Monthly Archives: April 2014

April 2, 2014

Paul Ryan’s Plan for the SEC: Slash & Burn

Not sure why Rep. Paul Ryan chose the SEC as an example of a federal agency with “duplication, hidden subsidies, and large bureaucracies” in his budget plan released yesterday, but he did. This is the 4th year in a row that Ryan has proposed a plan – but the first time he has focused on the SEC specifically. Remember that the SEC is not only deficit neutral and doesn’t count against the new-fangled Congressional budget caps, but is an independent agency that brings in more money to the US Treasury than it costs. Ryan’s proposal doesn’t specify exactly how much he would cut from the SEC (rather there are budget cuts for a group of agencies as a whole on pages 38-39).

This blog is nonpartisan – but the following blurb copied from pages 39-40 of the budget is worth analyzing since Ryan is a key member of Congress and a potential Presidential candidate (below each section is commentary from me):

Ryan: As of March 2013, the SEC had 3,950 full-time employees, and an average salary across the agency of over $155,000. SEC’s budget has risen by more than 45 percent since fiscal year 2007. If the President’s fiscal year 2015 budget request were granted, SEC’s budget would grow by another 26 percent in just one fiscal year.

Me: Remember how Congress wanted the SEC to grow like wildfire in the wake of the financial crisis? Back in 2010, they wanted the Staff to grow by 20% quickly. That pipe dream was quickly crushed by a series of long hiring freezes and a sequester that got made permanent. Meanwhile, the SEC oversees 25k market participants directly – and work indirectly on behalf of millions and millions of investors.

As for average salary, it is true that a GS-15, Step 10 in the DC area makes $155k. Most Staffers are now professionals as the SEC’s clerical staff has been cut to the bare minimum. But compare the pay of the average SEC Staffer to the pay on Wall Street. Peanuts! And let’s all read Michael Lewis’ “Flash Boys” and compare notes about how a defunded SEC is supposed to match wits without the modern technology that Chair White has requested as part of this budget cycle.

Ryan: There is a long paragraph lifted from a House Financial Services report about “in the run-up to the financial crisis and its aftermath, the SEC repeatedly failed to fulfill any part of its mission.” Madoff, Allen Stanford, etc.

Me: Blaming the SEC for the financial crisis seems like revisionist history. Blaming cops for crimes committed by others. If the SEC couldn’t handle supervising Wall Street, etc. before the financial crisis with the resources it had, how will it handle them better going forward with far fewer? At what point does the SEC get slashed so much that it will be completely ineffectual – with the result that there will be no more trust in the market?

Ryan: This resolution questions the premise that more funding for the SEC means better, smarter regulation. Adding reams of regulations to the books and scores of regulators to the payrolls will not provide greater transparency, consumer protection, and enforcement for increasingly complex markets.

Me: Since Dodd-Frank – and then the JOBS Act – nearly every rulemaking resource at the SEC has been devoted to implementing new regulations dictated by Congress. Congress is the one guilty of adding more regulations – some of them not so “better and smart” (eg. conflict minerals). Ryan acknowledges this as he thinks Dodd-Frank should be overturned.

Ryan: Instead, the SEC should streamline and make more efficient its operations and resources; defray taxpayer expenses by designating self-regulatory organizations (subject to SEC oversight) to perform needed examinations of investment advisors; and enhance collaboration with other agencies, such as the Commodity Futures Trading Commission, to reduce duplication, waste, and overlap in supervision. Ultimately, the committees of jurisdiction will establish the specific policies.

Me: I’m not even sure what to make of this paragraph. The last sentence really confuses me. Is Ryan saying that Congressional committees should be setting policy for an “independent” agency? Not only does that seem to violate the Constitution’s “separation of powers” doctrine, but it’s just plain scary as Congress clearly doesn’t have the knowledge (or time) to oversee the market like the SEC.

Let’s slash the SEC’s budget – but then create new SROs that will cost much more than what we slashed? As we learned the hard way before (eg. AICPA in charge of auditing standards), SROs tend to be ineffective because they are captured regulators. The SEC-CFTC overlap argument is old, tired and doesn’t have a lot of heft – the Venn diagram probably looks close to this.

SEC Chair White Testifies Over 2015 Budget Request

Yesterday, SEC Chair White testified in support of its $1.7 billion budget request for next year – under which the SEC hopes to hire 639 new Staffers and bring in new technology. Here’s the SEC’s budget justification plan.

SEC’s Cybersecurity Roundtable: Recaps & Reenactments

I’ve been posting memos recapping last week’s SEC cybersecurity roundtable in our “Cybersecurity” Practice Area. And I’ve created this 1-minute video of a sober reenactment of the roundtable:

– Broc Romanek

April 1, 2014

Survey: Venture-Backed IPO Practices

2013 was the strongest year for venture-backed IPOs in almost a decade: 82 deals (the most since 2007) generated aggregate proceeds of over $11.2 billion, an average offering amount of $137.2 million. At least one venture-backed company went public each month in 2013, and the pace of IPOs has accelerated in the first three months of 2014. Here’s a venture-backed IPO survey for 2013 from Gunderson Dettmer, focusing on key governance and disclosure items.

Among others, the findings include:

– All but two of the 71 companies reviewed were incorporated in Delaware
– 35% were listed on the Nasdaq Global Market, 30% on the NYSE, – 28% on the Nasdaq Global Select Market, and 7% on the Nasdaq Capital Market
– Average time from incorporation to IPO was over 9 years
– Average time from initial registration statement submission to the SEC to pricing the IPO was 5months
– 33% of the companies have already completed follow-on offerings, frequently prior to the expiration of the 180-day IPO lock-up period
– Over 90% of venture-backed companies took advantage of the JOBS Act accommodation to submit a registration statement confidentially, spending on average 3 months in confidential registration and filing registration statement publicly 1 month before their roadshow
– Nearly half of venture-backed companies still provided 3 years of audited financials, but over 66% provide 3 or less years of selected financial information.
– Significant majority provided limited executive compensation information
– Despite the JOBS Act accommodation, a significant majority of venture-backed companies choose to be subject to new public company GAAP

Wife tells husband: “don’t trade on my confidential information.” Husband does it anyways. Husband gets caught by SEC. Repeat.

Webcast: “Rural/Metro and Claims for Aiding & Abetting Breaches of Fiduciary Duty”

Tune in tomorrow for the webcast – “Rural/Metro and Claims for Aiding & Abetting Breaches of Fiduciary Duty” – to hear Kevin Miller of Alston & Bird; Brad Davey of Potter Anderson; Stephen Bigler of Richards Layton, Stephen Kotran of Sullivan & Cromwell and Bill Lafferty of Morris Nichols as they discuss a case expected to have a dramatic impact on the viability of claims for aiding and abetting breaches of fiduciary duty in connection with M&A transactions. Please print these course materials in advance…

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– Broc Romanek