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.
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:
The key components of proposed changes to the prospectus include:
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:
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:
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:
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.
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.
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:
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.
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.
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:
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 firstname.lastname@example.org, 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.
Receive insights from our specialists in a variety of areas and timely information on upcoming events directly to your inbox as they go live in our online Knowledge Center.