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Prudential Regulators Issue Guidance on New Accounting Standards Governing Credit Loss Allowances
On December 19, the Prudential Regulators have issued guidance in the form of a cover letter (OCC 2016-45; SR 16-19; FIL-79-2016) and FAQs to assist financial institutions and bank examiners interpret and apply new accounting standards applicable to estimated allowances for credit losses. Though applicable to all financial institutions, regardless of size, there are different effective dates for the new standard depending on the institutions status as a public entity and/or SEC filer. The above-referenced FAQs summarize key elements of the new accounting standard, such as effective dates, scope, and transition, while also highlighting the specific GAAP accounting provisions affected by the new standard, including: (i) purchased credit-deteriorated financial assets; (ii) held-to-maturity debt securities; (iii) available-for-sale debt securities; (iv) troubled debt restructuring; and (v) off-balance-sheet credit exposures. The guidance also outlines steps regulators have encourage financial institutions to take to prepare for the transition to the new accounting standard, including: (i) initial supervisory views on measurement methods, (ii) the use of vendors, (iii) scalability, (iv) data needs, and (v) allowance processes.
Obama Signs Into Law SEC Small Business Advocate Act
On December 16, President Obama signed into law H.R. 3784, the SEC Small Business Advocate Act of 2016. The legislation, which had broad bipartisan support in the House and Senate, establishes (within the SEC) an Office of the Advocate for Small Business Capital Formation and a Small Business Capital Formation Advisory Committee. Both the Office of the Advocate and the Advisory Committee will be tasked with the dual role of helping small businesses navigate the securities laws and advocate against the application of overly burdensome regulations to small businesses. The small-business advocate is modeled after the SEC’s office of the investor advocate, which was created under the Dodd-Frank Act as a voice for investors.
N.Y. Attorney General's Office, SEC and FINRA Assess Penalties, Fines Against Securities Firm Over Dark Pool Access Disclosures
On December 16, N.Y. Attorney General Eric Schneiderman announced a $37 million settlement against a major securities firm following its joint investigation with the Securities and Exchange Commission (SEC) into allegedly false statements and omissions made by the firm in connection with the marketing of its electronic order routing services, known as its “Dark Pool Ranking Model.” As explained by Attorney General Schneiderman, “Electronic order routing systems that route investor orders to various markets, including dark pools, are a part of modern equities trading, and companies that promote their routing capabilities must do so truthfully.” As part of the agreement, the firm admitted that it misled investors and violated New York State and federal securities laws; its conduct was also censured by both regulators.
That same day, FINRA announced its decision to fine the same firm $3.25 million for failing to disclose accurate information to all clients about services and features of its alternative trading system (ATS). In Form ATS filings with the SEC, the firm represented that all ATS users would have “identical access” to the system’s services and features. However, FINRA found that some ATS users, including high-frequency traders, were provided with more information than others and received services not available to others. The firm settled without admitting or denying the charges.
Division of Corporation Finance Director Keith Higgins to Leave SEC; Shelley Parratt to Become Acting Director
In a December 6 press release, the SEC announced that Keith F. Higgins, Director of the SEC’s Division of Corporation Finance, plans to leave the SEC in early January. Since joining the SEC in 2013, Mr. Higgins led the Division’s implementation of significant rulemaking and other responsibilities under the Dodd-Frank Act, Jumpstart Our Business Startups Act (JOBS Act), and Fixing America’s Surface Transportation Act (FAST Act). Upon Mr. Higgins’ departure, Shelley Parratt, Deputy Director for the Division of Corporation Finance, will become the acting Director. Ms. Parratt has served previously as acting Director. Ms. Parratt has served as Deputy Director of the Division since 2003, and has been responsible for assisting in strategic planning and developing Division policies and procedures and overseeing the disclosure review program. Ms. Parratt came to the SEC’s Division of Corporation Finance in 1986. She received her M.B.A. from Syracuse University and her B.A. from St. Lawrence University.
Wesley R. Bricker to Replace James Schnurr as SEC Chief Accountant
On November 22, the SEC announced that Wesley R. Bricker will become its Chief Accountant, succeeding James Schnurr who will be retiring this year. Mr. Bricker served under his predecessor as Deputy Chief Accountant since 2015 and has been Interim Chief Accountant since July of this year. As Chief Accountant, Mr. Bricker will be the principal advisor to the Commission on accounting and auditing matters and lead the Commission’s Office of the Chief Accountant. He also will be responsible for assisting the Commission with discharging its oversight of the Financial Accounting Standards Board and the Public Company Accounting Oversight Board.
