December 2021 financial reporting, governance, and risk management

| 12/15/2021
December 2021 financial reporting, governance, and risk management

Message from John Epperson, Managing Principal, Financial Services

Dear FIEB readers,

Like the holiday season, conference season brings fun, festivities, and new insights about our collective financial services family.

December 2021 has been filled with updates from regulators, standard-setters, preparers, users, and other stakeholders at the annual conference on SEC and PCAOB developments as well as new messages on the economic and reporting environment in the one-day banking conference update. 

Regulators, standard-setters, and other stakeholders, apart from their participation in conference season, continue their work on various matters including CECL, risk updates, and rulemakings. The dynamic financial reporting environment remains just that – dynamic. As 2022 approaches, I wish you, your family, and your friends a delightful holiday season, whether it’s in person or virtually.

Sign up to receive updates on accounting, governance, risk management, and compliance issues.
2021 Conference on Current SEC and PCAOB Developments

AICPA and CIMA hold annual conference 

The American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA) held the annual Conference on Current SEC and PCAOB Developments in Washington, D.C., Dec. 6-8, 2021. Topics of the conference included:

  • Stakeholder roles in fostering high-quality financial reporting
  • Environmental, social, and governance (ESG) matters
  • Adapting to continuous change

Various stakeholders including preparers, regulators, standard-setters, auditors, users, and others presented the audience with wide-ranging perspectives.

SEC chief accountant addresses high-quality reporting in a complex environment

On Dec. 6, 2021, acting Securities and Exchange Commission (SEC) Chief Accountant Paul Munter issued a statement on the Office of the Chief Accountant’s (OCA) continued focus on high-quality financial reporting in a complex environment. In his statement, he described the OCA’s role in the financial reporting system and shared information about its current priorities and its work related to rulemaking activities, oversight of standard-setting, implementation and application of standards, and application of auditor independence requirements. Munter also described the critical role of various stakeholder groups, including accounting standard-setters, preparers, auditors, and audit committees, and he shared observations regarding key areas of focus for each stakeholder group to promote and produce high-quality financial reporting for investors.

Munter identified these elements of high-quality financial reporting: high-quality accounting standard-setting, high-quality implementation and application of those standards, and high-quality audits. He noted that these are necessary to make sure that investors have the information they need to make well-informed investment decisions. To this end, the OCA supports the SEC’s rulemaking activities, accounting standard-setting oversight, efforts to promote effective implementation and application of those accounting standards, and Public Company Accounting Oversight Board (PCAOB) oversight.

Munter highlighted three rulemaking agenda items that are top of mind for most stakeholders: climate risk disclosures, trading prohibitions under the Holding Foreign Companies Accountable Act, and recovery of erroneously awarded compensation. He discussed each of these items in detail, identifying how the SEC and others have been addressing these during the year through guidance, recommendations, and requests.

Munter also said that high-quality financial reporting cannot be achieved without high-quality accounting standards and that one of the OCA’s main objectives is to promote the development of such standards. This is accomplished by assisting the SEC in its oversight of Financial Accounting Standards Board (FASB) standard-setting and by promoting high-quality international financial reporting standards and accounting consultations.

Shortly after issuing his statement, on Dec. 6, Munter, with other members of OCA leadership including John Vanosdall and Diana Stoltzfus, both deputy chief accountants, conducted a panel discussion at the AICPA-CIMA conference. The discussion expanded on the themes identified in Munter’s prepared statement and provided additional thoughts on topics such as ESG, materiality considerations, consultations, independence, and standard-setting.

OCA staff presents at AICPA-CIMA conference

Representatives from OCA staff on Dec. 6 reviewed various topics the staff has addressed in the past year, including:

  • Consultation themes such as revenue recognition, special purpose acquisition companies (SPACs), digital assets, and segments
  • Independence matters
  • International activities, including monitoring of international standard-setting bodies
  • Audit matters such as role in overseeing the PCAOB and the importance of effective internal control over financial reporting
  • Stakeholder engagement

As a reminder of the importance of auditor independence, the OCA staff panel discussion closed with that topic, including advice that auditor independence should not be an afterthought when an entity negotiates the terms of a merger transaction.

