November 2020: Latest SEC, FASB & Tax Updates & COVID-19 Related Updates from the SEC, IRS, Etc.

We are pleased to release MaloneBailey's November 2020 issue of The Crunch, our newsletter highlighting recent accounting, regulatory and tax updates. Please note that the updates provided in this newsletter are not a comprehensive list.

We encourage you to visit the SEC, FASB and IRS websites for more information as well as a complete list of updated rules, regulations and proposals. We invite you to contact us should you have any questions about the information provided in this issue. Please visit our website to review archived versions of this newsletter containing past accounting, regulatory and tax updates.

The MaloneBailey Team

www.malonebailey.com

What's the Crunch?

Featured Podcast

Tax Strategies and Accounting Tips Related to COVID-19

COVID-19 Related Updates

SEC Staff Speech, U.S. Credit Markets Interconnectedness and the Effects of the COVID-19 Economic Shock

Recent Accounting & Regulatory Updates

Recent FASB & AICPA Updates

FASB Accounting Standards Updates - No. 2020-07 —Not-for-Profit Entities (Topic 958) —Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets
Derivatives – FASB Ratifies Consensus-for-Exposure
Preparation, Compilation, and Review Engagements – AICPA Publishes New Edition of its Audit and Accounting Guide
Sustainability Reporting – IASB Consults on Sustainability Reporting
Revenue Recognition – FASB Discusses Recognition and Measurement of Revenue Contracts under Topic 805
Direct Examination Engagements – AICPA Issues SSAE 21 on Direct Examination Engagements
Insurance – FASB Discusses Proposal on Effective Date and Early Application for Insurance Standard
Digital Assets – AICPA Updates Digital Assets Practice Aid to Include Additional Questions & Answers
Single Audits – GAQC Alert 416 Published

Recent SEC & PCAOB Updates

Release No. 34-89963: Whistleblower Program
Release No. 33-10845: Adoption of Updated EDGAR Filer Manual
Release No. 34-89964: Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8
Release No. 33-10835: Update of Statistical Disclosures for Bank and Savings and Loan Registrants
SEC Staff Speech, Intellectual Siren Song by Commissioner Hester M. Peirce
SEC Staff Speech, Diversity Matters, Disclosure Works, and the SEC Can Do More: Remarks at the Council of Institutional Investors Fall 2020 Conference by Commissioner Allison Herren Lee
SEC Staff Speech, CAQ SEC International Practices Task Force
SEC Staff Speech, Keynote Address - Regulating with our Eyes on the Future by Dalia Blass Director, Division of Investment Management
SEC Staff Speech, Remarks at U.S. Treasury Market Conference by Commissioner Elad L. Roisman
SEC Staff Speech, Cybersecurity - Safeguarding Client Accounts Against Credential Compromise
SEC Staff Speech, CF Disclosure Guidance Topic: Topic No.7: Confidential Treatment Applications Submitted Pursuant to Rules 406 and 24b 2
Shareholder Proposals – SEC Adopts Amendments to Modernize Shareholder Proposal Rule
PCAOB Inspections – PCAOB Issues Staff Update and Preview of 2019 Inspection Observations

Tax Updates

Partnership Form’s 1065 Schedule K-1 Now Requires Reporting on Tax Basis Only

Extra Crunch

DTCC's Podcast: Advancing Financial Markets Together

About MaloneBailey, LLP

Featured Podcast

Tax Strategies and Accounting Tips Related to COVID-19

Summary - COVID-19 has brought tremendous changes to the economy and has impacted business operations significantly. How do we react and tax plan in such a turbulent period? The CARES Act includes provisions to support businesses in the form of loans, grants, and tax changes, among other types of relief. How should a business record and report these changes in its financial statements?

MaloneBailey experts discuss tax planning strategies that can help you cope with the pandemic and the accounting issues related to COVID and CARES Act.

For this podcast and many more, please visit the Resources section of the MaloneBailey website.

