SEC Spring 2018 Regulatory Agenda
On May 9, 2018, the SEC posted its latest version of its semiannual regulatory agenda and plans for rulemaking with the U.S. Office of Information and Regulatory Affairs. According to the preamble, information in the agenda was accurate as of March 13, 2018. On April 26, 2018, SEC Chairman Jay Clayton gave testimony before the Financial Services and General Government Subcommittee of the House Committee on Appropriations regarding the SEC’s requested fiscal year 2019 budget. This blog will summarize the newest regulatory agenda and SEC upcoming budgetary requests.
Usually the agenda is separated into two categories: (i) Existing Proposed and Final Rule Stages; and (ii) Long-term Actions. The Spring 2018 agenda is broken down by (i) “Prerule Stage”; (ii) Proposed Rule Stage; (iii) Final Rule Stage; and (iv) Long-term Actions. The Proposed and Final Rule Stages are intended to be completed within the next 12 months and Long-term Actions are anything beyond that. The number of items to be completed in a 12-month time frame have been consistently reduced in each agenda over the last two years. The newest agenda has 21 items, the semiannual list published in December, 2017 had 26, the July 2017 list contained 33 legislative action items to be completed, and the prior Fall 2016 list had 62 items.
Whereas the agenda concentrates on specific rulemaking, the SEC’s budget request seems more focused on the SEC’s need to modernize its information technology infrastructure and improve cybersecurity risk management. Of course budgetary needs encompass enforcement which would not appear on a rulemaking agenda. Chair Jay Clayton does, however, address the regulatory agenda in his budget request testimony, specifically noting that the reduced number of items on the short term regulatory list does not indicate a shift in the SEC’s needs and focus, but rather is meant to be more realistic regarding what the SEC can accomplish in a 12-month period.
Whereas the SEC asked for an increase of $100 million in its budget for fiscal year 2018, the current requested increase is $60 million from $1.652 billion to $1.658 billion. Chair Clayton’s particular areas of focus include (i) leveraging technology and enhancing cybersecurity and risk management; (ii) facilitating capital formation; (iii) protecting Main Street investors through multiple channels, including focusing on the most vulnerable investors, markets that are fertile ground for fraud and market integrity efforts such as combating insider trading, market manipulation and accounting fraud; (iv) maintaining effective oversight of changing markets; and (v) supporting SEC leasing efforts. The increased budget would also lift the current hiring freeze and allow the hiring of approximately 100 positions to help fill the approximately 400 position that were lost during the freeze.
Related to technology and cybersecurity, the SEC has an immediate plan to (i) invest in information security to improve monitoring, protect against advanced persistent threats and strengthen risk management; (ii) retire antiquated IT systems to improve cybersecurity; (iii) expand data analytics tools to facilitate earlier detection of potential fraud or suspicious behavior and better identify high-risk activities deserving examination; and (iv) modernize the EDGAR electronic filing system to make it more secure, more useful for investors and less burdensome for filers. For more information on the SEC’s cybersecurity efforts and the EDGAR hacking, see HERE and HERE
Regarding the need to facilitate capital formation, Chair Clayton testified about different initiatives the SEC has already undertaken, such as the staff rule allowing confidential submissions of registration statements (see HERE). On a forward-looking basis, Chair Clayton admits that there is a need to encourage small and emerging growth companies to access public markets; however, he does not make any particular suggestions, but rather just states that the SEC is trying to come up with ideas and initiatives.
In the area of protections for Main Street investors and markets, the SEC is focused on conduct by investment advisors and broker-dealers. Where Clayton sees the need to increase standards of conduct for both investment advisors and broker-dealers, he, like many in the marketplace, is not an advocate of the Department of Labor’s fiduciary rule. The SEC also supports “vigorous enforcement” against fraud and improper market activity by both market insiders such as investment advisors and broker-dealers, and by all market participants.
The Unified Agenda of Regulatory and Deregulatory Actions
The Office of Information and Regulatory Affairs, which is an executive office of the President, publishes a Unified Agenda of Regulatory and Deregulatory Actions (“Agenda”) with actions that 60 departments, administrative agencies and commissions plan to issue in the near and long term. The Agenda is published twice a year.
The first Agendas published after the 2016 presidential election stated that the Agenda “represents the beginning of fundamental regulatory reform and a reorientation toward reducing unnecessary regulatory burden on the American people.” Furthermore, the Office states, “[B]y amending and eliminating regulations that are ineffective, duplicative, and obsolete, the Administration can promote economic growth and innovation and protect individual liberty.”
Executive Orders 13771 and 13777 require agencies to reduce unnecessary regulatory burden and to enforce regulatory reform initiatives. Each agency was requested to carefully consider the costs and benefits of each regulatory or deregulatory action and to prioritize to maximize the net benefits of any regulatory action. The SEC is not the only agency with a reduced Agenda. Agencies withdrew over 1,600 actions that were initially proposed in the Fall 2016 Agenda. Also, adding transparency for those of us who like to stay up on these matters, the agencies will now post and make public their list of “inactive” rules.
