Category Archives: SEC Hot Topic

Another 12b-25 Enforcement Sweep

Reporting, SEC Hot Topic

We’d like to again remind our readers that Form 12b-25 is not an automatic extension for quarterly and annual reports.  In a prior blog post, we discussed an enforcement sweep in which eight companies paid fines for failing to disclose “anticipated restatements” in Form 12b-25.

On August 22, 2023, the SEC announced another sweep that caught five companies for exactly the same issue, failing to disclose “anticipated restatements.”  These companies restated their financial statements within three to twenty-one days after filing Form 12b-25.

As a reminder, Part III of Form 12b-25 includes this instruction:

State below in reasonable detail why Forms 10-K, 20-F, 11-K, 10-Q, 10-D, N-CEN, N-CSR, or the transition report or portion thereof, could not be filed within the prescribed time period.

(Attach extra Sheets if Needed)

As always, your thoughts and comments are welcome!

Getting Ahead of the MD&A Update Curve – Critical Accounting Estimates

Reporting, SEC Hot Topic, Uncategorized

As we discussed in this post, three parts of the SEC’s 2020 MD&A modernization have become focus areas in the comment process:

    • Critical accounting estimate disclosures
    • Quantitative and qualitative disclosures about material changes
    • Meaningfully addressing liquidity and capital resources

We also explored how one of the reasons behind this increase in MD&A comments could be that companies are reluctant to change MD&A, even when the change is to comply with a new rule or to improve MD&A!

This post presents an example comment and company response for the first of these three areas, critical accounting estimate disclosures.  While the example, particularly the revised disclosure, is lengthy, the lesson is simple.  Critical accounting estimates are not the same thing as accounting policies.  This is a very simple comment to avoid.

The Regulation S-K Item 303 guidance for critical accounting estimate disclosures, which was in FR 72 prior to the 2020 rule modernization, requires companies to go beyond accounting policy disclosure in the financial statements:

Critical accounting estimates. Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant. Provide qualitative and quantitative information necessary to understand the estimation uncertainty and the impact the critical accounting estimate has had or is reasonably likely to have on financial condition or results of operations to the extent the information is material and reasonably available. This information should include why each critical accounting estimate is subject to uncertainty and, to the extent the information is material and reasonably available, how much each estimate and/or assumption has changed over a relevant period, and the sensitivity of the reported amount to the methods, assumptions and estimates underlying its calculation.

Here is an example disclosure from a company’s Form 10-K that became the source of a critical accounting estimate comment. (Note that the title in this example is out of date.  It should, as stated in S-K Item 303, be Critical Accounting Estimates.)

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. We believe our estimates and assumptions are reasonable; however, actual results could differ from those estimates.

Our most significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements. Some of those significant accounting policies require us to make difficult, subjective, or complex judgments, or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria:

(1) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made, and

(2) different estimates reasonably could have been used, or changes in the estimate that are reasonably

We have identified the following critical accounting policies:

      • Revenue Recognition
      • Loyalty Program Accounting
      • Asset Impairment Analysis
      • Valuation of the TRA Liability

(Note: For the sake of illustration only the Loyalty Program Accounting disclosure is included here.  You can find the entire disclosure by the company here.)

Loyalty Program Accounting – The Company records a liability for loyalty points earned by passengers under its Sun Country Rewards program using two methods: (1) a liability for points that are earned by passengers on purchases of the Company’s services is established by deferring revenue based on the redemption value net of breakage; and (2) a liability for points attributed to loyalty points issued to the Company’s Visa card holders is established by deferring a portion of payments received from the Company’s co-branded agreement. The Company’s Sun Country Rewards program allows for the redemption of points to include payment towards air travel, land travel, taxes, and other ancillary purchases. The Company estimates breakage for loyalty points that are not likely to be redeemed. These estimates are based on historical experience of loyalty point redemption activity and other factors, such as program changes and modifications that could affect the ultimate usage pattern of loyalty points.