COVID-19 Related Updates

SEC Staff Speech, U.S. Credit Markets Interconnectedness and the Effects of the COVID-19 Economic Shock

Summary - The SEC published a staff report, U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock, which focuses on the origination, distribution and secondary market flow of credit across U.S. credit markets. The SEC staff report also addresses how the related interconnections in U.S. credit markets operated as the effects of the COVID-19 pandemic took hold. The SEC staff is expected to host a Roundtable on Interconnectedness and Risk in U.S. Credit Markets to discuss the issues raised in the report on the afternoon of October 14, 2020.

Report on U.S. Credit Market Interconnectedness

The SEC provides that in “the U.S. credit markets, banking and non-banking entities and intermediaries are intricately and inextricably interconnected. These interconnections are essential for the functioning of the markets, the provision of credit and the distribution of risk. These interconnections can also transmit and amplify risks in times of stress. The report identifies these interconnections and, with that framework, discusses how the COVID-19 economic shock reverberated through the credit markets in March and April 2020.”

The SEC provides that the principal purpose of the report is to identify and place in context key structural- and flow-related interdependencies in the U.S. credit markets as well as areas of stress revealed by the COVID-19 shock, with an eye toward informing policymakers as they seek to improve the functioning and resilience of our financial markets. The report does not make policy recommendations. Key takeaways from the report include:

The U.S credit markets, in size, structure and function have changed significantly since the 2008 global financial crisis.
The credit markets are highly interconnected, which can both accelerate risk transmission and facilitate risk absorption.
The ability of intermediaries (e.g., "market makers") to absorb significant, rapid shifts in investor sentiment (e.g., a "dash for cash") is limited in absolute terms and may become more limited as spreads widen and volatility increases during periods of stress and uncertainty.
Due to the interconnected nature of our credit markets and the size and scope of the COVID-19 shock, it was insightful, prudent and, perhaps, essential that the actions of the Federal Reserve and the CARES Act were multi-faceted and immediate.
The combination of the Federal Reserve’s intervention and the CARES Act also was extremely important in stabilizing prices (e.g., housing prices) and sustaining economic activity (e.g., consumer spending), which in turn added stability to the credit markets.
Banks and the banking system have been resilient to the COVID-19 shock to date notwithstanding their exposure to several trillions of dollars of residential and commercial mortgages and leveraged loans to corporations.

For more information, click here.

Recent FASB & AICPA Updates

FASB Accounting Standards Updates - No. 2020-07 —Not-for-Profit Entities (Topic 958) —Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets

Summary - The FASB issued Accounting Standards Update (ASU) No. 2020-07 Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, intended to improve transparency in the reporting of contributed nonfinancial assets, also known as gifts-in-kind, for not-for-profit organizations.

Examples of contributed nonfinancial assets include fixed assets such as land, buildings, and equipment; the use of fixed assets or utilities; materials and supplies, such as food, clothing, or pharmaceuticals; intangible assets; and recognized contributed services.

The ASU requires a not-for-profit organization to present contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash or other financial assets. It also requires a not-for-profit to disclose:

Contributed nonfinancial assets recognized within the statement of activities disaggregated by category that depicts the type of contributed nonfinancial assets; and
For each category of contributed nonfinancial assets recognized (as identified in (a)):
Qualitative information about whether the contributed nonfinancial assets were either monetized or utilized during the reporting period. If utilized, a description of the programs or other activities in which those assets were used.
The not-for-profit’s policy (if any) about monetizing rather than utilizing contributed nonfinancial assets.
A description of any donor-imposed restrictions associated with the contributed nonfinancial assets.
The valuation techniques and inputs used to arrive at a fair value measure, in accordance with the requirements in Topic 820, Fair Value Measurement, at initial recognition.
The principal market (or most advantageous market) used to arrive at a fair value measure if it is a market in which the recipient NFP is prohibited by a donor-imposed restriction from selling or using the contributed nonfinancial assets.

The amendments in this ASU should be applied on a retrospective basis and are effective for annual reporting periods beginning after June 15, 2021, and interim periods with annual reporting periods beginning after June 15, 2022. Early adoption is permitted.

