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SEC issues statement on importance of disclosures for investors, markets, and the fight against Covid-19
On April 8, the SEC issued a statement regarding the importance of disclosure for investors, markets, and the fight against Covid-19. Companies are encouraged to issue disclosures that respond to investor interest in the company’s standing, operationally and financially, describe the company’s Covid-19 response, and discuss how the company’s operations and financial condition may change as efforts to fight Covid-19 progress. The guidance also provides specific considerations for quarterly earnings statements and calls, and forward-looking disclosures.
SEC issues $2 million whistleblower award
On April 3, the SEC announced an approximately $2 million award to a whistleblower in an enforcement action. According to the SEC’s press release, the whistleblower “provided vital information and assistance that substantially contributed to an ongoing investigation” that would otherwise have “been difficult for the agency to obtain absent the tip.” The formal order also states that the whistleblower “expeditiously reported the information” despite implied threats and suffering hardships, and that the law-enforcement interests in this investigation were high.
As of April 3, the SEC has awarded 78 individuals a total of approximately $398 million in whistleblower awards since its first award in 2012.
Indiana securities regulator alerts registrants to regulatory relief
The Indiana Secretary of State, Securities Division issued a compliance alert to notify registrants that the division granted relief from fingerprinting requirements associated with registration applications for investment adviser representatives. The division indicated that it may provisionally approve an application for registration without fingerprints, provided the applicant submits fingerprints before June 30, 2020.
SEC highlights the need for top-quality financial reporting due to Covid-19
On April 3, the SEC Office of the Chief Accountant (OCA) released a statement regarding “the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19.” In the statement, the SEC Chief Accountant states that capital markets cannot function optimally without the free flow of “high quality financial information” that enables informed decision-making from lenders, investors, and other stakeholders. The statement points out that accounting and financial reporting may be challenging due to Covid-19 and that financial institutions may have to make “significant judgments and estimates,” but that the OCA does not intend to oppose “well-reasoned judgments.” Accounting areas that may require these judgments and estimates include (i) “[f]air value and impairment”; (ii) “[l]eases”; (iii) “[d]ebt modifications or restructuring”; (iv) “[h]edging”; (v) “[r]evenue recognition”; (vi) “[g]oing concern”; (vii) “[s]ubsequent events”; and (viii) “[a]doption of new accounting standards.” Regarding auditing, the OCA advises that auditor independence is of paramount importance to financial institutions and notes its willingness to consult on these issues. The statement also emphasizes the OCA’s engagement with the Financial Accounting Standards Board and the Public Company Accounting Oversight Board, as well as with international accounting groups regarding issues created by Covid-19. Finally, the OCA encourages those involved in the financial reporting system to collaborate, and reiterates the OCA’s willingness to answer Covid-19 related questions.
CFTC approves final interpretative guidance on “actual delivery” in virtual currency transactions
On March 24, the CFTC approved final interpretive guidance concerning the term “actual delivery” in the context of retail virtual currency transactions. As previously covered by InfoBytes, the CFTC reaffirmed its belief that virtual currencies are commodities, and thus certain transactions involving these types of currencies are subject to CFTC oversight. In order to demonstrate the “actual delivery” of virtual currency in connection with retail commodity transactions, the final interpretive guidance sets forth two primary factors that market participants must demonstrate:
- A customer has (i) the ability to secure “possession and control of the entire quantity of the commodity, whether it was purchased on margin, by using leverage, or any other financing arrangement”; and (ii) “the ability to use the entire quantity of the commodity freely in commerce (away from any particular execution venue) no later than 28 days from the date of the transaction and at all times thereafter”; and
- “The offeror and counterparty seller (including any of their respective affiliates or other persons acting in concert with the offeror or counterparty seller on a similar basis) do not retain any interest in, legal right, or control over any of the commodity purchased on margin, leverage, or other financing arrangement at the expiration of 28 days from the date of the transaction.”
