Financial Reporting and Regulatory Update

First Quarter 2022

From the SEC

Public statements and announcements

Broker-dealer risk

On March 14, 2022, Division of Trading and Markets staff issued a reminder to broker-dealers and other stakeholders to remain vigilant to market and counterparty risks in light of the current period of volatility and uncertainty.

Statement on materiality and financial statement errors

On March 9, 2022, Paul Munter, the SEC’s acting chief accountant, released a public statement outlining views on assessing the materiality of financial statement errors from the perspective of a reasonable investor. Munter provided reminders on the concept of materiality, thoughts on the importance of objectivity when assessing materiality, and observations from recent fact patterns SEC staff has addressed. Munter also reminded practitioners of SEC staff availability for consultation.

Statement on shareholder proposals

On March 8, 2022, at the Council of Insitutional Investors Spring 2022 Conference, Renee Jones, director of the SEC’s Division of Corporation Finance, remarked on the SEC’s decision to issue new shareholder proposal guidance, the importance of adhering to commission statements when interpreting commission rules, and how the current shareholder proposal season is progressing.

Remarks on regulating lawyers

At a Practicing Law Institute program on March 4, 2022, SEC Commissioner Allison Herren Lee gave a speech addressing Section 307 from the Sarbanes-Oxley Act, which mandates the adoption of minimum standards of professional conduct for attorneys appearing and practicing before the SEC in the representation of issuers. Section 307 addresses the concern that lawyers were acting in the interests of the executives who hired them and not in the interests of those to whom they owed that responsibility. Lee highlighted that to date the SEC has adopted only one standard that requires lawyers to report certain potential violations up the chain of management inside a corporate client, and the SEC has never enforced any actions against lawyers under this standard. She said this mandate calls for a broader set of rules to address the accountability of lawyers and that a set of standards should be established to better protect investors and markets. Lee focused on several areas that need to be addressed including the gate-keeping role of lawyers, lawyers who provide the answers that management desires when there are not supporting facts, the impacts of bad advice related to corporate disclosures, and the inadequacy of current standards.

Among other suggestions, Lee offered a few thoughts on areas that minimum rules should address, including:

  • A lawyer’s obligation to a corporate client, including how advice should reflect the interests of the corporation and its shareholders rather than the executives who hire the lawyer
  • The impact of the advice on the corporation and its shareholders, including the impact if the disclosure decision ultimately proves incorrect
  • Advice on materiality
  • Competence and expertise requirements
  • Firm oversight including a system of quality control
  • Independence requirements when providing advice

In closing, Lee stated “That is the goal of standards in this space – to support securities lawyers in giving clients their best advice while living up to the promise of public service that our profession embraces.”

Statement on FASB agenda consultation

On Feb. 22, 2022, SEC acting Chief Accountant Munter issued a “Statement on the FASB’s Agenda Consultation: Engagement With Investors and Other Stakeholders Vital to Development of High Quality Accounting Standards.” In the statement, he noted that in response to FASB’s June 2021 Invitation to Comment, “Agenda Consultation,” approximately one-third of the more than 500 responses received were from investors or other financial statement users. Munter said, “It is critically important that the FASB, and the Trustees of the Financial Accounting Foundation (the ‘FAF’) in its important oversight role over the FASB, continue to improve processes for obtaining and considering investor and other stakeholder feedback, and for clearly communicating with those stakeholders regarding how that feedback has impacted the standard-setting process.” Munter encouraged all stakeholders to continuously engage with the FASB in the standard-setting process and encouraged investors to share perspectives on what information is useful to them and how they could use that information. He noted that it is important for investors and other stakeholders to understand how their feedback is considered by the FASB, so the FASB should continue to focus on improving transparency in its communications of the types of investors the FASB engages with, the diverse extent and nature of investor feedback, and how the FASB considers investor feedback.

In addition, because the objective of financial reporting is to provide decision-useful information to investors and other users of financial reports, Munter noted that the FASB should be transparent about how projects would benefit investors and other financial statement users to meet this objective. In its decisions to add projects to its agenda or make changes to its standards, the FASB should make a clear case for change and should consider the expected costs for preparers and users as well as benefits of a change. Munter highlighted a few examples of current projects where there is diversity in views, including intangibles and subsequent accounting for goodwill, disaggregation of financial reporting information, climate-related transactions and disclosures, and digital assets.

