Securities and Exchange Commission Open Meeting
Securities and Exchange Commission
Wednesday, December 18, 2019
Key Topics & Takeaways
- Item I: Risk Mitigation Techniques for Uncleared Security-Based Swaps: In a unanimous vote, the SEC approved the proposal to implement risk mitigation techniques for uncleared security-based swaps.
- Item II: Rule Amendments and Guidance Addressing Cross-Border Application of Certain Security-Based Swap Requirements & Item III: Order Designating Certain Jurisdictions as “Listed Jurisdictions” for Purposes of Rule Amendments Addressing Cross-Border Application of Certain Security-Based Swap Requirements: In a 3-2 vote, with Commissioners Jackson and Lee dissenting, the SEC approved the proposals to expand and improve the cross-border security-based swaps regulatory framework, which would help stand up the SEC’s security-based swap regulatory regime.
- Item IV: Disclosure of Payments by Resource Extraction Issuers: In a 3-2 vote, with Commissioners Jackson and Lee dissenting, the SEC approved the proposal to revise the definition of the term project to require disclosure at the national and major subnational jurisdictions, the definition of not de minimis to include a project threshold and an individual payment threshold, and other the disclosure requirements for resource extractions.
- Item V: Amending the “Accredited Investor” Definition: In a 3-2 vote, with Commissioners Jackson and Lee dissenting, the SEC approved the proposal to amend the definition of an accredited investor to include nonfinancial tests, series 7, 65, and 82 licensed individuals, LLC’s and RBIC’s, Indian tribes and other persons.
- Item VI: Public Company Accounting Oversight Board 2020 Budget and Accounting Support Fee: In a 4-0 vote, with Commissioner Lee abstaining, the SEC approved the proposal to pass the PCAOB 2020 budget and accounting support fee.
Chairman Jay Clayton
In his statement, Clayton emphasized the importance of the Securities and Exchange Commission (SEC) updating and modernizing rules to reflect current market operations. He said that the first three proposals assist the SEC in standing up their Dodd-Frank Title VII requirements for swaps and establishing security-based governing requirements. Clayton continued that the actions help increase and harmonize rules alongside the Commodity Futures Trading Commission (CFTC), increasing effectiveness and decreasing costs. He said that the guidance would be consistent with international components to improve global regulation. He said that as times change, the cross-border framework would evolve.
Clayton explained that the fourth proposal would implement section 13(q) to section 1504 of the Securities Exchange Act of 1934. He highlighted that the SEC adopted rules to amend resource extraction disclosures in 2012 and 2016, which the U.S. District Court for the District of Columbia and Congress reversed, respectively. Clayton said that the SEC would fulfill its requirement to address the issue with a proposal that implements transparent provisions and addresses compliance and competitive harms. He said the U.S. remains committed to anti-corruption efforts and the proposal will help further such efforts.
Clayton highlighted that the fifth proposal would amend the definition of an accredited investor under Regulation D. He said on the individual side, investors should be measured beyond their income and wealth, adding that the proposal would include non-financial tests and expand provisions for licensed professionals and Indian tribes. Clayton said investors need advantages, protections, and alignment for public markets. He said the SEC should assess the private offering framework as a whole and consider Main Street investor participation.
Clayton concluded that alignment between the SEC and the Public Company Accounting Oversight Board (PCAOB) is important and that it is critical to executing the oversight initiative fully. He expressed appreciation for the PCAOB’s strategic plan, audit committees, and increases to human capital.
Commissioner Elad Roisman
In his statement, Roisman expressed appreciation for the harmonization of security-based swaps alongside the CFTC and said it is important to avoid making rules outside the SEC’s jurisdiction. He continued that the rules considered do not passively defer from the CFTC and there were coordinated efforts between the SEC and CFTC. He suggested being thoughtful when tailoring global and U.S. regulations. Roisman made a statement, welcoming improvements to the fourth proposal but echoed his support for regulatory oversight of the resource extraction disclosures.
Roisman in a later statement, suggested further improvements to the accredited investor definition for financial experience and professional qualifications. Roisman continued that the accredited investor definition improvement was timely, and that wealth is a “crude” measure of financial ability. He highlighted that the proposal does not open the “flood gates” to private offerings, but helps investors be able to make more investment choices. He expressed that the proposal helps provide more flexibility for capital raising.