CFTC Chairman Heath P. Tarbert stated that he anticipates a 90-day period before the CFTC begins initiating enforcement actions related to the final interpretive guidance that may not have been plainly evident in prior guidance, enforcement actions, and case law.
Fed changes supplementary leverage ratio rule to increase credit flow
On April 1, the Federal Reserve (Fed) released an interim final rule, which provides a short-term change to the calculation of the supplementary leverage ratio for holding companies (banks). This change temporarily allows banks to exclude their Treasury securities and Federal Reserve Bank deposits from the computation of the banks’ total assets, thus reducing the amount of capital the banks must maintain. The Fed suggested that the move will reduce the banks’ tier 1 capital requirements by around two percent, allowing them to take on more debt, resulting in an increase in available credit to households and businesses. The Fed stressed that it made this change to allow the banks to increase the flow of credit, and not to increase the banks’ capital distributions. The temporary change is effective immediately and will automatically revert on March 31, 2021. Comments on the rule must be submitted within 45 days of the announcement.
SEC announces $450,000 compliance-related whistleblower award
On March 30, the SEC announced a $450,000 award to a whistleblower in an enforcement action. According to the formal order, the whistleblower—who had compliance-related responsibilities at the company at issue in the enforcement action—suffered “unique hardships” after first attempting to report concerns within the company’s internal compliance structure. The whistleblower then reported the information to the SEC following the required 120-day time waiting period, which ultimately provided assistance to the SEC’s investigation and successful enforcement action. The SEC stated in its press release that this is the third whistleblower award given to an individual with compliance or internal audit responsibilities. As of March 30, the SEC has awarded 77 individuals a total of approximately $396 million in whistleblower awards since its first award in 2012.
SEC chair discusses resources allocations, oversight, and rulemaking
On April 2, SEC Chairman Jay Clayton issued a statement outlining the SEC’s approach to its allocation of resources, oversight, and rulemaking agenda. As previously covered by InfoBytes, the SEC issued guidance last month providing temporary relief and assistance to market participants impacted by the Covid-19 pandemic, including relief from certain notarization requirements and filing deadline extensions. Clayton noted, however, that despite these challenges, the SEC recognized that it is imperative that issuers keep investors equipped with material information, and accordingly has urged public companies to “continue to evaluate their obligations to make materially accurate and complete disclosures in accordance with the federal securities laws.” Among other things, Clayton also reiterated that, while public comments closed recently on several proposed rulemaking actions, the SEC will “not take final action on these items in the coming weeks to allow potential commenters more time to submit comments for consideration if needed.” The SEC does not expect to move forward on any of these proposed actions prior to May 1.
Relatedly, Clayton discussed Regulation Best Interest (Reg BI) and Form CRS, which establish new standards of conduct for broker-dealers and related persons when recommending securities transactions or investment strategies to retail customers. Clayton highlighted the extensive engagement efforts related to the implementation of Reg BI and Form CRS, and encouraged continued engagement with investors and other market participants on these regulatory enhancements. Clayton noted that, in light of these engagement efforts, the June 30 compliance date remains appropriate, and provided a number of resources to assist firms in understanding the new requirements and implementation process.
Indiana securities regulator alerts registrants to regulatory relief
On April 1, the Indiana Secretary of State, Securities Division issued a compliance alert to notify registrants that the division granted relief from fingerprinting requirements associated with registration applications for investment adviser representatives. The division indicated that it may provisionally approve an application for registration without fingerprints, provided the applicant submits fingerprints before June 30, 2020.
Arkansas Securities Department provides relief from regulatory deadlines and guidance on notarization
On April 1, the Arkansas Securities Department issued guidance providing relief from certain regulatory deadlines to licensed money services businesses and mortgage companies. The department is providing a 60-day extension to file financial statements and a 30-day extension to submit Call Reports and the MCR Standard Financial Condition Reports. Further, the guidance provides that licensed entities are authorized to use real-time audio and visual means to witness the signing of a legal document so long as the identity and physical presence of any and all witnesses and signers in Arkansas are validated at the time of execution of the document by real-time audio or visual means.