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Financial Reporting and Regulatory Update

Second Quarter 2019

From the SEC

Public statements and announcements

Implementation of new standards

At the 38th annual SEC and Financial Reporting Institute Conference in Los Angeles on June 6, 2019, acting Chief Accountant Sagar Teotia stressed the SEC’s commitment to transparent financial disclosures and the importance of being proactive and preventive. He said that the SEC’s biggest focus continues to be on the implementation of new standards. Teotia acknowledged that the increased number of new standards in recent years has increased pressure on the industry, but the profession has stepped up, and the benefits to investors are numerous. He also addressed disclosures related to the pending discontinuation of London Interbank Offered Rate (LIBOR) as a reference rate, an upcoming FASB exposure draft related to the simplification of the debt equity standard, and the SEC’s accounting consultation process.

Current financial reporting matters

A group of industry professionals, including SEC Deputy Chief Accountant Pat Gilmore, spoke on a panel at the 38th annual SEC and Financial Reporting Institute Conference on June 6, 2019, and addressed the following current financial reporting matters:

  • The upcoming proposal related to financial statement requirements for significant business acquisitions and dispositions. The panel said the main drivers of the proposal are the enhanced quality of information provided to investors and the simplification of the requirements to reduce the cost of compliance for preparers.
  • The continued emphasis on non-GAAP disclosures. These include ensuring that management has processes and controls in place over the appropriateness of any non-GAAP disclosures included in public filings.
  • Areas of disclosure to consider for 2019, including Brexit, LIBOR, and cybersecurity. The panel acknowledged that while these issues may not affect all companies, it is important for companies to tell investors whether or not they are concerned about these matters and why.

Forum on distributed ledger technology and digital assets

On May 31, 2019, the SEC hosted a live public forum focusing on distributed ledger technology and digital assets. The forum, which was organized by the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub), was webcast and is now available for viewing on the FinHub page. The agenda identified four panel discussions: capital formation considerations, trading and markets considerations, investment management considerations, and distributed ledger technology innovations.

National Compliance Outreach Program for Broker-Dealers

On June 27, 2019, the SEC and the Financial Industry Regulatory Authority (FINRA) held the 2019 National Compliance Outreach Program for Broker-Dealers at the Federal Reserve Bank of Chicago.

Designed for regulators and broker-dealer industry professionals, the program is a gathering to discuss compliance practices and promote a more effective compliance structure for investor protection. Emphasis was on leadership insights, retail investor protection, and regulatory topics such as digital assets and cybersecurity.

Staffing updates

On May 30, 2019, the SEC announced that Chief Accountant Wesley Bricker, who has been chief accountant since 2016 and with the SEC for more than six years,  is leaving the agency in June. On the same day, the SEC named Sagar Teotia its

acting chief accountant as of Bricker’s departure. According to the SEC, Teotia has served as deputy chief accountant, leading the accounting group since 2017. As acting chief, Teotia will serve as the principal adviser to the SEC on accounting and auditing matters and will lead the SEC’s Office of the Chief Accountant. Teotia will be responsible for assisting the SEC with its oversight of the FASB and the Public Company Accounting Oversight Board.

On June 3, 2019, the SEC announced that Kevin A. Zerrusen will serve as senior adviser for cybersecurity policy to Chairman Jay Clayton. The SEC noted that in this role “Zerrusen will coordinate efforts across the agency to address cybersecurity policy, engage with external stakeholders, and help enhance the SEC’s mechanisms for assessing cyber-related risks.” Currently, Zerrusen serves as chair of the Intelligence National Security Alliance’s Cyber Council, which is focused on effective public-private sector collaboration on cybersecurity issues. He also has 30 years of experience    with the Central Intelligence Agency, where his responsibilities included directing the agency’s cyber center, which analyzes, evaluates, and counters foreign cyberthreats.

