October 22, 2019

The SEC Cancels Another Open Meeting: What Gives?

The SEC has cancelled tomorrow’s open Commission meeting about proposing changes to its whistleblower office. I think this is the third cancelled open meeting in as many months. Does it matter? Not really. Is it worth blogging about? Probably not. Did I blog about it anyway? Yes.

Here’s a few thoughts:

1. Are You Sure It Doesn’t Matter? – For starters, when the SEC has cancelled other open meetings in recent months, it still took action through the seriatim process. So in terms of taking action, the net result was the same. But even if the SEC hadn’t taken action, I don’t think cancelling open meetings by itself is a big deal. Over the decades since the SEC was born, I doubt a Commissioner has ever been persuaded by arguments made at an open meeting to change the way they intended to vote.

In rare cases, a SEC Chair will calendar an open meeting to force an issue to a vote. Then, as the meeting date gets closer, there may be some accommodation that allows the Commission to act by seriatim to get something done.

In the old days, some would travel to DC to attend open meetings – so cancellation would have disappointed those with flights scheduled. But that no longer is an issue because the meetings are webcast and very few people attend in person these days. Plus, I think some people have realized that there simply isn’t much value in “reading the tea leaves” by watching an open meeting in the first place. I haven’t watched one since Bill Donaldson was SEC Chair – that’s 15 years ago.

2. How Many SEC Staffers Attend Open Meetings? – Not many more than those required to go. I do remember attending my first open meeting when I was a Staffer in the late ’80s – the proposal of Regulation S. It was crowded. I got a glimpse of how the SEC operated at the highest level. But my mere attendance as a lowly Staffer was a bit of a novelty – in fact, if my boss knew I snuck down to the open meeting room, I might have been in trouble.

I would wager that well over 90% of the people who work at the SEC have never attended an open meeting (back then and now). There’s no reason for them to see one unless they happen to be curious about what it’s like…

3. Is the SEC Required to Hold Open Meetings? – I blogged about this topic a while back. The upshot is that it’s conceivable that the SEC could take various actions for years without an holding an open Commission meeting. But it doesn’t do so because of the interest in holding the meetings, both within the SEC and outside.

4. Why Does the SEC Keep Calendaring & Then Cancelling Open Meetings? – I have no idea. But it seems a little strange. I’ve never seen so many meetings cancelled in such a short period of time.

Typically, a meeting is cancelled because at least one Commissioner suddenly is unavailable. Particularly if the agenda items are not the “hottest” around, action is then just taken in seriatim. Note that the SEC can take action in seriatim without first announcing (and cancelling) an open meeting.

5. Why Was This Particular Meeting Cancelled? – I doubt that Commissioner unavailability is the reason why this whistleblower meeting was cancelled – the SEC’s cancellation notice indicates that the meeting may be rescheduled for November. So it’s unlikely we shall see action taken in seriatim for this one. My guess is that the SEC needs more time to formulate its proposal.

Audit Committees Must Enforce Auditor Independence Rules? What Gives?

Here’s a note from Lynn Turner: Have you looked at this guidance from the PCAOB Staff? It essentially “guts” the auditor independence rules. It states that if an auditor has violated the independence rules:

1. It must communicate that to the audit committee. No communication of that is required to be made to investors who believe the auditor has complied with such rules.

2. The auditor must have fixed the violation, or alternatively, even thought the violation still exists, must put a plan in place to fix it.

3. The PCAOB Staff still permits an auditor to say in their report they were – and are – independent during the audit engagement time period, even though in fact they are not. This is, at best, misleading to investors. Some might say it’s lying.

This is particularly troublesome because the process relies on an audit committee. Nearly all the audit committees that I have known have scant expertise when it comes to the auditor independence rules. In fact, I can say I have never known an audit committee member who was truly knowledgeable in this area. Even most auditors are not well-versed on the independence rules, although they should be. That is why the SEC required audit firms – back in 2000 – to establish internal quality controls.

However, recent enforcement cases illustrate how these controls are not effectively working inside the big audit firms, as the firms continue to do whatever is necessary to hang onto their audit clients. It is my understanding that auditors do not have to rotate off – or inform any of the investors in – the companies for which their audit independence has been compromised as noted in these enforcement actions.

Today, an auditor can operate under the policy of “It is better to beg forgiveness than to ask for permission.” Investors should be asking if there really are any independence rules.

Meanwhile, two Senators have sent this letter to SEC Chair Clayton asking what is going on with the PCAOB, including why Commissioner Peirce received such a new prominent role overseeing the PCAOB and why the PCAOB’s General Counsel and Enforcement Director positions have been vacant for so long…

SEC Seeking Ideas So Small-Caps Not So Thinly Traded…

Last week, the SEC issued this statement asking for ideas how to boost the liquidity of stocks that currently are thinly traded. See this Mayer Brown memo – and this background paper from the SEC…

Broc Romanek