Jeffrey Thomas

The SEC last week issued a 21(a) Report concerning auditor independence in the context of loaned staff arrangements.  The report arose out of an investigation into KPMG’s practice of loaning non-manager level professionals to certain audit clients to perform junior level tasks related to tax compliance.  A typical task performed by the loaned staff was inputting data into federal or state tax returns using an audit client-issued computer while being supervised by a member of the client’s tax department.  KPMG’s internal guidance specifically allowed these types of arrangements.

The issue was whether KPMG’s practice of loaning staff to audit clients to perform tax work violated Rule 2-01 of Regulation S-X, which prohibits, among other things, an independent auditor from “acting as an employee” of an audit client.  In its Report, the SEC, suggesting strongly that KPMG’s practice did violate Rule 2-01, reiterated its statement from a 2000 release that “an auditor who provides services in a way that is tantamount to accepting an appointment as an … employee of the audit client cannot be expected to be independent in auditing the financial consequences of management’s decisions.”  The SEC went on to make the following additional points:

• An auditor may not provide otherwise permissible non-audit services (such as tax services) to an audit client in a manner that is inconsistent with other provisions of the independence rules (such as the prohibition against acting as an employee of the audit client).
• An accountant acting as an employee of the audit client need not perform any decision-making, supervisory, or ongoing monitoring functions for the audit client for Rule 2-01 to be implicated.
• In assessing whether an accountant is “acting” as an employee, a key factor is the degree of control that the audit client […]
  

The SEC today temporarily stayed Exchange Act Rules 15Ba1-1 through 15Ba1-8 and Rule 15Bc4-1 and Forms MA, MA-I, MA-W, and MA-NR until July 1, 2014.  The effective date for the Rules and Forms was January 13, 2014.  Additional details can be found here: http://www.sec.gov/rules/final/2014/34-71288.pdf

The SEC yesterday announced its enforcement results for FY 2013, which ended in September.  The amount of disgorgement and penalties the SEC obtained increased from $3.1 billion in FY 2012 to $3.4 billion in FY 2013–an approximately 10% increase.  The number of enforcement actions the SEC brought, however, declined from 734 in FY 2012 to 686 in FY 2013–an approximately 7% decline.  Notably, the SEC does not collect all disgorgement and penalties for which it obtains orders.

The SEC proposed rules this week implementing the crowdfunding provisions of the JOBS Act. Under the proposed rules:

• A company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
• Investors, over the course of a 12-month period, would be permitted to invest up to:
  • $2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.
  • 10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000.  During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.
• Certain companies, including SEC reporting companies and companies that have no specific business plan, would be ineligible to use the crowdfunding exemption.
• Securities purchased in a crowdfunding transaction could not be resold for a period of one year.
• Companies conducting a crowdfunding offering would be required to file certain information with the SEC, provide it to investors and the relevant intermediary facilitating the crowdfunding offering, and make it available to potential investors.
• Crowdfunding transactions would be required to take place through an SEC-registered intermediary – either a broker-dealer or a funding portal.

The Commission will seek public comment on the proposed rules for 90 days.

On September 18, 2013, the SEC adopted rules establishing a permanent registration regime for municipal securities advisors, as required by the Dodd-Frank Act.  While Dodd-Frank defined the term “municipal advisor” broadly to include, among other things, those who advise municipal entities about the issuance of municipal securities and those who solicit municipal entities for investments, the new rules contain a number of important exclusions from the definition of “municipal advisor,” including exclusions for public officials and employees of municipal entities, registered investment advisers, and underwriters.  The new rules require municipal advisors to register on a staggered basis beginning July 1, 2014.  The temporary registration regime, which was implemented in 2010, will remain in effect until December 31, 2014.