Capitol Report: SEC targets proxy and short selling rules, compensation disclosures for possible changes

The Securities and Exchange Commission asked investors on the day before Thanksgiving to take another look at a very long list of its regulations and tell the regulator whether they should stay on the books.

The move, made under cover of a long holiday weekend preoccupied with turkey and shopping, is an annual exercise required by the Regulatory Flexibility Act, a law passed in Reagan-era 1980 to address the perceived disproportionate impact of federal regulations on small businesses. It requires the SEC to selectively resurface rules after ten years in force and allow the public to comment on whether they should continue without change, be amended or be repealed completely.

It’s a much longer list than usual, with 43 rules, wrote Broc Romanek at TheCorporateCounsel.net blog. He notes that only 7 rules were highlighted in 2004.

The SEC has begun, at Chairman Jay Clayton’s direction to develop recommendations for possible additional changes to the definition of an “accelerated filer” that, if adopted, would reduce the number of companies that are subject to external audit requirements, which critics believe are costly and non-value added.

See: SEC looking at reducing auditor reviews at smaller companies

Clayton and his deputy, Corporation Finance Director Bill Hinman, have been very vocal about their desire to further reduce the regulatory requirements for public companies.

Read: Behind the push at the SEC to make it easier for IPOs to be launched

The SEC does ask for comment on several existing rules related to executive pay and related-party disclosures and also on rules related to the annual proxy and shareholder proposals. The SEC is encouraging the public to revisit how shareholders nominate directors and to critique rules that enhanced disclosures regarding board leadership, compensation consultants, and board oversight of risk.

The SEC requests for another look at the rule that allowed electronic filing of the information for Form D. That’s the short-cut notice filed for an offering that is exempt from full SEC registration requirements and one that is available only to “accredited investors.” Those are investors with a net worth of over $1 million, or that have consistently made over $200,000 per year in income, or companies that have over $5 million in assets, can invest.

The Form D revisions simplified and restructured the process and updated and revised information requirements to make it quicker and easier to issue securities to accredited investors with no SEC review. Companies aren’t required to file the Form D before the offering takes place, but instead within 15 days after the first sale of securities in the offering.

Clayton has repeatedly reassured the public that no initial coin offerings or ICOs have been “registered” with the SEC, but there has been a significant increase in these securities coming onto the market through Form Ds.

Read also: Here’s the blueprint for how ICOs are getting off the ground without SEC vetting

There are also several rule reviews requested related to short-selling and rules preventing naked short selling. For example, Regulation M, “Anti-Manipulation Rules Concerning Securities Offerings”, is intended to protect the independent pricing mechanism of the securities market so that IPO offering prices result from “the natural forces of supply and demand” and are not impacted by market manipulation.

One of the rules in this group is concerned with short selling that may artificially depress market prices and lead to lower than anticipated offering prices, reducing the proceeds from the IPO.

Another short-selling related rule on the list created an antifraud provision under federal securities laws to address fraud that occurs when traders associated with “naked” short selling deceive others about their intention or ability to deliver securities in time for settlement and fail to deliver securities by settlement date.

The list is open for public comment, but in general few take advantage of the opportunity. Former SEC commissioner Michael Piwowar noted in 2016 that “historically the lists have generated little or no public comment. In fact, in recent years the annual Rule List has prompted, on average, only one comment.”

Notably absent from the list is a request to revisit the rule that requires public companies to report their results on a quarterly basis. That’s despite President Donald Trump’s tweet on August 17 requesting that Clayton take a look at repealing the rule.

Romanek, an attorney who served the office of chief counsel in the SEC’s Division of Corporation Finance, and as a counsel to a former SEC commissioner, wrote that he believes the SEC will eventually propose to repeal of the requirement for smaller companies to report results on a quarterly basis.

Francine McKenna is a MarketWatch reporter based in Washington, covering financial regulation and legislation from a transparency perspective. She has written about accounting, audit, fraud and corporate governance for publications including Forbes, the Financial Times, Accountancy and the American Banker. McKenna had 30 years of experience at banks and professional-services firms, including at PwC and KPMG, before becoming a full-time writer.

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