While this seems like a fairly robust accounting policy disclosure, as a critical accounting estimate disclosure it generated this comment:

Management’s Discussion and of Financial Condition and Results of Operations Critical Accounting Policies and Estimates, page 4

    1. The disclosures of your critical accounting policies and estimates appear to be a
      repetition of certain of your significant accounting policies. Please revise your disclosures to address the material implications of the uncertainties that are associated with the methods, assumptions and estimates underlying your critical accounting estimates. Your expanded disclosure should address the risk related to using different assumptions and analyze their sensitivity to change based on outcomes that are deemed reasonably likely to occur. For additional guidance, refer to Item 303(b)(3) of Regulation S-K and the related Instruction 3 to paragraph (b) of Item 303.

The essence of this comment is a frequent theme, that simply repeating an accounting policy is not a critical accounting estimate disclosure.  Here is the company’s response, which, as you can read, significantly expands the disclosure (note, it’s ok to skim this lengthy disclosure!):

The Company respectfully acknowledges the Staff’s comment and will revise future filings in response to the Staff’s comment. Utilizing the disclosure from the most recent annual report on Form 10-K, the following reflects our proposed updated disclosures to be included in future filings. The Company notes there have been no changes to the selection and application of its critical accounting policies and estimates. The Company will continue to evaluate any reasonably likely changes that could impact its critical accounting estimates and provide updated disclosure in future filings as necessary. All numbers below are presented in thousands consistent with the disclosure approach used in the Company’s most recent annual report on Form 10-K.

Critical Accounting Policies and Estimates

……..

Loyalty Program Accounting

The Sun Country Rewards program provides loyalty awards to program members based on accumulated loyalty points. The Company records a liability for loyalty points earned by passengers under the Sun Country Rewards program using two methods: (1) a liability for points that are earned by passengers on purchases of the Company’s services is established by deferring revenue based on the redemption value, net of breakage; and (2) a liability for points attributed to loyalty points issued to the Company’s Visa card holders is established by deferring a portion of payments received from the Company’s co-branded agreement. The Company’s Sun Country Rewards program allows for the redemption of points to include payment towards air travel, land travel, taxes, and other ancillary purchases. The balance of the Loyalty Program Liabilities fluctuates based on seasonal patterns, which impact the volume of loyalty points awarded through travel or issued to co-branded credit card and other partners (deferral of revenue) and loyalty points redeemed (recognition of revenue). The Company records an estimate for loyalty points breakage in Passenger Revenue upon issuance of the loyalty points. Loyalty points held by co-branded credit card members do not expire. All other loyalty points expire if unused after three years.

Points Earned Through Travel Purchases. Passenger sales that earn Sun Country Rewards provide customers with travel services and loyalty points, which are each considered distinct performance obligations. The Company values each performance obligation on a standalone basis. The Company determines the standalone selling price of loyalty points issued using a redemption value approach which considers the value a passenger will receive upon redemption of the loyalty points. Consideration allocated to loyalty points is deferred, net of estimated breakage, and recognized as Passenger Revenue when both the loyalty points have been redeemed and the passenger travel occurs.

Points Earned through the Co-Branded Credit Card Program. Under the Company’s co-branded credit card program, funds received for the marketing of a co-branded credit card and delivery of loyalty points are accounted for as a multiple-deliverable arrangement. The Company determined the arrangement has two distinct performance obligations: loyalty points to be awarded; and use of our brand and access to our customer lists, and certain other advertising and marketing elements (collectively, the marketing performance obligation). Funds received from the co-branded credit card program are allocated to the two performance obligations based on relative standalone selling price. The assumptions used to allocate the funds received are not considered critical to the application of the accounting model for the Company’s loyalty program. Consideration allocated to loyalty points is deferred, net of estimated breakage, and recognized as Passenger Revenue when both the loyalty points have been redeemed and the passenger travel occurs. Consideration allocated to the marketing performance obligation is recognized as revenue as the spend occurs and is recorded in Other Revenue.

