October 30, 2017

SEC Enforcement: No More “Broken Windows”

According to this WSJ article, a change in the SEC’s approach to enforcement may be on the way.  Here’s an excerpt:

The Securities and Exchange Commission on Thursday signaled a pivot away from the prosecutorial approach to enforcement that the agency pursued after the financial crisis.

Steven Peikin, co-director of the SEC’s enforcement division, indicated the regulator would drop the “broken windows” strategy of pursuing many cases over even the smallest legal violations, and may also pull back from trying to make some companies admit to wrongdoing as a condition of settling with the SEC.

The SEC’s post-financial crisis “broken windows” approach to enforcement has been controversial – even among SEC Commissioners.  As Broc blogged, Commissioner Piwowar sharply criticized the approach in a 2014 speech, where he contended that “if every rule is a priority, then no rule is a priority.”

On a related note, this Bloomberg article quotes Steve Peikin as saying that the SEC needs to better communicate the potential benefits of cooperation with the agency’s enforcement efforts:

The SEC should tell securities lawyers and their clients more about how to benefit from cooperating with the commission in an enforcement action, a top enforcement official said Oct. 26.

The Securities and Exchange Commission should be more specific about what a company or an individual did to merit cooperation credit or didn’t do if credit is denied, said Steven Peikin, a co-director of the SEC Enforcement Division. Enforcement targets that cooperate with investigators can receive perks such as reduced sanctions or even no action at all.

The framework for determining cooperation the SEC laid out in its 2001 report of investigation into Seaboard Corp., including self-reporting and remediation, is still in effect, Peikin said. The co-director, a former Sullivan & Cromwell LLP partner, appeared to sympathize with people who are still unsure about the exact benefits of cooperation, however. “I think we have room for improvement,” said Peikin at Securities Docket’s annual Securities Enforcement Forum in Washington.

On self-reporting, the SEC could do more to emphasize the “carrots” over the “sticks” in obtaining cooperation, former Enforcement directors said during the gathering.

At the risk of sounding like a cynic, I think I’ve seen this movie before – when Harvey Pitt replaced Arthur Levitt as SEC Chair in 2001, that era gave us the Seaboard 21(a) Report on cooperation that Steve referenced in his remarks – but it only lasted about 90 days; then Enron came along and ruined it for everybody.

Financials: New “FASB Credit Loss Standard” Handbook

If you’re one of the few companies that’s ahead of the curve on FASB’s new revenue recognition standard – you aren’t out of the woods yet. Two additional standards – dealing with leases and credit losses – are barreling down on companies like a locomotive. Fortunately, KPMG has provided some help in the form of this handbook on ASC Topic 326, Financial Instruments—Credit Losses.

While financial institutions will be most significantly impacted by the new standard, this excerpt says that it will affect virtually all businesses:

This is not just a standard for banks. All entities that engage in lending activities and invest in debt securities that are classified as available-for-sale or hold to maturity will be affected. Additionally, entities with trade receivables, reinsurance recoverables, and loans to equity method investees also will be affected by Topic 326. Topic 326 is expected to require management to make new judgments and calculations when measuring expected credit losses. This may require changes in policies, processes and internal controls.

Public companies are required to implement the new standard for interim and annual periods in fiscal years beginning after December 15, 2019.

Transcript: “Cybersecurity Due Diligence in M&A”

We have posted the transcript for our recent webcast: “Cybersecurity Due Diligence in M&A.”

John Jenkins