.

The proposal clarifies, for both domestic and foreign registrants, that banks and savings and loan registrants are subject to Subpart 1400 and, with minor exceptions (see “Credit ratios” in the following table), matches the periods required for statistical disclosures to the annual and interim periods presented in the financial statements. The proposal carries over many current Guide 3 disclosures to Subpart 1400; however, it also eliminates certain Guide 3 disclosure topics (for example, return on equity and assets and short-term borrowings) and makes minor changes to Article 9 of Regulation S-X.

Highlights of significant proposed disclosure changes include:



Significant proposed changes

Average balance, interest and yield/rate analysis, and rate/volume analysis

Further disaggregates the categories of short-term interest-earning assets and short-term interest-bearing liabilities

Investment portfolio

Deletes certain disclosures and matches, with U.S. GAAP or International Financial Reporting Standards (IFRS), the categories presented for weighted average yield disclosures for each range of maturities by category of debt securities

Loan portfolio

Deletes certain disclosures and matches, with U.S. GAAP or IFRS, the loan categories for maturity by loan category disclosures; clarifies how contractual maturities and noncontractual rollovers or extensions affect the disclosure

Allowance for credit losses

Deletes the analysis of loss experience disclosure; carries over the ratio of net charge-offs during the period to average loans outstanding and requires the disclosure of the net charge-off ratio on a more disaggregated basis using loan categories under U.S. GAAP or IFRS


Does not propose disclosures related to the new credit loss standard but requests comment on whether there are material allowance disclosures under an expected credit loss model that are not already required by SEC rules, the proposed rules, U.S. GAAP, or IFRS

Credit ratios

Requires disclosure of certain credit ratios on a consolidated basis and disaggregates the current credit ratio disclosure (that is, net charge-offs during the period to average loans outstanding) into each loan category disclosed under U.S. GAAP or IFRS; proposes discussion of the factors that drove material changes in the ratios, or related components, during the periods presented


Requires five years of credit ratio disclosures for initial registration statements (including Regulation A offering statements); for other filings, would require disclosures for the financial statement periods presented in the filing


Requires disclosure of uninsured time deposits disaggregated by type and maturity


Comments are due on Dec. 2, 2019.

“Test-the-waters” expansion

The SEC announced on Sept. 26, 2019, that it voted to adopt a new rule that expands “test-the-waters” reform to all issuers.

Under this new rule, all prospective issuers, not just emerging growth companies (EGCs), are permitted to assess market interest in a possible initial public offering or other proposed registered securities offering by allowing discussions with potential qualified investors before the filing of a registration statement. These communications will be exempt from Securities Act Section 5 restrictions on written and oral offers prior to or after filing a registration statement. The expansion of the “test-the-waters” reform is designed to give companies more flexibility in determining whether to proceed with a registered offering before incurring the costs of preparing a registration statement.

The rule will be effective Dec. 3, 2019.

Proxy voting responsibilities of investment advisers

On Aug. 21, 2019, the SEC released clarification guidance addressing proxy voting responsibilities for investment advisers. In addition to other topics, the guidance covers the ability of investment advisers and their clients to establish a variety of voting arrangements and matters to consider when they use proxy advisory firm services.

In addition, the SEC provides interpretative guidance on the applicability of the federal proxy rules to proxy voting advice and notes that proxy voting advice provided by proxy advisory firms generally constitutes a “solicitation” under the federal proxy rules. Related guidance about the application of the proxy antifraud rule to proxy voting advice is included.

The guidance and interpretation were effective as of Sept. 10, 2019.

Proposal to modernize Regulation S-K disclosures

On Aug. 8, 2019, the SEC proposed amendments to modernize certain disclosures under Regulation S-K. The proposal addresses the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105). The proposed amendments are targeted to “improve these disclosures for investors, and to simplify compliance efforts for registrants. Specifically, the proposed amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material.”

 Among other proposed amendments to Items 101, 103, and 105, the changes include the following:

  • Item 101. Changes include clarification and expansion of the principles-based approach; additional disclosure topics such as human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business; and emphasis on the regulatory compliance requirement by including material government regulations.
  • Item 103. To avoid duplicated disclosures, changes include specifically stating that the required information about material legal proceedings may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document.
  • Item 105. Changes include requiring a summary risk factor disclosure if the risk factor section is greater than 15 pages, changing the required disclosures standard from the “most significant” factors to the “material” factors, and requiring risk factors to be organized under relevant headings.

Comments are due Oct. 22, 2019.

Updated Financial Reporting Manual

Corp Fin published an updated Financial Reporting Manual on July 1, 2019. The manual provides informal internal guidance from the Corp Fin staff on various accounting topics, financial reporting topics, and SEC rules.

The updated sections are marked “Last updated: 7/1/2019.” Among them:

  • Section 1610. Certain guidance on the effect of adopting new accounting standards on selected financial data is removed.
  • Topic 2, 2020.1. Application of Rule 3-13 and Note 5 to Rule 8-01 of Regulation S-X is clarified.
  • Sections 2030.1, 2030.3. Guidance has been removed. Requests to omit financial statements should be submitted through the Rule 3-13 waiver process.
  • Section 5240. Information is consolidated with note to Topic 2.
  • Section 10110. Revenue threshold for EGCs is updated pursuant to SEC Release 33-10332.

Auditor independence rules amendments

The SEC adopted, on June 18, 2019, a final rule, “Auditor Independence With Respect to Certain Loans or Debtor-Creditor Relationships,” that amends the SEC’s auditor independence rules about the analysis that must be done to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client at any time during an audit or professional engagement period under Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the Loan Provision). The amendments will do the following:

  • Focus the analysis on beneficial ownership rather than on both record and beneficial ownership.
  • Replace the existing 10% bright-line shareholder ownership test with a “significant influence” test.
  • Add a “known through reasonable inquiry” standard for identifying beneficial owners of the audit client’s equity securities.
  • For the definition of “audit client,” for a fund under audit, exclude any other funds that otherwise would be considered affiliates of the audit client under the rules for certain lending relationships.

The amendments were effective Oct. 3, 2019.

Changes to private securities offering exemptions

With the intention of expanding investment opportunities and promoting capital formation, the SEC issued, on June 18, 2019, a request for public comment on ways to simplify, harmonize, and improve the exempt offering framework.
The SEC is looking for input on possible changes to the exemptions for both companies and investors, including identifying potential overlap or gaps within the framework. The release considers limitations on who can invest in certain exempt offerings, or the amount they can invest; steps to assist in the transition from one offering to another or to a registered offering; expanding an entity’s ability to raise capital through pooled investment funds; and revising exemptions covering the secondary trading of securities initially issued in exempt offerings.

Comments were due Sept. 24, 2019.