Rules and guidance

Regulation Best Interest

On June 5, 2019, the SEC approved Regulation Best Interest, which clarifies that when making recommendations, a broker-dealer may not put its financial interests ahead of the interests of a retail customer.

At the same time, the SEC also approved a final rule on new Form CRS relationship summary and Form ADV amendments as well as two interpretations. The interpretations address investment advisers’ standard of conduct and broker-dealer exclusion.

These four actions provide clarification on the standards of broker-dealer   and investment adviser conduct, are designed to assist retail investors better understand and compare the services offered and make an informed choice of the relationship best suited to their needs and circumstances, and promote increased consistency in the level of protections provided specifically at the point in time that   a recommendation is made.

Proposal to expand exemption from auditor attestation on ICFR

On May 9, 2019, the SEC issued a proposal, “Amendments to the Accelerated Filer and Large Accelerated Filer Definitions,” to revise the definitions of “accelerated filer” and “large accelerated filer,” which would result in fewer registrants being required to obtain an auditor attestation on the effectiveness of ICFR.

The proposal generally does not change the public float thresholds used to  determine filing status. Rather, it adds a revenue test for certain registrants, aimed at scoping out lower-revenue entities that are not large accelerated filers. Specifically, the SEC proposes to exempt smaller reporting companies (SCRs) with less than

$100 million in revenue from the requirements of Section 404(b) of the Sarbanes- Oxley Act of 2002. The proposal has no impact on the statutory exemption from Section 404(b) afforded to issuers that qualify as emerging growth companies.

The proposal does not change the requirement that companies establish, maintain, and provide management’s assessment on the effectiveness of ICFR. The table summarizes the proposed new definitions:

Proposed thresholds and resulting filing status

Public float

Annual revenues

Filing status

Less than $75 million

N/A

SRC and nonaccelerated filer (ICFR attestation not required)

$75 million to $700 million*

Less than $100 million*

$75 million to $250 million

$100 million or more

SRC and accelerated filer

$250 million to $700 million

$100 million or more

Accelerated filer (not SRC)

$700 million or more

N/A

Large accelerated filer

 

*Represents a proposed change to ICFR attestation requirements for issuers with public float between $75 million and $700 million and revenues of less than $100 million.

The proposal also revises certain thresholds, combined with the revenue test, with respect to exiting different tiers of filer status (that is, nonaccelerated, accelerated,  or large accelerated filer).

The proposal does not include an effective date, which will depend on the feedback received and timing of the rulemaking process.

Comments are due July 29, 2019.

Proposal for changes to financial statement requirements for acquisitions and dispositions

On May 3, 2019, the SEC issued for public comment proposed rule amendments designed to improve the information for investors about the acquisition and disposition of businesses. The goal is to facilitate more timely access to capital and to reduce financial disclosure complexity and compliance costs.

The proposal includes amendments to Rules 3-05 and 3-14, Article 11 of Regulation S-X, and related forms for requirements on information related to financial statements of businesses acquired or to be acquired and for business dispositions. For investment companies, the proposal also includes new Rule 6-11 of Regulation S-X and amendments to Form N-14 for financial reporting of acquisitions involving investment companies.

Proposed changes include, among other things:

  • Revising the significance tests by changing the investment and income tests, increasing the use of pro forma financial information in measuring significance, and conforming the significance threshold and tests for a disposed business
  • Requiring at most two years of annual financial statements of an acquired business; eliminating the three-year requirement for acquisitions of major significance.
  • For acquisitions of a component of an entity, allowing certain expenses to be disclosed instead of reflected in the carve-out financial statements.
  • Clarifying when financial statements and pro forma financial information are required
  • Removing the requirement for separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for a complete fiscal year
  • Clarifying Rule 3-14 application requirements related to determination of significance, the need for interim income statements, special provisions for blind pool offerings, and the scope of the requirements
  • Amending the pro forma financial information requirements and disclosures to improve their content and relevance

Comments are due July 29, 2019.