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.
Items Impacting Boards of Directors
Impact: Although we miss seeing our clients in person, we believe most board meetings will continue to happen virtually at least until 2021.
The proposed requirements surrounding determining fair value in good faith include:
Previously, the board was not officially allowed to delegate the responsibility of fair value to the advisor or sub-advisor(s), and took ultimate responsibility with respect to fair value. Under the proposed rule, the board would now be allowed to assign the determination of fair value to the fund’s investment advisor, provided that:
If the board assigns the fair determinations to the advisor, the advisor would need to approve and adopt fair value policies and procedures, subject to board oversight under rule 38a-1. In such cases, the proposed rule would also require the advisor to establish and formalize a process for the approval, monitoring and evaluation of each pricing service provider.
The comment period on this proposal is open through July 21, 2020.
Impact: Many of the proposed requirements are currently common practice in the industry, so the proposed guidance simply formalizes what many investment companies are already doing. If adopted, we would not expect to see significant changes for most fund companies.
>> Read more in “SEC Proposes Rule to Modernize Fund Valuation Practices”
Financial Reporting & Disclosure Considerations
Impact: While the overall severity of COVID-19’s impact on the economy is unknown, it is important for funds to be conservative in their risk disclosures to shareholders; auditors must consider the impact a declining economy may have on the financial statements and potential audit risks.
Impact: These amendments are intended to improve transparency and comparability surrounding the information provided to investors for acquisitions and dispositions, and to reduce the complexity of disclosures provided. Not only does this new rule include many updates within the guidance for investment companies, it also rectifies issues with inconsistencies that historically have existed amongst the various rules registrants have to comply with surrounding reporting and disclosure when fund acquisitions or dispositions take place.
No-Action Letter on Treatment of Loans under Paycheck Protection Program
On April 22, 2020, the CFTC issued a no-action letter relating to the treatment of loans received by futures commission merchants (FCM) and introducing brokers (IB) under the Paycheck Protection Program in meeting their net capital requirements. The no-action position allows for FCMs and IBs to add forgivable expense amounts back to their calculations of net capital, so long as the following criteria are met:
In conjunction with this announcement, the NFA released a notice to its members on April 23, 2020, indicating that any FCM or IB in compliance with the terms of the CFTC’s no-action letter outlined above will also be deemed in compliance with applicable NFA rules surrounding net capital computations and requirements under Sections 1 and 5.
Impact: Much like the SEC relief discussed earlier, this is another good example of industry organizations working to recognize the impact COVID-19 may have on constituent members and helping them realize the benefits of various government programs, while remaining compliant with regulatory requirements.
New Board Inspection Report Template
As many are aware, the PCAOB paused on issuing inspection reports for 2018, as they embarked on a project to change their format. Finally, the time has arrived, and with the new format in place the PCAOB has been issuing 2018 reports, along with an excerpt explaining the changes and how to understand the new template.
Impact: As a result of the finalization of the new format, we expect our firm’s final 2018 inspection report to be issued in the near term. Speak with your Cohen & Company engagement team about the status at your next opportunity.
Crypto asset questions for audit committees. In-line with its strategic objectives, the PCAOB monitors the development and implementation of emerging technologies to analyze their implications to audit quality. As a result of a recent increase in the use of crypto assets across issuers, including material crypto asset transactions observed during inspections, the PCAOB identified the need for auditors and audit committees to focus more on identifying and assessing the risks of material misstatement to financial statements related to crypto assets, and on planning and execution of an appropriate audit response. In response, the PCAOB issued a “Spotlight” in May 2020 with information for auditors and audit committees, providing sample questions audit committees may want to ask their auditors. These questions include:
Impact: The PCAOB regularly issues guidance for audit committees to assist in their role of financial reporting oversight. Most times, this guidance is in response to changes in the evolution of today’s business operations environment. See other information for audit committees here.
Contact Lori Novak at firstname.lastname@example.org or Julie Lowry at email@example.com or a member of your service team to discuss these topics further.
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.
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