On the Republican side, a slew of proposed legislation is gaining traction—although, perhaps, not enough to prevail in the Senate or overcome a Presidential veto—that would strain the Commission’s resources and hamper future rulemaking ability. Among the most controversial of those bills is H. R. 5429, the Securities and Exchange Commission Regulatory Accountability Act, introduced by Rep. Scott Garrett (R-N.J.) on June 9. One week later, it advanced from the House Financial Services Committee by a party-line vote of 34-25.
The bill states its intent “to improve the consideration by the SEC of the costs and benefits of its regulations and orders.”
Requirements it lays out for the Commission include:
Before issuing a regulation under the securities laws, the SEC shall clearly identify the nature and source of the problem the proposed regulation is designed to address, assess the significance of that problem, and determine whether any new regulation is warranted
The SEC must utilize its Chief Economist to assess the costs and benefits—both qualitative and quantitative—of the intended regulation and propose or adopt it only on a reasoned determination that benefits justify the costs
The Commission shall Identify and assess available alternatives to a regulation that is considered, including modification of an existing regulation, and provide an explanation of why it meets objectives more effectively than the alternatives
The bill also calls for a review of existing regulations, “not later than one year after the date of enactment, and every five years thereafter,” to determine whether they are outmoded, ineffective, insufficient, or excessively burdensome. It must modify, streamline, expand, or repeal regulations in accordance with such a review. In reviewing any regulation that subjects issuers with a public float of $250 million or less to the attestation and reporting requirements of the Sarbanes-Oxley Act, the Commission “shall specifically take into account the large burden of such regulation when compared to the benefit of such regulation.”
Among those critical of the proposed legislation is the Council of Institutional Investors, a non-profit association of employee benefit plans, foundations, and endowments with combined assets under management exceeding $3 trillion. It could, according to the CII, “paralyze the SEC’s regulatory activities.”
“A year ago, I called your leadership at the SEC extremely disappointing. Today, I am more disappointed than ever.” (speaking to SEC Chair Mary Jo White)
Sen. Elizabeth Warren (D-Mass.)
“It is well established that while some of the costs of some SEC proposals or rules can be reliably estimated, the same is generally not true for the benefits,” a letter from Executive Director Kenneth Bertsch to members of Congress says. “In most instances, the benefits of a Commission rule relating to the financial markets, particularly a rule designed to protect investors, cannot be reliably measured.”
The bill, Bertsch said, would impose “a costly, one-sided, incomplete analysis in which the Commission would be hard pressed to satisfy the required determination that the benefits of a proposal or rule justify the costs of the regulation.” It could, for all practical purposes, “prohibit the SEC from issuing any substantive proposals or rules in furtherance of its mission to protect investors.”
The requirement to review existing regulations within one year of passage, and every five years thereafter, “would consume the SEC’s existing regulatory resources and likely require substantial additional dedicated resources,” he added. “This likely would paralyze SEC regulatory capacity.”
Also ramping up opposition is Americans for Financial Reform, a coalition of investor advocates. “This legislation would impose a host of unworkable new bureaucratic and administrative burdens on the agency,” it said in a statement.
The most prominent new requirement would mandate that the SEC identify every “available alternative” to a proposed regulation or agency action and analyze the costs and benefits of each such alternative prior to taking action, AFR added.
“This requirement alone could force agencies to complete dozens of additional analyses before passing a rule or guidance,” it said. “Placing this mandate in statute will also provide near-infinite opportunities for Wall Street lawsuits aimed at halting or reversing SEC actions. It would be a gift to trial lawyers who work on such anti-government lawsuits. No matter how much effort the SEC devotes to justifying its actions, the question of whether the agency has identified all possible alternatives to a chosen action, and has properly measured the costs and benefits of each such alternative, will always remain open to debate.”
As for Democrats, SEC Chair Mary Jo White was excoriated during a June 14 oversight hearing before the Senate Banking Committee. While it was predictable that Sens. Sherrod Brown (D-Ohio) and Bob Menendez (D-N.J.) would continue their saber-rattling over White’s refusal to commit to a political disclosure rule—an issue that has contributed to a delay in approving nominations needed to bring the SEC up to its full slate of five commissioners—Sen. Elizabeth Warren (D-Mass.), more surprisingly, took umbrage with the Commission’s ongoing disclosure effectiveness review.
“The SEC’s mission is to protect investors and capital markets, and requiring companies to disclose information is a critical part of that mission, she said. “Public companies may not like disclosing potentially embarrassing or damaging information, but the SEC’s job is to look out for investors and not for companies.”
SEC REGULATORY ACCOUNTABILITY ACT
The following is a selection from H. R. 5429, the SEC Regulatory Accountability Act.