For more information, click here.

Derivatives – FASB Ratifies Consensus-for-Exposure

Summary - As reported in its “Summary of Board Decisions” publication, the FASB met on September 16, 2020, and ratified a consensus-for-exposure reached by the EITF on ““Warrant Modifications: Issuers’ Accounting for Modifications of Equity Classified Freestanding Call Options That Are Not within the Scope of Topic 718, Compensation—Stock Compensation, or Topic 815—Derivatives and Hedging.” The FASB directed its staff to draft a proposed ASU reflecting the consensus-for-exposure for vote by written ballot.

For more information, click here.

Preparation, Compilation, and Review Engagements – AICPA Publishes New Edition of its Audit and Accounting Guide

Summary - The AICPA has published a new edition of its Audit and Accounting Guide, Preparation, Compilation and Review Engagements. Issued by the Accounting and Review Services Committee (ARSC), this new edition contains the latest developments in performing preparation, compilation and review engagements.

You will find ARSC's best advice on:

Recently issued Statement on Standards for Accounting and Review Services (SSARS) No. 25, Materiality in a Review of Financial Statements and Adverse Conclusions;
SSARS No. 24, Omnibus Statement on Standards for Accounting and Review Services — 2018; SSARS No. 23, Omnibus Statement on Standards for Accounting and Review Services — 2016, and
SSARS No. 22, Compilation of Pro Forma Financial Information.

For more information, click here.

Sustainability Reporting – IASB Consults on Sustainability Reporting

Summary - The Trustees of the IFRS Foundation have published the IASB Consultation Paper on Sustainability Reporting. The purpose of issuing this Consultation Paper is to assess demand for global sustainability standards and, if demand is strong, assess whether and to what extent the IFRS Foundation might contribute to the development of such standards. Comments on the Consultation Paper are due by December 31, 2020.

The IFRS Foundation was established to develop a single set of globally accepted accounting standards. It is the organization behind International Financial Reporting Standards (IFRS), which are required for use by more than 140 jurisdictions. The Trustees are responsible for the strategic direction and governance of the Foundation as well as for oversight of the IASB.

Amid heightened focus on environmental, social and governance (ESG) matters, developments in sustainability reporting and increased calls for standardization of such reporting, the Trustees are now seeking stakeholder input on the need for global sustainability standards and gauging support for the IFRS Foundation to play a role in the development of such standards.

The Consultation Paper sets out possible ways the IASB might contribute to the development of global sustainability standards by broadening its current remit beyond the development of financial reporting standards and using its experience in international standard-setting, its well-established and supported standard-setting processes and its governance structure.

One possible option outlined in the paper is for the IFRS Foundation to establish a new sustainability standards board. The new board could operate alongside the IASB under the same three-tier governance structure, build on existing developments and collaborate with other bodies and initiatives in sustainability, focusing initially on climate-related matters.

The Consultation Paper sets out critical success factors for the creation of a new board, including achieving sufficient support from public authorities and market participants; working with regional initiatives to achieve global consistency and reduce complexity in the reporting landscape; achieving the appropriate level of funding; and ensuring the current mission of the IFRS Foundation is not compromised.

The IFRS Foundation will schedule webinars to discuss the Consultation Paper and will publish information on the webinars on the project page.

For more information, click here.

Revenue Recognition – FASB Discusses Recognition and Measurement of Revenue Contracts under Topic 805

Summary - As reported in its “Summary of Board Decisions” publication, the FASB met on September 23, 2020, and discussed the potential alternatives for recognition and measurement of revenue contracts with customers acquired in a business combination. The FASB also addressed whether to add this project to its technical agenda as well as the scope of the project, disclosures, and whether to issue a proposed ASU.

The FASB decided to add a project to its technical agenda to address the following issues related to accounting for acquired revenue contracts with customers in a business combination:

Recognition of a contract liability or contract asset; and
Payment terms and their effect on subsequent revenue recognized by the acquirer.

