Weinberg & Company

Best Practice Newsletter – May 2023

SEC Sued Over Stock Buyback Rule-

The U.S. Chamber of Commerce has sued the Securities and Exchange Commission (SEC) to block implementation of its finalized rules requiring public companies to disclose more information on stock buybacks.

The lawsuit, filed May 12 with co-plaintiffs Texas Association of Business and the Longview Chamber of Commerce, challenges the SEC’s rule under the Administrative Procedure Act, as well as the U.S. Constitution. “The agency’s mandatory disclosure requirements not only risk the public airing of important managerial decisions but also compel speech in violation of the First Amendment,” said the Chamber in its press release announcing the lawsuit.

The new rules, which were approved May 3rd, require most public companies to provide daily tallies of their share repurchases, rather than the monthly aggregates that they currently report. Companies will be required to disclose the number of shares repurchased and the average price paid during each day of a buyback. Companies also will be required to check a box if their officers and directors purchased or sold shares within four business days of announcing a buyback program, among other requirements. The disclosures will have to be included in companies’ quarterly reports, starting with Q4 2023.

The U.S. Chamber said it “seeks to protect returns for investors as well as the ability of companies to make decisions free from government micromanagement”, adding that, “the SEC’s stock buyback rule doesn’t protect investors. Instead, it puts the thumb on the scale to discourage buybacks despite the fact that the repurchasing of shares improves returns for savers and investors across the economy.”

The SEC, however, says more granular disclosures will make it easier for analysts to compare the timing of share buybacks to stock trades by managers and directors. The agency says the disclosures will help identify buybacks designed to boost executive compensation or earnings per share, rather than to maximize shareholder returns.

The stock buyback rule passed with a 3-2 vote, with the SEC’s Democrat Commissioners in the majority. It comes one month after a new 1% excise tax on share repurchases went into effect. Stock buybacks have been in the Biden administration’s crosshairs as well, with the President in February voicing support for legislation increasing that excise tax to 4%.

For detailed information see: US Chamber lawsuit  

SPAC Audits Plagued by Deficiencies

The Public Company Accounting Oversight Board (PCAOB) has issued a report finding a relatively high rate of deficiencies in its inspection of the audits of special purpose acquisition companies (SPACs). SPACs are non-operating shell companies that are formed for the sole purpose of raising money to acquire or merge with another company, typically one that is private for the purpose of taking it public.

PCAOB inspectors reviewed more than 100 audits of companies that were either considered SPACs or that were formed through a de-SPAC transaction. The PCAOB reviewed 44 SPAC-related audits performed in 2021, and found that 61% of those had at least one deficiency. Of the 71 SPAC-related audits performed in 2022, 26, or 37%, had at least one deficiency.

The popularity of SPACs reached unprecedented highs in the US in 2020 and 2021, as companies rushed to raise capital during the COVID-19 epidemic. During that time, SPAC filings far exceeded traditional IPOs, as companies chose a capital raising vehicle that avoided some of the regulatory requirements and expenses involved with traditional initial public offerings.

In 2020, the U.S. SPAC market tallied 248 IPOs and gross proceeds of $75.3 billion. In 2021, those figures grew to 613 IPOs and gross proceeds of $144.5 billion. While SPAC activity dropped in 2022 to 84 IPOs, that number represented more SPAC IPOs than occurred each year in the decade prior to 2020.

Although the SPAC boom gave hundreds of smaller companies access to the public markets, many of those are now running out of cash and facing bankruptcy, according to the Wall Street Journal. “Shares of many of these companies trade under $1, more than 90% below where they did when they went public, and are in danger of being delisted,” said the Journal, which analyzed 342 companies that did SPAC deals in recent years.

To read more see: PCAOB report and Wall Street Journal article

Increased Reporting for Hedge Funds, PE Firms

The SEC has stepped up the timetable requiring SEC-registered hedge funds and private equity funds to report when they have experienced a stress that may pose a system risk, and has specified events which it considers are triggers for quick disclosure.

The amendments to existing Form PF were adopted May 3 and now require:

·    Large hedge fund advisers and all private equity fund advisers to file current reports upon the occurrence of certain reporting events that could indicate significant stress at a fund or investor harm. Those reporting events include certain extraordinary investment losses, significant margin and default events, terminations or material restrictions of prime broker relationships, operations events, and events associated with withdrawals and redemptions.

·    Large hedge fund advisers must file these reports as soon as practicable, but not later than 72 hours from the occurrence of the relevant event.

·    Reporting events for private equity fund advisers include the removal of a general partner, certain fund termination events, and the occurrence of an adviser-led secondary transaction. Private equity fund advisers must file these reports on a quarterly basis within 60 days of the fiscal quarter end.

·    The amendments also will require large private equity fund advisers to report information on general partner and limited partner clawbacks on an annual basis as well as additional information on their strategies and borrowings as a part of their annual filing.

These new rules will become effective six months after publication of the adopting release in the Federal Register, and the remaining amendments will become effective one year after publication in the Federal Register.

For more information on Form PF rule changes, see: SEC Fact Sheet

 AI Flunks CPA Exam

It’s been able to pass the Wharton entrance exam, Legal Bar exams, even many college Advance Placement exams, but when industry publication Accounting Today challenged AI ChatGPT with the CPA exam, it failed miserably. (Not sure if AI became depressed over it).

Accounting Today put ChatGPT to the test last April in an experiment that was conducted in collaboration with Surgent CPA Review.

When tested on the Business Environment and Concepts (BEC) section AI scored a mere 48%. It scored even less on the Financial Accounting and Reporting (FAR) section with a score of 35%, only 39% on the Regulation (REG) section and 46% on the Auditing and Attestation (AUD) section.

Earlier in the month, professors at Brigham Young University and other specialists from 186 institutions in 14 countries also put the original ChatGPT to the test and had similar results.

The BYU goal was to recruit as many professors as possible to see how the bot performed against accounting students at various universities. As part of the experiment, researchers also recruited undergraduate students from BYU to feed a bank of 2,268 textbook questions to the bot. The questions covered managerial accounting, financial accounting, tax, and other areas.

The results: human students’ average score was 76.7% compared to ChatGPT’s average score of 47.4%.

Perhaps the issue isn’t whether human intelligence or artificial intelligence can do better on the CPA exam. Could it be that some of the questions on the CPA exam are unintelligent?

 For more details on the Accounting challenge, see: Science Times

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.