Weinberg & Company

Simply Stated Newsletter – June 2019


Quarterly Reporting Will be Focus of SEC Roundtable

The SEC announced that it will hold a roundtable this summer to discuss short-termism and the role of quarterly disclosures.

Last December, the Commission published a request for comment soliciting input on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies. The request for comment highlighted questions that have been raised regarding the adequacy and appropriateness of mandated quarterly reporting and the prevalence of optional quarterly guidance. The request also asked for comments on whether and how the reporting system may be causing companies to disproportionally focus their time and resources on short-term results.

The SEC staff is currently developing an agenda and will soon set the date for the roundtable that will host investors, issuers, and other market participants. SEC Chairman Jay Clayton has asked the staff to consider the topics outlined below.

  • The role, if any, that short-termism plays in the declining number of public companies. In particular, examining how the pressure on public companies to take a short-term focus in our markets may discourage private companies from going public. This could provide valuable insight into how to make public markets more attractive and increase investment options for Main Street investors.
  • The SEC’s ability to reduce burdens for companies while facilitating better disclosure for long-term Main Street investors. For example, Clayton said he is interested in exploring whether the information typically included by companies in earnings releases could be allowed to satisfy certain quarterly reporting obligations and whether there are ways that quarterly disclosures could be streamlined. This is particularly the case in the first fiscal quarter when the quarterly report often comes closely on the heels of the annual report.
  • The potential for certain categories of reporting companies, such as smaller reporting companies, to be given flexibility to determine the frequency of their periodic reporting.
  • Market practices that could be oriented to encourage longer-term thinking and investment at public companies. For example, it would be informative to explore the extent to which certain activist practices, such as “empty voting” (e.g., acquiring voting rights over shares but having little or no economic interest in the shares), are factors that drive short-term focus.

Members of Congress Push to Delay CECL

The Financial Accounting Standards Board (FASB) issued its Current Expected Credit Loss (CECL) standard on June 16, 2016. Implementation begins this December. The new standard affects a broad part of the business sector that engages in lending, big and small.

CECL replaces the current impairment model which is based on incurred losses, and where investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms.

Under CECL, a lender will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of a loan.

Lenders complain CECL will require them to perform life-of-loan loss forecasting as soon as the provider says yes to a contract. It also will require them to calculate expected credit losses using supportable forward-looking macroeconomic and financial forecasts and report the losses on a quarterly or monthly basis. They contend that many lenders lack the macroeconomic and financial forecasts, historical macro data and tools required to simulate the range of credit loss scenarios required by CECL.

In a late-hour development, it appears that lenders have allies in both Congressional chambers. Bipartisan legislation, co-sponsored by ten House members, has been introduced that would delay CECL implementation until a quantitative impact study can be completed. Similar legislative action is in play in the Senate.

“The FASB is moving forward with an accounting standard affecting generally every financial institution in the country and the customers they serve, without a proper study of its broader economic impact. To me, this is yet another example of an unaccountable bureaucracy not taking the appropriate steps to ensure that it is helping instead of hurting folks,” said North Carolina Representative Ten Budd, a co-sponsor of the House bill.


U.S.-Listed Chinese Companies in Crosshairs… Again

Four U.S. Senators have introduced a bipartisan supported bill that would increase oversight of foreign companies listed on U.S. exchanges. Under penalty of being delisted, it would require foreign companies to comply with U.S. financial reporting rules. Although the bill encompasses all foreign companies, it is clear that the target is China-based companies that are listed on U.S. exchanges.

Senators Marco Rubio (R-FL), Bob Menendez (D-NJ), Tom Cotton (R-AR) and Kirsten Gillibrand (D-NY) introduced The Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges Act — the EQUITABLE Act for short.

According to a joint statement last December by the SEC and PCAOB, U.S. regulators face significant challenges in conducting oversight for the audits and financial reporting of Chinese companies listed on American stock exchanges.

Chinese law requires that books and records relating to company transactions and events occurring within China be kept and maintained in China, and it restricts the auditor’s documentation of work performed in the country from being transferred out of China.

Although a 2013 agreement allowed U.S. regulators to request audit working papers in China, there remains difficulty is gaining access. China’s state security laws are invoked at times to limit U.S. regulators’ ability to oversee the financial reporting of U.S.-listed, China-based companies. In particular, Chinese laws governing the protection of state secrets and national security have been invoked to limit foreign access to China-based business books, records and audit work papers.

The EQUITABLE Act would delist from American exchanges any foreign companies that don’t comply with U.S. accounting and oversight regulations, subject to a grandfather provision to avoid sudden losses to existing shareholders. Non-compliant companies would be subject to a robust disclosure regime in order to inform investors of their risk and to price this uncertainty into the market.

According to the US-China Economic and Security Review Commission, there are 156 Chinese companies, including 11 state-owned enterprises that are listed on America’s three largest exchanges with a combined market capitalization of $1.2 trillion.


SEC Adopts New Fiduciary Rule: “Regulation Best Interest”

The SEC voted to adopt a package of rulemakings and interpretations to clarify and elevate the standards of conduct for both broker-dealers and investment advisers.

Broker-dealers have been required to follow an SEC-mandated doctrine of customer fairness; they have to sell investments that suit their clients’ economic and investment profiles. However, brokers may recommend investments that bring them the highest commission and are not specifically required to subordinate their self-interest.