The FASB decided that the performance obligation concept under Topic 606, Revenue from Contracts with Customers, should be used as the recognition criteria for a contract liability arising from a revenue contract with a customer acquired in a business combination.

For more information, click here.

Direct Examination Engagements – AICPA Issues SSAE 21 on Direct Examination Engagements

Summary - The AICPA’s Auditing Standards Board (ASB) has issued Statement on Standards for Attestation Engagements (SSAE) No. 21, Direct Examination Engagements.

SSAE 21 adds new AT-C Section 206, Direct Examination Engagements. SSAE 21 also supersedes AT-C Section 205, Examination Engagements, and changes the title to Assertion-Based Examination Engagements. It also amends SSAE No. 18, Attestation Standards: Clarification and Recodification, as Amended, and AT-C Section 105, Concepts Common to All Attestation Engagements (AICPA, Professional Standards, AT-C sec. 105).

Direct Examination Engagements

New AT-C Section 206 contains performance and reporting requirements and application guidance for direct examination engagements. As noted in the accompanying At a Glance document, AT-C Section 206 “enables practitioners to perform an examination engagement in which the practitioner obtains reasonable assurance by measuring or evaluating underlying subject matter against criteria and expressing an opinion that conveys the results of that measurement or evaluation.”

The practitioners’ objectives in conducting a direct examination agreement include:

Obtaining reasonable assurance by measuring or evaluating the underlying subject matter against the criteria and performing other procedures to obtain sufficient appropriate evidence;
Expressing an opinion in a written report that conveys the results of the measurement or evaluation; and
Communicating in accordance with the results of the practitioner's procedures as required by AT-C Section 206.

Assertion-Based Examination Engagements

New AT-C Section 205 provides performance and reporting requirements and application guidance for assertion-based examination engagements. The requirements and guidance supplement the requirements and guidance in Section 105.

The practitioners’ objectives in an assertion-based examination agreement include:

Obtaining reasonable assurance about whether the subject matter as measured or evaluated against the criteria is free from material misstatement;
Expressing an opinion in a written report about whether the subject matter is based on or in accordance with the criteria, or the responsible party’s assertion is fairly stated, in all material requests; and
Communicating further as required by relevant AT-C Sections.

SSAE 21 is effective for practitioners’ reports dated on or after June 15, 2022.

For more information, click here.

Insurance – FASB Discusses Proposal on Effective Date and Early Application for Insurance Standard

Summary - As reported in its “Summary of Board Decision” publication, the FASB met on September 30, 2020, and discussed comment letter feedback received on its proposed Accounting Standards Update (ASU), Financial Services—Insurance (Topic 944): Effective Date and Early Application, and made the following two decisions.

To affirm its decision to defer the effective date of the amendments in ASU No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, for all insurance entities by one year.
To amend the proposed early application provisions of ASU 2018-12 whereby the early application transition date would be either the beginning of the prior period or the earliest period presented.

The FASB directed its staff to draft an ASU for vote by written ballot.

For more information, click here.

Digital Assets – AICPA Updates Digital Assets Practice Aid to Include Additional Questions & Answers

Summary - The AICPA has updated its Practice Aid, Accounting for and Auditing of Digital Assets, to include new nonauthoritative guidance discussing the holding of crypto assets by broker-dealers, crypto assets and fair value measurement, and accounting for stablecoin holdings.

The Practice Aid, originally issued in December 2019, provides nonauthoritative guidance for financial statement preparers and auditors on accounting for and auditing digital assets under GAAP and GAAS. The new material is complementary to the accounting guidance previously issued in December and the additional guidance published in July 2020 on client acceptance and continuance.

For purposes of applying the guidance, digital assets are defined broadly to include digital records, made using cryptography for verification and security purposes, on a distributed ledger (i.e., blockchain). Although all industries encounter change, the digital assets ecosystem is evolving rapidly. As firms seek to provide audits to entities within the ecosystem, they must give caution and consideration to unique risks and challenges.