The Company estimates breakage for loyalty points that are not likely to be redeemed. Loyalty points are combined in one homogenous pool, that includes both air and non-air travel awards, and are not separately identifiable. The estimated breakage rate is primarily based on historical experience of loyalty point redemption activity and other factors that may not be indicative of future trends, such as the COVID-19 pandemic, program changes or modifications that could affect the ultimate usage pattern of loyalty points. The Company continuously monitors its breakage rate assumptions and may adjust its estimated breakage rate for loyalty points in the future. Changes in the Company’s estimated breakage rate assumptions impact revenue recognition prospectively.

During the year ended 2021, the Company recognized $852 of loyalty points breakage within Passenger Revenue. A 10% change in the Company’s loyalty point estimated breakage rate would have resulted in a change to Passenger Revenue of approximately $170.

Our next post will explore another frequent comment area, providing both quantitative and qualitative explanations for material changes.

As always, your thoughts and comments are welcome!

SEC Extends Several Rulemaking Comment Periods

Reporting, SEC Hot Topic

On October 7, 2022, the SEC announced that it was extending the comment periods for eleven rulemaking releases and one request for comment.  The affected rulemakings include the SEC’s proposed rules for disclosures related to climate matters, stock repurchases and cybersecurity.  It also applies to the SEC’s SPAC proposal.

The extensions were made because of a technical problem in the Commission’s internet comment form.  The affected comment periods will be open until 14 days after the publication of the related release in the Federal Register.

As you can read in the related Press Release and Reopening Release, anyone who submitted a public comment related to the proposed rulemakings between June 2021 and August 2022 should check to see that their comment is included in the comment file at sec.gov.  If it is not included, it should be resubmitted.

As always, your thoughts and comments are welcome.

CorpFin Adds New Offices for Crypto Assets and Industrial Applications and Services

SEC Hot Topic

On September 9, 2022, CorpFin added two new offices to its Disclosure Review Program (DRP), the Office of Crypto Assets and the Office of Industrial Applications.  This brings the total number of DRP offices to nine.

The Office of Crypto Assets will consolidate the review of filings involving crypto assets into one group.  This will “enable the DRP to better focus its resources and expertise to address the unique and evolving filing review issues related to crypto assets.”

The Office of Industrial Applications and Services will review non-pharma, non-biotech, and non-medicinal products companies currently being reviewed in the Office of Life Sciences.

You can read more in this Press Release.

As always, your thoughts and comments are welcome!

The SEC’s Proposed Climate-Related Disclosures: Post Nine – Greenhouse Gas Emissions Attestation Requirements

Hot Topic, Reporting, SEC Hot Topic

In the first post in this series, we overviewed the three main areas addressed in the SEC’s Proposed Rule for climate-related disclosures:

  • Governance, strategy, risk and related disclosures outside the financial statements
  • Greenhouse gas emission disclosures and attestation requirements
  • Financial statement disclosures

As you may have heard and can read about in this Press Release, the comment period for this proposal ended June 17, 2022.

Subsequent posts in this series have addressed proposed disclosures for:

This post explores the proposed attestation requirements for greenhouse gas emission disclosures.  As a reminder, greenhouse gas disclosures would be required for all companies in their annual reports on Forms 10-K and 20-F, with updates on Forms 10-Q and 6-K.  Smaller reporting companies would not be subject to the Scope 3 disclosure requirements.  The related attestation requirements would apply to accelerated and large accelerated filers.  The attestation requirements fall into the following categories:

  • Attestation
  • Attestation provider
  • Attestation report requirements
  • Additional disclosures
  • Voluntary attestation reporting

Attestation

For companies that are accelerated or large accelerated filers and are required to disclose Scope 1 and Scope 2 emissions the proposed rule would require an attestation report for those disclosures.  The specific requirements concerning the provider of the attestation report and the form of the report are described below.

The attestation requirement would not apply to the first year that Scope 1 and Scope 2 disclosures are required.  For the second and third years where Scope 1 and Scope 2 disclosures are provided, an attestation report providing “limited assurance” would be required.  For the fourth and following years a “reasonable assurance” report would be required.

