The SEC has scheduled an open meeting for next Wednesday to consider three rulemakings from the Division of Trading and Markets, and one of them is the removal of credit ratings in Regulation M. Regulation M is the set of rules designed to prevent the manipulation of securities prices at the time of a distribution. The removal of credit ratings from SEC rules is yet another legacy of the Dodd-Frank Act. Section 939A of the Dodd-Frank Act directed the SEC to review its rules that use credit ratings to assess the creditworthiness of a security or money market instrument, remove any reference to or requirement of reliance on credit ratings and substitute such standard of creditworthiness as the SEC determines to be appropriate.
The SEC’s efforts to remove credit ratings from Rules 101 and 102 of Regulation M has been a bit of an odyssey. The SEC proposed amendments in 2008 and 2011 to remove references to credit ratings from Regulation M and replace them with alternative measures of creditworthiness, but those proposed amendments were never adopted. In March 2022, the SEC again proposed changes to Regulation M. Under the latest proposal, the SEC would replace the investment grade exception in Rule 101 of Regulation M with two alternative standards. For nonconvertible debt securities and nonconvertible preferred securities, the proposed standard is based on the issuer’s probability of default, while for asset-backed securities, the proposed amendments would except asset-backed securities that are offered pursuant to an effective shelf registration statement filed on Form SF-3. In addition, the SEC proposed to eliminate the investment grade exception in Rule 102 entirely and not replace it with any alternative standard.
The adoption of final rules would represent another example of Chair Gensler’s effort to clean up the outstanding Dodd-Frank Act rulemakings as we approach the thirteenth anniversary of the enactment of that legislation.
If you were perusing filings on EDGAR yesterday as I was, you no doubt found that, when you pulled up some filings, the screen was blank and no information was presented. It seemed evident that the filing was there on EDGAR, but you just could not see it. The SEC IT Staff was on top of this issue quickly and issued a statement acknowledging that EDGAR was experiencing a technical issue displaying certain iXBRL files, and they provided instructions for a work-around to access the filings. The notice indicated that the Staff expected to have the problem fixed by 6:00 am this morning, but I am still encountering the message “An Error has occurred within the Inline XBRL Viewer” when trying to access some filings.
It dawned on me as my frustration grew trying to access filings yesterday that I should really be more grateful for EDGAR. It is a tool that I use almost every day that usually works pretty flawlessly. Despite the onslaught of iXBRL, which makes using EDGAR even more wonky than ever, it does get the job done on a technology platform that appears to be straight out of the 1990s. I can certainly say that having started practicing at the dawn of EDGAR when we accessed ASCII-formatted filings internally at the SEC using our huge PCs running the OS/2 operating system (remember that?), EDGAR has really come a long way. So, I will take a deep breath and wait for the SEC IT Staff to sort out this latest glitch and not be so critical of my old friend EDGAR.
While I somehow reached a Zen state with regard to EDGAR glitches, I am still pretty stressed about all of the recent SEC rulemakings and all of those yet to come. If you are feeling the same way, our conferences are the best way to get caught up on all that is happening with the SEC that is affecting public company disclosure and corporate governance. We have assembled an outstanding group of panelists that will provide the latest thinking on the burning topics of the day. So be sure to sign up today.
When I first began speaking at conferences as an SEC employee back in the 1990s, it was ingrained in me that, before making any remarks, I must first give the “standard disclaimer,” or else some terrible consequences would be visited upon me. My early training worked, because invariably I would say the disclaimer, and even to this day when I am on a panel with someone from the SEC, I will prompt them to give their disclaimer or stop the discussion to give the person an opportunity to state the disclaimer if they forget to do so. Over the years I have even poked fun at the SEC disclaimer, as in this puppet show from the 2015 Proxy Disclosure Conference. Who knew puppets had disclaimers?
The one unusual thing about the standard disclaimer is that it stayed the same for as long as I can remember. In the almost three decades that I have been practicing, SEC speakers have been saying pretty much the same disclaimer: “The views I express today are my own and do not necessarily reflect the views of the Commission, the Commissioners or the Staff.” Even when I was engaged in the rote recitation of this disclaimer, it always struck me as odd that, as a representative of the SEC at the program, I was saying that I only expressed my own views, even though obviously the views I discussed on the panel were very much aligned with SEC policy at the time. Perhaps the disclaimer made more sense for the Commissioners, who in their speeches often express political or ideological views that are not necessarily aligned with the views of the Chairman or the other Commissioners. In any event, the disclaimer was what it was, and I did not dare to alter it out of fear of suffering the unknown consequences.