Commissioner Robert J. Jackson Jr., Securities and Exchange Commission
In his statement, Jackson said that the proposals addressing cross-border issues must do more to recognize global markets, be thoughtful and tailored for efficient and safe US markets, be fine-tuned, and consider differences between CFTC proposals particular to not de minimis definitions. He also expressed concerns about the change to governing private markets and the lack of data and analysis of potential risks. Jackson continued to express dissent for the proposal on resource extraction disclosures, stating that the rule would lead to fraud in investing. He added that investors need to be able to identify brokers who have engaged in fraud. Jackson in a later statement, said that the fifth proposal would expose investors to the risks of private markets, and recommended the SEC further analyze private markets to protect investors.
Commissioner Hester M. Peirce, Securities, and Exchange Commission
In her statement, Peirce echoed many of Clayton’s points about the Dodd-Frank Title VII requirements, the importance of harmonizing cross-border securities-based swap requirements, coordination with the CFTC, and the need to address resource extraction proposals. She added that listed jurisdiction is an important area the SEC is considering.
Peirce in an additional statement, highlighted her support for efforts to update the accredited investor definition, saying the recommendation provides meaningful reform. She suggested the SEC further consider geographic provisions. Peirce said it is important for the SEC to think about retail investment across private and public markets.
Commissioner Allison Herren Lee, Securities, and Exchange Commission
In her statement, Lee echoed many of the same points as Jackson regarding each proposal, adding that global effects can creep back into U.S. markets. She said that bad actor disqualification rules should not be weakened, disclosure requirements help fight global corruption, and there is a lack of data and analysis for many of the proposals. Lee in an additional statement, said that the rule on accredited investors should account for inflation and should consider the potential impacts private market risks could have on senior investors.
Item I: Risk Mitigation Techniques for Uncleared Security-Based Swaps
Brett Redfern, Director, SEC Division of Trading and Markets, explained that the proposal would adopt rules requiring the application of risk mitigation techniques for uncleared security-based swaps. He continued that the new rules, 15 Fi-3, 15 Fi-4, and 15 Fi-5, would establish requirements for registered security-based swap dealers and major security-based swap participants to: 1) periodically reconcile outstanding security-based swaps with counterparties; 2) engage in certain forms of portfolio compression exercises, as appropriate; and 3) execute written trading relationship documentation with each counterparty, prior executing a security-swap transaction. He echoed Clayton’s points about the SEC acting under Dodd-Frank Title VII mandates.
The Commission voted in favor of the proposal, 5-0.
Item II: Rule Amendments and Guidance Addressing Cross-Border Application of Certain Security-Based Swap Requirements & Item III: Order Designating Certain Jurisdictions as “Listed Jurisdictions” for Purposes of Rule Amendments Addressing Cross-Border Application of Certain Security-Based Swap Requirements
Redfern highlighted two proposals related to expanding and improving the cross-border security-based swaps regulatory framework. He said that the proposals would help stand up the SEC’s security-based swap regulatory regime as the compliance date is triggered in compliance with Dodd-Frank Title VII. He explained how the amendments would impact four areas: 1) the use of transactions that have been arranged, negotiated, or executed by U.S. personnel, triggering U.S. regulation and oversight of security-based swaps; 2) the requirement that non-U.S. swap dealers and major security-based participants provide certification and opinion of counsel regarding the ability to access information and conduct onsite examinations; 3) cross border application of statutory disqualification provisions; and 4) questionnaires or employment applications that registered security-based swap entities must maintain with regard to their foreign associated persons.
S.P. Kothari, Chief Economist and Director, SEC Division of Economic and Risk Analysis, added that the first three proposals would potentially reduce market fragmentation and compliance costs. He continued that the rules would harmonize security-based swap markets alongside CFTC rulemaking, eliminate certain record-keeping requirements, reduce compliance burdens for security-based swap entities, may enhance efficiency and effectiveness, and would promote risk mitigation while aligning with the SEC’s objectives.
The Commission voted in favor of both proposals, 3-2, with Jackson and Less dissenting.
Item IV: Disclosure of Payments by Resource Extraction Issuers
William Hinman, Director, SEC Division of Corporation Finance, stated that the proposal under consideration has had a long history, dating back nine years to the original rule being overturned by the U.S. District Court for the District of Columbia in 2012, and later being reversed by the Congressional Review Act (CRA) in 2016. He highlighted that the proposal would revise the definition of the term project to require disclosure at the national and major subnational jurisdictions. Hinman also stated the rule would revise the definition of not de minimis to include a project threshold and an individual payment threshold to require disclosures concerning payments made to the government equal to or exceeding $150,000 when the total of individual payments related to a project equal or exceed $750,000. He also said that the rule would include exemptions for small and emerging companies and expand filing deadlines and relief for issuers who recently completed their initial public offerings (IPO).
