Weinberg & Company

Best Practice – December 2022

By December 16, 2022 No Comments

SEC Targets Crypto Risk Disclosures-

The SEC has posted a sample letter on its website which will be sent to companies whose filings have been reviewed, asking them to respond to a long list of questions surrounding possible crypto asset exposures and any material impact that those holdings have had, or may have on their businesses, as well as risk factors going forward, including:

·    Risk from depreciation in stock price.

·    Risk of loss of customer demand for products and services.

·    Financing risk, including equity and debt financing.

·    Risk of increased losses or impairments in investments or other assets.

·    Risks of legal proceedings and government investigations, pending or known to be threatened, in the United States or in other jurisdictions against the company or its affiliates.

·    Risks from price declines or price volatility of crypto assets.

Although this new guidance comes a month after the bankruptcy of crypto exchange FTX and the arrest of its founder Sam Bankman-Fried, it is just the latest effort targeting crypto risks, and is part of a series of moves the SEC has made to place crypto assets under its regulatory umbrella. Under earlier guidance which took effect in April, the SEC started requiring US-listed companies that hold cyptocurrencies on behalf of users and customers to account for those assets as a liability on their balance sheets.

In May the SEC nearly doubled its cyber enforcement unit from 30 to 50 people who will be dedicated to looking for fraud in crypto asset offerings, crypto asset exchanges, crypto asset lending and staking products, decentralized finance (DeFi) platforms, non-fungible tokens (NFTs) and Stablecoins.

In a statement the SEC said “Recent bankruptcies and financial distress among crypto asset market participants have caused widespread disruption in those markets. Companies may have disclosure obligations under the federal securities laws related to the direct or indirect impact that these events and collateral events have had or may have on their business.”

Disclosure oversight will be handled by the Division of Corporate Finance which “believes that companies should evaluate their disclosures with a view towards providing investors with specific, tailored disclosure about market events and conditions, the company’s situation in relation to those events and conditions, and the potential impact on investors. Companies with ongoing reporting obligations should consider whether their existing disclosures should be updated.”

New Rules for Insider Trading

Public companies are now required to adhere to stricter rules regarding the trading of securities by corporate officers and directors and other insiders, thanks to amendments to Rule 10b5-1 adopted December 14 by the SEC.

Established in 2000, 10b5-1 plans allow corporate directors and officers to set up scheduled future share purchases or sales in order to avoid claims of insider trading.

The amendments to that Rule affect cooling off periods for officers, directors and other investors, and stricter company disclosure requirements.

Highlights of new rules include:

·    A minimum 90-day cooling-off period for directors and officers following plan adoption or modification, or two business days following the disclosure in certain periodic reports of the issuers financial results for the fiscal quarter in which the plan was adopted or modified before any trading can start.

·    A cooling-off period of 30 days for persons other than issuers or directors and officers before any trading can start under the trading arrangement or modification

·    Certification by directors and officers that they are not aware of material nonpublic information about the issuer or its securities and that they are adopting the plan in good faith and not as part of a plan or scheme to evade prohibitions of Rule 10b5-1.

Highlights of new disclosure requirements include:

·    Quarterly disclosure by registrants regarding the use of Rule 10b5-1 plans and certain other written trading arrangements by a registrant’s directors and officers for the trading of its securities.

·    Annual disclosure of a registrant’s insider trading policies and procedures.

·    Certain tabular and narrative disclosures regarding awards of options close in time to the release of material nonpublic information and related policies and procedure

Issuers will be required to comply with and report the new disclosure requirements on Forms 10-Q, 10-K and 20-F and in any proxy or information statements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.

The final amendments defer by six months the date of compliance with the additional disclosure requirements for smaller reporting companies.

Complete Access to Chinese Audit Inspections

 The Public Company Accounting Oversight Board (PCAOB) confirmed December 15 that for the first time in history, it had complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong.

Chair Erica Williams reported that during the PCAOB’s first series of inspections, which occurred between September and November 2022, PCAOB staff members “conducted on-site inspections and investigations in Hong Kong, reviewing thousands of pages of documents, conducting interviews and taking testimony.”

She added “Today’s announcement should not be misconstrued in any way as a clean bill of health for firms in mainland China and Hong Kong. It is a recognition that, for the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them.”

PCAOB staff inspected a total of 8 engagements conducted by two firms; one in mainland China and the other in Hong Kong. The selected engagements included several from categories of audit engagements PRC authorities had denied access to in the past – including large state-owned enterprises and issuers in sensitive industries.

Unlike earlier attempts at inspections during which documents had large swaths of redactions, investigators were able to view complete audit work papers with no redactions, and the PCAOB was able to retain information needed to complete its work. Also, the PCAOB had direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspected or investigated.

The PCAOB staff preliminarily has identified numerous potential deficiencies, and is expected to release the inspection report early in the new year.

To view the PCAOB’s Fact Sheet on its announcement, please click here:  https://pcaobus.org/news-events/news-releases/news-release-detail/fact-sheet-pcaob-secures-complete-access-to-inspect-investigate-chinese-firms-for-first-time-in-history

Credit Ratings Impacted by ESG Score

 Although the SEC has yet to issue its final decision on proposed ESG rules, companies needing debt financing already are feeling the impact of ESG assessments on their credit ratings.

According to a just-released report by Moody’s Investors Service, “The credit impact of ESG considerations is highly negative or very highly negative for about 20% of the more than 5,700 debt issuers that we have scored for exposure to ESG risks. The credit impact of these risks is most pronounced among corporate, sovereign, and sub-sovereign issuers.”

In addition, almost 30% of companies whose ESG performance has been assessed, “face potential negative impact from ESG issues,” said Moody’s. “For nearly a quarter of scored entities, credit ratings would be different if not for ESG issues.”

Beginning in March 2022, the SEC began collecting public comments on its proposed rule requiring US exchange-listed companies to provide detailed disclosures on a broad range of climate-related issues, including carbon emissions, climate risk, and greenhouse gas emissions.

If adopted, the SEC would require companies to describe on their Form 10Ks their strategy regarding climate risks, including plans on how they’re going to reach any targets they may have set.

After receiving thousands of letters, including from 24 State Attorneys General challenging the SEC’s authority to issue such rules, the SEC extended the comment period and had planned to publish the final rule in October 2022. The SEC’s decision is still pending.

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