The attestation report would be prepared using standards that are:

  • Publicly available at no cost;
  • Established by a body or group that has followed due process procedures; and
  • Broadly distributed for public comment.

A limited assurance report for years two and three would include words to the effect that “nothing came to their attention” of the attestation report provider that the information presented was not prepared in accordance with a chosen set of standards.  The process and procedures underlying this limited assurance report would be based on those standards.

If you would like to see an example of limited assurance on ESG information check out page 77 of Coke’s ESG report.  The last paragraph has the limited assurance report, which includes this language:

“Based on our review, we are not aware of any material modifications that should be made to the Schedule of Selected Sustainability Indicators for the year ended December 31, 2020, in order for it to be in accordance with the Criteria.”

In subsequent years when a reasonable assurance report would be required the provider would do more work and their report would say words to the effect that “in their opinion” the information presented has been prepared in accordance with the chosen set of standards.  This would be more like the report companies receive on their financial statements:

We have audited the accompanying consolidated balance sheets of The Coca-Cola Company and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareowners’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

If a company provides voluntary assurance before the required transition date, it must comply with the requirements described below.

Attestation provider

The attestation report must be provided by a “GHG emissions attestation provider.”  The proposed rule provides a list of required characteristics that make a person or firm a “GHG emissions attestation provider.”  The list includes criteria to determine if a provider is an “expert” in GHG emissions by virtue of possessing significant experience and sufficient competence and capabilities and to determine if the person or firm is independent.  You can read more in the details of proposed S-K Item 1505 below.

Attestation report requirements

The attestation report would be included in the proposed “Climate-Related Disclosure” section in the filing.  The form and content of the report would follow the reporting standards in the standards used by the attestation provider.  The proposed rule includes a lengthy list of minimum requirements for the report including identification of the standards used, the level of assurance provided and a statement about independence.

Additional disclosures

In addition to the attestation report, disclosures would include:

  • Whether the attestation provider has a relevant license from any relevant licensing or accreditation body;
  • If applicable, identification of the licensing or accreditation body;
  • Whether the attestation provider is a member in good standing of the licensing or accreditation body;
  • Whether the attestation engagement is subject to any oversight inspection program(s);
  • If applicable which oversight inspection program(s);
  • Whether the attestation provider is subject to record-keeping requirements; and
  • If applicable, identify the record-keeping requirements and the duration of those requirements.

Voluntary attestation reporting

If a company that is not required to provide an attestation report does in fact provide such a report it must make several disclosures, including the identity of the provider, the standards used, the level of attestation, any relationship with the attestation provider and whether the provider is subject to an oversight program.

Summary

The complexity of the attestation process and the related costs have been the subject of comments in the SEC’s rulemaking process.  Our next post will explore the proposed S-X financial statement disclosure requirements.

As always, your thoughts and comments are welcome!

For reference here is proposed S-K Item 1505.

1505 Attestation of Scope 1 and Scope 2 emissions disclosure.

(a) Attestation.

(1) A registrant that is required to provide Scope 1 and Scope 2 emissions disclosure pursuant to § 229.1504 and that is an accelerated filer or a large accelerated filer must include an attestation report covering such disclosure in the relevant filing. For filings made by an accelerated filer or a large accelerated filer for the second and third fiscal years after the compliance date for § 229.1504, the attestation engagement must, at a minimum, be at a limited assurance level and cover the registrant’s Scope 1 and Scope 2 emissions disclosure. For filings made by an accelerated filer or large accelerated filer for the fourth fiscal year after the compliance date for § 229.1504 and thereafter, the attestation engagement must be at a reasonable assurance level and, at a minimum, cover the registrant’s Scope 1 and Scope 2 emissions disclosures.

(2) Any attestation report required under this section must be provided pursuant to standards that are publicly available at no cost and are established by a body or group that has followed due process procedures, including the broad distribution of the framework for public comment. An accelerated filer or a large accelerated filer obtaining voluntary assurance prior to the first required fiscal year must comply with subparagraph (e) of this section. Voluntary assurance obtained by an accelerated filer or a large accelerated filer thereafter must follow the requirements of paragraphs (b) through (d) of this section and must use the same attestation standard as the required assurance over Scope 1 and Scope 2.