REVIEW OF EXISTING REGULATIONS—Not later than 1 year after the date of enactment of the SEC Regulatory Accountability Act, and every five years thereafter, the Commission shall review its regulations to determine whether any such regulations are outmoded, ineffective, insufficient, or excessively burdensome, and shall modify, streamline, expand, or repeal them in accordance with such review.
In reviewing any regulation, a regulation issued in accordance with formal rulemaking provisions) that subjects issuers with a public float of $250,000,000 or less to the attestation and reporting requirements of section 404(b) of the Sarbanes-Oxley Act of 2002, the Commission shall specifically take into account the large burden of such regulation when compared to the benefit of such regulation.
REQUIREMENTS OF ASSESSMENT PLAN AND REPORT
REQUIREMENTS OF PLAN—The assessment plan required under this paragraph shall consider the costs, benefits, and intended and unintended consequences of the regulation. The plan shall specify the data to be collected, the methods for collection and analysis of the data and a date for completion of the assessment. The assessment plan shall include an analysis of any jobs added or lost as a result of the regulation, differentiating between public and private sector jobs.
SUBMISSION AND PUBLICATION OF REPORT—The Chief Economist shall submit the completed assessment report to the Commission no later than two years after the publication of the adopting release, unless the Commission, at the request of the Chief Economist, has published at least 90 days before such date a notice in the Federal Register extending the date and providing specific reasons why an extension is necessary. Within seven days after submission to the Commission of the final assessment report, it shall be published in the Federal Register for notice and comment. Any material modification of the plan, as necessary to assess unforeseen aspects or consequences of the regulation, shall be promptly published in the Federal Register for notice and comment.
FINAL ACTION—Not later than 180 days after publication of the assessment report in the Federal Register, the Commission shall issue for notice and comment a proposal to amend or rescind the regulation, or publish a notice that the Commission has determined that no action will be taken on the regulation. Such a notice will be deemed a final agency action.
Warren stressed that “there is a lot you could be doing to protect investors,” including 20 mandatory Dodd-Frank Act rules from 2010 the SEC hasn’t completed. “But instead of moving forward on issues intended to help investors, you are actually headed in the opposite direction,” she said. “Since your first year in office, you have dedicated significant SEC time and resources to a project you invented and called the ‘disclosure effectiveness initiative.’
“Your big idea behind this project is that the SEC might be requiring companies to disclose too much information, causing investors to suffer something you call ‘information overload.’ I’m all for eliminating redundant disclosures and improving the ways information is presented, but, honestly, I have never heard of the concept of information overload in the context of investing in stocks. I’ve never heard of the idea that investors actually want less information than they are getting.”
Warren proceeded to repeatedly pepper White with demands for evidence that such a problem exists. As for the fact that a Regulation S-K review was demanded by Congress by both the JOBS Act and more recent FAST Act, Warren chastised her for going far beyond the former legislation’s focus on emerging growth companies.
“First of all, the review is not limited to duplicative or overloaded information,” White responded. “Our review is meant to make disclosure meaningful to investors, and we have recently received comments from all kinds of constituents, including our Investor Advisory Committee about identifying—and not objecting to removing—things that are repetitive, duplicative, and not useful. The purpose of this review is to make disclosure more meaningful for investors.”
“Let’s be honest about this. I cannot find, and you have not produced, a single investor who has complained to the SEC about receiving too much information,” Warren shot back. “Investors don’t want less information about the companies where they put their money. That’s ridiculous.” As for the Investor Advisory Committee—which includes representatives from hedge funds, pension funds, and retail investors—Warren added the the IAC recently said that the current amount of disclosure was appropriate.
Who wants less information to be disclosed? Warren blamed the U.S. Chamber of Commerce, “which represents the giant companies that have to do the disclosing” and criticized a “fact-free report whining about this non-existent information overload problem in 2014, shortly after you launched your initiative.”
“Information overload is a problem that was invented to justify a project aimed at making life easier for big companies and harder for investors,” she said, again asking White to concede that it is a convenient fiction.
“If you go back, even years ago, to Supreme Court Justice Thurgood Marshall defining materiality under the federal securities laws, a concern was expressed about too much information clouding the meaningful,” White said. “You are describing our disclosure effectiveness review in a way that is much narrower than its intent. We are listening to everybody and also talking about adding information through this review. The manner by which information is provided to investors, is also a huge priority in this review.”
The response did little to disarm Warren. “I am frustrated that, at your direction, the SEC has voluntarily spent two years trying to address a problem you have no evidence exists,” she said. “Instead of taking up work to help giant corporations, the SEC should do its job, starting with the [remaining] rules under Dodd-Frank. Your job is to look out for investors, but you have put the Chamber of Commerce and big business at the top of your priority list.”
Warren’s “drop the mic” moment: “A year ago, I called your leadership at the SEC extremely disappointing. Today, I am more disappointed than ever.”
“And I’m disappointed in your disappointment,” White replied. “I could not disagree any more with your characterization of what we are trying to do to improve our disclosure regime for investors.”