Keynote Address at PLI - Eleventh Annual Institute on Securities Regulation in Europe
Director, Division of Corporation Finance
U.S. Securities and Exchange Commission
March 8, 2012
Thank you David [Greenwald] for that kind introduction. I appreciate the invitation to come to speak to you. It is a pleasure to be back in London addressing this conference. I was last here two years ago, in 2010. Quite a lot has happened in that time.
I would first like to note that this is a wonderful year to be in London, not only because of the Olympics — although, I guess, I am a little early for that — but also because it is the Diamond Jubilee of the reign of Queen Elizabeth II. This is certainly a momentous year to be here. Unfortunately, I can only be here for about 18 hours on this trip, so I will need to come back soon to fully experience your celebrations.
The Diamond Jubilee seems a good occasion to look back and review what has changed, and not changed, in our capital markets over the past sixty years, and to speculate a little about how the SEC might consider responding to those changes.
I plan to talk with you today about our work implementing the extensive and far-reaching rulemaking mandate under the Dodd-Frank Act, and then, looking back and forward, describe our capital formation initiatives and share with you some thoughts I have on our approach to foreign issuers.
I must first, however, give the standard disclaimer — the views I express this morning are my own, and do not necessarily represent the views of the Commission, individual Commissioners, or any other member of the staff of the Commission.1
Dodd-Frank Act Rulemaking
In response to the financial crisis, the United States Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in July of 2010.2 I had been back at the Commission for about 13 months when the Dodd-Frank Act became law.
I was in private practice when the Sarbanes-Oxley Act was enacted in 2002,3 which was the last major piece of legislation affecting the U.S. capital markets prior to the Dodd-Frank Act. In some respects, the scope of Sarbanes-Oxley was very narrow — it was intended to dramatically improve the financial reporting infrastructure for U.S. public companies, and it did this by creating new auditor independence standards, a new oversight body for auditors, new audit committee standards, new certification requirements by CEOs and CFOs, new reports about disclosure controls and internal controls over financial reporting, and more, although not a great deal more.
In contrast, the Dodd-Frank Act is much broader in scope and purpose, affecting virtually every aspect of the capital markets, including asset-backed securities, swaps and other derivatives, proprietary trading by banks, consumer finance, and a great deal more.
As you know, Dodd-Frank affects public companies in a number of respects. It has provisions relating to credit ratings disclosures in prospectuses and reliance on credit ratings in our rules; executive compensation matters, including say-on-pay and a variety of compensation disclosures; listing standards for compensation committees of boards and for clawbacks of erroneously awarded executive compensation; the safe harbor for private placements; asset-backed securities; and topics we describe as “specialized disclosures” — disclosures relating to use of conflict minerals from the Congo, mine safety matters, and payments to governments by resource extraction issuers. The SEC and our fellow financial regulators in the United States are tasked with implementing these many and varied provisions. This has been, and continues to be, a significant undertaking for my Division and the Commission. The Commission has made, and continues to make, real progress implementing Dodd-Frank. The workload has been heavy and the work has been challenging. I am very proud of what my Division and the Commission have achieved so far.
The Commission has proposed or adopted rules for each Corporation Finance Dodd-Frank provision that has a deadline — though not always by the deadline. The Commission has adopted final Dodd-Frank Act rules recommended by my Division implementing provisions addressing say-on-pay,4 credit ratings,5 asset-backed securities,6 mine safety disclosures,7 and accredited investor status.8 The Commission also has a number of outstanding rule proposals from my Division that need to be finalized, several of which are quite challenging, such as Conflict Minerals,9 Resource Extraction,10 and Disqualification of Felons and Other “Bad Actors” in Regulation D offerings.11 And there are some rules — those without deadlines — that still need to be proposed. In some instances the provisions to be implemented are quite prescriptive — Congress’s directive appears pretty clear. Also, some of the provisions are outside our traditional areas of expertise. I am sorry to disappoint, but I am not going to predict when these rules will all be finalized. I can assure you, however, that we are working to complete effective rules as soon as possible.
