2022 Regulatory Outlook: A Year of Big Developments?

Insider stock sales, individual culpability in corporate misconduct, and climate-related disclosures headline a potentially busy year.
Matt HellerJanuary 25, 2022
2022 Regulatory Outlook: A Year of Big Developments?
Photo: bpperry

The first year of the Biden administration featured ample discussion on proposed shifts in U.S. regulation. But given the usual changeover in regulatory heads, it was just that: discussion.

2022 could be much more interesting. Several hot-button areas of interest to chief financial officers — involving the SEC, FASB, and law enforcement agencies — may see critical developments.

Here are four areas to keep tabs on in 2022.

White-Collar Crackdown

Both the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) have signaled that holding more individuals accountable for malfeasance is a priority. 

One emphasis for law enforcers is likely to be accountability, with the SEC returning to the Obama-era policy of requiring admission of wrongdoing in certain settlements and demanding individuals be held responsible for corporate misconduct. “We may seek admissions in certain cases where heightened accountability and acceptance of responsibility are in the public interest,” SEC Chair Gary Gensler said in a November 2021 speech.

At the DOJ, holding individuals accountable has long been policy, but according to the Orrick law firm, the department “now appears to be adding new elements to this approach.” Deputy Attorney General Lisa Monaco is urging prosecutors to “be bold” in prosecuting individual executives, even where that “means the government may lose some of those cases.” 

In addition, to get credit for cooperating with the DOJ, companies will be required to turn over information about all individuals suspected in misconduct, not just those “substantially involved,” which was the policy under the Trump administration. The DOJ also plans to consider a company’s entire criminal and civil history of violations when making decisions about resolving cases, and give prospectors free reign to impose corporate monitors on a company if necessary to ensure compliance.

Awaiting ESG Standards

“The Securities and Exchange Commission is navigating a historic effort to require public companies to release investor-facing climate-related disclosures,” Scott Flynn, audit vice chair of KPMG, wrote on in November. 

The SEC is expected to issue its much-anticipated standards for environmental, social, and governance (ESG) disclosure this year — at least it plans to. “Today’s investors are looking for consistent, comparable, and decision-useful disclosures around climate risk,”  Gensler told Congress in September 2021.

The SEC chief has indicated the commission is considering a robust assessment and reporting framework, but Gensler may run into some resistance on Capitol Hill and on on his own commission. “To me, the SEC requiring disclosure on ESG metrics is like if we required the gymnastics judges to judge the diving events — similar, but they’re not qualified,” Rep. Bill Huizenga, Michigan Republican, said in a House hearing.

In a position paper, the Financial Economists Roundtable has said any rules should be limited to financial matters — specifically, the impact of climate on a company’s cash flows. Going beyond that would amount to regulatory overreach, it said. And SEC Commissioner Hester Peirce has warned requiring disclosure of information that is not material would be both contrary to SEC practice and costly for issuers.

“Throwing out materiality or stretching it to encompass everything and anything would harm investors,” she said in a July speech.

But many proponents of ESG reporting, such as the United-Nations supported Principles for Responsible Investment, want more disclosure. They say large and small investors want lots of ESG information to help decide whether to invest, sell, and make proxy voting decisions.

For example, Gensler said last year the SEC could require company-level metrics on the progress toward climate-related goals; disclosure of greenhouse gas (GHG) emissions from a company’s operations (including its supply chain); and forward-looking statements that cover climate-change regulations, damage from severe weather, and effects from transitioning to a net-zero emissions business model. 

BlackRock CEO Larry Fink, in his annual letter to CEOs last week, said companies should tailor their ESG reports to the framework of the Task Force on Climate-related Financial Disclosures, which could become a model the SEC follows. Fink also said BlackRock is asking companies it invests in to set short-, medium-, and long term targets for GHG reductions.

Rules for Stock Sales

Corporate insiders, including CFOs, may need to prepare for a major change in a rule that protects them from future accusations of insider trading if they make stock trades as part of a pre-announced Rule 10b5-1 portfolio management plan.

The safe harbor currently applies to plans executed by a third party and set up at a time when the plan beneficiary (the executive) isn’t aware of material nonpublic information. But in December 2021, the SEC proposed tightening the rule to require company officers to wait 120 days before they can trade under a 10b5-1 plan. The change would also prohibit overlapping plans and limit single-trade plans to one trading plan per 12-month period.

“The core issue is that these insiders regularly have material information that the public doesn’t have,” Gensler said. “So how can they sell and buy stock in a way that’s fair to the marketplace?”

According to the Cooley law firm, the rule changes — if adopted in their current form — would be a significant departure from established practice in the operation of and disclosures for 10b5-1 plans.

The safe harbor does seem to need some updating. The plans were developed to allow for selling “routine amounts of shares every month over multiple years,” said Daniel Taylor, an accounting professor who runs the Forensic Analytics Lab at the University of Pennsylvania’s Wharton School.

But as of now, an executive can trade the same day a plan is created and an executive can modify or cancel a plan at any time. About a third of plans since 2004 involve just a single trade, according to InsiderScore data.

Given rule changes are highly likely in 2022, Cooley advises companies to “review any existing 10b5-1 plan guidelines in light of the proposed amendments, including any company-imposed cooling-off periods, and other restrictions and requirements that may align or differ from the proposed rules, and consider what impacts the proposed rules may have on current practices.”

Advancing Accounting 

Each turn of the calendar year brings predictions about potential new accounting standard updates from the Financial Accounting Standards Board (FASB). But FASB is slow and deliberate, often taking years for issue to bubble to the surface, much less be codified.

In 2022, two proposed changes are closer to the finish line than others. The first is accounting for goodwill. The board is leaning toward adding amortization (regular yearly writedowns of goodwill), a method it eliminated in 2001, to the existing impairment testing model.

“Based on the direction so far, a majority of our board has been interested in pursuing an amortization with impairments model … The impairment model could be the exact same as the current impairment model, or it could be tweaked,” FASB Chair Richard Jones told in 2021

Some investors oppose the change, saying the impairment model, sans regularly writedowns of goodwill, is a good way of discovering which management teams are good at acquisitions. One thorny problem looms: the International Accounting Standards Board may be headed in a different direction than FASB.

Another area where FASB may make progress is on its push to require issuers to break-out big-ticket expenses incurred by business divisions rather than just reporting segment profits or losses. Jones said a proposal could be issued in the first half of 2022.

As to the controversial area of accounting for cryptocurrencies and other digital assets, in late 2020 FASB decided not to add it to its agenda. But if the issue becomes more “pervasive” among corporates (MicroStrategy was flagged for its crypto accounting last week), the board could hit the accelerator. 

“One of the things that I tried to get an understanding of when I first got here was how quickly we could take action when there were emerging issues,” Jones told nine months into his first year as chair.