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November 01, 2021

Month-in-Brief: Securities Law

Alan J. Wilson, Rani Doyle

Securities Regulation

Financial Stability Oversight Committee Issues Report on Climate-Related Risk

By Melissa Sanders, Fox Rothschild LLP

On October 21, 2021, the Financial Stability Oversight Council (FSOC) issued its Report on Climate-Related Financial Risk (the “Report”). The report marked the first time that FSOC has identified climate change as a threat to the financial stability of the United States. The Report contains more than 30 recommendations to its members, who include the SEC, the Federal Reserve Board and the Commodity Futures Trading Commission. The recommendations were broadly divided into four categories, comprised of:

  1. Building capacity and expanding efforts to address climate-related financial risks
  2. Filling climate-related data and methodological gaps
  3. Enhancing public climate-related disclosures
  4. Assessing and mitigating climate-related risks that could threaten the stability of the financial system

Of particular note was the recommendation that members consider whether to issue specific requirements related to greenhouse gas emissions. The report also noted the work being done by FSOC members, including the work being done by SEC staff to develop a proposal that would require certain climate-related disclosures by public issuers.

SEC Modernizes Filing Fee Disclosure and Payment Methods

By Bella Zaslavsky, K&L Gates LLP

On October 13, 2021, the Securities and Exchange Commission (SEC) announced that it adopted amendments to modernize filing fee disclosure and payment methods. Filing fees apply to operating companies and investment companies (funds) that engage in various transactions, such as registered offerings, tender offers and certain merger and acquisition transactions. Companies will now be able to include all required information for filing fee calculation in a structured format, which will be attached as an exhibit to the filing. The amendments also include new payment options through automated clearing house (ACH) and debit and credit card payments, and do away with the less-used options of paper checks and money orders. Finally, the amendments expand the categories of previously paid (but unused) fees that can be used to offset fees owed.

The amendments will generally come into effect on January 31, 2022, except that the addition of options for filing fee payment via ACH and debit and credit cards (and the removal of the option for payment through paper checks and money orders) will not go into effect until May 31, 2022.

SEC Reopens Comment Period for Dodd-Frank Clawback Rules

By Alan J. Wilson, WilmerHale

On October 14, 2021, the Securities and Exchange Commission reopened the comment period on proposed rules requiring the adoption of listing standards for the recovery of erroneously awarded compensation, as mandated under the Dodd-Frank Act. The SEC originally proposed the clawback rules in 2015. Comments on all aspects of the original proposal are invited, in addition to comments on additional questions posed in the reopening release. Notably, the reopening release seeks comment on whether “an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws” should be read more broadly than initially proposed (e.g., whether a “little r” restatement should also trigger a clawback) and whether the proposed “reasonably should have concluded that the issuer’s previously issued financial statements contain a material error” standard for triggering a lookback should be revised. Comments are also invited regarding whether other developments since 2015, including in accounting practices and economic and other effects, merit further consideration.

The public comment period will remain open for 30 days following publication of the reopening release in the Federal Register.

SEC Acting Chief Accountant Highlights Auditor Independence and Issues Reminder to Gatekeepers

By Alan J. Wilson, WilmerHale

On October 26, 2021, SEC Acting Chief Accountant Paul Munter released a statement entitled The Importance of High Quality Independent Audits and Effective Audit Committee Oversight to High Quality Financial Reporting to Investors. The statement noted the upcoming twentieth anniversary of the Sarbanes-Oxley Act of 2002 and reminded gatekeepers (auditors, management and audit committees) to “maintain constant vigilance in the faithful implementation of the requirements of SOX by fulfilling their shared responsibilities to continue to produce high quality financial disclosures that are decision-useful to investors and maintain the public trust in our capital markets.”

Focusing on auditor independence, the statement underscored the importance of maintaining an auditor’s independence in both fact and appearance. Auditors, audit clients and audit committees were urged to pay particular attention to the nature and scope of all services provided by the independent auditor, including audit and permissible non-audit services. Particularly in light of active M&A and other transaction activity that could expand the entities considered an “audit client” or an “affiliate of the audit client” or result in new entities with significant influence over an audit client, the statement stressed the need for vigilance in monitoring non-audit services given their potential to jeopardize an auditor’s independence.

PCAOB Staff Previews 2020 Auditor Inspection Observations

By Thomas W. White, Retired Partner, WilmerHale

The Public Company Accounting Oversight Board has released a Staff Update and Preview of 2020 Inspection Observations that provides an overview of findings from the PCAOB’s 2020 program of inspections of public company auditors. The Staff Update discusses aggregate results of inspections of 153 audit firms and portions of 617 audits that generally had financial years ending during 2019 and the first half of 2020. The Staff Update is aimed at auditors and audit committees and may also “help investors and other stakeholders become more fully informed about the matters we find in our inspections.”

The PCAOB staff’s high-level observations include:

  • It continues to identify a number of audit deficiencies that recur from year to year. Areas of common audit deficiencies in 2020 were internal control over financial reporting, revenue and related accounts, accounting estimates, inventory, critical audit matters and independence. Notably, revenue accounts for the highest number of financial statement–related and internal control deficiencies. The PCAOB continues to identify frequent deficiencies in audits of revenue “[d]espite the focus and attention by audit firms on the new [revenue] accounting standard, as well as the training and/or tools audit firms provided to their auditors.”
  • For the majority of annually inspected audit firms (firms that audit at least 100 US public reporting companies), the PCAOB identified fewer findings in 2020 compared to its 2019 inspections. In other firms, which are inspected every three years, some improvements were noted, but deficiencies continue to remain high.
  • The Staff also observed a number of “good practices” that it believes may be effective in enhancing audit quality. These include incremental audit steps in response to the COVID-19 pandemic, real-time monitoring of in-process audit engagements, increasing supervision of the work performed by specialists, use of practice aids to assist engagement teams in identifying risks, enhancements related to engagement quality reviewers and providing focused industry training and work programs.

The Staff Update provides general observations about audit deficiencies and comparative information for three years, but it does not discuss results for individual firms. Inspection reports for individual firms will be published in the coming months.

Alan J. Wilson

Senior Associate, WilmerHale

Alan J. Wilson is a Senior Associate in WilmerHale’s Transactional Department who routinely counsels public company clients on a variety of matters concerning corporate governance and compliance with federal securities laws, particularly with regards to the intersection between law and accounting.  He also advises public and private companies from a range of industries on navigating transactional and strategic matters, including securities offerings, mergers and acquisitions, joint ventures, and activist shareholder engagement.

Rani Doyle

Executive Director, EY Center for Board Matters

Rani is an executive director in the EY Center for Board Matters.  She has extensive experience working with executive management and boards at public and private companies on a wide range of corporate governance and business matters.