Investment Industry Wire | October 2020– October 19, 2020 by Julie Lowry

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)

Proposal: Modifications to Shareholder Reporting
In August, the SEC announced proposed rules relating to the modernization and consolidation of shareholder reporting. The proposal would replace the delivery of annual and semi-annual reports with a streamlined annual shareholder report, and would also revamp the composition and relevancy of information included in a fund’s prospectus.

The key components to the proposed annual shareholder report would include:

  • That an alternative snapshot of fund expenses be provided, including costs paid based on a theoretical investment of $10,000, in both a dollar amount and percentage of investment basis;
  • A disclosure, included in the expense table, of total return before costs paid of the theoretical investment;
  • Graphic presentation of the fund’s holdings, along with their impact on fund performance;
  • Disclosure of certain key statistics, including net assets, portfolio turnover, total number of holdings, average credit quality and weighted average maturity, among others;
  • Eliminating the disclosure of “since inception” total returns. Only total returns for one year, five years and 10 years would be included.

The key components of proposed changes to the prospectus include:

  • Replacing the existing fee table in the summary section of the prospectus with a simplified fee summary. For instance, the new fee table would only include a single line item for “ongoing annual fees,” and would eliminate footnotes that only apply with limited exceptions (only ongoing and permanent fees should be represented);
  • Clarifying language and terms used in the current fee table so that they can be more easily understood, e.g., only include expenses greater than $0, to eliminate use of the terms “None” or “N/A” within the table;
  • Promoting disclosure of principal risks rather than daunting non-principal risk disclosures. Principal risks would be those that put more than 10% of the fund’s assets at risk.
  • Listing, in order of importance, specific principal risks, i.e., discuss how certain investments/fund attributes actually put the fund at risk, rather than how the risk could theoretically impact the fund.

In addition to changes in the composition and layout of the prospectus, the proposal also includes changes to what information certain shareholders receive. While new shareholders would continue to receive the entire prospectus, existing shareholders could elect to only receive disclosure of material fund changes.

>> Read “SEC Proposes Engaging Dashboards and Revamp to Shareholder Reports and Disclosures for Retail Investors”

Impact: The SEC’s proposed modifications to the disclosure framework highlight key information they believe is important to retail investors. While all the information previously provided will still be available, the delivery of the slimmed down annual report will allow investors to focus on what has been deemed important.

SEC Adopts Amendments to Modernize Shareholder Proposal Rule
On September 23, 2020, the SEC amended the requirements for submission of shareholder proposals in Exchange Act Rule 14a-8, which governs the process by which shareholders submit proposals for proxy. The final amendments will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022.

In an effort to raise the bar on the requirements to submit a shareholder proposal, the modifications not only change the eligibility criteria for submission of proposals, but they also include resubmission thresholds (a shareholder or its third-party representative may submit only one proposal per meeting). The final amendments provide for a tiered approach based on the value and duration of ownership.

To have a proposal included in a proxy, a shareholder must demonstrate continuous ownership of at least:

  • $2,000 of the company’s securities entitled to vote on the proposal for at least three years (eliminating the 1% test);
  • $15,000 of the company’s securities entitled to vote on the proposal for at least two years; or
  • $25,000 of the company’s securities entitled to vote on the proposal for at least one year.

While the amendments will become effective 60 days after publication in the Federal Register, the final rules also provide for a transition period with respect to the ownership thresholds. This transition period will allow shareholders meeting specified conditions to rely on the previous $2,000/one-year ownership threshold for proposals submitted for an annual or special meeting to be held prior to January 1, 2023.

Impact: The SEC has been very active over the last several months, revamping (or proposing modifications to) rules that have been stale for decades, including Rule 14a-8.  These amendments will improve the proxy process by ensuring there is an appropriate alignment of interests between shareholders who submit a proposal, and the company and other shareholders who bear the costs associated with the inclusion of such proposals in the company’s proxy statement.

Adopted Rule: Redefining the “Accredited Investor
In late August, the SEC adopted amendments to the “accredited investor” definition by adding a variety of criteria to those who would qualify for this status. Prior to the adoption of the new amendments, the test for qualification relied exclusively on either a person’s income or net worth. The SEC's amendments to the definition are intended to more effectively identify those investors with reliable alternative indicators of financial sophistication, such as having sufficient knowledge and expertise to participate in unregistered private offerings.

Some of the more notable inclusions of the expanded definition include:

  • Natural persons may qualify based on certain professional certifications, designations or credentials (such as Series 7 or Series 82);
  • With respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
  • Limited liability companies with $5 million in assets;
  • SEC- and state-registered investment advisors, exempt reporting advisors, and rural business investment companies (RBICs); and,
  • “Family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act.