Corp Fin presents at AICPA conference

On Dec. 7, SEC Division of Corporation Finance (Corp Fin) Director Renee Jones; Chief Accountant Lindsay McCord; Craig Olinger, senior adviser to the chief accountant; and deputy chief accountants Sarah Lowe and Melissa Rocha provided an overview of recent activities at Corp Fin that affect accounting and reporting for 2021 year-end filings. Topics included: 

  • Staff challenges, including volume of transactions and filings
  • Special purpose acquisition companies
  • Climate change disclosure
  • Restatements and materiality considerations
  • China-based issuers
  • Non-GAAP measures and key performance metrics
  • Segment reporting
  • Spinoff transactions

McCord also provided Corp Fin remarks during the end-of-day Q&A session with some observations on the implementation questions the staff fielded on the now effective final rule (from Nov. 19, 2020), “Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information.”

AICPA A&A guide on CECL

AICPA releases credit losses A&A guide

On Nov. 11, 2021, the AICPA issued its long-awaited credit losses audit and accounting (A&A) guide. In addition to addressing items covered in the September 2019 practice aid, the guide provides implementation observations and adds a new chapter for accounting issues addressed by the FASB’s Credit Losses Transition Resource Group (TRG) or the AICPA’s Financial Reporting Executive Committee (FinREC) as follows:

  • Scope exception for loans and receivables between entities under common control
  • Scope of purchased financial assets with credit deterioration guidance for beneficial interests within FASB Accounting Standards Codification (ASC) 325-40
  • Application of FASB ASC 325-40 for trading securities
  • Refinancing and loan prepayments
  • Measurement inputs for short-term arrangements
  • Discounting inputs using a method other than a discounted cash flow method
  • Reasonable and supportable forecast – developing the period and use of historical information
  • Reversion method: Estimation versus accounting policy
  • Determining the life of a credit card receivable
  • Zero expected credit losses
  • Accounting for troubled debt restructurings (TDRs)
  • Capitalized interest
  • Gains and losses on subsequent disposition of leased assets
  • Accounting for changes in foreign exchange rates
  • Inclusion of future advances of taxes and insurance payments
  • Considerations related to FASB ASC 326 for insurance-entity-specific balances
  • Transition guidance for pools of financial assets
  • Application of subsequent events
Takeaways from the December 2021 AICPA banks and savings institutions conference update

AICPA holds 1-day year-end update

The 46th annual AICPA National Conference on Banks and Savings Institutions was held Sept. 20-22, 2021. Given the evolving financial reporting environment, the AICPA offered a one-day update on Dec. 1, 2021, to share the latest economic outlook and reporting developments. Crowe has updated its comprehensive report on the conference, originally issued on Oct. 12, 2021, with information from the Dec. 1 one-day update. Key takeaways identified during the one-day conference include:

  • Federal Reserve Board (Fed) Chief Accountant Lara Lylozian said the International Sustainability Standards Board (ISSB) is expected to issue a set of sustainability-related disclosure standards for proposal in 2022.
  • For banks that have yet to adopt the current expected credit losses (CECL) accounting standard, Jeffrey Geer, Office of the Comptroller of the Currency (OCC) associate chief accountant, reminded participants that banks will not have to reconstruct data from prior periods to create CECL models; however, banks should consider the relevance and reliability of data used in modeling. The larger a bank is, the more granularity in modeling will be expected. All banks should be prepared to support the rationale for the methodology selected and the data used to develop the estimate of expected credit losses.
  • Federal Deposit Insurance Corp. (FDIC) Chairman Jelena McWilliams informed participants that relief granted by the FDIC related to Part 363 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) will expire at the end of 2021.
  • Lylozian said the next steps in the federal banking agencies’ supervisory oversight over digital assets include consideration of the following: safekeeping and custody, facilitation of customer purchases and sales of digital assets, loans collateralized by crypto assets, issuance and distribution of stablecoins, and the holding of crypto assets on balance sheets. The regulatory agencies are also considering the treatment of digital assets in regulatory capital calculations.
Matters of importance from the federal financial institution regulators