(b) GHG emissions attestation provider. The GHG emissions attestation report required by paragraph (a) of this section must be prepared and signed by a GHG emissions attestation provider. A GHG emissions attestation provider means a person or a firm that has all of the following characteristics:

(1) Is an expert in GHG emissions by virtue of having significant experience in measuring, analyzing, reporting, or attesting to GHG emissions. Significant experience means having sufficient competence and capabilities necessary to:

(i) Perform engagements in accordance with professional standards and applicable legal and regulatory requirements; and

(ii) Enable the service provider to issue reports that are appropriate under the circumstances.

(2) Is independent with respect to the registrant, and any of its affiliates, for whom it is providing the attestation report, during the attestation and professional engagement period.

(i) A GHG emissions attestation provider is not independent if such attestation provider is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that such attestation provider is not, capable of exercising objective and impartial judgment on all issues encompassed within the attestation provider’s engagement.

(ii) In determining whether a GHG emissions attestation provider is independent, the Commission will consider:

(A) Whether a relationship or the provision of a service creates a mutual or conflicting interest between the attestation provider and the registrant (or any of its affiliates), places the attestation provider in the position of attesting such attestation provider’s own work, results in the attestation provider acting as management or an employee of the registrant (or any of its affiliates), or places the attestation provider in a position of being an advocate for the registrant (or any of its affiliates); and

(B) All relevant circumstances, including all financial or other relationships between the attestation provider and the registrant (or any of its affiliates), and not just those relating to reports filed with the Commission.

(iii) The term “affiliates” as used in this section has the meaning provided in 17 CFR 210.2-01, except that references to “audit” are deemed to be references to the attestation services provided pursuant to this section.

(iv) The term “attestation and professional engagement period” as used in this section means both:

(A) The period covered by the attestation report; and

(B) The period of the engagement to attest to the registrant’s GHG emissions or to prepare a report filed with the Commission (“the professional engagement period”). The professional engagement period begins when the GHG attestation service provider either signs an initial engagement letter (or other agreement to attest a registrant’s GHG emissions) or begins attest procedures, whichever is earlier.

(c) Attestation report requirements. The GHG emissions attestation report required by paragraph (a) of this section must be included in the separately captioned “Climate-Related Disclosure” section in the filing. The form and content of the attestation report must follow the requirements set forth by the attestation standard (or standards) used by the GHG emissions attestation provider. Notwithstanding the foregoing, at a minimum the report must include the following:

(1) An identification or description of the subject matter or assertion being reported on, including the point in time or period of time to which the measurement or evaluation of the subject matter or assertion relates;

(2) An identification of the criteria against which the subject matter was measured or evaluated;

(3) A statement that identifies the level of assurance provided and describes the nature of the engagement;

(4) A statement that identifies the attestation standard (or standards) used;

(5) A statement that describes the registrant’s responsibility to report on the subject matter or assertion being reported on;

(6) A statement that describes the attestation provider’s responsibilities in connection with the preparation of the attestation report;

(7) A statement that the attestation provider is independent, as required by paragraph (a) of this section;

(8) For a limited assurance engagement, a description of the work performed as a basis for the attestation provider’s conclusion;

(9) A statement that describes significant inherent limitations, if any, associated with the measurement or evaluation of the subject matter against the criteria;

(10) The GHG emissions attestation provider’s conclusion or opinion, based on the applicable attestation standard(s) used;

(11) The signature of the attestation provider (whether by an individual or a person signing on behalf of the attestation provider’s firm);

(12) The city and state where the attestation report has been issued; and

(13) The date of the report.

