New SEC Chair Announces Guiding Principles
In remarks before the Economic Club of New York, new SEC Chairman Jay Clayton discussed eight guiding principles:
- Principle #1: The SEC’s mission is our touchstone. Investors and capital markets will suffer if the SEC strays from its mission or emphasizes one principle over the others.
- Principle #2: Our analysis starts and ends with the long-term interests of the Main Street investor.
- Principle #3: The SEC’s historic approach to regulation is sound.
- Principle #4: Regulatory actions drive change, and change can have lasting effects. The disclosure-based regime has worked so well that we — not just the SEC, but lawmakers and other regulators — have slowly but significantly expanded the scope of required disclosures beyond the core concept of materiality. Those actions have been justified by regulators and lawmakers alike, often based on discrete, direct and indirect benefits to specific shareholders or other constituencies. And it has often been concluded that these benefits outweigh the marginal costs that are spread over a broad shareholder base. But the roughly 50% decline in the total number of U.S.-listed public companies over the last two decades forces us to question whether our analysis should be cumulative as well as incremental.
- Principle #5: As markets evolve, so must the SEC.
- Principle #6: Effective rulemaking does not end with rule adoption. The Commission should review its rules retrospectively. We should listen to investors and others about where rules are, or are not, functioning as intended. We cannot be shy about being introspective and self-critical.
- Principle #7: The costs of a rule now often include the cost of demonstrating compliance. Vaguely worded rules can too easily lead to subpar compliance solutions or an overinvestment in control systems. The Commission needs to make sure at the time of adoption that we have a realistic vision for how rules will be implemented as well as how we and others intend to examine for compliance.
- Principle #8: Coordination is key. The SEC shares the financial services space with many other regulatory players. Coordination is key for over-the-counter derivatives and cybersecurity.
Mr. Clayton also outlined some areas where these principles can guide practice:
- Public companies have a clear obligation to disclose material information about cyber risks and cyber events. I expect them to take this requirement seriously. I also recognize that the cyber space has many bad actors, including nation states that have resources far beyond anything a single company can muster. Being a victim of a cyber penetration is not, in itself, an excuse. But, I think we need to be cautious about punishing responsible companies who nevertheless are victims of sophisticated cyber penetrations.
- There are circumstances in which the Commission’s reporting rules may require publicly traded companies to make disclosures that are burdensome to generate, but may not be material to the total mix of information available to investors. Under Rule 3-13 of Regulation S-X, issuers can request modifications to their financial reporting requirements in these situations. I want to encourage companies to consider whether such modifications may be helpful in connection with their capital raising activities and assure you that SEC staff is placing a high priority on responding with timely guidance.
- With the Department of Labor’s Fiduciary Rule now partially in effect, it is important that the Commission make all reasonable efforts to bring clarity and consistency to this area. It is my hope that we can act in concert with our colleagues at the Department of Labor in a way that best serves the long-term interests of Mr. and Ms. 401(k). Any action will need to be carefully constructed, so it provides appropriate and meaningful protections but does not result in Main Street investors being deprived of affordable investment advice or products.
Contact Steve Quinlivan for more information.