Investment Industry Wire | April 2021– April 29, 2021 by Lori Novak

The pace and intricacies of regulatory change in the investment industry are, at times, nothing short of overwhelming. Yet, organizations in this space need to have a clear understanding of evolving regulations, their timing and overall impact.

To help you stay up to date, below is Cohen & Company’s quarterly recap of the latest developments at a variety of regulatory agencies likely to impact our clients.


Securities & Exchange Commission (SEC)

SEC Withdraws Certain COVID-19 Reliefs Granted
On April 30, 2021, the temporary relief provided in March 2020 allowing short-term funding to registered open-end management investment companies, other than money market funds and insurance company separate accounts registered as unit investment trusts, will expire as the Staff Letters Related to COVID-19 Response are being withdrawn.

SEC Solicits Comments on 17a-7
SEC Rule 17a-7 allows for securities transactions between affiliated entities (cross-trades), provided the transactions meet certain criteria. Two of those criteria state that the trade must involve a security for which market quotations are readily available, and the trade must be effected at the independent current market price of the security.

As the SEC has recently stated, possible revisions to Rule 17a-7 is on the rulemaking docket. The genesis of this project stems from the recently SEC-adopted Valuation Rule. Within the rule is a new definition of the term “readily available market quotations.” Since the SEC has historically taken the position that the phrase “for which market quotations are readily available” has the same meaning under Rule 17a-7 and under the valuation provisions of the Act, the way in which this term is now defined under the new Valuation Rule would preclude certain fixed income securities from meeting the definition and, thus, being cross-traded under the limitations of Rule 17a-7 as currently written.

As the staff evaluates which revisions to incorporate in Rule 17a-7 and other staff letters relied upon by industry participants engaging in cross-trading, they are asking for feedback on a variety of considerations from industry constituents.

Impact: It seems the SEC is motivated to revise current guidelines to minimize conforming hassles of advisers and funds. While we would not expect a complete overhaul of the protections embedded in the current Rule 17a-7, cross-trading entities should use this opportunity to submit feedback so any amendments can be as meaningful and comprehensive as possible.

New Dear CFO Letters and Updates
The SEC’s Division of Investment Management continues the process of updating, eliminating or supplementing previously issued Dear CFO Letters for modifications due to market or regulatory changes. These letters originally were issued as interpretive guidance by the Chief Accountant’s Office within the SEC Division of Investment Management to express views related to industry specific accounting and disclosure matters. With the round issued on March 30, 2021, a number of existing Dear CFO Letters were modified or withdrawn, while one new letter was issued. 

Newly issued Dear CFO letter 

  • 2021-01 Insurance Products Transitioning to SAP from U.S. GAAP per Provision or Request. In this new Dear CFO letter, an insurer may be able to use financial statements prepared under Statutory Accounting Principles (SAP) in their filings on Forms N-3, N-4, N-6 or S-1, instead of U.S. GAAP financial statements. 

Amended or modified Dear CFO Letters

  • 1995-11 Pro Forma Fee Tables and Capitalization Tables. In May 2020, rules around financial reporting of acquisition and disposition of businesses, including investment companies, were amended and new Regulation S-X Rule 6-11 was adopted, removing the requirement to provide pro forma financial statements in connection with fund acquisitions. Accordingly, the SEC is modifying historical guidance around proforma information and providing additional views regarding pro forma fee tables and capitalization tables to be included in a registration statement where multiple potential outcomes may exist.
  • 1997-01 Foreign Pricing Considerations. Explicit guidance around foreign pricing considerations when determining fair value of certain investments is provided in Financial Accounting Standards Board Accounting Standards Codification Topic 820 Fair Value Measurements. This position is being modified to refer to this guidance. In addition, with the recission of ASRs 113 and 118 in their entirety upon the compliance date of Rule 2a-5, additional modification was necessary and is effective as of September 8, 2022, the compliance date for Rule 2a-5.
  • 1997-06 Closed-End Fund Expense Ratios—Dividend Payments. Originally modified in November 2019, this position around the presentation of stock dividend payments to preferred stockholders was again modified to provide additional clarity on the presentation of these payments based on the liability or equity accounting treatment of the preferred stock. 
  • 2001-06 Filings Pursuant to Rule 488 of the Securities Act of 1933. With the adoption of new Regulation S-X 6-11 around reporting of acquisition and disposition of businesses, this previously expressed view on pro forma financial statements and filings pursuant to Rule 488 under the Securities Act of 1933 required modification.
  • 2020-03 Combined Financial Statements for Compliance with Advisers Act Rule 206(4)-2. Recently, this position was issued discussing when an adviser can provide combined audited financial statements to comply with Rule 206(4)-2(b)(4) under the Investment Advisers Act of 1940. The update modifies the types of factors that should be considered in this assessment.