FDIC releases Quarterly Banking Profile for third quarter 2021

The FDIC on Nov. 30, 2021, issued the “Quarterly Banking Profile” (QBP) covering the third quarter of 2021. According to the QBP, FDIC-insured banks and savings institutions earned $69.5 billion quarterly net income, a $18.4 billion (35.9%) increase from a year ago. That increase was driven largely by economic growth and improved credit conditions, which led to a third consecutive quarter of aggregate negative provision expense.

The QBP provides these additional third quarter highlights:

  • Net interest income rose 4.3% from the previous year, totaling $134.4 billion. The average net interest margin decreased 12 basis points from the previous year but slightly improved 6 basis points from the previous quarter to 2.56%.
  • Noninterest income rose $3.4 billion (4.7%) compared to the previous year.
  • Total loans and leases increased by $62.7 billion from the previous quarter.
  • Noncurrent loans (those 90 days or more past due) declined $7 billion from second quarter 2021, and net charge-offs were down $7.4 billion from the previous quarter.
  • Community banks reported annual net income growth of $1.4 billion, up 19.6% from a year ago.

The total number of FDIC-insured commercial banks and savings institutions declined from 4,951 to 4,914 from the previous quarter. During the third quarter, three new banks were chartered, 39 banks were absorbed by mergers, one bank ceased operations, and, for the third straight quarter, no banks failed. The number of institutions on the FDIC’s problem bank list declined by five to 46 in the third quarter, which represents the lowest level since QBP data collection began in 1984.

NCUA issues third quarter 2021 performance data

On Dec. 6, 2021, the National Credit Union Administration (NCUA) reported quarterly figures for federally insured credit unions based on call report data submitted to and compiled by the agency for the third quarter of 2021.

Highlights include:

  • The number of federally insured credit unions declined to 4,990 from 5,029 in the second quarter of 2021. In the third quarter of 2021, 3,122 federal credit unions and 1,868 federally insured, state-chartered credit unions existed.
  • Total assets reported for federally insured credit unions rose by 12.9% to $2.02 trillion, up $231 billion from a year ago.
  • Net income at an annual rate totaled $21.5 billion, up $10.6 billion (96.2%) from the previous year.
  • The return on average assets was 112 basis points in the third quarter of 2021, an increase of 65 basis points from the third quarter of 2020.
  • The credit union system’s net worth ratio decreased from 10.44% the previous year to 10.23% in the second quarter of 2021.

OCC issues semiannual risk report

The OCC on Dec. 6, 2021, released its “Semiannual Risk Perspective” for fall 2021. It focuses on issues that pose threats to those financial institutions regulated by the OCC and is intended as a resource to the industry, examiners, and the public. The report highlights key issues facing the banking industry and the effects of the COVID-19 pandemic on the federal banking sector.

Per the report, banks are weathering the COVID-19 crisis with resilience and satisfactory credit quality and strong earnings; however, weak loan demand and low net interest margins (NIM) continue to weigh on performance. In the report, the OCC recognizes that operational risk is elevated as banks respond to an evolving and increasingly complex operating environment and cyber risks. Credit risk is moderate as widespread government programs and appropriate risk management limited the potential credit impact, though some areas warrant continued attention.

The report notes heightened compliance risk, driven by regulatory changes and policy initiatives that continue to challenge risk management. Additionally, strategic actions taken by banks to offset earnings impacts of low yields and NIM compression remain a risk. The report also highlights an OCC initiative to act on the risk that climate change presents to the federal banking system.

The report covers risks facing national banks and federal savings associations based on data as of June 30, 2021. It is organized topically: The operating environment, bank performance, special topic on community banks, trends in key risks, and supervisory actions are individual focuses.