SEC Continues to Show Interest in Municipal Bond Market
In a first for the SEC, on September 15, a federal jury has found a municipality and its former Budget Director liable for violations of federal securities laws by acting “knowingly” or with “severe recklessness” while making representations about the financial condition of the City of Miami during three separate offerings of municipal securities in 2009. The SEC alleged, and the jury agreed that city officials violated federal law when they transferred cash from capital projects—funds that had already been allotted, or were needed to cover ongoing expenses—to mask shortfalls in the city’s general fund in order to convince bond-rating agencies that the city’s finances were better than they really were. Miami had been operating under a 2003 SEC cease-and-desist order based on similar conduct. On September 9, the SEC also reached a settlement agreement with an Oklahoma-based bank to resolve allegations that it failed to detect and alert bond holders as to problems in various municipal bond offerings while acting as indenture trustee. As outlined by the SEC final order, the bank allegedly knew that some of the assisted living facilities serving as collateral for the bonds had been closed, and that an individual had withdrawn investor money from reserve funds for the bond offerings and used such funds for other business ventures and personal expenses. The bank did not admit or deny the SEC’s allegations, but agreed to pay $984,000 in disgorgement, as well as a $600,000 civil penalty.
DOJ and SEC Decline FCPA Action Against California-Based Software Company
On September 8, a California-based software company disclosed in its annual statement that following an investigation into its operations in Russia and certain of the Commonwealth of Independent States, the DOJ and SEC have both declined to bring enforcement actions under the FCPA. An announcement of possible violations was first disclosed in the December 2013 blog post by Roxane Marenberg, Vice President and Deputy General Counsel in the company’s Global Compliance Enablement division. In the post, Marenberg stated that the company was conducting an investigation into alleged FCPA violations at the request of the SEC and DOJ in response to a communication those agencies had received concerning the company’s operations and discounting practices. The company’s disclosures did not provide any further detail about the nature of the business activities being investigated.
SEC Appoints New Deputy Associate Director in Division of Investment Management's Rulemaking Office
On September 7, the SEC named Sarah G. ten Siethoff Deputy Associate Director in the Division of Investment Management’s Rulemaking Office. Since joining the SEC in 2008, Ms. ten Siethoff has served in various roles in the Division’s Rulemaking Office, including Assistant Director, Senior Special Counsel, and Senior Counsel. In her new role, Ms. ten Siethoff will, among other things, recommend rulemaking and other policy initiatives under the Investment Company and the Investment Advisers Acts of 1940. Prior to joining the SEC in 2008, Ms. ten Siethoff worked as an associate in private practice.
SEC Announces $22 Million-Plus Whistleblower Award; Program Surpasses $100 Million in Awards
On August 30, the SEC announced that a whistleblower will receive more than $22 million for providing the SEC with a “detailed tip and extensive assistance” to help the agency uncover “well-hidden” securities fraud at the whistleblower’s company. The $22 million-plus award is the second largest SEC whistleblower award, following a $30 million award in September 2014. The SEC began the whistleblower program in 2011 and announced its first award in August 2012. Since then, the agency’s program has surpassed $100 million in total money awarded. More than 14,000 whistleblower tips have been submitted to the Whistleblower Office, with a total of 33 whistleblowers receiving monetary awards.
Two Companies Reserve Hundreds of Millions of Dollars for Potential FCPA Settlements
Second quarter SEC filings revealed substantial financial reserves set aside by two companies, each under investigation for alleged FCPA violations for over half a decade. If they end up reflecting the size of the ultimate settlements reached, the reserves, totaling hundreds of millions of dollars, would represent some of the largest FCPA enforcement settlements ever reached by the Justice Department.
According to its July 29 Form 6-K/A filing with the SEC, a Brazilian aircraft manufacturer has recognized a $200 million loss contingency in connection with its discussions to settle the DOJ’s investigation into allegations that the manufacturer’s sales executives bribed various Dominican individuals who, in exchange, influenced legislators in the Dominican Republic to approve a $92 million contract and financing agreement for aircraft. The manufacturer also disclosed that a final settlement is likely to include a deferred prosecution agreement and the imposition of an independent monitor to oversee the manufacturer’s compliance with the terms of an agreement. The related criminal case by the Brazilian government against eight of the manufacturer’s sales executives is still ongoing.
On August 2, a publicly-traded hedge fund revealed in its Form 10-Q filing with the SEC that it has raised its FCPA investigation reserve to over $414 million from the $200 million accrued in the prior quarter. The hedge fund disclosed that it was raising the reserve based on ongoing discussions to resolve the matter with the SEC and DOJ.