Securities and Exchange Commission Chairman Jay Clayton, in a 33-page testimony prepared for his appearance before the Senate Banking Committee, emphasized the Commission’s focus “on investors, innovation, and improved performance” as he ticked off the agency’s wide-ranging accomplishments over the past 12 months. The SEC has been working to modernize its practices within the constraints of legislation that is almost 90 years old while simultaneously undertaking a regulatory correction of sorts as it eased some perhaps too-stringent requirements imposed in the wake of the 2008 financial crisis.
Getting things done
And accomplishments there are. In 2019, the SEC planned to propose or finalize 39 rules; and, as of December 2019, it had advanced 34, or 87 percent, of them, Clayton reported—despite a month-long government shutdown at the beginning of the year.
This year saw the SEC finalize Regulation Best Interest, which requires broker-dealers to act in the best interest of their customers rather than putting their own financial interests first. This action found favor with Senate Banking, Housing and Urban Affairs Committee Chairman Mike Crapo (R-Idaho), who commended the SEC for striking “the appropriate balance of increasing transparency in investors’ relationships, while preserving access to advice relationships and investment products.” State attorneys general, however, have not been so enamored. A number have filed suit against the SEC challenging the regulation.
In the modernization vein, the SEC updated requirements applicable to exchange-traded funds in 2019 to reduce the amount of red tape involved in bringing these funds to market and to provide greater transparency for investors. The Commission also finalized a final rule expanding “test the waters” accommodation to all issuers, rather than just emerging growth companies, to allow them to assess market interest in a potential initial public offering.
Also in 2019, the SEC demonstrated its ability to play well with others as it worked with other regulatory agencies to update the Volcker rule to relax prohibitions on proprietary (“prop”) trading and bank ownership of hedge funds and private equity funds.
Mixed reviews on proxies
Furthering its focus on transparency and modernization, the SEC tried to tackle—with somewhat controversial results—the matter of proxies, the statements companies must provide to shareholders regarding matters that will be addressed at annual meetings. In August, the regulator issued proxy adviser guidance explaining that expert proxy voting advice given at the request of investors is subject to the requirements for proxy solicitation under the Securities Exchange Act of 1934. Institutional Shareholder Services (ISS), a proxy advisory firm, promptly filed a lawsuit in federal court in Washington, D.C., in an effort get the guidance set aside.
“We already have a great deal of digitization in our financial system. There is a difference between sovereign-backed and private mediums of exchange.”
Jay Clayton, Chairman, Securities and Exchange Commission
Then in November, the SEC voted to propose amendments to rules governing proxy solicitations to improve disclosures about conflicts of interest that proxy advisory firms provide to their clients. If finalized, the rules would also give companies the opportunity to review and provide feedback when they identify errors in proxy voting advice. Comments on the proposal are due by Feb. 3, 2020.
About that Main Street investor
Also this fall, the SEC proposed amendments to rules on the process for shareholder proposals to be included in a company’s proxy statement. If finalized, getting a shareholder proposal placed on the following year’s proxy would be more difficult. Clayton noted when the proposal was announced the last time the thresholds for getting shareholder proposals on proxy statements were updated was in 1954.
Clayton also mentioned letters received from a single mother, some retirees, a teacher, and veterans expressing concerns about the proxy process. A common theme in the letters, he said, was the concern of these Main Street investors that their investments “were being steered by third parties to promote individual agendas, rather than to further their primary goals of being able to have enough money to lessen the fear of ‘running out’ in retirement or to leave money to their children and grandchildren.”
Bloomberg later disclosed those letters seem to have been generated by a corporate-funded advocacy group, and some may not even have been written by their purported authors.
“You are focused on strengthening the hand of already very strong CEOs and corporations at the expense of their shareholders in many cases,” Sen. Christopher Van Hollen (D-Md.) accused Clayton at the Banking Committee’s oversight hearing. The letters Clayton had mentioned “were clearly orchestrated by a group called 60 Plus,” a “dark money fund group that corporations use for messaging,” Van Hollen said. The SEC chair said the Commission is investigating the matter.
The 2020 to-do list
The SEC’s contemplation of proxies will carry over into the new year, as will its continued examination of digital assets. The SEC’s FinHub has a framework in place to help those considering initial coin offerings determine whether securities laws apply. “We already have a great deal of digitization in our financial system,” Clayton said at the Senate hearing. He cautioned, though, that “there is a difference between sovereign-backed and private mediums of exchange.”
The SEC has still not yet finalized changes it proposed to its whistleblower rules back in 2018, even as its proposal continues to generate controversy for fear it imposes a cap on whistleblower awards. Clayton has insisted the proposed revision is not a cap.
Simplification of disclosure requirements is also on the SEC’s plate. SEC staff is “developing proposals to modernize and streamline disclosures provided to investors,” Clayton said in his prepared remarks.
China seems to be posing a few headaches for the Commission. About 156 Chinese companies, some of which are government owned at least in part, are listed on U.S. exchanges, Sen. John Kennedy (R-La.) observed at the hearing, but those companies apparently are not allowing the Public Company Accounting Oversight Board (PCAOB) to review their audits. The SEC has an oversight role regarding the PCAOB.
“It’s a problem,” Clayton acknowledged. To that end, he and PCAOB Chairman William Duhnke recently met with the heads of the Big Four audit firms, which tend to be involved through affiliates in the audits of Chinese companies. The goal was to make sure the audit work performed concerning Chinese companies is of the same quality as the audit work done in other jurisdictions, Clayton said at the hearing. He anticipates this being a continuing dialogue. Kennedy has introduced a bill called the Holding Foreign Companies Accountable Act, S. 945, that would delist a company for failure to cooperate with the PCAOB.
How active the 116th Congress is likely to be on this or any SEC matters remains to be seen—given that 2020 will be an election year—but a look at recent metrics may be telling. As of this writing, just 78 laws had been enacted during the 116th Congress, according to GovTrack. While we are still in the first year of the two-year Congress, that figure is far below the number of laws enacted during the previous Congress (443).
Special report: Compliance 2020
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A modern, corporate-friendly SEC glides into 2020