Federal banking regulators finalize rule on prompt reporting of cyberattacks

The federal banking agencies on Nov. 18, 2021, issued a final rule requiring banks to promptly notify their primary federal regulator within 36 hours of a “computer-security incident” that rises to the level of a “notification incident,” as defined in the rule. In the release, the agencies indicate that this notification requirement will promote early awareness of emerging threats to banks and the broader financial system and will enable agencies to react to these threats before they elevate to a systemic level.

The comprehensive rule also separately requires bank service providers to notify their affected banking customers as soon as possible when the service provider determines that it has experienced a computer security incident that has caused, or is reasonably likely to cause, a material service disruption for four or more hours.

In the final rule, which was initially proposed in December 2020, the agencies define computer security incidents as an occurrence that results in actual harm to an information system or the information contained within it. It defines a notification incident as one that has materially disrupted or degraded – or is likely to materially disrupt or degrade – banking operations, activities, or processes or delivery of products to customers.

Compliance with the final rule is required by May 1, 2022.

FinCEN updates ransomware advisory

The Financial Crimes Enforcement Network (FinCEN), on Nov. 8, 2021, released an updated advisory to replace its October 2020 advisory on “Ransomware and the Use of the Financial System to Facilitate Ransom Payments.” This amended advisory, issued in response to increasing ransomware attacks, incorporates information released in the FinCEN “Financial Trend Analysis” report issued in October 2021. This advisory reflects new information on trends and types of ransomware and associated payments as well as recent examples of ransomware attacks.

The advisory, which is part of the U.S. Department of the Treasury’s broader efforts to combat ransomware, also provides financial red flags of ransomware-related illicit activity to assist financial institutions in identifying and reporting suspicious transactions associated with ransomware payments. Financial institutions of all sizes are encouraged to carefully review the advisory and stay informed of increased sophistication of ransomware attacks.

President nominates Powell for Fed chair, Brainard for vice chair

On Nov. 22, 2021, President Joe Biden announced that he will nominate Jerome Powell to serve a second term as Federal Reserve chair. Powell has served as a member of the Fed’s board of governors since 2012 and was initially nominated to serve as chair during the previous administration, confirmed by the Senate in 2018.

The president also announced that he has selected Lael Brainard, a member of the Fed board of governors since 2014, to serve as Fed vice chair.

The Fed board currently has three vacant seats, including the vice chair for supervision, which is a separate role from Fed vice chair. Biden signaled he will make additional Fed appointments in December.

Fed launches New York Innovation Center with BIS

The Fed officially launched on Nov. 29, 2021, its New York Innovation Center (NYIC) focused on fintech products and services for the central bank community. This new innovation center is a strategic partnership between the Bank for International Settlements (BIS) Innovation Hub and the Federal Reserve System. Through the NYIC, the Fed and BIS plan to collaborate with public and private sector experts to “validate, design, build, and launch” new fintech products.

The center identifies five opportunity areas and delivery solutions:

  • Supervisory and regulatory technology
  • Financial market infrastructures
  • Future of money (digital currencies)
  • Open finance/banking as a service
  • Climate risk

Bank regulators provide update on crypto asset activities and plans for guidance

The federal banking regulators, on Nov. 23, 2021, issued a joint statement providing an update on their recent crypto asset activities. The agencies have been moving quickly in an effort to identify and clarify issues for crypto-related activities banks might conduct.

In the joint statement, the FDIC, Fed, and OCC unveiled a crypto asset road map that will guide their work in 2022 and beyond. Specifically, the agencies said that they plan to issue guidance related to crypto asset safekeeping and traditional custody services, ancillary custody services, facilitation of customer purchases and sales of crypto assets, loans collateralized by crypto assets, the issuance and distribution of stablecoins, and activities involving the holding of crypto assets on a bank’s balance sheet. In addition, the agencies said they will evaluate how to apply bank capital and liquidity standards to crypto assets and will continue to monitor the crypto asset market.

