In February, the Office of Management and Budget released the proposed fiscal 2021 United States government budget. The beginning of the Budget contains a message from President Trump delineating a list of key priorities of the administration including better trade deals, preserving peace through strength, overcoming the opioid crisis, regulation relief and American energy independence. The budget has some notable aspects that directly relate to the capital markets and its participants.
As the federal government has been doing for all agencies, the 2021 Budget seeks to eliminate agency reserve funds. Specifically regarding the SEC, the Budget cuts the SEC reserve by $50 million. The reduction in reserve fund is thought to increase overall accountability as the SEC would need to go to Congress to ask for additional funds if needed, with an explanation, instead of just accessing a reserve account. Reserve fund cuts are sent to the U.S. Treasury for deficit reduction.
However, the Budget also increases the overall SEC financing by 5.6% for a total of $1.9 billion including allowing for a 2.9% increase in workforce. The budget also increases the SEC’s annual funding for cybersecurity from $41.8 million to $46.6 million.
One of the overarching stated principals in the Budget is to reduce overlapping and duplication and in particular, “when multiple agencies or programs have similar goas, engage in similar activities or strategies, or target similar beneficiaries” they should be consolidated or the duplicated functions eliminated. In that regard, the 2021 budget proposed moving the now autonomous PCAOB under the SEC with a mandate that the SEC and PCAOB start to consolidate their duplicative functions. “Consolidating these functions within SEC will reduce regulatory ambiguity and duplicative statutory authorities,” the proposed Budget states.
The PCAOB was originally created by the Sarbanes-Oxley Act of 2002 in response to a series of accounting frauds including involving Enron Corp. However, the SEC is also tasked with investigation, oversight and enforcement against the same accounting firms that must be members of the PCAOB. The PCAOB has faced a series of controversies in recent years.
In December 2017, following a scandal involving the leak of confidential information about future inspections of KPMG LLP to auditors at the accounting firm, the SEC replaced the PCAOB’s entire board. A month later criminal charges were unsealed for three former PCAOB employees and three former KPMG executives.
In May 2018, five key division and office heads departed the regulator. Also in 2018, the number of settled disciplinary proceedings made public by the PCAOB dropped by 63%. In May 2019, a group of current and former PCAOB employees filed a whistleblower complaint alleging infighting, a hostile work environment and retaliatory conduct.
To top off the issues, in September 2019,a nonpartisan government oversight report found that over its full 16-year life, the PCAOB had only brought 18 enforcement actions against the big four accounting firms despite having found 808 instances of defective audits by those same firms. The report found that the PCAOB had only collected a total of $6.5 million in fines despite having the authority to demand as much as $15 million per violation. Finally, the report found an incestuous relationship between the PCAOB and the big four accounting firms with a frequent interchange of employees. In short, the PCAOB has not proved itself worth its expense nor effective in its mission.
Like other savings, the savings from folding in the PCAOB with the SEC would be used to reduce the federal deficit. It is expected that the joining of the two would result in a savings of $57 million in 2022 and a total of $580 million over ten years.
It is widely acknowledged that the increase in digital assets and cryptocurrencies has increased the prevalence of money laundering and funding for criminal activities including cybercriminals and terrorist activities. As an example, in August of last year, the Treasury Department’s Office of Foreign Assets Control (“OFAC”) blacklisted the cryptocurrency addresses of Chinese nationals involved in trafficking and producing the drug fentanyl. It is believed that the perpetrators were laundering funds using cryptocurrency. At the time, FinCEN issued an advisory to financial institutions outlining some of the common schemes used to launder funds.
In a move to increase law enforcement in this sector, after nearly two decades of control under of the U.S. Department of Homeland Security, the 2021 Budget proposes moving the Secret Service to the Department of the Treasury. The Budget cites the need for increased efficiencies in combating threats stemming from financial technology, including cryptocurrencies. The Budget would also provide the Secret Service with $2.4 billion in funding and allow for an additional 119 Secret Service agents.
The budget also proposes funding $127 million to support the Financial Crimes Enforcement Network, which “links law enforcement and intelligence agencies with financial institutions and regulators.” The budget outlines that the funding would help support FinCEN’s actions under the Bank Secrecy Act and would “expand its efforts to combat emerging virtual currency and cybercrime threats.” FinCEN regulates and monitors anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA).
AML/CFT obligations apply to entities that the BSA defines as “financial institutions,” such as futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSBs) as defined by FinCEN (for more information on MSBs see HERE), and broker-dealers and mutual funds obligated to register with the SEC. The AML/CFT requirements under the BSA include establishing effective processes and procedures, recordkeeping and reporting and filing suspicious activity reports (SARs). For more information, see HERE.
The Budget also allocated $173 million to the Department of Treasury’s Office of Terrorism and Financial Intelligence which combats terrorists, rogue regimes, proliferators of weapons of mass destruction, human rights abusers, and other illicit actors by denying their access to the financial system, disrupting their revenue streams, and degrading their ability to cause harm.
As an aside, in addition to the Secret Service, Budget will also move the Bureau of Alcohol, Tobacco, Firearms and Explosives and the Organized Crime and Drug Enforcement Task Force to the Department of Treasury. The ATF has historically been under the Department of Justice.
Small Business Administration (SBA)
The SBA was established to aid, counsel and assist small businesses. The Budget supports $43 billion in business lending to assist U.S. small business owners in accessing affordable capital to start, build, and grow their businesses though loans will have an up-front administrative fee to offset costs.
Other Points of Interest – Technology and Cybersecurity
The Administration is prioritizing technology and industries of the future across the board with an emphasis on artificial intelligence. The Department of Defense Budget invests over $14 billion in science and technology programs that support key investments in industries of the future, such as artificial intelligence, quantum information science, and biotechnology, as well as core Department of Defense modernization priorities such as hypersonic weapons, directed energy, 5G, space, autonomy, microelectronics, cybersecurity, and fully networked command, control, and communications.
The Department of Commerce provides $718 million for the National Institute of Standards and Technology (NIST) to advance U.S. innovation and technological development, as part of an all-government approach to ensure that the US leads the world in the areas of AI, quantum information science, advanced manufacturing, and next generation communications technologies such as 5G. The Budget doubles NIST’s AI funding in order to accelerate the development and adoption of AI technologies and help ensure AI-enabled systems are interoperable, secure and reliable.
The Department of Energy has a new Artificial Intelligence and Technology Office responsible for providing department wide guidance and oversight on AI technology development and application. The Budget provides $5 million for this new office to enhance AI R&D projects already underway. In addition, the Department of Energy is allocated $5.8 billion for the Office of Science to continue its mission of focusing on early-stage research. Within this amount: $475 million is requested for Exascale computing to help secure the United States as a global leader in supercomputing; $237 million is requested for quantum information science; $125 million is requested for AI and machine learning; and $45 million is requested to enhance materials and chemistry foundational research to support U.S.- based leadership in microelectronics. Moreover, to support broad, interagency cybersecurity efforts, the Budget provides funding in multiple programs, including $185 million for the Office of Cybersecurity, Energy Security, and Emergency Response.
The Department of Education Budget includes $2 billion for Career and Technical Education Grants to ensure that all high schools can offer high-quality technological educations.
Laura Anthony, Esq.
Anthony L.G., PLLC
A Corporate Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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