The updated Practice Aid includes 13 new questions and answers relating to the following subject-matter areas:

The definition of an investment company when engaging in digital asset activities and the effect of participation in digital asset activities;
Accounting by an investment company for digital assets it holds as investments;
Recognition, measurement and presentation of digital assets specifically to broker-dealers;
Crypto assets that require fair value measurement, including determining the principal (or most advantageous) market; and
Accounting for stablecoin holdings, including how investors that do not apply specialized industry guidance should account for holding a stablecoin.

For more information, click here.

Single Audits – GAQC Alert 416 Published

Summary - The AICPA has published GAQC Alert No. 416 which provides various information, including:

A status update on the expected addendum to the Office of Management and Budget (OMB) 2020 Compliance Supplement (Supplement addendum) and a related GAQC comment letter;
A summary of topics discussed at a recent Single Audit Roundtable meeting, including significant concerns on the new Provider Relief Fund program;
Updated illustrative audit reports are now available on the GAQC Web site, as well as a marked report to show changes needed for the 2018 edition of Government Auditing Standards (Yellow Book); and
A hold the date reminder for upcoming GAQC Web events.

For more information, click here.

Recent SEC & PCAOB Updates

Release No. 34-89963: Whistleblower Program Rules

Summary - The SEC adopted amendments to the rules governing its whistleblower program that are designed to provide greater clarity to whistleblowers and increase the program’s efficiency and transparency. Concurrently, to provide additional efficiencies, as well as clarity and transparency in the award determination process, the SEC’s Office of the Whistleblower published guidance regarding the process for determining award amounts for eligible whistleblowers. The SEC’s whistleblower program was created to incentivize individuals to report high-quality tips to the SEC and assist the agency in its efforts to combat wrongdoing and, as a result, better protect investors and the marketplace.

The amendments to the whistleblower rules are intended to “provide greater transparency, efficiency and clarity, and to strengthen and bolster the program in several ways. The rule amendments increase efficiencies around the review and processing of whistleblower award claims, and provide the Commission with additional tools to appropriately reward meritorious whistleblowers for their efforts and contributions to a successful matter.” Among other enhancements, the amendments provide a mechanism for whistleblowers with potential awards of less than $5 million (which historically have represented nearly 75% of all whistleblower awards), subject to certain criteria, to qualify for a presumption that they will receive the maximum statutory award amount. Other awards will continue to be evaluated consistent with past practice.

The amendments also affirm that award amounts are to be determined exclusively based on the application of the award factors set forth in the SEC’s whistleblower rules. In other words, there is not a separate (post application of the award factors) assessment of whether award amounts are too small or too large. The amendments further clarify that the SEC may waive compliance with the Tip, Complaint or Referral filing requirements if a whistleblower complies with the requirements within 30 days of first providing the information or of first obtaining actual or constructive notice of the TCR filing requirements.

The whistleblower rule amendments will become effective 30 days after publication in the Federal Register.

For more information, click here.

Release No. 33-10845: Adoption of Updated EDGAR Filer Manual

Summary - The SEC has published a new edition of its EDGAR Filer Manual. This new edition includes updates to Volume II of the manual and related forms. The EDGAR system was upgraded to reflect these changes on September 21, 2020.

This edition of the manual is effective upon publication in the Federal Register.

For more information, click here.

Release No. 34-89964: Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8

Summary - The SEC has adopted amendments to modernize its shareholder proposal rule, which governs the process for a shareholder to have its proposal included in a company’s proxy statement for consideration by all of the company’s shareholders.

The rules also provide for a transition period so that shareholders who are currently eligible at the $2,000 threshold will remain eligible to submit a proposal for inclusion in the company’s proxy statement so long as they continue to maintain at least their current holdings through the date of submission (and through the date of the relevant meeting).

The amendments also update, for the first time since 1954, the levels of shareholder support a proposal must receive to be eligible for resubmission at future shareholder meetings, so as to relieve companies and their shareholders of the obligation to consider, and spend resources on, matters that had previously been voted on and rejected by a substantial majority of shareholders without sufficient indication that a proposal could gain traction among the broader shareholder base in the near future.