OCC issues interpretive letter on crypto asset activities

In news related to the previously mentioned interagency statement, in Interpretive Letter 1179 issued on Nov. 23, 2021, the OCC confirmed banks must demonstrate that they have adequate controls in place before they can engage in certain cryptocurrency, distributed ledger, and stablecoin activities. This letter clarifies that the activities addressed in the previous interpretive letters issued by the OCC in 2020 and earlier in 2021 on crypto assets and stablecoins may be conducted after a bank notifies its supervisory office of its intent to engage in the activities and receives written notification that it does not object.

This recent interpretive letter also reiterates that OCC Interpretive Letter 1176 regarding the OCC’s chartering authority did not expand on or change a bank’s existing obligations under fiduciary activities regulations. The OCC retains discretion in determining whether an activity is conducted in a fiduciary capacity for purposes of federal law.

The latest letter provides a road map for banks to engage with their supervisory office to provide written notification of their proposed activities and outlines the criteria that the OCC will follow to evaluate the proposed activity and provide a supervisory nonobjection.

Basel Committee issues principles for managing climate-related financial risks

On Nov. 16, 2021, the Basel Committee on Banking Supervision (BCBS) released a public consultation document outlining principles for the effective management and supervision of climate-related financial risks. The BCBS said it is taking a “holistic approach” to addressing these risks in the global banking system, including the consideration of disclosure, supervisory, and regulatory measures.

The document includes 18 high-level principles, 12 of which provide banks with guidance, while the remaining six provide guidance for prudential supervisors. The bank-related principles address corporate governance, internal controls, capital and liquidity adequacy, risk management processes, monitoring and reporting, and scenario analysis.

According to the document, “The proposed principles seek to achieve a balance in improving practices related to the management of climate-related financial risks and providing a common baseline for internationally active banks and supervisors, while maintaining sufficient flexibility given the degree of heterogeneity and evolving practices in this area.”

The BCBS document indicates that banks “should manage climate-related financial risks in a manner that is “proportionate to the nature, scale, and complexity of their activities and the overall level of risk that each bank is willing to accept.”

Comments on the principles are due Feb. 16, 2022.

FFIEC updates BSA/AML exam manual

The Federal Financial Institutions Examination Council (FFIEC) released, on Dec. 1, 2021, one new section and updates to three chapters of its Bank Secrecy Act/anti-money laundering (BSA/AML) examination manual.

In the press release, the regulators said these updates “should not be interpreted as new requirements or as a new or increased focus on certain areas. Rather, these sections provide information and considerations related to certain customers that may indicate the need for bank policies, procedures, and processes to address potential money laundering, terrorist financing, and other illicit financial activity risks.” The updated manual also should give financial institutions additional transparency into the BSA/AML examination process.

The sections of the manual updated in this release are:

  • Introduction – Customers (new)
  • Charities and Nonprofit Organizations
  • Independent Automated Teller Machine Owners or Operators
  • Politically Exposed Persons

In addition, the manual reminds examiners that no specific customer type automatically presents a higher risk of money laundering, terrorist financing, or other illicit financial activity than any other type. Additionally, “banks that operate in compliance with applicable BSA/AML requirements and reasonably manage and mitigate risks related to the unique characteristics of customer relationships are neither prohibited nor discouraged from providing accounts or services to any specific class or type of customer.”

NCUA approves field of membership rule

On Nov. 18, 2021, the NCUA board unanimously approved a final rule that revises the NCUA’s “Chartering and Field of Membership Manual” definition of service facility for multiple common-bond federal credit unions that participate in a shared branching network.

For purposes of adding groups, any shared branch, shared ATM, or shared electronic facility is included in the definition of “service facility.” In addition, the federal credit union does not need own the shared branch network for the shared branch or shared ATM to be a service facility.

Other changes to the definition of service facility that were included in the December 2020 proposed rule are not included in the final rule. In particular, service facilities for purposes of underserved area additions are required to offer more services than service facilities for purposes of group additions.

