All five SEC Commissioners testified yesterday at an oversight hearing held by the House Financial Services Committee, the first time all five have appeared since 2007, according to Chair Maxine Waters. (Here is their formal testimony.) These hearings are, of course, broken up into bite-size five-minute Q&A sessions, so there is not much opportunity for in-depth questioning. And most often, it seemed that the Representatives directed their questions to the Commissioners that were most likely to provide gratifying answers—meaning a Commissioner of the Representative’s own party. There were, however, some notable exceptions, such as Representative Katie Porter’s pointed questioning of Commissioner Hester Peirce with regard to her views on ESG disclosure. In the end, the hearing did provide some insight into the current thinking and expectations of many of these legislators and regulators.
You may recall that, at the end of last year, SEC Chair Jay Clayton and Corp Fin Chief Accountant Kyle Moffatt were warning at various conferences about some of the risks the SEC was monitoring, among them the LIBOR phase-out, which is expected to occur in 2021. LIBOR, the London Interbank Offered Rate, is calculated based on estimates submitted by banks of their own borrowing costs. In 2012, the revelation of LIBOR rigging scandals made clear that the benchmark was susceptible to manipulation, and British regulators decided to phase it out. In one speech, Clayton reported that, according to the Fed, “in the cash and derivatives markets, there are approximately $200 trillion in notional transactions referencing U.S. Dollar LIBOR and… more than $35 trillion will not mature by the end of 2021.” Clayton indicated that an alternative reference rate, the Secured Overnight Financing Rate, or “SOFR,” has been proposed by the Alternative Reference Rates Committee; nevertheless, there remain significant uncertainties surrounding the transition. (See this PubCo post.) And those uncertainties surrounding LIBOR and SOFR may be leading companies and others to delay addressing the issue until everything is finally settled. Perhaps with that in mind, on Friday evening, the SEC staff published a Statement that “encourages market participants to proactively manage their transition away from LIBOR.” And, in the press release announcing the publication, Clayton drew “particular attention to the staff’s observation: ‘For many market participants, waiting until all open questions have been answered to begin this important work likely could prove to be too late to accomplish the challenging task required.’”
Allison Lee has finally been confirmed by the Senate as an SEC Commissioner. As a result, the SEC now has a full complement of Commissioners. Lee fills the Democratic seat formerly occupied by Kara Stein and, in fact, was her counsel for just over a year. In total, she was at the SEC for 13 years, including as Senior Counsel in Enforcement. Here is the statement of congratulations from the rest of the SEC.
Yesterday, SEC Chair Jay Clayton announced that the SEC will be holding a roundtable this summer to discuss “the impact of short-termism on our capital markets and whether our reporting system, or other aspects of our regulations, should be modified to address these concerns…. The SEC staff roundtable will seek to explore the causes of short-termism and to facilitate conversations on what market-based initiatives and regulatory changes could foster a longer-term performance perspective in American companies.” In his statement, Clayton observed that, in light of increases in life expectancy, together with the greater responsibility of “Main Street investors” for their own retirements—largely as a result of the shift from the security of company pensions to 401(k)s and IRAs—the needs of these investors have changed: “Main Street investors are more than ever focused on long-term results.” However, from time to time, they also “need liquidity. In other words, at some point, long-term investors do become sellers. The SEC’s disclosure rules should reflect and foster these needs—long-term perspective and liquidity when needed.” To that end, the goal of the roundtable is not just to discuss the problems associated with short-termism, but also to promote “further dialogue on the causes of and potential solutions to the issue.”
The newest SEC Commissioner, Elad Roisman, who has reportedly gotten the nod to head up the SEC’s efforts regarding proxy advisory firms, told the U.S. Chamber of Commerce in late March that he expects the SEC to issue new guidance, sometime after proxy season this year, regarding the use by institutional investors of proxy advisory firm recommendations, as reported in The Deal. And, according to the WSJ, Roisman has “also questioned whether it was appropriate for the SEC to exempt proxy advisers from some regulations on investment advice, including whether they can both advise a company and make recommendations to its shareholders at the same time.” However, as discussed in this PubCo post, the question of whether proxy advisory firms, such as ISS and Glass Lewis, have undue influence over the voting process and should be reined in has long been something of a political donnybrook. With the issue of proxy advisory firm regulation so politically freighted, will the SEC limit the scope of its effort to guidance to institutional investors or, more controversially, go further and impose regulation on proxy advisors, as many companies have advocated?
The SEC has voted to propose a new rule, Rule 163B, that would expand the JOBS Act’s “test-the-waters” reform beyond emerging growth companies to apply to all issuers. If expanded as proposed, the new rule would allow a company (and its authorized representatives, including underwriters) to engage in oral or written communications, either prior to or following the filing of a registration statement, with potential investors that are, or are reasonably believed to be, qualified institutional buyers (QIBs) or institutional accredited investors (IAIs) to determine whether they might be interested in the contemplated registered offering. The proposed new rule is designed to allow the company to gauge market interest in the deal before committing to the time-consuming prospectus drafting and SEC review process or incurring many of the costs associated with an offering. According to the press release, SEC Chair Jay Clayton views the extension of this reform as a way to enhance the ability of companies “to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies…. [Clayton has] seen first-hand how the modernization reforms of the JOBS Act have helped companies and investors. The proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.”
The proposal is so uncontroversial that the SEC did not even hold an open meeting to vote on it. I’d don’t think I’d be going out on too much of a limb if I predicted that, although there may be tweaks to it, the proposed new rule is just about a done deal. The proposal will have a 60-day public comment period following its publication in the Federal Register.
Unless you’ve been unplugged and hiding under a rock recently, you’ve heard that the federal government shutdown has ended—at least for the next three weeks. In a statement today, SEC Chair Jay Clayton said that the SEC has “resumed normal staffing levels and is returning to normal operations.” What that will mean in practice, we don’t really know yet, given the likelihood of significant backlogs that accumulated over the past month. Clayton advised that the leaders of Divisions, such as Corp Fin, are consulting with the staff and “are continuing to assess how to most effectively transition to normal operations.” Corp Fin is expected to publish a statement (as are other offices) “in the coming days regarding their transition plans,” which will be available on the SEC website.