The amendments will be effective 60 days after publication in the Federal Register, and the final amendments will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022. The final rules also provide for a transition period with respect to the ownership thresholds that will allow shareholders meeting specified conditions to rely on the $2,000/one-year ownership threshold for proposals submitted for an annual or special meeting to be held prior to January 1, 2023.

For more information, click here.

Release No. 33-10835: Update of Statistical Disclosures for Bank and Savings and Loan Registrants

Summary - The SEC announced that it has adopted rules to update and expand the statistical disclosures that bank and savings and loan registrants provide to investors, in light of changes in this sector over the past 30 years. The SEC indicates that the rules also eliminate certain disclosure items that are duplicative of other agency rules and requirements of U.S. GAAP or IFRS. The rules replace Industry Guide 3, Statistical Disclosure by Bank Holding Companies, with updated disclosure requirements in a new subpart of Regulation S-K. The rules are intended “to help ensure that investors have access to more meaningful, relevant information about these registrants to facilitate their investment and voting decisions.”

The SEC’s rules require disclosure about the following:

Distribution of assets, liabilities and stockholders’ equity, the related interest income and expense, and interest rates and interest differential;
Weighted average yield of investments in debt securities by maturity;
Maturity analysis of the loan portfolio including the amounts that have predetermined interest rates and floating or adjustable interest rates;
Certain credit ratios and the factors that explain material changes in the ratios, or the related components during the periods presented;
The allowance for credit losses by loan category; and
Bank deposits including average amounts and rate paid and amounts that are uninsured.

The rules will be effective 30 days after publication in the Federal Register and will apply to fiscal years ending on or after December 15, 2021. However, voluntary compliance with the new rules will be accepted in advance of the mandatory compliance date. Guide 3 is scheduled to be rescinded effective January 1, 2023.

For more information, click here.

SEC Staff Speech, Intellectual Siren Song by Commissioner Hester M. Peirce

Summary - SEC Commissioner Hester M. Peirce recently discussed financial market regulation. Peirce indicates that “regulation is necessary. I think we can all agree with that. But less is very much more when it comes to the government deciding how free citizens may invest their money, plan for their and their families’ futures, and enter into contracts with other free citizens.”

For more information, click here.

SEC Staff Speech, Diversity Matters, Disclosure Works, and the SEC Can Do More: Remarks at the Council of Institutional Investors Fall 2020 Conference by Commissioner Allison Herren Lee

Summary - SEC commissioner Allison Herren Lee recently discussed diversity and inclusion. Lee indicates that recent events have “triggered an unprecedented national conversation on racial injustice that also highlights the urgency of ensuring diverse perspectives and representation at all levels of decision making in our country. At the SEC, a number of recent rulemakings have also pushed this issue to forefront. Our recent adoption of amendments to Regulation S-K, for example, took a step forward by adding human capital as a broad topic for possible disclosure, but declined to require, among other things, disclosure of diversity data—even data that most companies are already required to keep under Equal Employment Opportunity Commission (EEOC) rules.”

For more information, click here.

SEC Staff Speech, CAQ SEC International Practices Task Force

Summary - The Center for Audit Quality (CAQ) has published minutes from the November 19, 2020 International Task Force meeting. Topics discussed at this meeting included:

Transition to Foreign Private Issuer status of a foreign public shell immediately upon its reverse merger with a foreign operating company and basis of accounting reported by the operating company in conjunction with the transaction; and
Impact on updating schedules such as Schedule 12-28 (real estate) for the application of IAS 29.

For more information, click here.

SEC Staff Speech, Keynote Address - Regulating with our Eyes on the Future by Dalia Blass Director, Division of Investment Management

Summary - SEC Director of Investment Management, Dalia Blass, recently discussed the need to regulate with an eye to the future. Dalia indicated that “the Division’s philosophy in recommending changes to the asset management regulatory framework has been to seek forward-looking solutions. We do not recommend that the Commission consider reforms just to address issues that have already happened. Instead we focus on regulations that will balance flexibility to accommodate future changes with promoting resiliency to future crises.”