As the FASB considers feedback, Munter said he believes it should keep in mind “the importance of: 1) making the case for change; 2) appropriately scoping projects to make timely, meaningful, and achievable changes while ensuring appropriate due process is used throughout the standard-setting life cycle; and 3) continuing to seek investor and other stakeholder input.” In conclusion, Munter reiterated the importance of the FAF and FASB’s focus on improvement and their efforts to better address the significant and evolving needs of investors. Munter said he looks forward to the continued progress and improvements in incorporating investors’ feedback into the standard-setting process.

Remarks on the PCAOB

On Feb. 15, 2022, before the Stanford Law School Federalist Society, SEC Commissioner Hester M. Peirce presented remarks on the PCAOB. She said the PCAOB is not working alone and has a small but very important role to play in the broader economy. Peirce noted that the economy is all about working with other people to enable all participants to survive and prosper and that auditors have a part in the cooperation and collaboration as high-quality financial statements enable investors to determine whether to invest money in a company. As auditors play a role in producing high-quality financial reporting, so too do audit regulators and accounting and audit standard-setters. On this point, Peirce highlighted the role of the PCAOB by first touching on its history and then describing certain obstacles and challenges the PCAOB has faced and will face in the current marketplace and in the future. She described the unusual structure of the PCAOB where the SEC has responsibility for overseeing the PCAOB’s activities and approving its budget. This structure also creates duplication in setting standards, enforcement actions, and independence requirements.

Finally, she warned of the PCAOB’s potential involvement in ESG issues and said that its involvement in the ESG area could “undermine the ability of the PCAOB to play its role as neutral arbiter of audit quality.”

Remarks on money market, open-end bond, hedge funds

On Feb. 4, 2022, SEC Chair Gary Gensler presented a statement before the Financial Stability Oversight Council (FSOC) regarding financial resiliency of money market funds, open-end bond funds, and hedge funds. His statement highlighted how the nature, scale, and interconnectedness of these funds could create financial stability issues.

Gensler said that he believes the SEC has a responsibility to help protect for financial stability. To meet that responsibility, he and the SEC have taken several actions including:

  • Requesting staff to make recommendations for strengthening the resiliency of these fund sectors
  • Proposing amendments to the rules that govern money market funds
  • Considering improvements to the fund liquidity rule or considering other reforms to enhance fund liquidity, pricing, and resiliency in possible future stress events for open-end bond funds
  • Proposing amendments to Form PF for hedge funds
  • Proposing a rule to require public reporting of large security-based swap positions
  • Reproposing a new rule to prevent fraud, manipulation, and deception in connection with security-based swap transactions

In closing, Gensler noted that he welcomes the FSOC’s input on the SEC’s ongoing consideration of how to improve resiliency for money market funds, open-end bond funds, and hedge funds.

Speech on cybersecurity

Chair Gensler presented a speech on cybersecurity at the Annual Securities Regulation Institute at Northwestern Pritzker School of Law on Jan. 24, 2022. After providing a brief look at the history of cyberattacks and noting that the cost may well be in the trillions, Gensler noted that cybersecurity relates to all parts of the SEC’s mission and that the SEC has many rules that address cyber risk. These rules relate to business continuity, books and records, compliance, disclosure, market access, and anti-fraud, among others. When considering cybersecurity policy, Gensler focuses on cyberhygiene and preparedness, cyber incident reporting to the government, and disclosure.

To provide insight into the SEC’s focus on cyber risks, Gensler indicated he has requested SEC staff recommendations on:

  • Updating and expanding Regulation SCI, which is designed to help ensure entities such as stock exchanges, clearinghouses, alternative trading systems, and self-regulatory organizations have sound technology programs, business continuity plans, testing protocols, and data backups
  • Strengthening cybersecurity hygiene and incident reporting for financial sector registrants, considering guidance issued by the Cybersecurity and Infrastructure Security Agency and others
  • Determining how customers and clients receive notifications about cyber events when their data has been accessed and potentially changing the timing and substance of notifications as required under Regulation S-P
  • Disclosing cybersecurity practices, cyber risks, and cyber events for public companies
  • Further addressing cybersecurity risk related to service providers to protect investors and make sure key services are not disrupted

Remarks on dynamic regulations

Before the Exchequer Club of Washington, D.C., on Jan. 19, 2022, Chair Gensler presented prepared remarks on dynamic regulations for a dynamic society, quoting a 1963 report that said “no regulation can be static in a dynamic society.” He described two guiding principles over dynamic regulations:

  • Continuing to drive efficiency in the U.S. capital markets
  • Modernizing the SEC rules for today’s economy and technologies

He said that efficiency is about lower costs for both issuers and investors and stated that he has requested recommendations from SEC staff about how to move toward increased efficiency in the capital markets through competition and transparency. Gensler then discussed modernizing SEC rules for the current economy and technologies and the importance of innovation in the U.S. markets. He said that the “most dramatic change to our markets is the use of predictive data analytics and artificial intelligence” and that while these developments increase access and choice, they also create significant public policy considerations, including conflicts of interest, bias, and systemic risks.