SEC Flex Regulatory Agenda
Only 11 items are listed in the final rule stage. On the Agenda in the final rule stages are Regulation S-K disclosure updates and simplification rule changes we have all expected. The proposed rule change was issued in October 2017, a summary of which can be read HERE. Business, Financial and Management Disclosure Required by Regulation S-K remains in the proposed rule stage, continuing the topic of disclosure reform.
Included in the final rule stage are amendments to the smaller reporting company definition (see HERE), and regulation of NMS Stock Alternative Trading Systems. Amendments to the interactive data (XBRL) program have been moved up from proposed to final rule stage since July 2017.
Disclosure on hedging by employees, officers and directors was moved from long-term action to final rule stage. The proposed rules were issued in February 2015 (see HERE) and will result in checking another box on the Dodd-Frank rulemaking list. Also moved from proposed to final is implementation of FAST Act report recommendations (see HERE).
Also included for final rules are amendment to the SEC’s Freedom of Information Act Regulations, modernization of property disclosure for mining companies, investment company reporting modernization and amendments to the Investment Advisers Act, disclosure or order handling information, and amendments to municipal securities rules.
Items of interest in the proposed rule stage include amendments extending the testing-the-waters provisions to non-emerging growth companies (see current testing-the-waters provisions HERE) which were previously on the long-term list; financial disclosures about entities other than the registrant (see HERE), disclosure of payments by resource extraction issuers, amendments to the financial disclosure for registered debt security offerings, filing fee processing updates, bank holding company disclosures, exchange traded funds, auditor independence with respect to loans or debtor-creditor relationships, amendments related to fair access to investment research, fund of fund arrangements, investment company liquidity disclosure, and amendments to the Whistleblower Program Rules.
Rule on disclosure for unit investment trusts and offering variable insurance products, use of derivatives by registered investment companies and business development companies, Business, Financial and Management Disclosure Required by Regulation S-K, personalized investment advice standards of conduct, and amendments to marketing rules under the Advisors Act, are also included in the proposed rule stage.
Still on the long-term actions are rules related to reporting on proxy votes on executive compensation (i.e., say-on-pay – see HERE), transfer agents (see HERE), Form 10-K summary, and revisions to audit committee disclosures.
Items on the long-term agenda include amendments to the accredited investor definition (see HERE), registration of security-based swaps, universal proxy, corporate board diversity, investment company advertising, stress testing for large asset managers, prohibitions of conflicts of interest relating to certain securitizations, definitions of mortgage-related security and small-business-related security, standards for covered clearing agencies, and risk mitigation techniques.
Other items of interest on the long-term action list include simplification of disclosure requirements for emerging growth companies and forward incorporation by reference on Form S-1 for smaller reporting companies (EGCs may already incorporate by reference – see HERE), Regulation Crowdfunding amendments, several securities-based swaps regulatory actions, conflict minerals amendments, amendments to Guide 5 on real estate offerings and Form S-11, and incentive-based compensation arrangements.
Added as a Prerule Stage item is fund retail investor experience and disclosure requests for comment.
Regulation A amendments are on the long-term action list. I am hopeful that these amendments may include an increase in the offering limits and opening up Regulation A to reporting issuers. See HERE. Moreover, now that the Economic Growth, Regulatory Relief and Consumer Protection Act has been signed into law requiring that Regulation A be amended to allow for use by reporting companies, I suspect this item will be moved up the line.
Not included in previous lists, and now on the long-term action list, is Regulation Finders. The topic of finders has been ongoing for many years, and I am extremely pleased to see it make the list. See HERE for more information.
Still not on the short-term agenda are future Dodd-Frank rules, including proposed regulatory actions related to pay for performance (see HERE), executive compensation clawback (see HERE) (which is not on the agenda at all), and clawbacks of incentive compensation at financial institutions (also not on the list at all), although some of these items remain on the “long-term actions” schedule.
The SEC rulemaking agenda may not include further rulemaking on many Dodd-Frank rules, but it also does not include specific rulemaking to repeal existing regulations, such as the pay ratio disclosure rules which were adopted in August 2015 and initially apply to companies for their first fiscal year beginning on or after January 1, 2017. See HERE for more information on this rule. The pay ratio rules do not apply to emerging-growth companies, smaller reporting companies, foreign private issuers, U.S-Canadian Multijurisdictional Disclosure System filers, and registered investment companies. All other reporting companies are subject to the new rules. In October 2016 the SEC published five new compliance and disclosure interpretations (C&DIs) on certain aspects of the final rules. The C&DIs covered two main topics: (i) the use of a consistently applied compensation measure in identifying a company’s median employee; and (ii) the application of the term “employee” to furloughed employees and independent contractors or “leased” workers.
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