Weinberg & Company

Simply Stated Newsletter – May 2019


Easing the burden for smaller companies 

SEC Proposes Change to SOX 404(b) Requirement 

The Securities and Exchange Commission (SEC) voted to propose amendments to the accelerated filer and large accelerated filer definitions in order to reduce costs for certain lower-revenue companies.

If adopted, smaller reporting companies with less than $100 million in revenues would not be required to obtain an attestation of their internal control over financial reporting (ICFR) from an independent outside auditor, a requirement known as SOX 404(b).

The proposed amendments would not change key protections from the Sarbanes-Oxley Act of 2002, such as independent audit committee requirements, CEO and CFO certifications of financial reports, or the requirement that companies continue to establish, maintain, and assess the effectiveness of their ICFR.

The SEC came under criticism in 2018 when it liberalized the definition of Smaller Reporting Company (SRC) but did not relieve those companies from the SOX 404(b) requirement.

However, when the Commission revised the SRC definition, the Chairman directed the staff to formulate recommendations for possible rule amendments that “would appropriately redefine the issuers that are designated as accelerated filers and thereby promote capital formation,” and he directed the staff to consider “how the rule change could reduce compliance costs for certain registrants, while maintaining appropriate investor protections.”


The proposed amendments would:

  • Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be an SRC and had no revenues or annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available
  • Increase the transition thresholds for accelerated and large accelerated filers becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million
  • Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status.

“The proposed rules build on the JOBS Act of 2012 and are aimed at a subset of smaller companies where the additional requirement of an ICFR auditor attestation may not be an efficient way of benefiting and protecting investors,” said SEC Chairman Jay Clayton. “Investors in these lower-revenue companies will benefit from more tailored control requirements. Many of these smaller companies – including biotech and healthcare companies – will be able to redirect the savings into growing their companies by investing in research and human capital.”

The public comment period will remain open for 60 days following publication in the Federal Register of the proposed changes.


Regulating the Regulators

The White House moved to curb the power of federal regulators by directing them to submit nonbinding guidance documents to the budget office for review, a step that could slow the enactment of any new rule that potentially has a large impact on the economy, reports Politico.

The memo from acting Office of Management and Budget (OMB) Director Russell Vought will impact most all government agencies, including such independent regulators as the Federal Reserve and the SEC. Agencies will need to notify the Office of Information and Regulatory Affairs (OIRA) of upcoming guidance, with a determination of whether it qualifies as “major”– the threshold for notifying Congress under the Congressional Review Act. Those deemed major by OIRA would need to be sent to Congress, which would then have the ability to strike it down under the review act that allows lawmakers a short window to roll back a rule.

It was thought that the OMB does not have the ability to compel independent agencies to submit their rules in this way, and monetary policy decisions by the Fed are explicitly exempt. However in 2017, the Government Accountability Office found years-old documents from financial regulators that qualified as rules under the Congressional Review Act. That determination opened the door, allowing Congressional recourse if agencies don’t notify them of important guidance, reports Politico.


Nonbank Lending on the Rise, so is SEC Scrutiny

According to Federal Reserve research, growth in lending among nonbanks escalated after post-crisis legislation required large banks to meet high standards for the amount and quality of capital on their balance sheets, reports Morning Consult.

Today, mutual funds, hedge funds and asset managers increasingly control debt marketplaces and lending. The Financial Stability Board estimates that banks’ share of global financial assets have fallen to 39% in 2018 from 45% in 2008, while nonbank lending had grown to 31% from 26% in the same period.

As nonbank lending increases, the SEC is playing an increasingly important role in discussions of economic stability, according to SEC Chair Jay Clayton.

“The growth of collateralized loan obligations (CLOs), in particular, is one of the primary nonbank lending issues on the table for discussion, along with single securities backed by a pool of debt which often have low credit rating,” said Clayton.

About two-thirds of CLOs are now held by nonbank investors, according to the Financial Stability Board.


Attracting Capital  

As part of National Small Business Week (May 5-11), the SEC’s Office of the Advocate for Small Business Capital Formation hosted a roundtable to hear from small businesses and their investors.