Remarks on climate change pledges

At a virtual meeting on Dec. 14, 2021, SEC Commissioner Caroline Crenshaw described climate change as a crisis and noted that it will have a substantial impact on the U.S. capital markets. In addressing certain aspects of climate change, she discussed the recent increase in net-zero pledges by public companies and highlighted that in many cases it was unclear how companies would achieve these goals or what information they would need to give investors to evaluate and monitor implementation of these pledges over time. Crenshaw noted that “while net-zero emissions pledges are an important step forward, they underscore the loud, repeated, and sustained calls for decision-useful metrics – metrics calculated using reliable and comparable methodologies that enable investors to decide whether the companies mean what they say.” She specifically called for disclosure of political spending, which may conflict with companies’ net-zero strategies and might further the interests of executives rather than the interests of the investors. Additionally, she noted that linking executive compensation to achieving ESG goals further underscores the need for accurate and reliable climate metrics and decision-useful disclosures.

She concluded with comments on the importance of disclosure of information in the private markets and warned of the risks tied to these markets, where the SEC has less visibility and less oversight.


Proposed SPAC disclosure rules

On March 30, 2022, the SEC proposed rules related to special purpose acquisition companies (SPACs) that would:

  • Increase disclosures and provide more investor protections in initial public offerings by SPACs and de-SPAC transactions (business combination transactions between SPACs and private operating companies)
  • Determine the treatment of business combination transactions involving a reporting shell company under the Securities Act of 1933 and revise the financial statement requirements applicable to transactions involving shell companies, including SPACs
  • Expand the guidance on the presentation of projections in SEC filings to address concerns about reliability and reasonableness
  • Provide that a SPAC that complies with the conditions in the rule would not need to register as an investment company under the Investment Company Act of 1940

Comments are due 60 days after publication on the SEC’s website or 30 days after publication in the Federal Register, whichever period is longer.

Proposed rules to standardize climate-related disclosures

On March 21, 2022, the SEC proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports. The proposed rule changes would require a registrant to disclose information about:

  • The registrant’s governance of climate-related risks and relevant risk management processes, including disclosures to understand developed transition plans and publicly set climate-related targets or goals
  • How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements over time
  • How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook
  • The impact of climate-related events and transition activities on the line items of the consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements

The proposal also requires disclosure of a registrant’s greenhouse gas (GHG) emissions, requiring a registrant to disclose information about its own emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3) under certain circumstances. Additionally, accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emissions disclosures. The proposed rules would include a phase-in period for compliance.

The proposal would require climate-related disclosures to be filed using inline extensible business reporting language (inline XBRL).

Commissioners Crenshaw, Gensler, Lee, and Peirce each released a public statement explaining their views on the proposal.

Comments are due 30 days after publication in the Federal Register or 60 days after the date of issuance, whichever period is longer.

Proposed cybersecurity disclosures

On March 9, 2022, the SEC proposed new cybersecurity incident and risk management, strategy, and governance disclosures, which would:

  • Require disclosure in Form 8-K within four business days of the determination of a material cybersecurity breach
  • Require periodic disclosures about, among other items:
    • The entity’s policies and procedures to identify and manage cybersecurity risks, including whether the entity considers cybersecurity to be part of its business strategy, financial planning, and capital allocation
    • Management’s experience in assessing and managing cybersecurity risk and its role in implementing the entity’s policies, procedures, and strategies
    • The entity’s board of directors’ cybersecurity expertise and its oversight of cybersecurity risk
    • Updates about previously reported material cybersecurity incidents
    • A series of previously undisclosed individually immaterial cybersecurity incidents that has become material in the aggregate

The proposal would require cybersecurity disclosures to be filed using inline XBRL.

Comments are due May 9, 2022.