From the Financial Accounting Standards Board (FASB)

FASB proposes guidance on TDRs and vintage disclosures

On Nov. 23, 2021, the FASB issued a proposed Accounting Standards Update (ASU), “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures,” addressing areas identified as part of its post-implementation review of the CECL standard. The proposed amendments would eliminate the accounting guidance for TDRs by creditors while enhancing disclosure requirements for loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty. Under the proposal, an entity would apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 to 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. 

Related to vintage disclosures, the proposed ASU would require that a public business entity disclose current period gross write-offs by year of origination for financing receivables and net investments in leases.

Comments are due Dec. 23, 2021.

FASB issues guidance for disclosures about government assistance

On Nov. 17, 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832) – Disclosures by Business Entities About Government Assistance,” which requires business entities to disclose information about certain types of government assistance they receive, including cash grants and grants of other assets.

Required disclosures include:

  • The nature of the transactions
  • The related accounting policy used to account for the transactions
  • Amounts presented in the financial statement by line item
  • Significant terms and conditions of the transactions, including commitments and contingencies

The amendments are effective for all entities, excluding not-for-profit entities and employee benefit plans, that account for a transaction with a government by applying a grant or contribution accounting model by analogy to other accounting guidance, for financial statements issued for annual periods beginning after Dec. 15, 2021. Early application is permitted.

FASB discusses identifiable intangible assets and subsequent accounting for goodwill

At its Nov. 17, 2021, meeting, the FASB board continued discussions on the elements of an estimated goodwill amortization model, including an overall amortization period, a possible list of factors, a cap and a floor on the amortization period, and the reassessments of an estimated goodwill amortization period. No decisions were made.

From the Securities and Exchange Commission (SEC)

SEC chair discusses SPACs

At the Healthy Markets Association Conference on Dec. 9, 2021, SEC Chair Gary Gensler delivered a speech on the use of SPACs to go public. Gensler said that SPACs have many moving parts and a two-step structure that creates additional conflicts, including conflicts between investors that remain throughout the deal and those that cash out after voting. Gensler has requested that the SEC staff offer proposals about “how to better align the legal treatment of SPACs and their participants with the investor protections provided in other IPOs, with respect to disclosure, marketing practices, and gatekeeper obligations.”

Additionally, Gensler has asked the SEC to provide recommendations about how investors might be better informed about the fees, projections, dilution, and conflicts that may exist during all stages of SPACs and how investors can receive those disclosures at the time they’re deciding whether to invest. As part of this process, the SEC staff is also considering clarifying disclosure obligations under existing rules. 

Gensler also discussed concerns about who is performing the role of “gatekeeper” in the SPAC transaction process. He noted that gatekeepers may include directors, officers, SPAC sponsors, financial advisers, and accountants. Gensler said that some might “attempt to use SPACs as a way to arbitrage liability regimes. Many gatekeepers carry out functionally the same role as they would in a traditional IPO but may not be performing the due diligence that we’ve come to expect.” With regard to liability, he warned that “SPACs do not provide a ‘free pass’ for gatekeepers.” Recommendations are expected from the SEC staff about how the SEC can better align incentives between gatekeepers and investors as well as how the SEC can address the status of gatekeepers’ liability obligations. Gensler reminded the audience that as these recommendations are being developed, the SEC’s Division of Enforcement will continue to make sure that investors are being protected in the SPAC area. 

SEC staff releases statement on LIBOR transition

The SEC, on Dec. 7, 2021, published “SEC Staff Statement on LIBOR Transition – Key Considerations for Market Participants” as a reminder to investment professionals of their obligations when recommending securities linked to the London Interbank Offered Rate (LIBOR). It also reminds companies and asset-backed securities issuers of their disclosure obligations related to LIBOR transition. This statement follows previous staff statements addressing other aspects of the approaching LIBOR transition and addresses: 

  • Background and general considerations for market participants
  • Broker-dealer registrants: recommendations to retail customers
  • Broker-dealer registrants: municipal securities underwriting and sales to customers
  • Registered investment advisers and funds
  • Disclosure considerations for public companies and asset-backed securities issuers

SEC chair and commissioners address crypto markets

On, Dec. 2, 2021, SEC Chair Gensler and Commissioner Hester Peirce delivered remarks before the Investor Advisory Committee on crypto markets and regulatory concerns.

