If the staff and leadership at the Securities and Exchange Commission had hoped that clearing their plate of most Dodd-Frank Act and JOBS Act mandates would make 2016 a year to focus on their own initiatives, they may want to revisit that thinking.
Throughout the fall, talk in Washington was of Congress passing a “JOBS Act 2.0”—a sequel of pro-business regulatory reform pushed by Republicans and corporate lobbyists. Some of those hopes finally came into law through a highway spending bill Congress passed in December, and the deadlines attached to the legislation all but assure that it will capture the SEC’s time with the start of this year.
Among the regulatory reform items included in the 1,300-page, $300 billion, Fixing America’s Surface Transportation Act (the FAST Act):
Rather than the current 21-day limitation, investor road shows may now begin 15 days after the confidential filing of an IPO registration statement is made public.
An issuer designated an emerging growth company at the time it submits a confidential registration statement or a public registration will continue to benefit from that status until it moves forward with an IPO or one year after it ceases to be an EGC.
Within 180 days of enactment of the FAST Act (that is, by mid-June), the SEC must issue regulations that permit issuers to submit a summary page on Form 10-K, cross-referenced to other disclosures in Form 10-K as needed.
Although a review of Regulation S-K is already underway as part of the SEC’s review of its disclosure regime, that pace escalates with the FAST Act. Within 180 days, Congress wants the SEC to move on reforms to reduce the regulatory burdens on emerging growth companies, accelerated filers, and smaller reporting companies; and eliminating disclosure requirements that are duplicative, outdated, or unnecessary.
The SEC is also tasked with a study of Regulation S-K that assesses ways to simplify and modernize disclosures, reducing the cost and burden on issuers. A company-specific approach that eliminates boilerplate language and static requirements should also be addressed. This report must be submitted to Congress within 360 days of the FAST Act’s enactment, accompanied by related rule proposals.
As for other legislative ideas beyond the FAST Act, that might comprise a true JOBS Act 2.0, the prospect is less certain.
“The SEC has not looked at a lot of the phased disclosure that applies to [smaller reporting companies] in an awfully long time. It would be reasonable to anticipate that we would see something there.”
Anna Pinedo, Partner, Morrison Foerster
“It is hard to see the momentum gathering for that,” says Anna Pinedo, a partner at law firm Morrison Foerster. “There are lots of individual pieces of legislation which on their own were not controversial, but I just don’t see how they will get passed” in the current political climate.
As for what the SEC will tackle, Pinedo expects movement on a long-awaited revision to the definition of accredited investors. Based on hints emerging from commissioners and the SEC’s Investor Advisory Group, those changes may arrive sooner rather than later.
While many companies and business leaders will look closely for changes to forthcoming final rules related to executive compensation (including the much-maligned pay ratio rule), Pinedo doesn’t foresee any surprises. “Given how long it took to get to where they are, I wouldn’t anticipate a great deal of change,” she says.
FAST ACT PROVISIONS
Below is an excerpt from Fixing America’s Surface transportation Act's main summary.
The Fixing America’s Surface Transportation (FAST) Act is five-year legislation to improve the Nation’s surface transportation infrastructure, including our roads, bridges, transit systems, and rail transportation network. The bill reforms and strengthens transportation programs, refocuses on national priorities, provides long-term certainty and more flexibility for states and local governments, streamlines project approval processes, and maintains a strong commitment to safety.