For more information, click here.

SEC Staff Speech, Remarks at U.S. Treasury Market Conference by Commissioner Elad L. Roisman

Summary - SEC Commissioner Elad L. Roisman recently discussed his ideas for improving the market for U.S. Treasuries. Among his ideas were:

Ensuring that regulators have full view of secondary market trading;
Improving SEC understanding and, to the extent insufficient, oversight of key treasury market participants; and
Broadening access to central clearing in the cash market.

Roisman believes that prioritizing these three improvements would help optimize regulators‟ oversight capabilities and support the market’s efficient functioning.

For more information, click here.

SEC Staff Speech, Cybersecurity - Safeguarding Client Accounts Against Credential Compromise

Summary - The staff in the SEC’s Office of Compliance Inspections and Examinations (OCIE) has issued a Risk Alert, Cybersecurity: Safeguarding Client Accounts against Credential Compromise. This risk alert highlights “credential stuffing,” which is a method of cyber-attack to client accounts that uses compromised client login credentials, resulting in the possible loss of customer assets and unauthorized disclosure of sensitive personal information.

OCIE indicates that it has observed in recent examinations an increase in the number of cyber-attacks against SEC-registered investment advisers and brokers and dealers using credential stuffing. Credential stuffing is “an automated attack on web-based user accounts as well as direct network login account credentials. Cyber attackers obtain lists of usernames, email addresses, and corresponding passwords from the dark web and then use automated scripts to try the compromised user names and passwords on other websites, such as a registrant’s website, in an attempt to log in and gain unauthorized access to customer accounts.”

OCIE cautions that credential stuffing is emerging as a more effective way for attackers to gain unauthorized access to customer accounts and/or firm systems than traditional brute force password attacks. When a credential stuffing attack is successful, “bad actors can use the access to the customer accounts to gain access to firms’ systems, where they are able to steal assets from customer accounts, access confidential customer information, obtain login credential/website information that they can sell to other bad actors on the dark web, gain access to network and system resources, or monitor and/or take over a customer’s or staff member’s account for other purposes.”

This guidance provides a summary of credential stuffing, highlights practices firms have implemented in response to help protect client accounts, and discusses other considerations for firms preparing for credential stuffing.

For more information, click here.

SEC Staff Speech, CF Disclosure Guidance Topic: Topic No.7: Confidential Treatment Applications Submitted Pursuant to Rules 406 and 24b 2

Summary - The staff in the SEC’s Division of Corporation Finance (Corp Fin) has updated its guidance in CF Disclosure Topic No. 7, Confidential Treatment Applications Submitted Pursuant to Rules 406 and 24b-2. This guidance addresses how and what to submit when filing an application objecting to public release of information otherwise required to be filed under the Securities Act and the Securities Exchange Act. Corp Fin indicates that this guidance replaces and supersedes the guidance provided in Staff Legal Bulletins No. 1 and No. 1A.

Corp Fin updated the guidance relating to options available to companies whose confidential treatment orders are about to expire. Companies that previously have obtained a confidential treatment order have three choices of what to do when the order is about to expire:

Refile the unredacted exhibit;
Extend the confidential period pursuant to Rules 406 or 24b-2; or
Transition to the rules governing the filing of redacted exhibits under Regulation S-K Item 601(b)(10)(iv)[11] and parallel rules.

For more information, click here.

Shareholder Proposals – SEC Adopts Amendments to Modernize Shareholder Proposal Rule

The SEC indicates that the amendments will “facilitate engagement among shareholder-proponents, companies and other shareholders, including preserving the ability of smaller shareholders to access the proxy statements of the companies in which they have demonstrated a continuing interest.” Under the rules, any shareholder may submit an initial proposal after having held $2,000 of company stock for at least three years, or higher amounts for shorter periods of time. The rules also provide for a transition period so that shareholders who are currently eligible at the $2,000 threshold will remain eligible to submit a proposal for inclusion in the company’s proxy statement so long as they continue to maintain at least their current holdings through the date of submission (and through the date of the relevant meeting).