Gensler shared thoughts on the crypto markets, including:

  • The markets have been catalysts for change and innovation.
  • As this asset class has $2.6 trillion aggregate market capitalization, it belongs inside public policy.
  • The asset class is full of fraud, scams, and abuse.
  • The crypto market does not have sufficient investor protection, and existing protections have significant gaps.

He noted that these items leave the crypto markets open to manipulation and investors vulnerable. He warned that it is best to be preemptive in addressing investor protection issues and not wait until a major issue arises. Further he cautioned that “financial innovations throughout history don’t long thrive outside of our public policy frameworks.”

In her remarks, Peirce also reiterated the importance of investor protections in the crypto markets and specifically touched on other areas of investor protection that are important to consider, including:

  • Regulatory clarity. Peirce said that the SEC has not provided clarity in response to repeated questions, which has led to enforcement actions. She requested the committee urge the SEC to address the tough questions surrounding the crypto markets’ identification, trading, platforms, and custody.
  • Investor access. She noted that while the SEC recently started permitting bitcoin futures-based exchange-traded funds, the commission has yet to approve a spot exchange-traded product.
  • Individual liberty. She wondered if the SEC could regulate with a “lighter hand” so as to not use regulation to force investors into the SEC’s “comfort zone.”

In addition to the remarks made by Gensler and Peirce, the International Journal of Blockchain Law published a statement by Commissioner Caroline Crenshaw on Nov. 9, 2021. It includes a discussion of the advantages and shortfalls of decentralized finance (DeFi). She says that DeFi presents a multitude of opportunities; however, it also poses important risks and challenges for regulators, investors, and the financial markets. She includes background on the current regulatory landscape for DeFi, the SEC’s role, and two structural hurdles that should be addressed. The hurdles that Crenshaw identifies are pseudonymity and lack of transparency, both of which make it easier to conceal manipulation.

SEC issues guidance on spring-loaded compensation of executives

On Nov. 29, 2021, SEC staff issued Staff Accounting Bulletin No. 120, which outlines new interpretive guidance on “spring-loaded” awards to executives, and estimating the fair value of share-based payment transactions under ASC Topic 718, “Compensation – Stock Compensation,” when an entity has not yet released known and material nonpublic information. Spring-loaded awards are share-based payments granted shortly before the release of market-moving information, such as an earnings release with better-than-expected results or the disclosure of a significant transaction. SEC staff observes that spring-loaded awards should receive particular scrutiny from those charged with governance over a public entity’s compensation and financial reporting. In addition, any incremental value related to the anticipated release of material nonpublic information should be considered as an entity measures compensation cost for such awards.

The new guidance addresses whether adjustments to the current share price or the expected volatility assumption are appropriate when using a fair value-based measurement method for share-based payment transactions. The staff provides examples of when adjustments might be necessary and also offers reminders of an entity’s corporate governance and disclosure obligations as well as the need to maintain effective internal control over financial reporting.

SEC proposes rule to increase securities lending market transparency

The SEC, on Nov. 18, 2021, published a proposed rule on the reporting of securities loans. The rule is intended to strengthen the transparency and efficiency of the securities lending market. It would require 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.

Concurrent with the release of this proposal, Chair Gensler released a statement noting that securities lending and borrowing is an important part of the U.S. market structure and that the public benefits from transparency and competition. Gensler said, “It’s important that market participants have access to fair, accurate, and timely information,” and “this proposal would bring securities lending out of the dark.”

Comments are due Jan. 7, 2022.

SEC adopts new proxy rules for contested elections, proposes amendments

On Nov. 17, 2021, the SEC adopted final rules that require parties in a contested election to use universal proxy cards that include all director nominees presented for election at a shareholder meeting. The rule changes will allow shareholders to vote by proxy for their preferred combination of board candidates – similar to the rules for in-person voting. Additionally, to further facilitate shareholder voting in director elections, the SEC adopted amendments to make sure that proxy cards clearly specify the applicable shareholder voting options in all director elections and to require proxy statements to disclose the effect of a shareholder’s election to withhold its vote. Compliance with the rules, which will be applicable to all nonexempt solicitations for contested elections other than those involving registered investment companies and business development companies, will be required for any shareholder meeting involving contested director election held after Aug. 31, 2022.

