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SEC IAC Meeting

Securities and Exchange Commission

Investor Advisory Committee Open Meeting

Thursday, June 9, 2022

Topline

  • The Commissioners focused their remarks on the elder investor protection issue, also briefly touching on climate risk and accounting.
  • IAC approved recommendations on protecting elder investors and funding a grant program for advocacy clinics.

Opening Statements
In her opening statement, Commissioner Hester Peirce discussed the topics of the first two panels and briefly touched on her opposition to the SEC’s climate disclosure proposal, adding that she would advise the Investor Advisory Committee (IAC) to ensure that when it meets, there is room at the table for a diversity of opinion. She also said protecting older adult investors can be done with law school clinics but that Commission involvement in securing taxpayer funding for these clinics could be problematic. She then urged IAC to think about whether the role being suggested for the proposed coordination center could be served by the SEC’s existing Office of Investor Education and Advocacy. Commissioner Allison Herren Lee’s opening remarks focused on how audited financial statements are vital for the disclosure regime and that regulators need to continually evaluate disclosure standards. Commissioner Caroline Crenshaw’s remarks highlighted fraud scams and exploitation schemes as major problems for older investors and law school investor advocacy clinics as a way to address these issues, adding that these clinics fill a gap by assisting investors who may not have access to legal representation. But she warned that there is a decline in clinics and a need for more clinic funding.

Commission Chair Gary Gensler discussed the SEC’s recent climate risk disclosure rule proposal and how companies are currently disclosing different information, in different places, and at different times. He also touched on non-traditional financial information and the importance of issuers disclosing accurate, not misleading, consistently applied, material information tied to traditional financial information. Next, Gensler discussed the importance of investor advocacy clinics and a potential new pathway for the SEC to fund these clinics.

Panel Discussion Regarding Accounting of Non-Traditional Financial Information

The two-part panel gave an overview of the accounting and auditing infrastructure in the U.S. and discussed whether the accounting and auditing infrastructure is providing investors with the information they need to make informed decisions.

Moderator

  • Cambria Allen-Ratzlaff, Managing Director and Head of Investment Strategies, JUST Capital

Panelists

  • James Andrus, Interim Managing Investment Director, Board Governance &Sustainability, CalPERS
  • George Botic, Director, Division of Registration and Inspections, Public Company Accounting Oversight Board (PCAOB)
  • Robert H. Herz, CPA, FCA, Board Member, Fannie Mae; and former Chairman of the Financial Accounting Standards Board (FASB)
  • Colleen Honigsberg, Associate Professor of Law, Stanford Law School
  • Shehzad (Shaz) Niazi, Deputy Chief Counsel, Office of the Chief Accountant, U.S. Securities and Exchange Commission

Panel Discussion

Botic and Shehzad provided a general overview of the accounting and auditing infrastructure in the U.S. Botic discussed the inspection process, international coordination in inspections, inspection findings, and enforcement activities. Alice Stinebaugh asked if an audit would be concerned with fake accounts in social media companies. Botic emphasized the need to understand controls in the broader revenue cycle. Paul Roye asked how Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB) are funded and if they are sufficiently funded. Shehzad said they are funded through accounting report fees and that their funding is sufficient.

Herz, Andrus, and Honigsberg discussed whether the accounting and auditing infrastructure is providing investors with the information they need to make informed decisions and offered their suggestions to ensure the U.S. capital markets keep pace with changes and remain the most competitive in the world. Herz touched on due process concerns at the SEC and the establishment of the new global sustainability standard. Andrus addressed whether climate and human capital financial disclosure would benefit capital markets and discussed further enforcing accounting and disclosure requirements and materiality concerns with a standard focused on the risks of the time. Honigsberg discussed accounting for investment and how accounting rules are inconsistent across different investments. She also highlighted proposed human capital disclosure reform for investors to have the information to capitalize labor.

Panel Discussion Regarding Climate Disclosure

This panel focused on the SEC’s recent proposal to modify disclosure requirements related to climate change.

Moderator

  • Brian Hellmer

Panelists

  • Jonathan Bailey, Head of ESG Investing, Neuberger Berman
  • Shivaram (Shiva) Rajgopal, Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing, Columbia Business School
  • Samantha Ross, Founder, AssuranceMark, the Investors’ Consortium for Assurance
  • Cynthia A. Williams, Professor of Law and Osler Chair in Business Law, York University

Panel Discussion

Williams highlighted the contents of the proposed climate disclosure rule and specifically discussed why the SEC proposed the required climate disclosure rule, the rule’s contents, the main points of contention regarding the rule, and why climate disclosure is needed. Williams stated that over 90% of Fortune 500 companies are currently preparing sustainability reports and that investors have been asking for better, more consistent, and more comparable data as it relates to climate disclosures. Williams also discussed climate transition risks in tropical commodities. Rajgopal discussed reactions from the issuer community regarding the proposed climate rule and aspects of the proposed rule issuers find constructive. Rajgopal stated that compliance costs are small relative compared to the benefits of climate related disclosures. He said the SEC estimates compliance cost around $630,000 in the first year and compared it to implementing 404(b) disclosures.

Ross discussed investors’ reactions to the proposed climate disclosure rule and stated that investors reactions have been uniformly positive, adding that investors like global harmonization of climate disclosures. Ross also discussed the financial statement Metrix piece within the disclosure rule. Bailey discussed disclosures across Global Industry Classification Standard (GICS) sectors for Scope 1 and 2 emissions as well as carbon related allocations.

Discussion of a Recommendation on Protecting Older Investors

Leslie Van Buskirk stated that the recommendation calls for the SEC to refine how it talks about fraud victims, lead a coordinated effort to strengthen the system in the United States for reporting, addressing, and preventing investment fraud, encourage investors to “Ask and Check” before they hire an investment professional, strengthen investor protection for self-directed IRAs, strengthen the training of investment professionals, and strengthen ongoing efforts to encourage the designation of a trusted contact.

The Committee passed the recommendation by a voice vote of 22-0.

Discussion of a Recommendation on Funding Investor Advocacy Clinics

The IAC recommended that the SEC support the Investor Justice Act, which would provide authority to the SEC to establish a grant program to fund qualified investor advocacy clinics with the SEC’s Congressionally appropriated funds.

The Committee passed the recommendation by a unanimous voice vote.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.