Weinberg & Company

BEST PRACTICE February 2022 Newsletter

By February 23, 2022 No Comments

Private Funds May Face New Rules:

The $18 trillion private equity market may soon face new requirements relating to how funds are audited, how books and records are maintained, and how fund advisers will be required to report adviser-led secondary transactions.

In an effort to increase regulation of private fund advisers, which include private equity and hedge funds, the SEC is proposing new rules and amendments to the Advisers Act of 1940 which also would require private fund advisers to “provide investors with quarterly statements detailing certain information regarding fund fees, expenses and performance,” the SEC said in its press release.

The proposed changes, which were detailed in a 341-page report, would require all registered advisers, including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing.

If adopted, the new rules would prohibit private fund advisers from several activities, including:

  • Seeking reimbursement, indemnification, exculpation, or limitation of liability for certain activity.
  • Charging certain fees and expenses to a private fund or its portfolio investments, such as fees for underperformed services and fees associated with an examination or investigation of the adviser.
  • Reducing the amount of an adviser clawback by the amount of certain taxes.
  • Charging fees and expenses related to a portfolio investment on a non-pro rata basis.
  • Borrowing or receiving an extension of credit from a private fund client.

The SEC is accepting comments on the proposed rule for either 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the release in the Federal Register, whichever period is longer.

CFOs Working “Blind” on ESG

As global CFOs attempt to comply with financial and regulatory reporting standards surrounding Environmental, Social and Governance (ESG), a new report shows that fewer than half of the largest companies have been able to identify the appropriate parameters for disclosure.

“Many companies are still managing blind,” said consulting firm Accenture, following a report which surveyed 640 CFOs and other financial professionals worldwide.

“Leaders increasingly understand the need to effectively measure the impact of ESG on their business, but many struggle to take the appropriate action,” said the report.

At issue are 15 competing frameworks for ESG that vary in both scope and reporting detail, leaving CFOs in a quandary as to which one to adopt.

Accenture’s survey found that nearly 49 percent of respondents reported an inability to determine the best metrics for ESG performance.

The survey also revealed that:

  • While the majority (78%) of finance leaders are seeking to understand the financial risk to their business that sustainability represents, only 47% have defined key metrics and data sources for their ESG reporting.
  • Another 44% of respondents cited an “inability to define/prioritize material ESG issues for disclosure” as one of the challenges for measuring and reporting ESG performance. This inability comes at a time when there is growing pressure from regulators, investors, and lawmakers in their various countries to incorporate ESG into a company’s financial reporting.
  • A mere 26% of finance professionals reported having clear and reliable data to monitor their sustainability goals.
  • 54% said that either insufficient skills or talent within their companies had impaired ESG measuring and reporting.
  • Just 31% of companies claimed to have fully embedded ESG data and measurement in their core operational and management information systems.

In the U.S., SEC Chair Gary Gensler has ordered staff to propose its own rules for U.S. companies sometime this year. It’s anticipated that SEC rules will parallel, but not duplicate, global standards.

The Accenture report surveyed CFOs and financial executives in 12 industries and six countries, including the U.S., China, Germany, the U.K., France, and Italy with reported revenues in excess of $1 billion.

Filing Deadline May Shorten for 13D and 13G Filers

Shareholders exceeding the 5 percent ownership threshold in public company securities may be required to report their stake within 5 days if new SEC proposed rules go into effect. Under existing beneficial ownership rules, investors are allowed 10 days from the time ownership exceeds 5 percent to file Schedule 13D or Schedule 13G.

SEC Chairman Gary Gensler says 10 days is too long in today’s fast-moving markets, stating that beneficial ownership filings can have a material impact on a company’s share price, and that the 10-day reporting gap “creates an information asymmetry between these investors and other shareholders.”

“These amendments would update our reporting requirements for modern markets, reduce information asymmetries, and address the timeliness of Schedule 13D and 13G filings,” said Gensler in an SEC press release.

SEC Commissioner Hester Peirce took issue with the proposal, saying in a statement that although the proposal is characterized as modernization, “it fails to contend fully with the realities of today’s markets or the balance embodied in Section 13(d) of the Exchange Act. The proposed amendments acknowledge some of the challenges, but do not fully grapple with or resolve them in a consistent manner.”

If adopted, the new rules would:

  • Accelerate the filing deadlines for Schedule 13D beneficial ownership reports from 10 days to 5 days and require that amendments be filed within one business day.
  • Generally accelerate the filing deadlines for Schedule 13G beneficial ownership reports (which differ based on the type of filer).
  • Expand the application of Regulation 13D and 13G to certain derivative securities; clarify the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations.
  • Provide new exemptions to permit certain persons to communicate and consult with one another, jointly engage issuers, and execute certain transactions without being subject to regulation as a “group.”
  • Require that Schedules 13D and 13G be filed using a structured, machine-readable data language.

The SEC has opened a 60-day comment period.

SPAC Underperformance Slows IPOs

January 2022 ranked as the slowest month for SPAC IPOs since May 2021, with just 23 going public, and February is on a similar pace, according to SPAC Research, which monitors the market.

This follows a banner year when Nasdaq reported 613 SPAC IPOs in 2021, which raised a combined $145 billion—far exceeding the 397 traditional IPOs which generated approximately $142 billion.

The 2022 slowdown is being attributed to cooling interest by investors after the vast majority of 2021 SPAC IPOs ended the year trading below their offering price.

“There’s no sugar-coating it: SPAC market conditions remain brutal for any participant except those looking to put new dollars to work as a fixed-income alternative,” said SPAC Research in its February report. “The performance of recent deSPACs has been abysmal, and only 20% or so of closed deals since October 1, 2021 are trading above $10.” De-SPACing occurs when a SPAC identifies a target and begins the acquisition process, resulting in a merger.

Bloomberg is reporting that due to waning investor interest, at least six mergers with SPACs have been canceled this year “on pace for a record number of nixed deals in a single quarter.”

While the average redemption rate has climbed steadily to over 90 percent of deSPACs by mid-February, said SPAC Research, “It’s incredibly disheartening to see such a huge number of deals trading below their transaction price.”

Registration withdrawals are on the rise too, “as teams re-evaluate the risk/reward of sponsorship given increased costs and the challenging environment.”

Only 16 traditional IPOs priced as of mid-February, a 71.9% decrease from the same date last year, according to Renaissance Capital, which tracks the IPO market.

Audit Quality Sustained During Pandemic

A just released survey of audit committee members reveals that, despite the pandemic-forced remote work requirements, 98 percent of committee members said that audit quality either increased (32%) or stayed the same (66%) over the past year.

The survey, conducted by the Center for Audit Quality and Deloitte, reported that COVID-19 had forced auditors to come up with new ways to conduct audits at a time when travel restrictions and on- site visits were either outright prohibited or posed a challenged.

Survey respondents, which included 246 from primarily large-cap U.S.-based public companies, said that as pandemic restrictions were either eased or lifted, some auditors have continued to use remote audit practices that were put in place when the pandemic started.

As auditors shifted to more remote work, cybersecurity risks became a priority for audit committees, with 53% saying that cybersecurity became a top focus on their agenda. Another 48% said that data privacy security became a top focus. Other top focus areas included ethics and compliance (48%), third-party risk (47%) and enterprise risk management (42%).