(d) Additional disclosures by the registrant. In addition to including the GHG emissions attestation report required by paragraph (a) of this section, a large accelerated filer and an accelerated filer must disclose the following information within the separately captioned “Climate-Related Disclosure” section in the filing, after requesting relevant information from any GHG emissions attestation provider as necessary:

(1) Whether the attestation provider has a license from any licensing or accreditation body to provide assurance, and if so, identify the licensing or accreditation body, and whether the attestation provider is a member in good standing of that licensing or accreditation body;

(2) Whether the GHG emissions attestation engagement is subject to any oversight inspection program, and if so, which program (or programs); and

(3) Whether the attestation provider is subject to record-keeping requirements with respect to the work performed for the GHG emissions attestation engagement and, if so, identify the record-keeping requirements and the duration of those requirements.

(e) Disclosure of voluntary attestation. A registrant that is not required to include a GHG emissions attestation report pursuant to paragraph (a) of this section must disclose within the separately captioned “Climate-Related Disclosure” section in the filing the following information if the registrant’s GHG emissions disclosures were subject to third-party attestation or verification:

(1) Identify the provider of such attestation or verification;

(2) Describe the attestation or verification standard used;

(3) Describe the level and scope of attestation or verification provided;

(4) Briefly describe the results of the attestation or verification;

(5) Disclose whether the third-party service provider has any other business relationships with or has provided any other professional services to the registrant that may lead to an impairment of the service provider’s independence with respect to the registrant; and

(6) Disclose any oversight inspection program to which the service provider is subject (e.g., the AICPA’s peer review program).

CorpFin Budget Request

Reporting, SEC Hot Topic

On May 17, 2022, Chair Gary Gensler testified about the SEC’s budget request before the Subcommittee on Financial Services and General Government U.S. House Appropriations Committee.  His testimony contains several interesting statistics.  While SEC headcount has decreased in the last five years, the number of entities registered and subject to SEC oversight has increased by 12%.  In addition, the volume of data processed by the SEC has grown by 20% annually over the last two years.

His remarks about CorpFin are consistent with this trend:

“The Division of Corporation Finance has shrunk 19 percent since 2016. The FY23 budget request would still leave us 8 percent shy of the number of FTEs we had in FY16.

The Division oversees the disclosures of registered issuers so that investors have the material information they need to make informed investment decisions. Like other Divisions, their responsibilities have grown in recent years.

In FY16, Corporation Finance reviewed filings related to approximately 510 new registrants. That grew almost fourfold last year, to 1,960. Initial public offerings create new disclosures and ongoing streams of work for which SEC staff are responsible. Our role in protecting investors is heightened when a company is being introduced to public investors for the first time.

And yet, during that time, the staff of the Division fell. The Division’s ability to review filings of existing registrants is more limited given transaction volume and complexity of deals.”

As always, your thoughts and comments are welcome!

SEC Publishes Spring Rulemaking Agenda

SEC Hot Topic

On June 22, 2022, the Office of Information and Regulatory Affairs released the U.S Government’s “Spring 2022 Unified Agenda of Regulatory and Deregulatory Actions,” which includes the SEC’s spring agenda.  The SEC’s agenda includes climate change and cybersecurity in the Final Rule stage and human capital resources disclosures in the Proposed Rule stage.

As always, your thoughts and comments are welcome!

Acting Chief Accountant Addresses Auditor Independence and Ethical Cultures in Audit Firms

Reporting, Role of the Audit Committee, SEC Hot Topic

On June 8, 2022, Acting Chief Accountant Paul Munter issued a Statement titled “The Critical Importance of the General Standard of Auditor Independence and an Ethical Culture for the Accounting Profession.”

The Statement:

  • Reviews the principles in the SEC’s auditor independence framework,
  • Summarizes OCA’s approach to independence questions,
  • Lists recurring issues in independence consultations, and
  • Discusses the importance of an ethical culture to accounting firms.

The auditor independence framework section begins with a review of the foundational principles in S-X Rule 2.01:

The Commission will not recognize an accountant as independent, with respect to an audit client, if the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompassed within the accountant’s engagement. In determining whether an accountant is independent, the Commission will consider all relevant circumstances, including all relationships between the accountant and the audit client, and not just those relating to reports filed with the Commission.

