Financial Reporting and Regulatory Update

Third Quarter 2020

From the SEC

COVID-19 resources and guidance

Coronavirus response

The SEC is continuing to update its COVID-19 response page, which describes how the SEC is addressing the impact of COVID-19 through maintaining SEC operations continuity; monitoring markets and engaging with market participants; providing guidance and targeted regulatory assistance and relief, enforcement, examinations, and investor education; and extending comment periods for certain pending actions and rules. The page includes links to all of the current resources and guidance available from the SEC.

Roundtable on COVID-19 disclosure considerations

On June 30, 2020, a panel of various financial statement users participated in a virtual roundtable with SEC Chair Jay Clayton and Division of Corporation Finance (Corp Fin) Division Director William Hinman to discuss their perspectives on what issuers should consider for quarterly COVID-19 disclosures as well as other topics including the importance of forward-looking information and human capital initiatives. Panelists included:

  • Gary Cohn, former director of the National Economic Council
  • Glenn Hutchins, chairman of North Island
  • Tracy Maitland, president and CIO of Advent Capital
  • Barbara Novick, vice chairman and co-founder of BlackRock.

An archive of the roundtable is available.

Public statements and announcements

Safeguarding client accounts cybersecurity alert

On Sept. 15, 2020, the Office of Compliance Inspections and Examinations (OCIE) issued a cybersecurity risk alert covering safeguarding client accounts. The risk alert is based on observations from recent OCIE examinations. It “encourages firms to review their customer account protection safeguards and identity theft prevention programs and consider whether updates to such programs or policies are warranted to address emergent risks.”

Small-business capital formation meeting

The Small Business Capital Formation Advisory Committee met on Aug. 4, 2020, to discuss how capital markets are serving underrepresented founders, including minorities and women. SEC Chairman Jay Clayton and commissioners Allison Herren Lee, Hester Peirce, and Elad Roisman offered remarks at the meeting, which also included a discussion of opportunities to access capital for underrepresented founders and a discussion of solutions for inclusive capital formation including best practices and potential regulatory solutions. Data regarding underrepresented founders provided details of minority-owned and women-owned businesses including access to capital challenges. A recording of the meeting is available on the SEC’s website.

Rules and guidance

Regulation S-K and Securities Act forms guidance

The SEC’s Corp Fin staff updated, on Sept. 21, 2020, its Compliance and Disclosure Interpretations (C&DIs) for Regulation S-K and for Securities Act forms.

The update to the C&DI on Regulation S-K appears in question 219.05 and provides guidance on reporting compensation for periods affected by COVID-19. The updated guidance on Securities Act forms appears in question 115.18 and addresses the merger of a private operating company or companies with or into a reporting shell company and whether the resulting combined entity may rely on the reporting shell company’s pre-merger reporting history to meet the eligibility requirements of Form S-3 during the 12 calendar months following the business combination.

Expiring confidential treatment orders

On Sept. 9, 2020, Corp Fin released an update to CF Disclosure Guidance: Topic No. 7. The new guidance describes the three options available to companies whose confidential treatment orders are expiring, including refiling the unredacted information, extending the confidential period, and transitioning to compliance with the requirements under Regulation S-X item 601(b)(1) and other parallel rules.

Extension of temporary amendments to crowdfunding offerings

On Aug. 28, 2020, the SEC issued a temporary final rule to provide an extension to the temporary amendments issued on May 4, 2020, for crowdfunding offerings. The amendments provide conditional relief for established smaller companies affected by COVID-19 that are relying on a Regulation Crowdfunding offering to meet their urgent funding needs. The temporary final rule is intended to expedite the offering process for eligible companies by providing relief from certain rules with respect to the timing of the company’s offering and the financial statement requirements. Companies must meet enhanced eligibility requirements to take advantage of this relief and must provide clear and prominent disclosure to investors about their reliance on the relief.

The amendments in the rule are effective from Aug. 31, 2020, to Sept. 1, 2021, and are applicable to offerings under Regulation Crowdfunding between May 4, 2020, and Feb. 28, 2021.

Regulation S-K disclosures

The SEC, on Aug. 26, 2020, adopted amendments to update the description of business (item 101), legal proceedings (item 103), and risk factor (item 105) disclosures required under Regulation S-K. Incorporating changes in the capital markets and the economy, the amendments also reflect the SEC’s commitment to a principles-based, registrant-specific approach to disclosure and are intended to improve the readability of disclosure documents and to discourage repetition and reduce the disclosure of information that is not material.

Among other changes to Items 101, 103, and 105, the amendments include the following:

  • Item Clarifying and expanding the principles-based approach; adding disclosure topics such as human capital resources, including any material human capital measures or objectives that management focuses on in managing the business; and emphasizing regulatory compliance by including material government regulations
  • Item Specifically stating that required information about material legal proceedings may be provided through hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document
  • Item Requiring a summary disclosure if risk factors exceed 15 pages, changing the required disclosure standard from “most significant” to “material” factors, and requiring risk factors to be organized under relevant headings

The amendments were effective on Nov. 9, 2020.

Accredited investor definition

On Aug. 26, 2020, the SEC adopted amendments to the accredited investor definition, which is one of the principal tests for determining who is eligible to participate in private capital markets. Previously, individual investors who did not meet specific income or net worth tests, regardless of their financial sophistication, were not provided the opportunity to invest in private markets. These amendments update and improve the definition to better identify institutional and individual investors that have the knowledge and expertise to participate in private markets.

The amendments include defined measures of professional knowledge, experience, or certifications in addition to the existing tests for income or net worth that allow for qualification as an accredited investor. Qualifying individuals now will include those who have certain professional certifications and designations and a “knowledgeable employee” of a private fund for the purpose of investing in that fund. The amendments also increase the list of entities that may qualify as accredited investors.

The amendments are effective on Dec. 8, 2020.

Staffing updates

On Aug. 19, 2020, the SEC named Marc P. Berger as deputy director of the Division of Enforcement. Before this appointment, Berger was the director of the SEC’s New York regional office. Prior to his position with the SEC, Berger was a federal prosecutor in New York.

On Aug. 18, 2020, the SEC announced the appointment of Diana Stoltzfus as a deputy chief accountant in the agency’s Office of the Chief Accountant. Stoltzfus will lead the activities of the office’s Professional Practice Group, which includes supporting the commission in overseeing the activities of the PCAOB, managing rule-making and the resolution of auditor independence matters, and monitoring and addressing matters related to requirements for internal control over financial reporting and the audit of the financial statements. Stoltzfus was most recently a partner at PricewaterhouseCoopers LLP.

On Aug. 17, 2020, the SEC announced that Caroline A. Crenshaw and Hester M. Peirce were sworn into office as SEC commissioners. Both Crenshaw and Peirce were unanimously confirmed by the U.S. Senate on Aug. 6, 2020. Commissioner Crenshaw is a captain in the United States Army Reserve, Judge Advocate General’s Corps, and has served in positions across the SEC. Commissioner Peirce first was sworn in as a commissioner in 2018 and has focused on matters of innovation in financial services and on regulatory matters under the Dodd-Frank Wall Street Reform and Consumer Protection Act Title VII.

On Aug. 5, 2020, the SEC announced that Lindsay McCord has been named chief accountant of Corp Fin, where she has served as acting chief accountant since March 2020. Previously, McCord served as a Corp Fin deputy chief accountant, managing a team responsible for providing technical guidance and interpretations of financial statement and related disclosure requirements.

For more information contact Crowe.