I have often said that the SEC is an outstanding agency – for example, see here. I still believe that, although my belief has been tested in the last couple of years by the “regulatory rampage” in which the SEC has engaged.
But there is always room for improvement, and in a November speech, Commissioner Mark Uyeda offered some significant suggestions that, IMHO, would benefit companies, their stock- and stakeholders, and our capital markets generally. I urge you to read the speech. And, more importantly, I urge the SEC to take Commissioner Uyeda’s suggestions seriously.
Here are a few of his key points:
- Determining the Purpose of Rules: The first step in rulemaking should be “to answer the question: what problem is the Commission trying to solve?” Commissioner Uyeda notes that the answer to that question is increasingly that investors desire the information. In discussions with the SEC staff – particularly in recent years – I’ve heard that a lot. However, it’s impossible to know whether one or a small number of investors want the information or whether the staff is hearing from lots of investors who want it, and the Commission apparently is not asking why they want it and what use they plan to make of it. Commissioner Uyeda suggests that the Commission should inquire into those subjects before running off to adopt rules. I couldn’t agree more. All too often, the justification for onerous new rules seems to be that some investors would be interested in the information; I submit that that is not even close to a legitimate basis on which to engage in rulemaking.
- Re-Proposing Rules: In the last few years, the SEC has re-proposed a number of rules that were proposed years ago but were not acted upon. In particular, Commissioner Uyeda refers to the “Pay vs. Performance” rules that were finally adopted in time to impact companies’ proxy statements in 2023. He notes that certain provisions of the re-proposed rules differed significantly from the originally proposed rules but that the comment period was too short to permit careful consideration of the differences, with the end result that the new rules don’t seem to work in some respects. His solution is that “[b]efore the Commission adopts any final rule that significantly deviates from the [original] proposal, it should seriously consider re-proposing the rule with the revised rule text and an updated economic analysis.” Again, I couldn’t agree more.
- Scalability: Commissioner Uyeda points out that as far back as 1992, “the Commission recognized that smaller companies ‘are disproportionately affected by…complexities in…disclosure requirements’”, but that many recent rulemakings, including those on cybersecurity, share repurchases, Rule 10b5-1 plans, and clawbacks, do not provide for scaled disclosure. He also notes that the current classifications of issuers – e.g., “accelerated filers” – don’t really help, pointing out that “an accelerated filer with a $250 million public float [is] subject to the same disclosure requirements as a large accelerated filer with a $250 billion float.” He doesn’t comment on the impact that unscaled rulemaking has on companies considering going public or public companies contemplating going dark or going private, but I can tell you from personal experience that onerous rules are a big factor in those considerations.
- Finally, though he doesn’t use the term “regulatory rampage,” Commissioner Uyeda lists the new rules that took effect in 2023 and those that will impact companies’ 2024 disclosures and notes that the cumulative effect of that rampage places incredible pressure on companies (and their counsel), making it very difficult to provide meaningful disclosure: “Given the tight deadlines and resource constraints, it would not be surprising if companies rely more on boilerplate disclosure that provides little or no benefit to investors.”
I would add just one more suggestion, though I can’t take credit for it (those who deserve the credit know who you are). Specifically, the Commission consults with a variety of groups, such as the Investor Advisory Committee and the Small Business Advisory Committee. Why not create an “Issuer Advisory Committee” (or something similar) so that, among other things, rulemakings could be discussed and considered – and, ideally, debugged – before they are proposed. I fervently believe that such a committee could facilitate better rulemaking. However, I have witnessed several situations in which this suggestion has been dismissed as if it is not even worthy of consideration. It’s been pointed out that the other advisory committees were mandated by Congress; that may be true, but it’s equally true that the Commission does not need Congressional permission to form such a committee.
I’m a strong believer in good regulation, and I also believe that suggestions like those above could help to make our public company disclosure regime better. I hope that someone – aside from Commissioner Uyeda – is listening.