Proposed amendents to short sale disclosure rule, order marking requirement, CAT

The SEC, on Feb. 25, 2022, proposed rule changes that would provide greater transparency to investors and regulators by increasing the public availability of data related to short sales. New Exchange Act Rule13f-2 would require institutional investment managers who exercise investment discretion over short positions meeting specified thresholds to report on the proposed Form SHO information relating to end-of-the-month short positions and certain daily activity affecting such short positions. Under the proposed rule, the SEC would aggregate the data by security and publicly distribute the aggregate data to all investors. This aggregate data would supplement the short sale data currently available from the Financial Industry Regulatory Authority and stock exchanges.

Additionally, the SEC proposed a new provision of Regulation SHO, Rule 205, to create a new “buy to cover” order marking requirement for broker-dealers. Regulation SHO requires a broker-dealer to identify each sale order that it effects as either “long,” “short,” or “short-exempt”; however, it does not include such a requirement for purchase orders. This proposed rule would require a broker-dealer to mark a purchase order as “buy to cover” if the purchaser has any short position in the same security at the time the purchase order is entered.

The SEC also proposed to amend the national market system plan governing the consolidated audit trail (CAT) to require CAT reporting firms to report “buy to cover” information. The proposed amendments include a provision that would require each CAT reporting firm to indicate where it is asserting use of the bona fide market making exception under Regulation SHO.

Comments are due April 26, 2022.

Comment period for securities loans reporting proposal reopened

On Feb. 25, 2022, the SEC reopened the comment period for its proposed rule on reporting securities loans. The original proposed rule of Nov. 18, 2021, was intended to strengthen the transparency and efficiency of the securities lending market by requiring lenders of securities to provide the material terms of securities lending transactions to a registered national securities association. That association would then make available to the public certain information concerning each transaction and aggregate information on securities on loan and available to loan.

In reopening the comment period, the SEC is requesting comment on any potential effects of the proposed Securities Exchange Act of 1934 (Exchange Act) Rule 13f-2 regarding short sale disclosure that the SEC should consider in determining whether to adopt the proposed Exchange Act rule regarding the reporting of securities loans.

Comments were due April 1, 2022.

Proposed amendments to beneficial ownership reporting

On Feb. 10, 2022, the SEC issued a proposal to modernize beneficial ownership reporting requirements to provide more timely information. The proposed amendments would accelerate filing deadlines for beneficial ownership reports under Exchange Act Sections 13(d) and 13(g) and require Schedule 13D and Schedule 13G filings to be filed using machine readable structured language, among other amendments.

The proposed amendments would accelerate the filing deadlines for Schedule13D beneficial ownership reports from 10 days to five days and require that amendments be filed within one business day. For Schedule 13G, the filing deadlines which differ based on type of filer would also be accelerated. The amendments, among other changes, would also extend the application of 13D and 13G to certain derivative securities and provide new exemptions to permit certain persons to communicate and consult with one another, jointly engage issuers, and execute certain transactions without being subject to regulation as a group under the regulations.

Comments were due April 11, 2022.

Proposed amendments to whistleblower rules

On Feb. 10, 2022, the SEC proposed changes to two whistleblower program rules that would 1) allow the SEC to pay whistleblower awards in cases where those awards might otherwise be paid under another entity’s whistleblower rules and 2) affirm the SEC’s authority to consider increasing awards in certain circumstances.

According to Chair Gary Gensler, "these amendments, if adopted, would help ensure that whistleblowers are both incentivized and appropriately rewarded for their efforts in reporting potential violations of the law to the Commission."

Comments were due April 11, 2022.

Proposed amendments to private fund investor protection

On Feb. 9, 2022, the SEC proposed new rules and amendments to enhance private fund investor protection. These new rules and amendments would require private funds to provide quarterly reporting of fees and performance, obtain an annual audit, and document annual compliance reviews. Additionally, the proposed rules would prohibit private fund advisers from providing certain types of preferential treatment to investors in their funds unless it is disclosed to investors and would prohibit all private fund advisers from engaging in certain activities.

Comments are due April 25, 2022.

Proposed cybersecurity risk management rules for investment advisers and funds

The SEC, on Feb. 9, 2022, issued a cybersecurity risk management for investment advisers and funds proposal, under which investment advisers and funds would be required to adopt written cybersecurity policies, report significant cybersecurity events to the SEC on a new confidential form, publicly disclose certain cybersecurity events, and implement certain record-keeping policies.

Comments were due April 11, 2022.