In contrast, investment advisors were deemed “fiduciary” by a 1963 Supreme Court decision — although the word fiduciary was not specifically used in the statute creating the regulatory structure. As fiduciaries, investment advisors must put their clients’ interest above their own.

In April 2016 the Labor Department stepped in and imposed its version of a uniform fiduciary rule. “It was a massive overreach by the Labor Department, and it subjected a new class of Registered Investment Advisors (RIAs) to a heightened fiduciary standard with respect to clients with which these RIAs may have had only minimal interaction, wrote former SEC Chair Harvey L. Pitt in a recent Wall Street Journal opinion piece. “It also threatened to deprive middle-class clients of any access to meaningful investment advice, given the cumbersome and costly requirements of the proposed rule,” he added. In March of 2018 the Fifth U.S. Circuit Court of Appeals ruled that the Labor Department exceeded its jurisdictional limits and struck down Labor Department’s fiduciary rule.

Under Regulation Best Interest, broker-dealers will now be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy. It will enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.

Under the new rules, both broker-dealers and investment advisers will be required to deliver a relationship summary to retail investors at the beginning of their relationship. Firms will summarize information about services, fees and costs, conflicts of interest, legal standard of conduct, and whether or not the firm and its financial professionals have disciplinary history.


Retirement Overhaul Legislation Leaps Forward

The U.S. House of Representatives overwhelmingly passed (417-3) the Setting Every Community Up for Retirement Enhancement Act – or Secure Act for short.

The Senate seems equally interested in revamping the retirement system and plans to quickly take up the legislation, and the White House has signaled its support as well.

There will be amendments as it makes its way through the Senate, but for now the House bill represents the largest change to the retirement system since 2006. Below are highlights from the House passed bill:

  • It repeals the age cap for contributing to a traditional IRA (currently 70 ½).
  • Changes the age to start required taxable withdrawals from 401(k)s and IRAs from 70 ½ to 72 years old.
  • Requires employers to provide an estimate on 401(k) statements so employees would know how much monthly income their balance would support.
  • Requires 401(k)-type plans to offer participation of long-tenured part-time employees working more than 500 hours a year.
  • New parents could take penalty-free distributions of up to $5,000 from their plans within a year of the birth or adoption of a child to cover expenses.
  • Allows the withdrawal of up to $10,000 from a 529 education-savings plan for paying some student loans.
  • Retirement savings could be converted into a steady lifetime income through buying an annuity in a 401(k)-style retirement plan. Employers would choose whether or what type of such plans could be offered to employees.
  • Private sector employers without a worker retirement-savings plan would be allowed to band together to offer a 401(k)-type plan.
  • To help offset the cost of this legislation, beneficiaries of inherited IRAs would no longer be able to liquidate the balance over their lifetime and stretch out tax payments. They would have to withdraw the money within 10 years of the IRA owner’s death and pay any taxes due, though there are exemptions for surviving spouses and minor children.


CPA Charles J. Reichert, writing a Tax Matters column for the Journal of Accountancy, relates the case of a couple that used their Jersey City, New Jersey address when they filed their 2014 federal income tax return on October 15, 2015.

The couple subsequently moved to Rutherford, New Jersey. When they submitted IRS Form 2848 (Power of Attorney) in November 2015 they used their new Rutherford, New Jersey address on the form. They also used their new address in April 2016 when they submitted Form 4868 to extend the filing date for their 2015 income tax return.

However on October 13, 2016, prior to filing their 2015 tax return, the IRS sent the couple by certified mail, a Notice of Deficiency to their old Jersey City address, but it was returned by the post office to the IRS as undelivered.

On January 17, 2017 (more than 90 days after October 13, 2016) the couple became aware of the Notice of Deficiency and filed a petition to the Tax Court.

Reichert explains: For the Tax Court to have jurisdiction to hear a taxpayer’s case, a taxpayer must petition the court for relief of a valid deficiency notice within 90 days of the date the notice was mailed to the taxpayer.

A valid deficiency notice must be sent to the taxpayer’s last known address. The IRS maintains that the last known address is the address that appears on the taxpayer’s most recently filed and properly processed federal tax return, unless the IRS has been given clear and concise notification of a different address.

Rev. Proc. 2010-16 defines which federal forms are a “return” for this purpose and defines “clear and concise notification.” Clear and concise notification can be oral, written, or electronic.

Written notification includes completing and sending IRS Form 8822, Change of Address, to the IRS or sending the IRS a signed written statement with the required information. Taxpayers may also contact the IRS in person or by phone to effect a change of address.

The Tax Court held that the taxpayers had not provided the IRS with clear and concise notification of their address change; therefore the deficiency notice sent to the taxpayers’ old address was valid and the taxpayers’ petition for relief was not timely.


“It’s nice to have a lot of money, but you know, you don’t want to keep it around forever. I prefer buying things. Otherwise, it’s a little like saving sex for your old age.”
Warren Buffett

“Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the models. Beware of geeks bearing formulas. ”
Warren Buffett

An Audited Legacy of Quality

It’s become a lot easier to choose the best audit firm. That’s because the Public Accounting Oversight Board (PCAOB) conducts periodic inspections of all audit firms and publishes its reports online. For all to see.

Yes, we get audited too.

Weinberg & Company is consistently at the very top when it comes to the quality of our work– just check our legacy of stellar inspection reports.

We thought we were building a leading, international accounting firm by providing Big 4 expertise, delivered with personal service.

Turns out we were also building “An Audited Legacy of Quality.”

Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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