Chief accountant calls for commitment to professional skepticism and audit quality
On Feb. 5, 2024, SEC Chief Accountant Paul Munter issued a statement on the importance of professional skepticism and the key roles of auditors and audit committees in conducting high-quality audits. Citing rising Public Company Accounting Oversight Board inspection deficiency rates, Munter urged auditors to be wary of potential pressures on management and other heightened fraud risks amid an evolving economic environment. He said that to help ensure high-quality audits, auditors should engage proactively with the audit committee, involve specialists when further expertise is necessary, train engagement teams to be aware of bias, and empower staff to exercise professional skepticism. He added that it is the auditor’s responsibility to wield such skepticism in assessing management’s judgment and in collecting and evaluating audit evidence.
Munter also spoke on the role of the audit committee, stating that the audit committee should consider a firm’s inspection results and other quality metrics and measures when appointing an auditor. The audit committee should engage in regular dialogue with the auditor, asking questions about the partner’s involvement and the team’s requisite experience and knowledge. Munter noted that both auditors and audit committees should remember their responsibility to protect the interests of investors rather than prioritizing the interests of management.
SEC issues final rules on SPAC transactions
On Jan. 24, 2024, the SEC adopted final rules on initial public offerings (IPOs) conducted by special purpose acquisition companies (SPACs) and on subsequent business combination transactions, commonly known as de-SPAC transactions. The final rules, which include new guidance and regulatory changes alongside enhanced disclosures, better align requirements and legal obligations in such transactions with those of traditional IPOs.
Among other provisions, the final rules introduce new mandatory disclosures for SPAC IPOs – including information about the SPAC structure, planned de-SPAC timeline, risks, and governance. Filings for both SPAC IPOs and de-SPAC transactions must include disclosures about the SPAC sponsor, potential conflicts of interest, and potential shareholder dilution. The final rules also require additional disclosures for de-SPAC transactions, including a disclosure of the board of directors’ determination of whether a specific de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders (when mandated by the jurisdiction in which the SPAC is organized).
The final rules also introduce regulatory updates, making the target company a co-registrant in a de-SPAC transaction, thereby subjecting target company executives to legal liability for material registration statement errors or omissions. They designate any business combination involving a shell company (including, but not limited to, SPACs) as a sale of securities to the shell company’s shareholders. The rules also introduce provisions on the use of projections broadly applicable to all SEC filers, as well as requirements on projections and forward-looking statements specific to SPAC transactions.
The final rules provide guidance on identifying underwriters in a de-SPAC transaction and assessing whether a SPAC qualifies as an investment company under the Investment Company Act of 1940. They also require re-determination of smaller reporting company status following a de-SPAC transaction and require a 20-day minimum dissemination period for security holder communication materials in connection with such transactions. Certain structured data extensible business reporting language (XBRL) requirements are also included within the final rules.
The final rules become effective 125 days after publication in the Federal Register. Structured data requirements become effective 490 days after publication.
For more details on the final rules, see the Crowe article “SEC Final Rules Enhance Disclosures for SPAC IPOs.”
SEC adopts final rules on the definition of “dealer”
On Feb. 6, 2024, the SEC adopted final rules on statutory definitions of a dealer or a government securities dealer – specifically, providing clarification on the qualifier of a person who does not buy or sell securities “as a part of a regular business,” which exempts such persons from registering with the commission under the Securities Exchange Act of 1934. Addressing concerns about market participants that engage in significant liquidity-providing activities but were not previously required to register as dealers due to the exemption, the new rules specify that either of the following activities would entail buying or selling securities as part of a regular business:
- “Regularly expressing trading interest that is at or near the best available prices on both sides of the market for the same security, and that is communicated and represented in a way that makes it accessible to other market participants”
- “Earning revenue primarily from capturing bid-ask spreads, by buying at the bid and selling at the offer, or from capturing any incentives offered by trading venues to liquidity-supplying trading interest”
The final rules become effective 60 days after publication in the Federal Register. Affected market participants will have one year from the effective date to comply with dealer registration requirements.
SEC adopts final amendments to Form PF requirements
On Feb. 8, 2024, the SEC and the Commodity Futures Trading Commission (CFTC) jointly adopted final amendments to private fund reporting Form PF. The amendments require enhanced reporting from certain SEC-registered investment advisers to private funds, including:
- Enhanced reporting for large hedge fund advisers on qualifying hedge funds with a net asset value of at least $500 million, including enhanced information on risk and exposure, investment performance by strategy, and financing and investor liquidity
- Enhanced reporting for advisers and their private funds, including enhanced information on assets under management and asset value, withdrawal and redemption rights, inflows and outflows, borrowings and types of creditors, beneficial ownership, and fund performance
- Separate reporting for “each component fund of a master-feeder arrangement and parallel fund structure” and aggregate reporting for trading vehicles used by reporting funds
In addition, the amendments remove the aggregate reporting requirement on hedge funds by large hedge fund advisers.
Entities have one year after publication in the Federal Register to comply with the amended Form PF requirements.
SEC denies rulemaking petition on no admit/no deny policy
On Jan. 30, 2024, the SEC denied a petition for rulemaking to amend the commission’s “no admit/no deny” policy. The policy currently prevents defendants from denying allegations when entering into a settlement with the commission, requiring defendants to either admit the allegations or to state that they neither admit nor deny the allegations. SEC Chair Gary Gensler and Commissioner Hester Peirce issued statements on the decision.