One of the topics included the challenge of raising capital for companies not located in what was described as “investing hotspots.” According to SEC 2018 figures, venture-backed companies in the U.S. raised nearly $100 billion in over 5,000 deals. Over 75% of that funding occurred in just three states. Only about 13% of deal flow happens between the coasts, and it is especially difficult to raise capital in areas with low populations. Roundtable panelists suggested the SEC focus on ways to incentivize investors to invest in the Midwest. Suggestions included the creation of opportunity zones similar to South Carolina’s angel tax credit, and asked the SEC to help develop secondary trading markets.

Another topic involved accredited investors. Citing that only a small number of accredited investors participate in funding (300,000 out of 10 million eligible accredited investors) panelists suggested that the SEC seek ways to educate and encourage more eligible investors to participate in private investments.

It has been years since there has been an adjustment to the definition of accredited investor, but the group was clear in discouraging the SEC from raising the accredited investor threshold.

Pursuant to an SEC concept release currently in process, the SEC staff is reviewing whether to keep the existing accredited investor definition, which is a binary test where one must meet the threshold or cannot participate at all. An alternative being considered is to scale the level of investment permitted according to the wealth of the investor.

Source: Cooley PubCo


Last Democrat Leaving SEC Commission

The only Democrat member of the SEC is expected to leave government later this year, paving the way for a more conservative tilt on some regulatory decisions, reports the Wall Street Journal.

Robert Jackson Jr. will likely return to teaching this Fall at New York University Law School. The White House said it plans to nominate Allison H. Lee, a former SEC enforcement attorney and a Democrat for a seat on the five-member commission. However, if Jackson leaves before Lee is confirmed, the commission would have only three commissioners, and no Democrats. (Chairman Jay Clayton is a political independent.)

To maintain nonpartisan status, no more than three commissioners are permitted to belong to the same political party. Also, SEC rules require that at least three commissioners participate in a vote on new regulations.


Yes Money Talks… but sometimes it whistles loudly 

The SEC announced awards totaling $50 million to two whistle blowers whose high-quality information assisted the agency in bringing a successful enforcement action. One whistleblower received the Commission’s third highest award to date of $37 million and the other received an award of $13 million.

The SEC has now awarded approximately $376 million to 61 individuals since issuing its first award in 2012. Awards can range from 10 to 30% of the money collected when the monetary sanctions exceed $1 million. All payments are made out of an investor protection fund that is financed entirely through monetary sanctions paid to the SEC by securities law violators.


Business Expense: Most Used Vendors

Expense management software provider Certify analyzes the most recent business expense and vendor ratings data and publishes its reports quarterly. Here are a few findings from its most recent first quarter 2019 SpendSmart report.

In the Most Expensed Restaurants category all meal expenses for breakfast, lunch and dinner were included. The data shows the most frequent expensed restaurant by percentage along with average cost per transaction. STARBUCKS led this category (5.38% $13.88), followed by MCDONALD’S (2.65% $10.20), CHICK-FIL-A (1.73% $31.14), PANERA BREAD (1.68% $52.54), and DUNKIN’ DONUTS (1.45% $14.96).

In the Most Expensed Lodging category MARRIOTT led with 9.08% at an average cost of $300.58, followed by HAMPTON INN (8.97% $236.44), COURTYARD BY MARRIOTT (7.37% $194.45), HILTON GARDEN INN (4.86% $222.18) and HOLIDAY INN EXPRESS (4.74% $237.92).

DELTA led the Most Expensed Airline category with 19.28% and an average cost of $446.73, followed by AMERICAN AIRLINES (17.21% $354.23), UNITED AIRLINES (14.53% $377.17), SOUTHWEST (12.74 $279.35), and ALASKA (2.10% $281.16).

The report highlighted a growing trend of business travelers using scooters to get around, and noted scooter rental costs increasingly showing up in corporate expense reports. BIRD leads the category with 46%, followed by LIME at 42%, RAZOR 8%, SCOOT at 4%. UBER owns a minority stake in LIME.

UBER not only led the ride-hailing category, it was the most expensed vendor overall.


“The factory of the future will have only two employees: a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment.” Warren G. Bennis, American scholar and author, 1925-2014


“For a list of all the ways technology has failed to improve the quality of life, please press three.” Alice Kahn, American writer

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Turns out we were also building “An Audited Legacy of Quality.”

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.

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