Investment Industry Wire | August 2021

The pace and intricacies of regulatory change in the investment industry are, at times, nothing short of overwhelming. Yet, organizations in this space need to have a clear understanding of evolving regulations, their timing and overall impact.

To help you stay up to date, below is Cohen & Company's quarterly recap of the latest developments at a variety of regulatory agencies likely to impact our clients.

Securities & Exchange Commission (SEC)

Question Added to Investment Company Reporting Modernization FAQ
Since the 2016 adoption of the investment company reporting modernization reforms, the SEC Division of Investment Management has issued a series of questions and answers providing its views and further clarifying questions that arise in the industry.

In April, the division added one more Q&A to the list. This newest update relates to the calculation of the monthly average value of portfolio securities on loan for NCEN items C.6.f and C.19.a. While the staff indicated that a range of methodologies would provide a reasonable representation of a fund's activities, it did offer the following three examples as reasonable calculation methods:

1. For each month during the reporting period, take the sum of the value of securities on loan, or net assets, for each day during the month and divide by the number of days in the month. Then, take the sum of each of these monthly values during the reporting period and divide by the number of months in the reporting period; or
2. Take the sum of the value of securities on loan, or net assets, at the end of each month and divide that sum by the number of months in the reporting period; or
3. Take the sum of the values of securities on loan, or net assets, as of the first day of the reporting period and the last day of each month in the period, and divide that sum by the number of months in the reporting period, plus one.

The SEC further clarified that in each of these examples, days when there is no securities lending activity should be assigned a value of zero and also be included in the count of total days in the period.

» Read the full list of FAQs

Impact: By specifying examples of calculation methodologies, the SEC is promoting comparability between investment companies. This in turn will give investors clearer insight as to the risk associated with a fund's activities and allow them to better weigh investment options.

American Institute of Certified Public Accountants (AICPA)

AICPA Issues Statement on Auditing Standard No. 144
In June 2021, the AICPA issued SAS No. 144, on the use of specialists and external information sources when valuing financial instruments. This new standard brings AICPA guidance more in line with the PCAOB's most recent standards on valuation, which were effective for December 31, 2020, audits.

SAS No. 144 provides guidance on applying the principles of fair value when management has used a specialist to develop estimates, as well as guidance for when auditors have used specialists in auditing fair value measurements. However, the most notable amendment of the standard is the inclusion of an appendix, 'Use of Pricing Information From Third Parties as Audit Evidence.' The appendix focuses on the reliability of audit evidence obtained from one or more pricing services and/or broker dealers, as well as additional procedures that may be performed to assess the reliability of audit evidence and its source.

The new standard is effective for periods ending on or after December 15, 2023, with early implementation permitted.

» Read the full text of Standard No. 144

Impact: With the use of specialists becoming more common due to the growing complexity of today's financial instruments, these modernizing amendments were much needed. Although this topic modifies audit-specific guidance, it may spur additional questions and support requested from your auditors as they work through their annual audit.

Contact Julie Lowry at [email protected], Lori Novak at [email protected] or a member of your service team to discuss these topics further.

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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.

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