We realize that some of the provisions will be challenging for companies to comply with; the staff’s goal, as we have been developing and recommending rules to the Commission, is to operationalize the statutory mandate in a manner that is workable, but at the same time true to the Dodd-Frank Act. This is a delicate balance, but one that I believe we are achieving. We have benefited in this exercise from the significant public comment, both before the Commission has proposed rules implementing Dodd-Frank mandates12 and on the actual rules that the Commission has proposed. Many of you have not been shy in telling us what you think about some of the proposed rules. We appreciate and need this feedback, and I urge you to please keep commenting. As you prepare your comments, please tell us why you do, or do not, like something the Commission has proposed, and please give us alternatives to consider if you do not like the proposal. Also, please provide economic data on the impact of what Congress has asked us to do or on how the Commission is proposing to implement it.
Capital Formation Initiatives
Even though we are very busy implementing Dodd-Frank, we also are keenly focused on our capital formation initiatives. Early last year, Chairman Schapiro tasked us with a new initiative. She asked us to take a fresh look at our regulations to determine how we could better facilitate capital formation without compromising critical investor protections. The Chairman asked us to look at a number of areas, including the triggers in our rules that require private companies to start Exchange Act reporting and allow reporting companies to stop reporting (or “go dark”); whether our private placement exemptions are appropriately structured to help smaller companies raise money, particularly in light of the changes in the way people communicate and interact; and whether the restrictions on communications in registered offerings, including initial public offerings, continue to be appropriate and necessary for investor protection.
If we look back sixty years at the capital markets, there has been tremendous change, some of it brought about by technology and some of it by changing attitudes and ways of thinking about regulation and capital raising. It was about sixty years ago when a part of the structure for private offerings of securities was established, with the Supreme Court decision in Ralston Purina,13 which allowed issuers to offer and sell securities in so-called private placements to investors who could fend for themselves — focusing the inquiry on whether an investor needs the protections that come with registration. It was about fifty years ago that the basic regulatory structure for unlisted, unregistered companies was established, when Congress added Section 12(g) to the Exchange Act:14 U.S. issuers with $1 million in assets and 500 shareholders of record were required to register with the SEC and became subject to the periodic reporting requirements of the Exchange Act (the Commission has since raised the asset number to $10 million).15
Several decades on, we find ourselves faced with a changed, and rapidly changing, world. One in which regulators must find ways to adapt without sacrificing the key principles of investor protection that underlie our system of rules and give investors the confidence they need to put their money at risk in our markets. In doing so, I think we have to ask ourselves some fundamental questions about how our regulatory scheme works in the context of significant changes in the markets and in the ways that we communicate. Included among these are:
- How does the concept of a private placement fit in the age of social media, bloggers, and 24/7 news coverage? And how should we think about restrictions on general solicitation against that backdrop?
- How does a regulatory system for registered offerings originally premised on carefully controlled communications — structured so that investors’ attention is directed to the important, balanced, complete, and (hopefully) reliable information in prospectuses — stay relevant when investors are bombarded with information coming through sources that issuers often cannot control and that we never could have foreseen when the rules were written?
- Is a “quiet period” for a registered IPO realistic today, and are we helping investors by limiting information in these offerings?
- If more communication is better, as many would advocate, how can we assure that investors are protected and that those who communicate with the goal of encouraging investors to invest are held appropriately accountable so that they take care in deciding what to say?
- With pre-IPO companies widely trading in private company markets, widespread use of equity to pay employees, longer periods between formation and IPO, ever-expanding OTC markets, and securities ownership increasingly shifting to indirect forms, what are the characteristics that should determine whether a company should be subject to registration and reporting under the Exchange Act?
Commission staff have been thinking about these questions, and working to bring recommendations to the Commission to address at least some of the concerns raised by these questions. As part of this effort, we are thinking about whether there are ways to make going public easier and whether the ban on general solicitation is still necessary and workable. We also are looking at the registration and reporting requirements under the Exchange Act, and the staff is currently conducting a comprehensive study of the Section 12(g) thresholds and triggers for registration and reporting. As you know, the Commission recently updated the Section 12(g) rules for foreign private issuers;16 updating the domestic system clearly needs consideration as well.