Similarly, the definition of qualified institutional buyer in Rule 144A was also expanded to include limited liability companies and RBICs, if they own and invest $100 million in securities.

These amendments become effective 60 days after publication in the Federal Register.

Impact: While the original requirements to meet accredited investor status could help ensure financial losses related to investment did not have a significant impact on an individual investor’s net worth, the amendments more closely align with the spirit of the rule in the first place, in not limiting the assessment of an investor’s sophistication solely to monetary thresholds. The amended definition will provide more investors access to privately offered funds, which was previously limited by the more restrictive definition.

Adopted Rule: Limitation on Fund of Funds Investments in Underlying Funds
On October 7, 2020, the SEC adopted a new rule, 12d1-4, to permit a registered investment company or business development company to acquire the securities of another registered investment company in excess of the limits outlined in section 12d1-1 of the Investment Company Act of 1940.

Under the current rule, the Commission must issue an exemptive order on a case by case basis, and the terms of that order vary from fund to fund, depending on the type of acquiring fund. The new rule will create a consistent framework for fund of funds arrangements and most registered fund types (open-end funds, unit investment trusts, closed-end funds (including BDCs), exchange-traded funds and exchange-traded managed funds) will all be able to rely on Rule 12d1-4.

Provisions of the rule include:

  • Limits on Control and Voting: As proposed, the final rule prohibits an acquiring fund and its advisory group from controlling an acquired fund (as control is defined in the 1940 Act) and establishes voting limitations to reduce the amount of influence that an acquiring fund and its advisory group may have over an acquired fund. The limitations on control and voting conditions do not apply to fund of funds arrangements involving only funds within the same group of investment companies.
  • Required Evaluations and Findings: To address concerns that an acquiring fund could exert undue influence over an acquired fund or charge duplicative fees and expenses, the rule will require the acquiring fund to make certain evaluations and findings before investing in an acquired fund. These differ depending upon whether a fund is the acquiring or acquired fund and whether it is a management company, unit investment trust or a separate account funding variable insurance contracts.
  • Required Fund of Funds Investment Agreements: In addition, the rule will require funds that do not share the same investment advisor to enter into a fund of funds investment agreement memorializing the terms of the arrangement. This and the evaluation and finding requirements replace a proposed requirement that would have prohibited an acquiring fund that acquires more than 3% of an acquired fund’s outstanding shares from redeeming more than 3% of the acquired fund’s total outstanding shares in any 30-day period.
  • Limits on Complex Structures: To limit funds’ ability to use fund of funds arrangements to create overly complex structures, Rule 12d1-4 generally will prohibit funds from creating three-tier fund of funds structures, except in certain circumstances, including an exception that will permit an acquired fund to invest up to 10% of its total assets in other funds (including private funds) without restriction (the “10% bucket”). The 10% bucket will provide flexibility for fund of funds arrangements to evolve while permitting certain structures that could benefit investors through greater efficiency.

The new rule will be effective 60 days after publication in the Federal Register. To facilitate a transition period, the compliance date for the amendments to Form N-CEN will be 425 days after publication in the Federal Register. The rescission of Rule 12d1-2 and the Commission’s exemptive orders will be effective one year from the effective date of the rule.

Impact: The new rule provides investment companies with flexibility to allocate and structure investments efficiently, without having to seek exemptive orders from the SEC, as long as the outlined conditions are satisfied. This creates a consistent and efficient rules-based framework for the formation of funds of funds.

Adopted Rule: Amendments to Modernize Rule 15c2-11 of the 1934 Act
On September 16, 2020, the SEC adopted amendments to Rule 15c2-11. The rule aims to provide greater transparency in the over-the-counter market by generally prohibiting broker-dealers from publishing quotations for an issuer’s security when issuer information is not current or publicly available.  However, the new amendments also provide exceptions for certain OTC securities that may be less susceptible to fraud and manipulation.

Prior to the amendments, some of the rule’s previous exceptions permitted broker-dealers to maintain a quoted market for an issuer’s security in perpetuity, in the absence of current and publicly available information about the issuer, and even when the issuer no longer exists. The amended rule enhances disclosure and investor protection in the OTC market.

The amendments are effective 60 days after publication in the Federal Register, with a compliance date nine months after the effective date, except the requirement for an issuer’s financial information for the last two fiscal years to be available, in which case the compliance date is two years after the effective date.

Impact: Another rule that was long overdue for modernization, the modification is thought to enhance investor protection by limiting a broker-dealer’s ability to publish quotations for a security when current issuer information is not publicly available, subject to certain exceptions.

American Institute of Certified Public Accountants (AICPA)

New Auditing Standard: Statement on Auditing Standards No. 143, Auditing Accounting Estimates and Related Disclosures
The AICPA issued the new standard to supersede SAS No. 122 Section 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, and amend various other AU-C sections in AICPA Professional Standards. This new standard is effective for audits of financial statements for periods ending on or after December 15, 2023.