Elliot Staffin, Special Counsel, SEC Division of Corporation Finance, added that the proposal would implement two new additional exemptions for situations in which a foreign law or a pre-existing law contract prohibits the required disclosure. He continued that other provisions revise the definition of control to exclude entities or operations in which an issue has a proportionate interest, limit the liability for the required disclosure by deeming the payment information to be furnished but not filed with the SEC, and permit an issuer to aggregate payments based on type made below the major subnational government level.
Kothari added that analysis shows the rule could impact compliance costs directly and indirectly, as well as create a competitive disadvantage for certain companies.
Question & Answer
Peirce and Lee asked how overseas reporting would satisfy U.S. requirements. Hinman responded that if companies file overseas, they would be able to file those disclosures in the U.S. to satisfy SEC requirements. He said that in some cases, the filings will have to be aggregated and calculated to satisfy U.S. levels.
The Commission voted in favor of the proposal, 3-2, with Jackson and Lee dissenting.
Item V: Amending the “Accredited Investor” Definition
Hinman stated that the proposal would expand the definition of an accredited investor beyond the current financial measures of income and wealth. He said the measure would account for professional knowledge, certification and experiences. Hinman added that the revised definition would expand the definition to include Series 7, 65 and 82 licensed individuals, expand spousal finance pools, include Indian tribes, and add limited liability companies (LLCs) and rural business investment companies (RBICs) to the list of qualified entities. Hinman said the new categories would increase investment opportunities and streamline compliance. He added that the SEC would consider inflation adjustments in the four-year Dodd-Frank review process, as the measure would not adjust. He concluded that the SEC should review for inflation and other market development when expanding the pool of investors over time to reflect wage growth and net growth.
Charlie Guidry, Counsel, SEC Division of Corporation Finance, echoed that the proposal would expand the definition, amending rules 2a51-1(b) under the Investment Company Act to include Indian tribes, as well as 144 (a), 163 (b) for inclusion of LLCs and RBICs and 501 (a) as a “catch-all” category that qualifies institutional buyers satisfying the $100 million threshold.
Kothari added that there are expectations that investors could experience increased capital formation and cost savings with lower risks with this proposal. He said that investors could benefit from private market investments and negative effects would be limited due to the targeted nature of the expanded definition of an accredited investor. Kothari added that this rule could lead to private companies remaining private longer, although the SEC’s job is not to make recommendations on whether companies should go public or not.
The Commission voted in favor of the proposal, 3-2, with Jackson and Lee dissenting.
Item VI: Public Company Accounting Oversight Board 2020 Budget and Accounting Support Fee
Sagar Teotia, Chief Accountant, SEC Office of the Chief Accountant, stated that the PCOAB reviewed their budget and aligned its interests with the SEC. He said the budget covers funding for the PCAOB board and staff to implement their strategic plans and recommended passage.
Caryn Kauffman, Chief Financial Officer, SEC Office of Financial Management, echoed that the proposal is in conjunction with PCAOB and SEC alignment. She highlighted that the budget request increased from the fiscal year (FY) 2019 allocation of $273 million to a request of $287 million. Kauffman said that the requested increase is for staffing and would be recovered by the accounting support fee.
William Duhnke, Chairman, PCAOB, said that the PCAOB has made progress on its strategic priorities, and will make a continued effort in 2020. He said that their plans have included innovative oversight, improvements to inspections, quality control, human capital, stakeholder impacts, technology, and enhancing risk and compliance management. Duhnke said the PCAOB has spent time addressing sustainable gaps in the organization and will not make substantial changes for its 2020 strategic plan related to its 2019 plan.
Question & Answer
Clayton, Jackson, and Peirce asked Duhnke how he plans to utilize the budget and increase transparency, organization structure and audit processes. He said that the organization is still climbing to maturity, and he will use additional resources for technology and staffing purposes, beyond the recent hiring of a Chief Risk Officer. He said that the PCAOB is tasked with inspecting forms and audits, not financial statements, and the PCAOB will continue to coordinate with the SEC, build out infrastructure and work towards rulemaking.
The Commission voted in favor of the proposal, 4-0. Lee abstained from voting.
For more information on this event, please click here.
For an archive of past SIFMA hearing coverage, please click here.