For more information, click here.

PCAOB Inspections – PCAOB Issues Staff Update and Preview of 2019 Inspection Observations

Summary - As discussed above, the PCAOB has published a Staff Update and Preview of 2019 Inspection Observations. This staff update and preview shares certain observations from the 2019 inspections of audits of issuers prior to issuance of the inspection reports. This update includes information on the PCAOB’s continued efforts to transform its inspections process, most recent inspection observations, and perspectives from target team work related to multi-location audits. Auditors may find this information useful as they plan and perform their audits, and audit committees may find it useful as they engage with their auditors.

The PCAOB previously provided initial observations from its review of the first phase of implementation of critical audit matters for large accelerated filers with a fiscal year ending on or after June 30, 2019.

For more information, click here.

Tax Updates

Partnership Form’s 1065 Schedule K-1 Now Requires Reporting on Tax Basis Only

Written by Tabitha Ford, Tax Senior, MaloneBailey, LLP

Summary - The IRS released an early draft of the instructions to Form 1065, U.S. Return of Partnership Income, for tax year 2020 (filing season 2021) that include revised instructions for partnerships, which are now required to report only tax basis capital accounts to partners on Schedule K-1 (Form 1065). The balance sheet will still be reported as the basis method used by the partnership and any differences will remain as reconciled to tax basis using Schedule M-1 and Schedule M-2 of Form 1065.

To be prepared for these changes and avoid any delay’s in filing due to the additional reporting requirement, partners and partnership representatives should understand the following :

For the 2019 tax year, did the partnership file using a tax basis, GAAP basis, or any other type of basis?
If the 2019 tax year return was filed using anything other than the tax basis method:

Did the partnership maintain capital accounts in it’s books and records using the tax basis method?
If so, the tax basis method must be used as the beginning capital account for tax year 2020 and to track partner’s capital going forward.
If tax basis was not previously maintained in the partnerships records, the partner’s beginning capital should be reconfigured using either the tax basis method, modified outside basis method, modified previously taxed capital method, or section 704(b) method, for tax year 2020 only. (see below Beginning Capital Revision Methods)
All other lines should be reported using the tax basis method.
If the partners capital was adjusted under section 734(b) previously, the accumulated adjustments should be removed from beginning capital and reflected as an other increase / decrease item for tax year 2020.

Beginning Capital Revision Methods:

Tax Basis Method – Does not include adjustments for partner’s share of liabilities.
Modified Outside Basis Method – The partner’s adjusted tax basis in it’s partnership interest less the partner’s share of liabilities and any 743(b) adjustments.
Modified Previously Taxed Capital Method –
Amount of cash the partner would receive if you liquidated after selling all of your assets in a fully taxable transaction for cash equal to the fair market value of the assets; increased by
The amount of tax loss determined without taking into account any 743(b) adjustments and decreased by
The amount of tax gain determined without taking into account any 743(b) adjustments
704(b) Method
The partner’s section 7104(b) capital account
Plus/ Less: partner’s share of section 704(c) built-in loss or gain

If you would like to ensure any partnerships you own or manage is prepared for the revisions to the Schedule K-1 capital account reporting, please feel free to contact our Senior Tax Manager, Nicole Zhao.

Extra Crunch

DTCC's Podcast: Advancing Financial Markets Together

Summary - DTCC offers a podcast that focuses on industry trends and perspectives from members of the global financial services community.

DTCC also offers other podcast series, including CSDR podcast series and DTCC Exception Manager podcast series.

For more information about the podcast and to subscribe, please click here.

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Should you be interested in a complimentary estimate for audit, consulting and tax services, please contact Caroline Rosen at crosen@malonebailey.com or 713.343.4286.

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