SEC extends climate-related disclosures comment period and reopens comment period for private fund advisers and Regulation ATS proposed rules
On May 9, 2022, the SEC announced that it has extended the public comment period from May 20, 2022, until June 17, 2022, on the proposed rulemaking to enhance and standardize climate-related disclosures for investors.
A recent report from Crowe, “SEC Proposes Climate-Related Disclosures: A Closer Look,” provides considerations for management and boards and for those who choose to comment on the proposal.
Additionally, the SEC announced the reopening of the comment periods for 30 days on the proposed rulemaking to enhance private fund investor protection and on the proposed rulemaking to include significant Treasury markets platforms within Regulation ATS. The comment periods will reopen following publication in the Federal Register.
Small-business committee discusses proposed rules on climate disclosures and SPACs
On May 6, 2022, the SEC’s Small Business Capital Formation Advisory Committee met to examine the SEC’s proposed rules on climate-related disclosures and proposed rules on special purpose acquisition companies (SPACs), shell companies, and projections.
Chair Gary Gensler provided remarks to the committee on both proposals. He said he believes the climate-related disclosures proposal will help ensure that investors receive consistent, comparable, and decision-useful information and will establish clear and consistent reporting obligations for issuers. Gensler said that the SPACs proposal would strengthen the disclosures, marketing practices, and gatekeeper and issuer obligations for SPACs.
Commissioner Hester M. Peirce also provided remarks on the proposals’ potential effects on small businesses. She noted that the climate change proposal would vastly expand the disclosure requirements and compliance burdens for all public companies, and she shared concerns that she provided when the rules were proposed. She posed several questions about the unique challenges that small companies might face. She also noted that the SPAC proposal would require significant changes to the operations, economics, and timeline of SPACs.
SEC chair remarks on cybersecurity
Gensler on April 14, 2022, gave a speech before the joint meeting of the Financial and Banking Information Infrastructure Committee and the Financial Services Sector Coordinating Council, addressing the SEC’s important roles as part of “Team Cyber” and as a regulator.
Gensler said he thinks about the evolving cybersecurity risk landscape in three ways: cyberhygiene and preparedness, cyber incident reporting to the government, and disclosure to the public. He discussed the SEC’s cybersecurity policy work related to financial sector registrants, public companies, service providers, and the SEC itself.
Related to financial sector SEC registrants, Gensler discussed proposed changes to and expansion of Regulation Systems Compliance and Integrity (Reg SCI) and said that he believes additional opportunities exist to expand Reg SCI to further strengthen the cyberhygiene of important financial entities, including and beyond the Treasury market. He highlighted the rules proposed in February 2022 that would require registered investment advisers, registered investment companies, and business development companies to bolster their cybersecurity practices focusing on adopting written plans to address cybersecurity risks, disclosing certain cybersecurity incidents to the public, reporting certain cybersecurity incidents to the SEC, and meeting specific recordkeeping obligations. He said such reforms could reduce the risk that these registrants would not be able to maintain critical operational capability during a significant cybersecurity incident.
For public companies, Gensler discussed the March 2022 proposal to enhance cybersecurity disclosures, which would require ongoing disclosures on companies’ governance, risk management, and strategy with respect to cybersecurity risks and would mandate material cybersecurity incident reporting.
Gensler noted that the SEC is not immune to cyberattacks and said the staff continues to work to protect SEC data and information technology. He concluded with a reminder that cyber risks have implications across the financial sector, investors, issuers, and the economy and the SEC has a role to play, along with the rest of Team Cyber.
SEC chair and commissioner remark on financial markets
Recently, both Gensler and Commissioner Caroline A. Crenshaw spoke about regulating various aspects of the financial markets:
- On May 6, 2022, Gensler presented a speech on enhancing the efficiency, resiliency, and transparency of the U.S. markets, including consideration of disclosures. He highlighted the importance of new rules to meet the needs of the current and future markets and to help the U.S. maintain its competitiveness in the world market.
- On April 26, 2022, Gensler spoke virtually about the fixed income markets, noting their importance to individuals, companies, and governments in the U.S. and around the world. He discussed some of the policy work at the SEC with respect to strengthening and increasing transparency, modernizing rule sets for electronic platforms, and enhancing financial resiliency.