Rescission of Dear CFO letters

  • 1994-02 Valuation of Certain Portfolio Investments. In December 2020, the SEC adopted Rule 2a-5 under the Investment Company Act regarding good faith determinations of fair value, which explicitly withdrew Accounting Series Releases (ASR) 113 and 118. These ASRs previously provided guidance around the valuation of certain portfolio investments. This historic position added views around ASRs 113 and 118, and therefore is being withdrawn upon Rule 2a-5’s effective date, September 8, 2022.
  • 1997-03 Designation of Segregated Assets. The SEC recently adopted Rule 18f-4, designed to provide comprehensive regulation and oversight over the use of derivatives and certain other transactions by funds. This position provided views on internal accounting and control issues related to assets segregation rules within Release 10666. Release 10666 is being withdrawn in connection with Rule 18f-4, and, therefore, this position is no longer necessary upon the August 19, 2022, effectiveness of Rule 18f-4. 
  • 1998-07 Financial Data Schedules. The views discussed in this item are being withdrawn as they related to certain financial data schedules that were previously required from registrants who filed Forms N-4 and S-6. The financial data schedules have been removed from the EDGAR filer manual, and, accordingly, registrants no longer file such schedules.

While not authoritative guidance, Dear CFO Letter guidance should be considered when addressing certain accounting, disclosure and auditing matters.

>> Read the industry comment letter from the SEC Division of Investment Management

Impact: The SEC Division of Investment Management continues to provide clarity around their expectations. The additional guidance in Dear CFO Letters was historically thought of as very useful, and the revival of this practice is welcomed to assist in navigating the complexities within the regulatory requirements.

SEC Withdraws and Modifies Previously Issued Guidance on Use of Derivatives
In March 2021, the SEC’s Division of Investment Management withdrew or modified numerous previously issued staff position letters directed at the use of derivatives.  

With the adoption of Rule 18f-4 in November 2020, which provides funds and business development companies requirements for entering into and monitoring the use of derivatives and other transactions, certain inconsistencies existed between the rule and other guidance provided over the years relating to Sections 12(a) (short sales) and 18 (300% asset coverage rule) of the Investment Company Act. 

Effective August 19, 2022, this information update provides a list of numerous letters withdrawn or modified in an effort to continue to clean up and provide consistency in the existing guidance. 

>> Read “SEC Information Update”

Impact: The SEC continues its efforts to identify and revise their previously issued positions set forth through various historical position letters that result in inconsistencies with newly issued rules. This continued effort is key to orderly adoption of the new rules.

Public Company Accounting Oversight Board (PCAOB)

2020 Conversations with Audit Committee Chairs
Each year, in conjunction with the annual inspection of PCAOB registered firms, the PCAOB inspection teams hold conversations with the audit committee chairs of the issuers selected for inspection. As output from their most recent inspection process, the PCAOB has issued a summary of key audit considerations and other important information received during these discussions.

In addition to the effects of the COVID-19 pandemic on the audit, the PCAOB discussed three core topics during their conversations:

  • The auditor and communications with the audit committee,
  • New auditing and accounting standards, and
  • Emerging technologies.

>> Read “2020 Conversations with Audit Committee Chairs

Impact: Although the communication from the PCAOB doesn’t necessarily represent its views, it is an example of one way the agency is providing transparency into its annual review process.
 

Contact Lori Novak at lnovak@cohencpa.com,  Julie Lowry at jlowry@cohencpa.com or a member of your service team to discuss these topics further.


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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.