Following are some of the fundamental enhancements of SAS No. 143.

  • Explains the nature of accounting estimates and the concept of estimation uncertainty;
  • Provides information about scalability of the SAS for all types of accounting estimates, from those that are relatively simple to complex;
  • Requires a separate assessment of inherent risk and control risk at the assertion level;
  • Includes an enhanced risk assessment, intended to address the challenges auditors face when auditing accounting estimates, by providing risk assessment requirements that are more specific to estimates, and addresses the increasingly complex business environment and complexity in financial reporting frameworks;
  • Emphasizes that the auditor’s further audit procedures need to be responsive to the reasons for the assessed risks of material misstatement at the relevant assertion level;
  • Refers to relevant requirements in other AU-C sections and provides related guidance to emphasize the importance of the auditor’s decisions about controls relating to accounting estimates;
  • Addresses the exercise of professional skepticism when auditing accounting estimates;
  • Requires the auditor to evaluate, based on the audit procedures performed and the audit evidence obtained, whether the accounting estimates and related disclosures are reasonable in the context of the applicable financial reporting framework.

Impact: These enhancements coincide with the effectiveness of PCAOB auditing standard 2501.  However, we do not foresee a material change in the testing we will perform under our firm’s audit plans.

Proposal: Understanding the Entity and Its Environment and Assessing Risk of Material Misstatements
In an effort to further converge U.S. auditing standards with those of our international counterparts, the AICPA issued a proposed statement on auditing standard (SAS) based largely on International Standard on Auditing 315. Comments on this proposal are due November 25, 2020.

The objectives of the proposed SAS include:

  • Enhancing the requirements and guidance on identifying and assessing the risk of material misstatements, in particular, relating to the auditor’s effort to obtain the necessary understanding;
  • Modernizing the standard in relation to IT considerations, including addressing risks arising from entity’s use of IT;
  • Revising the definition of determining risks of material misstatements, including significant risks.

Impact: If adopted, this proposed SAS is intended to provide the necessary updates in the auditing standards due to the evolution of how an entity records and summarizes financial information, as well as to enhance the auditor’s professional skepticism. 

Financial Accounting Standards Board (FASB)

Proposal: Conceptual Framework Accounting Standards Update: Elements
On July 16, 2020, the FASB issued for public comment a new chapter of the Conceptual Framework for Financial Reporting. The new chapter focuses on broad elements, such as assets, liabilities, revenues, and expenses, and their characteristics. The new chapter would replace Concept Statement 6, providing clarity to the rights or obligations that give rise to an asset and/or liability, eliminating confusing information in the original concepts, and adding clear distinction between liabilities and equity and between revenues, gains, expenses and losses. Comments on the proposal are due November 17, 2020.

Impact: The overall objective of the conceptual framework project is to construct an improved foundation for developing future accounting standards. This proposal is just one step towards that goal to improve the understandability and comparability of information provide to investors.

Other Miscellaneous Regulators

Modifications to Volcker Rule
The Volcker Rule, imposed under the 2010 Dodd-Frank Act, aimed to protect bank customers by preventing banks from investing in or sponsoring certain types of funds, such as hedge funds and venture capital funds (the “covered fund provisions”). Those in support of the Volcker Rule felt that these investments contributed to the 2008 financial crisis.

In an effort to free up a substantial amount of capital and stimulate economic activity, the Federal Deposit Insurance Corporation, Federal Reserve, Office of the Comptroller of the Currency and other regulators finalized an overhaul to this rule, easing the restrictions related to covered fund provisions, and allowing lenders to reduce margin requirements on derivative trades. 
The amendments permit banking entities to invest in or sponsor:

  • Credit funds whose assets consist solely of loans and debt instruments, cash equivalents and other assets related to acquiring, holding, servicing, disposing, or selling loans and debt instruments, including interest rate or foreign exchange derivatives that reduce the risks of the permitted assets. Proprietary trading is prohibited as if the fund were a banking entity, and the fund must otherwise comply with applicable banking law;
  • Venture capital funds, as defined under the Investment Advisers Act;
  • Family wealth management vehicles for "family customers," as long as no more than 0.5% is owned by third parties; and
  • Customer facilitation vehicles by a banking entity upon a customer request to provide the customer exposure to a transaction, investment strategy or other service of the banking entity.

The amendments became effective October 1, 2020

Impact: The modifications to the Volcker Rule will enable banking organizations to expand the services offered to their customers, potentially adding significant capital to the markets and reduce the compliance burdens.

Contact Lori Novak at,  Julie Lowry at 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.