Also on Nov. 17, 2021, the SEC approved for public comment proposed amendments to its rules governing proxy voting advice. First, the SEC is proposing to rescind conditions to the availability of two exemptions from the proxy rules’ informational and filing requirements on which proxy voting advice businesses often rely. Second, the proposed amendments would rescind the 2020 changes made to the proxy rules’ liability provision.

Comments are due Dec. 27, 2021.

In response to the final rules, Commissioners Crenshaw, Allison Herren Lee, Elad Roisman, and Peirce all issued statements. Additionally, Crenshaw, Lee, Roisman, and Peirce issued statements on the proposed proxy voting advice.

SEC commissioner addresses internal controls

On Nov. 16, 2021, at a conference on controlling internal controls, Commissioner Crenshaw spoke about ESG matters, digital assets, and internal accounting controls. Crenshaw identified ESG risks as some of the most pressing issues for public companies and investors and said that the reliability of corporate ESG risk disclosures and their potential impact on and connectivity to financial statements is critical. She said that corporate internal controls play a vital role in making sure that ESG risk disclosures are consistent and reliable and reiterated that management is responsible for establishing and maintaining an effective system of internal controls.

In her remarks, she noted that internal accounting controls must evolve with the markets. She discussed the importance of assessing whether existing corporate internal accounting controls are sufficient to provide reasonable assurances that each business and its assets are adequately controlled. Concentrating first on cybersecurity, Crenshaw noted that she was particularly interested in understanding how public companies are responding to cybersecurity intrusions and attacks, which create threats to management’s ability to safeguard the company’s assets.

Crenshaw shared her thoughts on identifying and measuring climate change risk and her interest in understanding how companies are determining whether and how financial statements are affected by it; how assumptions used to reach these determinations are set, tested, and reevaluated over time; and how disclosures are formulated. Lastly, she touched on safeguarding digital assets and noted that it is critical for companies to consider, among other things, whether the internal accounting controls frameworks safeguarding these assets are working, how they need to be modified from existing frameworks, and what changes need to be implemented.

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB swears in new board member

On Nov. 18, 2021, the PCAOB swore in Kara M. Stein as a board member. Her term will run through Oct. 24, 2026.

Most recently, Stein served as a distinguished policy fellow and lecturer-in-law at the University of Pennsylvania Carey Law School and director of the AI, Data, and Capital Markets Initiative at the Center for Innovation, University of California Hastings Law. Stein previously served as a commissioner of the SEC from 2013 to 2019.

From the Center for Audit Quality (CAQ)

CAQ releases annual transparency report

On Nov. 10, 2021, the CAQ and Audit Analytics issued the “2021 Audit Committee Transparency Barometer,” which tracks S&P 1500 proxy disclosures to evaluate transparency regarding audit committee oversight of the external auditor and other important financial reporting topics.

The CAQ notes that voluntary disclosure of audit committee oversight indicates higher levels of involvement. In addition, effective audit committee oversight enhances audit quality. This edition of the barometer reports that – as has been the case – the highest rates of disclosure relate to nonaudit services, auditor tenure, criteria considered to evaluate the audit firm, and involvement in audit partner selection. Additionally, the report highlights that cybersecurity disclosures continue to have the greatest increases year over year since 2016. The report finds that disclosures related to auditor compensation and explanations for changes in fees paid to the external auditor have the lowest rates of disclosures and provide the greatest opportunity for improvement. The publication also provides disclosure examples.r

Contact us

Sydney Garmong
Sydney Garmong
Partner, National Office
Mark Shannon
Mark Shannon
Partner, National Office
Dennis Hild
Dennis Hild
Principal, National Office