Weinberg & Company

Best Practice Newsletter – April 2023

Supreme Court Ruling Reduces Power of SEC, FTC-

In a unanimous decision, the Supreme Court on April 14 made it easier for individuals and companies to challenge complaints filed against them by the Securities and Exchange Commission (SEC) and Federal Trade Commission (FTC), potentially reducing the power of these two federal regulators.

In a decision written by liberal Justice Elena Kagan, the justices said individuals and companies facing agency investigations can go straight to federal court. The ruling challenges whether in-house agency judges can always impartially adjudicate cases.

The ruling revolved around two separate cases: a Texas accountant who challenged the constitutionality of an SEC administrative law judge (ALJ) to hold enforcement proceedings against her, and another case involving the use of an ALJ by the Federal Trade Commission against an Arizona technology company.

When, as in the enforcement actions against Cochran and Axon, a Commission elects to institute adminis­trative proceedings to address statutory violations, it typically dele­gates the initial adjudication to an Administrative Law Judge (ALJ) with authority to resolve motions, hold a hearing, and then issue a decision.

As prescribed by statute, a party objecting to the Commission proceedings makes its claims first within the Commission itself, and then (if needed) in a federal court of appeals. But the parties here sidestepped that review scheme and brought their claims in district court, seeking to enjoin the administrative proceedings.

The court held that the statutory review schemes set out in the Securities Exchange Act and Federal Trade Commission Act do not displace a district court’s federal-question jurisdiction over claims challenging as uncon­stitutional the structure or existence of the SEC or FTC.

The decision is the latest in a line of rulings that have chipped away at the federal administrative state, reducing agencies’ powers and making them more vulnerable to sweeping constitutional attacks. The challengers in this case argued that the job protections afforded to ALJs violate the Constitution’s separation of powers by insulating the judges from presidential control.

The Biden administration contended that these arguments could only be made after going through commission proceedings and challenging the final decisions in a federal appeals court. However, the challengers argued that they shouldn’t have to endure an expensive process that could take years.

Writing for the court, Justice Kagan said that the challengers would lose their rights if they couldn’t assert them until after the proceedings were over. Kagan relied on a 1994 decision that said federal trial courts can hear immediate challenges in some circumstances. This ruling said federal judges have jurisdiction when a disputed legal issue might not otherwise get “meaningful judicial review,” lies outside the agency’s expertise and is “wholly collateral” to the in-house review system.

To read the Supreme Court’s ruling, please see: 21-86 Axon Enterprise, Inc. v. FTC (04/14/2023) (supremecourt.gov)

New Disclosures for Joint Ventures Adopted

The Financial Accounting Standards Board (FASB) has updated its rules to require businesses to report on the assets they bring into certain joint ventures.

Adopted at its April meeting, the change is aimed at filling gaps in disclosure requirements. Existing U.S. GAAP rules do not state how joint ventures should account for what each party initially contributes to the joint entity. The new disclosures will go into effect on January 1, 2025 and will apply to joint ventures formed on or after that date. The updates will offer more clarity to audit firms and companies that set up joint ventures.

Under the new rules, certain joint ventures will be required to disclose their formation date and their fair value at formation. This involves measuring liabilities and assets at their current value. The proposal will apply to certain joint ventures that result in a stand-alone business and generally include involvement from each party to the joint venture.

Companies also will have to disclose the amount of certain assets and liabilities that will be recognized by the joint venture. Additionally, joint ventures will have to disclose the amount of goodwill or intangible assets recognized by the joint venture, if any.

In making its ruling, the FASB board said that new disclosure requirements would apply only when the joint venture is formed, and not for the lifetime of the entity.

For more information on FASB’s decision, please see: April 5, 2023 Board Meeting Handout (fasb.org)

IPOs Remain Depressed in Q1

The total number of Initial Public Offerings continued to remain low in Q1 2023, with 46 IPOs raising a total of $3.1 billion, a decrease of 72% compared to the same period last year, according to data services provider Audit Analytics.

The 46 deals included 35 traditional IPOs, which raised $2.3 billion and 11 Special Purpose Acquisition Company (SPAC) IPOs which raised a total of $797 million.

In Q1 2022, a total of 85 IPOs went to market, raising $11.3 billion. Though Q1 2022 was higher than this year, it’s a stark contrast to Q1 2021, during which time 407 IPOs raised a total of $134.6 billion. It’s important to note that in 2021, the vast majority of those IPOs were SPACs.

Audit Analytics notes that “The IPO market is likely to continue to remain depressed given the uncertainty around the banking crisis coupled with concerns surrounding higher interest rates and inflation.”

For more data on Q1 2023 IPOs, please see: Q1 2023 IPO Trends: Market Downturn Persists | Q1 2023 IPO Trends: Market Downturn Persists – Audit AnalyticsAudit Analytics

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