Weinberg & Company

Best Practice Newsletter – March 2023

SVB Failure Evokes Call for Fair Value Accounting-

Fingers are pointing in every direction in the aftermath of the collapse of Silicon Valley Bank (SVB). It is also reviving debate over whether certain financial reporting requirements proposed after the global financial crisis of 2008-2009 should have been implemented.

In a CFA Institute blog Sandy Peters, both a CPA and Certified Financial Analyst, argues that the Financial Accounting Standards Board (FASB) should eliminate what she calls the “Hide-Til-Maturity” accounting for financial instruments and replace it with fair value accounting.

In 2010, FASB proposed that accounting for financial instruments, including loans, should use the fair value approach, as opposed to being reflected at amortized cost, or held-to-maturity (HTM).

At the time, Peters says, then FASB chair Bob Herz advocated for the fair value approach because, “He recognized that masking fair value with a mixed measurement model, which allows some financial instruments to be reflected at their historical cost, only hides the impact of market risks on a bank’s financial stability and valuation.”

Facing political pressure, according to Peters, FASB retreated from its proposal and retained the “mixed measurement model” wherein securities can be classified as held-to-maturity based upon “management intent” and “business model/strategy.”

“What that means,” writes Peters, “is that the financial statement carrying value of those financial instruments held-to-maturity is reflected at amortized cost, or what management paid for the asset sometime in the past plus amortization of the discount or premium from the face value. The fair value is only disclosed on the face of the financial statement and in the footnotes. Any unrealized loss is ‘hidden in plain sight.’”

“But management intent and business model do not change the value of financial instruments,” she continued. “The HTM classification only makes it harder for investors and depositors to see.”

Read more: Peters’ analysis of the SVB failure is available at the CFA Institute at: https://blogs.cfainstitute.org/marketintegrity/2023/03/13/the-svb-collapse-fasb-should-eliminate-hide-til-maturity-accounting/

New Cybersecurity Reporting Regs Proposed

Wall Street’s top cop, the SEC, has proposed new rules requiring all Market Entities to implement policies and procedures to address cybersecurity risks. Market Entities include: broker-dealers, the Municipal Securities Rulemaking Board, clearing agencies, major security-based swap participants, national securities associations, national securities exchanges, security-based swap data repositories, security-based swap dealers, and transfer agents.

The proposed new Rule 10 would require Market Entities to:

1.   Establish, maintain and enforce written policies and procedures to address cybersecurity risks.

2.   At least annually be required to review and assess the design and effectiveness of those policies and procedures.

3.   Give the SEC immediate written electronic notice of a significant cybersecurity incident.

4.   Implement controls designed to minimize user-related risks and prevent unauthorized access to information systems.

5.   Oversee service providers that receive, maintain, or process information or are otherwise permitted to access information systems.

6.   Publicly disclose summary descriptions of their cybersecurity risks and the significant cybersecurity incidents they experienced during the current or previous calendar year.

Certain small broker-dealers would be exempt from some of these requirements. The SEC is seeking public comment, which will remain open 60 days after its publication in the Federal Register.

Read more: SEC Fact Sheet

Biden’s 2024 Budget Tax Hike Wish List

The Biden administration has unveiled its FY2024 budget with a wish list that includes proposals for substantial tax hikes aimed at wealthier taxpayers.

Released March 9, the proposed budget is likely to face hurdles in a divided Congress and includes a minimum tax on billionaires, and tax rate increases for Medicare and capital gains.

Excerpts from Biden’s FY2024 tax hikes include:

1.   A near doubling of the capital gains tax rate for long term capital gains (assets held for more than one year) to 39.6% from what is currently at most 20%. The proposed increase would, under Biden’s proposal, apply to investors who make at least $1 million a year.

2.   An increase of the Corporate Rate to 28%.

3.   An increase in the Medicare tax rate to 5% from the current 3.8%. This tax increase is being proposed for those making more than $400,000 per year. That threshold would be based on wages, salary and capital gains.

4.   Those same $400,000 and up wage earners also would be subject to a higher top tax rate of 39.6%, compared to today’s 37% top rate.

5.   Proposals to quadruple the tax on corporate stock buybacks from 1% to 4%.

6.   A proposal called “Minimum Tax on Billionaires” would impose a 25% minimum tax on  those with wealth of more than $100 million.

Read more: https://www.whitehouse.gov/wp-content/uploads/2023/03/budget_fy2024.pdf

Securities Class Action Settlements at 15-Year Highs

Plaintiffs in securities class action lawsuits are cashing in big time, with research showing that the number of class action settlements reached in 2022 reached a 15-year high. The research, conducted by Cornerstone, also found dramatic increases in the total dollar value of settlements and median settlement amounts.

Cornerstone reported that in 2022, the number of securities class action settlements increased to 105, up from 87 in 2021. The total value of those settlements nearly doubled to $3.8 billion in 2022, up from $1.9 billion a year earlier.

The median settlement amount of $13 million increased 46% from last year. Median “simplified tiered damages” also reached a record high, growing to $481 million, which is an increase of 125% from 2021.

“Simplified tiered damages” uses simplifying assumptions to estimate per-share damages and trading behavior. It provides a measure of potential shareholder losses that allows for consistency across a large volume of cases, thus enabling the identification and analysis of potential trends.

Cornerstone credits the large number of settlements and amounts to a corresponding high number of cases filed between 2018 and 2020. The majority of cases filed during those years and settled in 2022 involved substantially larger defendants, which also pushed up settlement amounts. Driving the large settlement amounts were eight mega settlements, which ranged in value from $100 million to $809.5 million.

Read more: Cornerstone Research Press Release

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.