As expected, the rule proposals keep coming from the SEC. The Commission provided notice of an open meeting on February 9 that will cover several items. In addition to two rule proposals from the Division of Investment Management (with one of those dealing with cybersecurity risk management for registered investment advisers and investment companies), the Commission will consider a proposal from the Division of Trading and Markets to shorten the standard settlement cycle for most securities transactions, as well as a proposal from the Division of Enforcement’s Office of the Whistleblower and the General Counsel’s office to amend the whistleblower rules.
The SEC recently announced that it is seeking candidates for appointment to the Investor Advisory Committee, which was established under the Dodd-Frank Act to advise the Commission on protecting investors and improving securities regulations. In August 2020, the SEC announced new procedures regarding the process to nominate candidates for appointment to the Investor Advisory Committee. Candidates for vacancies on the Committee will be identified by a nominating committee composed of staff from across the SEC’s divisions and offices. The nominating committee will identify candidates based on functional membership categories published on the SEC’s website. Members of the public are encouraged to express their interest in serving on the Investor Advisory Committee.
We have recently seen the Investor Advisory Committee being active in helping to shape SEC policy. Last year, Investor as Owner Subcommittee of the SEC’s Investor Advisory Committee developed recommendations on proposed changes to Rule 10b5-1 that were adopted by the Investor Advisory Committee and the SEC’s Rule 10b5-1 rule proposals incorporated a number of those recommendations.
The PCAOB has announced that it created of two new advisory groups — the Investor Advisory Group and the Standards and Emerging Issues Advisory Group. The PCAOB says that these advisory groups “will enable the PCAOB to obtain essential input and insights from investors and other stakeholders on a wide variety of matters related to improving audit quality.”
The Investor Advisory Group will advise the PCAOB on matters concerning the PCAOB’s mission to oversee the audits of public companies, and related matters (such as the audits of broker-dealers). The PCAOB says that this group will “protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports, including providing investors’ perspectives on key areas of concern and potential emerging risks related to PCAOB oversight activities.”
The Standards and Emerging Issues Advisory Group will replace the Standards Advisory Group created in early 2021, and advise the PCAOB on existing standards, proposed standards, potential new standards and, if requested by the Board, on matters other than standards that are of significance to the PCAOB, including emerging audit issues. The PCAOB says that this group “will provide for enhanced public engagement with a diverse group of investors and other stakeholders.”
The PCAOB is now seeking public comment on the proposed structures of these two new advisory groups, as well as nominations for membership in each group. The deadline for nominations is February 28. Nominations are open to both new prospective participants and members who have served on the PCAOB’s previous advisory groups.
The Center for Audit Quality (CAQ) and Deloitte recently teamed up to prepare the “Audit Committee Report: Common Threads Across Audit Committees.” The report is based on a survey of 246 audit committee members from U.S.-based public companies with a market capitalization greater than $700 million. The report presents findings in a number of key areas for audit committees, including audit quality, financial reporting and internal controls, fraud risk, enterprise risk management, cybersecurity and data privacy security, ethics and compliance and third party risk and audit committee engagement.
Yesterday, the Staff issued its annual Staff Report on Nationally Recognized Statistical Rating Organizations (NRSROs), providing a summary of the Staff’s examinations of NRSROs and discussing the state of competition, transparency, and conflicts of interest among NRSROs. This report is required by Section 6 of the Credit Rating Agency Reform Act of 2006 and Section 15E(p)(3)(C) of the Exchange Act. The report is prepared by the SEC’s Office of Credit Ratings.
The report covers a lot of ground in the realm of credits ratings, but one particular area caught my attention. As noted in the report, during 2021 inspections of NRSROs, the Staff focused on several areas of risk related to ESG factors. The report notes:
Development in the area has grown rapidly, and competition has increased among NRSRO and non-NRSRO providers, leading the Staff to identify several areas of potential risk to NRSROs. These include the risks that, in incorporating ESG factors into ratings determinations, NRSROs may not adhere to their methodologies or policies and procedures, consistently apply ESG factors, make adequate disclosure regarding the use of ESG factors applied in rating actions, or maintain effective internal controls involving the use in ratings of ESG-related data from affiliates or unaffiliated third parties. The Staff also identified the potential risk for conflicts of interest if an NRSRO offers ratings and non-ratings ESG products and services.
The Staff notes that examples of non-ratings ESG products and services include: (i) evaluations of the environmental benefits of a project financed with the proceeds of a “green” bond issuance; (ii) ESG scores based on the expected impact of ESG factors on a company’s growth, profitability, capital efficiency, and risk exposure; and (iii) assessments of a company’s risk from climate-related scenarios. The Staff indicates that these products and services are not credit ratings and are therefore not directly regulated by the SEC’s Office of Credit Ratings.
A few months ago, I covered the efforts of the SEC’s Office of the Advocate for Small Business Capital Formation to expand the resources available to small business seeking capital. Following up on the capital raising navigator that was launched last year, the Office has now launched its “Building Blocks” resource page. The page features several blocks with questions such as “what is a general solicitation?” and “what is the role of accredited investors?” and clicking on those blocks directs you to more detailed resources which answer the question. On the Building Blocks page, the Staff solicits suggestions for more questions to be answered, and one could envision this page filling up with building blocks given all of the questions that small businesses have about capital raising.