Proposed amendments to shorten the securities transaction settlement cycle

The SEC, on Feb. 9, 2022, issued a proposal on reducing risk in clearance and settlement that would shorten the standard securities trade settlement cycle from two business days after trade date to one business day after trade date. The proposal also addresses shortening the process of confirming and affirming the trade information necessary to prepare a transaction for settlement so that it can be completed by the end-of-trade date. The proposal also would require clearing agencies that provide central matching services to facilitate fully automated transaction processing and to provide annual reports on progress.

Comments were due April 11, 2022.

Comment period for pay versus performance reopened

On Jan. 27, 2022, the SEC reopened the comment period on proposed rules for pay versus performance that were issued to address Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The act requires disclosure of information reflecting the relationship between executive compensation actually paid by a company and the company’s financial performance. The reopening of the comment period is meant to allow interested parties additional opportunity to analyze and comment on the proposal considering developments in compensation practices since the first publication in 2015 and to respond to the additional requests for comment included in this release. In the release, Chair Gensler noted, “If adopted, this proposed rule would strengthen the transparency and quality of executive compensation disclosure.”

Comments were due March 4, 2022.

In a dissenting statement, Commissioner Peirce stated that she does not agree with the reopening of the comment period, and she described the original proposal as flawed.

Proposed amendments to Regulation ATS, Regulation SCI

Building on a 2020 proposal to enhance transparency and oversight over alternative trading systems (ATS) that trade government securities, the SEC on Jan. 26, 2022, proposed amendments to:

  • Expand Regulation ATS to include ATSs that trade government securities, National Market System stock, and other securities
  • Extend Regulation Systems Compliance Integrity (SCI) to ATSs that trade government securities
  • Expand the definition of “exchange” to include communication protocol systems so that communication protocol systems that operate as ATSs would need to adhere to Regulation ATS

Under the proposed amendments, ATSs that limit securities activities to government securities or repurchase agreements or reverse repurchase agreements on government securities and register as broker-dealers, or are banks, would no longer be exempt from Regulation ATS. The goal is to expand investor protections and enhance cybersecurity by covering more ATSs that trade Treasurys and other government securities under the regulatory framework.

Comments were due April 18, 2022.

Commissioner Crenshaw issued a statement supporting the proposal and saying that the proposed amendments advance the objective of fair competition. She said that as part of this proposal, the SEC is “soliciting comment on the possibility of extending the operational transparency requirements of Rule 304 to all categories of ATSs, including ATSs that trade corporate debt securities, municipal securities, and equity securities other than NMS stocks.” It also is soliciting comment “on whether to prohibit certain practices that present potential conflicts of interest, including the disclosure of confidential subscriber information and trading by the broker-dealer operator and its affiliates in the ATS.”

In a dissenting statement on the proposed amendments to Regulation ATS, Commissioner Peirce described the proposal as “too wide-ranging and, given its length, too unwieldy to facilitate careful consideration. . . . And the release goes well beyond government securities, or even fixed-income securities; key parts of the proposal affect trading venues that make any type of security available for trading.” She also criticized the length of the comment period as too short to fully evaluate and analyze the proposal. She concluded her statement with “a final message to those who operate any service that is designed to facilitate any communication between potential buyers and sellers of any type of security: Read this release. Even if you have nothing to do with government securities or even fixed-income, or with traditional securities, read this release. Preferably as soon as it is published on the Commission’s website. It covers a lot of ground, and you should not assume that it has nothing to do with you, because it probably does.”

Proposed changes to Form PF

On Jan. 26, 2022, the SEC proposed changes to Form PF, which certain private fund advisers use to report confidentially to the SEC, to:

  • Require new current reporting of specified events for large hedge fund advisers and advisers to private equity funds
  • Decrease the reporting threshold for large private equity advisers
  • Revise reporting requirements for advisers of large private equity and large liquidity funds

Comments were due March 21, 2022.

Proposed amendments to insider trading plans and related disclosures

On Jan. 13, 2022, the SEC reissued, for public comment, its proposal “Rule 10b5-1 and Insider Trading,” which was originally issued on Dec. 15, 2021.

Comments were due April 1, 2022.

Staffing updates

On March 15, 2022, Commissioner Lee announced that as her term expires in June 2022, she intends to step down from the SEC once her successor has been confirmed.

Elad Roisman issued a departing statement on Jan. 21, 2022, his last day as SEC commissioner. Roisman reflected on his time at the SEC, the importance of the SEC’s mission, and his gratitude for those with whom he has worked.

On the same day, Chair Gensler and Commissioners Peirce, Crenshaw, and Lee jointly issued a statement on Roisman’s departure thanking him for his service to the SEC and highlighting his many contributions.