ROADS & BRIDGES
Facilitates commerce and the movement of goods by refocusing existing funding for a National Highway Freight Program and a Nationally Significant Freight and Highway Projects Program
Expands funding available for bridges o the National Highway System
Streamlines the environmental review and permitting process to accelerate project approvals, without sacrificing environmental protections
Eliminates or consolidates at least six separate offices within the Department of Transportation and establishes a National Surface Transportation and Innovative Finance Bureau to help states, local governments, and the private sector with project delivery
Increases transparency by requiring the Department of Transportation to provide project-level information to Congress and the public
Promotes private investment in our surface transportation system
Promotes the deployment of transportation technologies and congestion management tools
Encourages installation of vehicle-to-infrastructure equipment to improve congestion and safety
Updates research and transportation standards development to reflect the growth of technology
PUBLIC TRANSPORTATION
Increases dedicated bus funding by 89% over the life of the bill
Provides both stable formula funding and a competitive grant program to address bus and bus facility needs
Reforms public transportation procurement to make federal investment more cost effective and competitive
Consolidates and refocuses transit research activities to increase efficiency and accountability
Establishes a pilot program for communities to expand transit through the use of public-private partnerships
Eliminates the set aside for allocated transit improvements
Provides flexibility for recipients to use federal funds to meet their state of good repair needs
Provides for the coordination of public transportation services with other federally assisted transportation services to aid in the mobility of seniors and individuals with disabilities
Requires a review of safety standards and protocols to evaluate the need to establish federal minimum safety standards in public transportation and requires the results to be made public
HIGHWAY & MOTOR VEHICLE SAFETY
Focuses funding for roadway safety critical needs
Increases percentage of National Priority Safety Program states can spend on traditional safety programs
Ensures more states are eligible for safety incentive grant funds and encourages states to adopt additional safety improvements
Encourages states to increase safety awareness of commercial motor vehicles
Increases National Highway Traffic Safety Administration civil penalties cap
Increases funding for highway-railway grade crossings
Requires a feasibility study for an impairment standard for drivers under the influence of marijuana
Improves the auto safety recall process to better inform and protect consumers
Increases accountability in the automobile industry for safety-related issues
Prevents the rental of cars with safety defects
TRUCK & BUS SAFETY
Overhauls the rulemaking process for truck and bus safety to improve transparency
Consolidates truck and bus safety grant programs and provides state flexibility on safety priorities
Incentivizes the adoption of innovative truck and bus safety technologies
Requires changes to the Compliance, Safety, Accountability program to improve transparency in the FMCSA’s oversight activity
Improves truck and bus safety by accelerating the introduction of new transportation technologies
Source: House of Transportation.
Beyond the JOBS Act and FAST Act, Pinedo expects the SEC to further address smaller reporting companies and bring them into parity with accommodations that have been given to EGCs.
“The SEC has not looked at a lot of the phased disclosure that applies to SRCs in an awfully long time,” she said. “It would be reasonable to anticipate that we would see something there.”
Trickier Issues
Those hungry for controversy will want to watch for the SEC’s efforts to issue a fiduciary standard for investment advisers.
Throughout 2015 the agency made little progress crafting rules for retail brokers and asset managers that offer investment advice. Those rules, intended to dovetail with pending Labor Department standards, require that the advice offered always be in the best interest of clients. The financial advice industry has argued that hard-and-fast rules would have a chilling effect that would ultimately eliminate much-needed counsel for clients.
“The SEC has struggled with this for years,” says Robert Plaze, a partner at law firm Stroock, Stroock & Lavan.
The SEC has also floated trial balloons to authorize third-party, private sector compliance exams for investment advisers. That move is intended to ease the burden on its Office of Compliance Inspections and Examinations, which currently examines less than 10 percent of the 11,500 registered investment advisers annually.
Pursuing private sector exams is a mildly veiled criticism of the SEC’s inability to increase its Congressional appropriation. Many in the industry have worried that outsourcing exams would be too costly, and perhaps ineffective. Suggested compromises include imposing a new fee that would help fund OCIE exams, authorizing Financial Industry Regulatory Authority exams as a supplement to SEC efforts, or even creating a new self-regulating organization for registered investment advisers.
“There are a lot of practical concerns,” Plaze says. “What kind of a compliance audit it would be? Who would do it, and how much confidence could the SEC really have in it? When accountants audit financial statements they audit against Generally Accepted Accounting Principles, but there is no such thing for compliance.”
If top accounting firms win that new work, Plaze fears this would “extend the monopoly accountants have in the auditing area to compliance.” He wonders: “How could small advisers afford that?”
Plaze also expects discussions about stress-testing of mutual funds. “Everybody at the SEC is scratching their head about that,” he says. “In a normal mutual fund what are the stresses you are testing against? What is the benchmark you test against? It is going to be very interesting to see how the SEC approaches it.”
Todd Cipperman, founding principal of Cipperman Compliance Services, will also be watching for news on third-party compliance audits and how the SEC will impose a retail fiduciary standard on RIAs and broker-dealers.
His other prognostications for 2016 are bolder and more speculative: former SEC Commissioner Dan Gallagher will replace FINRA CEO Rick Ketchum when Ketchum retires (as announced) in the second half of 2016; the SEC will cite insufficient compliance budget as part of an enforcement action; addressing CCO fears of personal liability, the insurance industry will begin offering CCO insurance; the SEC will propose a rule that requires the registration of proprietary or high-frequency trading firms.
In the coming year the SEC may further clarify its stance on cyber-breach disclosures, says Jason Day, a partner at Perkins Coie.
Day also expects the SEC to continue rethinking its procedures for granting no-action letter relief for companies that want to exclude certain shareholder proposals. That dovetails with what he sees as the continued increase in activist shareholders.
“Five years ago, only large-cap companies received shareholder proposals,” he says. “Now, it has really moved into the middle market and the mainstream.”
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