We are very much at an information gathering stage with regard to each of these projects, and we will be seeking public input, which I expect the Commission will do through concept releases, requests for comment, or other means. We also are looking beyond our borders, to see how other jurisdictions address these issues. With regard to the latter, we are aware that the securities laws of some foreign jurisdictions set forth different frameworks that govern solicitation and advertising in private offerings, and this may be instructive for us as we move forward in this area.
Regulation of Disclosure by Foreign Private Issuers
Before I turn away from the things we are currently working on at the Commission, I know many of you are interested in hearing from me on the progress we are making on the Commission’s decision about whether to incorporate IFRS into the financial reporting system for U.S. issuers. I can tell you that the staff has completed all of its work under the Work Plan17 — I am sure you saw the two staff papers we posted at the end of last year,18 which represent an important part of the overall work towards this effort. The staff is now focused on completing a final report for the Commission, which we expect will be published in a few months. I know, you want to ask me what exactly does “a few” mean — how about we leave it at “more than couple and less than many.”
As we consider IFRS and look back at our regulatory scheme and the changes in the capital markets, I also have been thinking about the Commission’s approach to the regulation of foreign private issuers that are registered with the SEC. Looking forward, post-Dodd-Frank implementation, I wonder if this should be a priority area for us to look at to determine whether the regulatory model has kept up with the times.
The staff is continually evaluating our rules and assessing whether they are working to protect investors and promote capital formation in an optimal balance. This evaluation and re-evaluation has not overlooked how we regulate foreign issuers in our markets. As you know, in 2005, the Commission eased the transition of foreign companies to IFRS by permitting companies to present only two years of financial statements in their first year of IFRS reporting.19 In 2006 and 2007, the Commission re-wrote the rules on foreign issuer deregistration, completely changing our approach from one that counted noses of U.S. shareholders to one that looks at relative trading volume in the United States as a measure for whether a foreign company could end its filings with the SEC.20 In 2007, the Commission eliminated the U.S. GAAP reconciliation for foreign companies that use IFRS as issued by the IASB in their SEC filings,21 and in 2008, the Commission completely changed its approach to the Rule 12g3-2(b) exemption, allowing companies to post information on-line rather than send copies of materials for access in the SEC’s public reference room in Washington, DC.22 And, for those of you wondering, the reference room does still exist. Finally, in 2008, the Commission moved up the deadline for Annual Reports on Form 20-F from six months to four months.23 The first year for this new deadline is now upon us for all of you with December 31 year ends. I cannot take your filing here, but please be sure to file your 20-F by April 30th.
Much has changed over the years, and one thing we have noticed is a fundamental change in the demographics of our population of foreign private issuers. At one time, not so long ago, the typical foreign private issuer was a large cap, FT Global 500 company that was listed in its home country and that was looking to list on the New York Stock Exchange as a secondary listing. Many of these companies were from the United Kingdom, and it was a well-worn path — primary trading market in London, with a secondary listing in the United States. It was in this environment that the current reporting regime was developed, under which foreign private issuers are not independently subject to any ongoing SEC reporting in the United States, other than the 20-F. As you know, Form 6-K is basically a cover sheet that simply says: when a company publishes material information for shareholders in accordance with home country or home exchange requirements, the company should submit that information to the SEC too, so that U.S. investors have access to that same information.
This regime made great sense when established. By and large, the home country was the principal price discovery market, and the level of disclosure that supports price discovery and trading in the home market should also support price discovery and trading in the United States. The United States did not need to drive periodic disclosure for U.S.-listed foreign companies — the home country regulator was focused on that.
Just like the facts underpinning our review of our rules relating to capital formation — circumstances have changed and the markets have changed. So, we need to ask whether we should change our regulatory approach to foreign issuers. We have slightly fewer than 1,000 foreign private issuers that are registered and reporting with the Commission — and that number has held pretty steady for quite some time. However, in a major change, a large percentage of these companies are listed only in the United States. It has always been the case that there were some foreign companies that were only listed in the United States, but now we see large numbers of foreign companies whose only trading market is the New York Stock Exchange or Nasdaq.