The discussion emphasizes that a simple “checklist compliance exercise” with the detailed requirements in Regulation S-X will not assure that an auditor is independent.  All “relevant circumstances” must be considered when assessing independence.

The discussion of OCA’s approach to independence questions briefly reviews the staff’s process and emphasizes several considerations, including:

  • Consultations should include all information relevant to an independence determination, and
  • Companies and their auditors should not place undue reliance on previous independence consultations as circumstances, legal or regulatory requirements may be different.

The discussion of recurring issues in independence consultations begins with a discussion of concerns by the OCA staff that they are observing “loosening attitudes” about the general independence standards.  It also focuses on the “checklist mentality,” non-audit services, including providing non-audit services to affiliates, and risks in alternative practice structures.

The concluding section about ethical culture issues begins with this statement:

“It is of paramount importance that public accounting firms foster a culture of ethical behavior with respect to all aspects of their professional responsibilities, including auditor independence.”

Included are discussions of how firms should be willing to forgo engagements that are “close-to-the-line” for independence and the importance of quality control systems.

As always, your thoughts and comments are welcome!

A Busy REGFLEX Agenda for the SEC

SEC Hot Topic

On June 11, 2021, the SEC’s regulatory agenda was published as part of the Office of Information and Regulatory Affairs “Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions.”

As you can read in this Press Release, proposed and final rule making areas addressed in the agenda include:

  • Disclosure relating to climate risk, human capital, including workforce diversity and corporate board diversity, and cybersecurity risk
  • Market structure modernization within equity markets, treasury markets, and other fixed income markets
  • Transparency around stock buybacks, short sale disclosure, securities-based swaps ownership, and the stock loan market
  • Investment fund rules, including money market funds, private funds, and ESG funds
  • 10b5-1 affirmative defense provisions
  • Unfinished work directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including, among other things, securities-based swaps and related rules, incentive-based compensation arrangements, and conflicts of interest in securitizations
  • Enhancing shareholder democracy
  • Special purpose acquisition companies
  • Mandated electronic filings and transfer agents

You can also get more perspective about the agenda in this speech that Chair Gensler gave at London City Week.

As always, your thoughts and comments are welcome!

About That Selected Financial Data and Quarterly Information Change??

Reporting, SEC Hot Topic

In an earlier post, we suggested eliminating Selected Financial Data and quarterly information disclosures in Form 10-K.  This was based on the early transition option in the SEC’s Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information Final Rule.

The change in administrations in Washington, D.C. has created the possibility of a change in the effective date of the new rule.  In a January 20, 2021, Presidential Action titled “Regulatory Freeze Pending Review,” the new administration provides this guidance:

  1. With respect to rules that have been published in the Federal Register, or rules that have been issued in any manner, but have not taken effect, consider postponing the rules’ effective dates for 60 days from the date of this memorandum, consistent with applicable law and subject to the exceptions described in paragraph 1, for the purpose of reviewing any questions of fact, law, and policy the rules may raise.  For rules postponed in this manner, during the 60-day period, where appropriate and consistent with applicable law, consider opening a 30-day comment period to allow interested parties to provide comments about issues of fact, law, and policy raised by those rules, and consider pending petitions for reconsideration involving such rules.  As appropriate and consistent with applicable law, and where necessary to continue to review these questions of fact, law, and policy, consider further delaying, or publishing for notice and comment proposed rules further delaying, such rules beyond the 60-day period.  Following the 60-day delay in effective date:

a.  for those rules that raise no substantial questions of fact, law, or policy, no further action needs to be taken; and

b.  for those rules that raise substantial questions of fact, law, or policy, agencies should notify the OMB Director and take further appropriate action in consultation with the OMB Director.

A deferral of the effective date is not automatic.  And there are some questions about whether this action applies to independent agencies such as the SEC.  Whatever the case, the SEC would have to take action to defer the effective date.  With these uncertainties it is likely not prudent to make these changes now.

As always, your thoughts and comments are welcome!