August 2013

Costs of PCAOB proposal greatly outweigh benefitsThe PCAOB’s recently proposed auditing standards aim to “provide investors and other financial statement users with potentially valuable information that investors have expressed interest in receiving but have not had access to in the past” by changing the standard auditor’s report and increasing the auditor’s responsibilities.  Sounds like a lofty goal, except that the information that they are proposing to require auditors to provide is either (i) self-evident; (ii) an infringement on the judgment of the issuer’s audit committee; or (iii) just plain not helpful.  What the proposed auditing standards do accomplish, however, is to add more costs to being a public company just like their last proposal on mandatory auditor rotation.

Critical Audit MattersUnder the proposed auditing standards, an auditor will be required to include a discussion in its auditor’s report about the issuer’s “critical audit matters.”  Difficult, subjective, or complex judgments, items that posed the most difficulty in obtaining sufficient evidence, and items that posed the most difficulty in forming the opinion on the financial statements are deemed to be “critical audit matters.”  While this requirement may seem straightforward at first, the reality is that this “new” information should be self-evident by anyone who knows how to read a financial statement.  Revenue recognition, estimates for allowances, pension assumptions, etc. are typically deemed to be “critical audit matters” by an auditor when planning audit procedures.  These critical accounting policies are already discussed in issuers’ MD&A and in their financial statements.  Further, any investor who actually is looking at the fundamentals of an issuer’s business and historical results should already be highly focused on estimates that, if wrong, could materially impact the financial statements.  Auditors will end up being overly inclusive on what is deemed “critical” for fear of having Continue Reading PCAOB proposal piling on more costs for public companies (again)

SEC reminds you to have a disaster recovery planAlmost 10 months since Superstorm Sandy caused widespread destruction to the northeastern U.S., an area not known for frequent hurricane activity, the people and businesses affected have still not fully recovered. As we now reenter the peak of hurricane season, businesses along the eastern seaboard are probably taking a closer look now than in years past at their disaster preparedness in light of last year’s events. The impact of Hurricane Sandy was certainly not limited to the U.S. In reality, there were global implications as, for example, U.S. equity and options markets were closed for two full trading days following the storm. As a result, the SEC, FINRA and the CFTC undertook a joint review of their individual business continuity and disaster recovery planning. Last week, on August 16, these three regulatory agencies issued a joint release outlining some lessons learned and best practices noted in their investigations and review.

The release focused on a number of specific areas including:

  • Widespread disruption considerations;
  • Alternative locations considerations;
  • Vendor relationships;
  • Telecommunications services and technology considerations;
  • Communication plans;
  • Regulatory and compliance consideration; and
  • Review and testing.

The primary motif in the release was that Continue Reading Hurricanes, flash freezes and other disasters – plan and disclose accordingly or you may be hearing from the SEC

Bitcoins regulated by the SEC?Things are quickly getting real in the virtual currency world. Virtual currency providers have endured a series of recent shutdowns, prosecutions, restrictions, court decisions and investigations ranging from a ban on Bitcoin use by the Thai government to an investigation by the New York Department of Financial Services which in a memorandum called  the virtual currency space “a virtual Wild West for narcotrafficers and other criminals.” The U.S. Senate Committee on Homeland Security and Governmental Affairs announced that it has initiated an inquiry into Bitcoin and other virtual currencies and has requested a number of regulatory agencies to provide information on their role in preventing criminal activity in the digital currency space. Regulators seized the United States assets of Mount Gox, the largest global entity involved in exchanging Bitcoins for actual currency, and the SEC recently issued an Alert on some of the dangers of virtual currencies. And now, a federal court has ruled that Bitcoins are securities.

Bitcoin is the major player in the virtual currency industry. Bitcoin’s currency is a true virtual currency which is not sponsored or managed by any country or backed by any asset, and it is not regulated by any central bank or other agency. Bitcoins exist through an open-source software program. Users can buy Bitcoins through exchanges that convert real money into the virtual currency. Users of Bitcoins can keep their identities confidential and can participate in financial transactions on what appears to be a totally secret basis. The value of a Bitcoin is determined by a software algorithm which apparently monitors and controls the available supply of Bitcoins.

A recent federal court decision centered on Bitcoins will have interesting and far-reaching ramifications for virtual currencies and even has some important securities law implications. Trendon Shavers is one of the most visible and prominent players in the virtual currency industry and is heavily involved in Bitcoin matters. As part of his Bitcoin activities, Mr. Shavers formed First Pirate Savings & Trust, which he characterized as a “virtual hedge fund” based entirely on Bitcoins. He wisely Continue Reading Bitcoins as securities?: Tough times for virtual currencies in the real world

Investment advisers vs broker-dealersWhen managing investments and strategies for personal financial goals, retail investors often seek guidance from their investment advisers, and on an increasing basis, from their broker-dealers.  Broker-dealers and investment advisers are regulated extensively, but the regulatory requirements differ.  Broker-dealers and investment advisers are also subject to different standards under federal law when providing investment advice about securities.

The Investment Advisers Act of 1940 regulates specified financial professions, including financial planners, money managers, and investment consultants.  Under the Advisers Act, an investment adviser is any person who, for compensation, is engaged in a business of providing advice to others or issuing reports or analyses regarding securities.  With regard to the required standard of care applied to investment advisers when providing advice to their clients, applicable case law requires a fiduciary standard which, essentially, requires that the advisor put the client’s interests first, ahead of his or her own interest.

The Securities Exchange Act of 1934 and its implementing rules comprise the most central regulatory apparatus for broker-dealers. The Exchange Act defines a broker as a “person engaged in the business of effecting transactions in securities for the account of others,” while a dealer is a “person engaged in the business of buying and selling securities for his own account.” In comparison to the fiduciary obligation of an investment advisor, broker-dealers currently have a less stringent “suitability standard” that requires that investment products they sell fit an investor’s financial needs and risk profile.

Under the Investment Advisers Act, registered broker-dealers are excluded from its terms so long as Continue Reading Uniform fiduciary standard for broker-dealers and investment advisers? Proceed with caution!

Avoid 506 Offering TrapsAs we previously blogged about, the SEC finally adopted final rules to remove the ban on general solicitation and advertising in Rule 506 offerings.  The removal of the ban is a huge change in the way private offerings may be conducted and welcome relief to the thousands of issuers each year who have tapped out their “friends and family,” but yet are too small to attract private equity funds.  With these new changes, however, bring challenges in making sure you conduct a “new” Rule 506 offering (a/k/a Rule 506(c) offering) correctly.

So, with the caveat that best practices are still being developed for Rule 506(c) offerings and issuers and attorneys are still parsing through the new rules, here are five potential pitfalls to avoid:

1.         Being too lenient as to reasonable steps.  Beginning in mid-September, Rule 506(c) offerings will allow general solicitation and advertising as long as you sell securities only to accredited investors and take reasonable steps to verify that the purchasers are accredited.  Issuers are faced with the prospect of defining for themselves what “reasonable steps” are.  That is good and bad.  What issuers can’t do is simply take the easy way out – issuers bear the burden of proving that its offering qualifies for a registration exemption.  The final rules release from the SEC gives a lot of suggestions about what reasonable steps could entail, but each case is fact and circumstance based.  You should also note that the traditional method of self-certification won’t cut it for purposes of Rule 506(c).  Fortunately, the SEC also provided four specific “safe harbors” that are each deemed to be reasonable steps: Continue Reading Avoiding five potential traps in “new” Rule 506 offerings