That all leads us to a curious development that has emerged in just the past month that was recently highlighted by Professor Benjamin Edwards on the Business Law Prof Blog. Professor Edwards notes that the disclaimer has changed in very recent speeches made by SEC Chair Gensler and others at the SEC. For example, in remarks at the Municipal Securities Disclosure Conference in May, Chair Gensler stated: “My views are my own as Chair of the SEC, and I am not speaking on behalf of my fellow Commissioners or the staff” (emphasis added). Further, in a speech last week to the Investment Company Institute, Chair Gensler stated: “As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I’m not speaking on behalf of my fellow Commissioners or the SEC staff” (emphasis added). The change is also evident in speeches by the SEC Staff, as I noted in recent remarks by the Director of the Division of Investment Management: “I must remind you all that my remarks today are provided in my official capacity as the Commission’s Director of the Division of Investment Management but they do not necessarily reflect the views of the Commission, the Commissioners, or members of the staff” (emphasis added). Professor Edwards indicates that this overall change in approach to the disclaimer likely arises from some recent litigation developments:
The changed language likely results from discovery disputes in SEC vs. Ripple Labs. Some news reports have covered the SEC being forced to turn over documents related to a 2018 Speech by William Hinman, then the SEC’s Director for the Division of Corporation Finance.
I poked around the docket in that case and found an order finding that internal discussions about the Hinman speech were discoverable and not protected by the Deliberative Process Privilege (DPP) because Hinman was communicating his own opinions and they did not “relate to some form of agency position, decision, or policy”.
At least with these recent changes the disclaimer makes more sense, in that the speaker acknowledges that they are speaking in their official capacity and not just expressing their own personal views. Now I need to think about whether my puppet disclaimer needs to change going forward.
The SEC’s five Commissioners issued a joint statement yesterday honoring the legacy of Harvey Pitt. The statement says:
We mourn the passing of Harvey Pitt, the 26th Chairman of the Securities and Exchange Commission. Harvey loved this agency, dating back to his time right out of law school serving as a staff attorney in the Office of General Counsel (OGC). He continued to serve the Commission for a decade, advising former Commissioner Francis M. Wheat, taking on important roles in OGC and the Division of Market Regulation, and serving in the front office of former Chairman Ray Garrett, Jr. After only seven years at the SEC, Harvey became the youngest General Counsel in the SEC’s history. It was one of his greatest dreams to come back later in his career to chair the agency. As Chair, he oversaw the SEC’s response to the September 11th attacks and led the Commission’s rulemaking efforts in response to the corporate accounting crises of the 1990s. Even in the last year, he has made himself available to offer advice and continued to submit comment letters on our rulemaking proposals. Our hearts go out to Saree and Harvey’s family.
In addition, the WSJ published this obituary, recounting Pitt’s role in so many important developments over the years.
I was recently joined by my MoFo colleagues Spencer Klein and Brandon Parris on the MoFo Above Board podcast, and we discussed some the latest developments in shareholder activism that are of interest to board of directors and those who advise them. The Above Board podcast is part of MoFo’s Above Board Resource Center, which highlights resources that are most relevant to directors, general counsels and those who advise boards of public companies.
It is with great sadness that I write today about the death of Harvey Pitt, who served as the 26th Chairman of the SEC. He passed away yesterday at the age of 78. Harvey was a giant of the securities bar who served as the SEC’s youngest General Counsel in 1975, and who was a senior partner at Fried, Frank, Harris, Shriver & Jacobson after his first ten-year tour at the SEC concluded in 1978. He began his tenure as SEC Chairman in August 2001, and soon thereafter he addressed the September 11 crisis, navigating that extraordinarily difficult situation to see the markets up and running again in the days after the attack. During his tenure as Chairman, he also addressed a crisis in confidence in the markets brought on by the accounting scandals at companies such as Enron and WorldCom, as well as the enactment and implementation of the Sarbanes-Oxley Act. Following his resignation in 2003, Harvey founded the global strategic business consulting firm, Kalorama Partners, LLC, and its law firm affiliate, Kalorama Legal Services, PLLC.
One of the great accomplishments of Harvey’s career for which I will always be grateful is the founding of the SEC Historical Society. He was a founding trustee and first President of the SEC Historical Society. I have been involved with the SEC Historical Society for many years, and I was very pleased to see Harvey become more involved with the organization again during my time in leadership. To me, the SEC Historical Society represents Harvey’s love for the SEC and its staff and is a fitting legacy that he leaves behind.
Beyond his career as a regulator, lawyer and CEO, Harvey was admired as a great family man, friend and mentor. I offer my condolences to his family and many friends and colleagues. I understand that there will be a service on Monday, June 5th at 1:00 pm at the Washington Hebrew Congregation.
The PCAOB has announced that, at an open meeting on June 6th at 10:00 am Eastern, the Board will consider issuing for public comment a proposal amending PCAOB auditing standards related to the auditor’s responsibility for noncompliance with laws and regulations, including fraud, in an audit. The PCAOB states: “The proposed amendments are aimed at strengthening auditor requirements to identify, evaluate, and communicate possible or actual noncompliance with laws and regulations, thereby enhancing investor protection.”
If you have never attended our conferences, this is definitely the year to participate – with so much going on at the SEC, you do not want to miss all of the insights that our incredible group of speakers bring to the table. If you have attended our conferences, you already know that you do not want to miss out on all that we have to offer this year. Sign up today and save!
One of the building blocks that you will definitely want to check out is on the topic of integration, which distills the SEC’s integration framework into a handy one-pager and explains why integration is something that small businesses raising capital need to think about. I have not seen a one-pager about integration since Marty Dunn’s “Integration Manifesto,” which had a key role in shaping today’s integration framework, as I recounted in an article in the January-February 2021 issue of The Corporate Counsel.