June 4, 2015

Are Partisan Politics Destroying the SEC?

This is a challenging – and complex – question. A fair answer truly can’t be given unless you happen to work right now at the SEC at the highest levels. But I still can give my 10 cents without the benefit of true inside baseball. I’ll go out on a limb with an answer of “not really ‘destroying,’ but things aren’t good – and not necessarily for the reasons expressed by many today.” Here’s what I mean by that:

1. The Commissioners Certainly Are More Rebellious – SEC Commissioner unity is a thing of the past. Over the past decade or so, each succeeding slate of Commissioners have publicly fought more and more. As I’ve blogged before, back when I worked for a Commissioner in the late ’90s, Chair Arthur Levitt rarely would take a matter to a vote unless he knew he had a 5-0 vote in his pocket. And he certainly wouldn’t have tolerated public displays of contention. There occasionally were heated debates behind the scenes – but I don’t recall any of that spilling out into the open. Chair White – just like Chair Schapiro before her – doesn’t have that luxury. Oral & written dissents are a regular occurrence; not a rarity.

2. Rebellion Isn’t Necessarily a Bad Thing – My observations about Commissioner dissent above don’t mean that I think that’s a bad thing. I’m just noting a trend. Since it only takes three Commissioner votes to approve something, the fact that there are two dissenting votes – or even that a Commissioner is vocal in expressing displeasure – shouldn’t impact the agency’s daily operations. Of course, divisive dissent does have an impact on Staff morale – and certainly on how the public views the agency. But in terms of rulemaking & pursuing Enforcement cases, etc., that alone should be a small speedbump given the limited power that Commissioners have by themselves (learn more about that from the transcript of our webcast: “How the SEC Really Works”). You certainly don’t want Commissioners acting as rubber stamps.

3. Congress Is The Primary Partisan Problem – Partisan politics has seeped from Capitol Hill down into all the federal agencies – and the SEC is no exception. It used to be that a Congressional Committee Chair might only occasionally ask something of an agency head. Now it’s all the members of a Congressional Committee seeking an audience, with a greater frequency. During Chair Schapiro’s term, I blogged several times about the abuse – asking SEC officials to constantly testify in hearings. It’s hard to get real work done when you are constantly preparing to testify – or to respond to lengthy written requests from Congress. These shenanigans continue. Very little of this is driven by a desire to protect investors or benefit our markets. Most of it is purely for “show” – or an attempt to disrupt how the agency functions.

4. Rulemaking Will Always Be Hard Going Forward – Today’s WSJ article entitled “SEC Bickering Stalls Mary Jo White’s Agenda” provides us with some nice statistics for this point. It notes how Chair White has brought a record 755 enforcement actions in the latest fiscal year – but only finalized 7 rules in ’14 (compared to an average of 17 per year over the past decade). In my opinion, the largest factor for this rulemaking dearth is how hard it is to get a rule over the line since the DC Circuit’s 2011 proxy access decision in the Business Roundtable/Chamber lawsuit. Trust me, rulemaking was hard before that – now the requisite enhanced economic analysis & other new mandated processes increases the difficulty by an untold magnitude.

And things are bound to get worse before they get better. Congress continues to explore ways to meddle in affairs for which they have limited expertise. The latest is the “Regulation Sensibility Through Oversight Restoration Resolution of 2015,” which establishes a joint select committee charged with reviewing how agencies adopt rules – including holding hearings on how to reduce regulatory overreach. The SEC could only get 7 rules adopted last year – is that overreach? The circus plays on…

“Bad Actor” Waivers: Now for Forward-Looking Statements

A few days ago, SEC Commissioner Piwowar gave a speech supporting waivers relating to a company’s’ ability to rely on the PLSRA statutory safe harbor for forward-looking statements. Here’s a related blog by Steve Quinlivan:

The Securities Act (Section 27A(b)) and the Exchange Act (Section 21E(b)) exclude reliance on the safe harbor for forward-looking statements if, among other things, the statement is made with respect to an issuer that has, within the past three years, been convicted of any felony or misdemeanor described in paragraphs (i) through (iv) of Section 15(b)(4)(B) of the Securities Exchange Act of 1934. The Securities Act and the Exchange Act each provide the disqualifications may be waived “to the extent otherwise specifically provided by rule, regulation, or order of the Commission.” The SEC granted this waiver to Barclays PLC to continue be able to continue to rely on the safe harbor for forward looking statements as a result of a guilty plea for a violation of the Sherman Antitrust Act.

Meanwhile, another day, another waiver dissent from a SEC Commissioner…

IPO Analyst Research: FINRA Issues 7 FAQs on Conflicts

Here’s an excerpt from this MoFo blog:

Many market participants were left in a quandary following FINRA enforcement actions in connection with member firm research analyst “participation” in meetings with prospective issuers. Recently, FINRA published a handful of Frequently Asked Questions relating to its research rules.

The FAQs outline three stages of an IPO a pre-IPO period, a solicitation period, and a post-mandate period. Each such stage is described in the FAQs and FINRA also describes the attendant risks associated with a research analyst’s activities during these various stages. Of course, during the pre-IPO stage, the attendant risks are attenuated and FINRA believe that these attenuated risks can be addressed adequately through properly designed policies and procedures. However, FINRA cautions that member firms ought to be sensitive to any communications that would suggest the issuer already had determined to proceed with an IPO. The guidance also provides FINRA’s view regarding when the “solicitation period” would be deemed to begin, although this would seem, in real life, to be a highly fact-specific matter. In the post-mandate period, again, the risks are attenuated, in FINRA’s view, and may be effectively addressed by member firms through their policies and procedures. The guidance is particularly strident with respect to valuation analyses. For example, the FAQs note that a member firm that is competing for an IPO role must repudiate any communication that would seemingly indicate that a valuation reflects the analyst’s views and expressly note that the firm cannot make any representations about the analyst’s views on valuation.

– Broc Romanek