Month: December 2023

Accounting and AuditingSecurities

SEC Chief Accountant has some thoughts about the statement of cash flows

The SEC’s Office of Chief Accountant appears to be taking a hard look these days at statements of cash flows. In “The Statement of Cash Flows: Improving the Quality of Cash Flow Information Provided to Investors,” SEC Chief Accountant Paul Munter discusses the importance of the statement of cash flows, the failure of companies and auditors to prepare and review cash flows statements with an appropriate level of care and the mischaracterization of classification errors on the cash flows statement as immaterial, resulting in questionable “little r” restatements. Munter cautions that “preparers and auditors may not always apply the same rigor and attention to the statement of cash flows as they do to other financial statements, which may impede high quality financial reporting for the benefit of investors.”  According to Munter, that conclusion is evidenced by both the prevalence of restatements associated with the statement of cash flows as well as by the staff’s “observations of material weaknesses in internal control over financial reporting…around the preparation and presentation of the statement of cash flows.” It’s worth noting here that, as reported by the WSJ, other SEC representatives have also been raising these same issues at conferences regarding inadequate attention to the statement of cash flows and lack of objectivity in assessing the materiality of cash flow errors. Statements like this one from the Chief Accountant and others at OCA usually warrant close attention because they signal topics on which the staff is focused and often presage Enforcement activity on these same subjects.

/ December 5, 2023
administrative lawLitigationSecurities

Future of SEC’s ALJs looks bleak—but the administrative state? Not so much

Last week, SCOTUS heard oral argument in Jarkesy v. SEC (BTW, pronounced Járk?z?, according to his counsel).  As you may have heard, that case is about the constitutionality of the SEC’s administrative law judges. There were three questions presented, and Jarkesy had been successful in the appellate court on all three:

“1. Whether statutory provisions that empower the Securities and Exchange Commission (SEC) to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment.   

 2. Whether statutory provisions that authorize the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine.   

 3. Whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.”

While, on its face, the case may not have much allure, it has the potential to be enormously important in limiting the power of the SEC and other federal agencies. That’s especially true if SCOTUS broadly decides that the statute granting authority to the SEC to elect to use ALJs violates the nondelegation doctrine. This case, together with the two cases to be heard in January addressing the continued viability of Chevron deference (see this PubCo post), could go far to upend the “administrative state.” And, for those justices with a well-known antipathy to the administrative state, that might be their ultimate goal. (See, for example, the dissent of Chief Justice Roberts in City of Arlington v. FCC (2013), where he worried that “the danger posed by the growing power of the administrative state cannot be dismissed.”) During the over two-hour oral argument, however, the discussion was focused almost entirely on the question of whether the SEC’s use of an ALJ deprived Jarkesy of his Seventh Amendment right to a jury trial—certainly an important issue with possibly far-reaching implications across federal agencies. But what was most conspicuous—and perhaps most consequential—was what was not discussed: the nondelegation doctrine. In case I missed it, I searched the 170-page transcript and found the word “nondelegation” only once and that from the lips of SEC counsel. While, at the end of the day, the Court’s opinion could certainly go in a different direction, the oral argument did not leave the impression that the end of the administrative state is nigh—not as result of this case, at least.

/ December 4, 2023
LitigationSecurities

SEC concedes unable to correct defects in buyback rule

On October 31, the Fifth Circuit issued an opinion in Chamber of Commerce of the USA v. SEC, granting the Chamber’s petition for review of the SEC’s Share Repurchase Disclosure Modernization rule. The Court held that the “SEC acted arbitrarily and capriciously, in violation of the APA, when it failed to respond to petitioners’ comments and failed to conduct a proper cost-benefit analysis.” However, recognizing that there was “at least a serious possibility that the agency will be able to substantiate its decision given an opportunity to do so,” the Court decided that, instead  of vacating the rule, it would allow the SEC 30 days “to remedy the deficiencies in the rule,”  and remanded the matter with directions to the SEC to correct the defects in the rule.  The three-judge panel, however, “retain[ed] jurisdiction to consider the decision that is made on remand.” The deadline was set at November 30, 2023. On November 22, the SEC announced that it had issued an order postponing the effective date of the Share Repurchase Disclosure Modernization rule.  As a result, the rule was stayed pending further SEC action. (See this PubCo post.) On the same date, the SEC filed a brief motion asking the Court for an extension of time to correct the defects. In its motion, the SEC said only that, “[s]ince the remand, the Commission’s staff has worked diligently to ascertain the steps necessary to comply with the Court’s remand order and has determined that doing so will require additional time.”  The SEC said in the motion that it would provide an update within 60 days on the status of its efforts. Not surprisingly, the Chamber opposed the motion. On November 26, the Court issued an Order, refusing to grant the extension. The question then was whether or not the SEC would still submit an analysis to the Court attempting to correct the defects by the court-imposed deadline. (See this PubCo post, this PubCo post and this PubCo post.)  Now we have the answer.

/ December 1, 2023
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