- On April 28, 2022, Crenshaw presented a speech discussing SPACs and SPAC IPOs. She noted that the SEC has identified several areas of concern with SPACs, including misaligned incentives, several points of dilution that might disproportionately affect retail investors, and a lack of liability that could create an unjustified advantage in this path to the public markets over the traditional IPO. She encouraged all “to think about the ever-growing divide between the public and private markets and how the paths to public markets can be improved and made more efficient while preserving key investor and market integrity protections.”
- On April 14, 2022, Crenshaw presented a speech addressing private markets and their important role in the economy. She said that private markets are growing at record rates and companies are staying private for longer periods of time, and she discussed whether adequate protection exists for investors in private markets. She noted the debate on the balance between public and private markets and posed multiple questions to help define recommendations from the SEC.
SEC provides guidance on consideration of geopolitical risk
The staff in the SEC’s Division of Corporation Finance (Corp Fin) published “Sample Letter to Companies Regarding Disclosures Pertaining to Russia’s Invasion of Ukraine and Related Supply Chain Issues” to provide guidance on disclosures. While the letter was created to specifically address the current conflict, the comments could be applied more broadly across similar situations. The letter indicates that Corp Fin believes that companies should provide detailed disclosure, to the extent material or otherwise required, regarding:
- “Direct or indirect exposure to Russia, Belarus, or Ukraine through their operations, employee base, investments in Russia, Belarus, or Ukraine, securities traded in Russia, sanctions against Russian or Belarusian individuals or entities, or legal or regulatory uncertainty associated with operating in or exiting Russia or Belarus”
- “Direct or indirect reliance on goods or services sourced in Russia or Ukraine or, in some cases, in countries supportive of Russia”
- “Actual or potential disruptions in the company’s supply chain”
- “Business relationships, connections to, or assets in, Russia, Belarus, or Ukraine”
The financial statements also might need to reflect and disclose:
- Impairment of assets
- Changes in inventory valuation
- Deferred tax asset valuation allowance
- Disposal or exiting of a business
- Deconsolidation
- Changes in exchange rates
- Changes in contracts with customers or the ability to collect contract considerations
Additionally, Corp Fin notes that “many companies have experienced heightened cybersecurity risks, increased or ongoing supply chain challenges, and volatility related to the trading prices of commodities regardless of whether they have operations in Russia, Belarus, or Ukraine that warrant disclosure.” Also, Corp Fin requests that companies should “consider how these matters affect management’s evaluation of disclosure controls and procedures, management’s assessment of the effectiveness of internal control over financial reporting, and the role of the board of directors in risk oversight of any action or inaction related to Russia’s invasion of Ukraine, including consideration of whether to continue or to halt operations or investments in Russia and/or Belarus.”
SEC expands Crypto Assets and Cyber Unit
On May 3, 2022, the SEC announced the addition of 20 positions to the newly renamed Crypto Assets and Cyber Unit in the Division of Enforcement, which will increase the unit to 50 positions. The Crypto Assets and Cyber Unit is responsible for protecting investors in crypto markets and from cyber-related threats.
Since 2017, when it was created, “the unit has brought more than 80 enforcement actions related to fraudulent and unregistered crypto asset offerings and platforms, resulting in monetary relief totaling more than $2 billion.” The unit has brought numerous actions against SEC registrants and public companies for failing to maintain adequate cybersecurity controls and for failing to appropriately disclose cyber-related risks and incidents. To continue to address the ever-growing crypto markets and ensure investors are protected, the expanded unit will focus on investigating securities law violations related to:
- Crypto asset offerings
- Crypto asset exchanges
- Crypto asset lending and staking products
- Decentralized finance platforms
- Nonfungible tokens
- Stablecoins
SEC issues guidance on crypto assets
As reported in the April issue of Financial Institutions Executive Briefing, the SEC, on March 31, 2022, issued Staff Accounting Bulletin (SAB) 121, providing guidance on filing financial statements with the SEC for entities that provide crypto asset custody services for platform users.
Crowe released on April 22, 2022, an article taking an in-depth look at SAB 121. As significant judgment might be required to determine the applicability of SAB 121, the article provides a decision tree to help entities decide if the SAB’s accounting and disclosure guidance applies to them.