Questions I believe we need to ask include:
- Is the current 6-K reporting model the right model for these companies? Does it continue to be the right model for foreign private issuers in general?
- Should companies that are only listed in the United States, whose only price discovery market is an exchange in the United States, who have a significant shareholder base in the United States, and who have no applicable home country disclosure requirements, be subject to a reporting model that is different than a U.S. company? Should these companies not be required to provide quarterly financial information and 8-K level current reporting?
- Should any of these questions apply to foreign private issuers that are also listed on a foreign exchange?
In the end, my question is simply whether the current reporting model is one that provides the appropriate investor protections. I am sensitive to the fact that there continue to be many foreign companies that are dual-listed in the United States and that these issuers have a keen interest in not being subject to duplicative and overlapping filing obligations. Nonetheless, as we look back and forward, I think we should be willing to ask the hard questions about the continued vitality of the current reporting regime for foreign private issuers, particularly for foreign companies that are only listed in the United States.
Disclosure Review Program
Finally, and before I close, I would like to spend a moment talking about the Commission’s disclosure review program. Over 80 percent of the staff in the Division of Corporation Finance is devoted to reviewing filings. The accountants, lawyers, and financial analysts spend countless hours reviewing disclosures in prospectuses for IPOs and follow-on offerings, in annual reports and other reports on Forms 10-Q, 8-K and 6-K. The companies they learn about could be among the largest in the world, with revenues of billions of dollars, Euros or pounds, and thousands of employees around the world; or may be micro-cap start-up companies with almost no revenues, and the founder as its single employee. Sarbanes-Oxley requires that we review every registered company at least once every three years, and we do that, and even more frequently for the larger companies. Indeed, we now review the very largest U.S. financial services firms continuously throughout the year.
I mention our disclosure review program not only because of the importance of this work, but because it is an approach to regulation that we increasingly share with others around the world. Division staff has regular meetings and teleconferences with staff from the European securities regulators, ESMA, and the Financial Reporting Review Panel here in London. We trade perspectives and information on what we are seeing with IFRS, risk disclosures, and other topical disclosure and accounting areas.
I think our disclosure review program is the great engine that drives better accounting and disclosure practices in the United States. We ask questions about matters that seem unclear or inconsistent or about disclosures that we do not understand. These are often some of the same types of questions investors and analysts would raise with the company if they had the opportunity, but we have the advantage of having an opportunity to ask the question, and we usually have a much better chance of getting our questions answered. As a result of this process, companies provide better disclosures for investors. Markets have changed and will continue to change, but our review program remains nimble and resilient.
Thank you so much for inviting me to be with you this morning. It has been a pleasure to be here.
1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees.
2 Pub. L. No. 111-203 (July 21, 2010).
3 Pub. L. No. 107-204 (July 30, 2002).
4 Shareholder Approval of Executive Compensation and Golden Parachute Compensation, Release No. 33-9178 (January 25, 2011), available at http://www.sec.gov/rules/final/2011/33-9178.pdf.
5Security Ratings, Release No. 33-9245 (July 27, 2011), available at http://www.sec.gov/rules/final/2011/33-9245.pdf; Removal From Regulation FD of the Exemption for Credit Rating Agencies , Release No. 33-9146 (September 29, 2010), available at http://www.sec.gov/rules/final/2010/33-9146.pdf.
6 Suspension of the Duty to File Reports for Classes of Asset-Backed Securities Under Section 15(d) of the Securities Exchange Act of 1934, Release No. 34-65148 (August 17, 2011), available at http://www.sec.gov/rules/final/2011/34-65148.pdf; Issuer Review of Assets in Offerings of Asset-Backed Securities, Release No. 33-9176 (January 20, 2011), available at http://www.sec.gov/rules/final/2011/33-9176.pdf; Disclosure for Asset-Backed Securities Required by Section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Release No. 33-9175 (January 20, 2011), available at http://www.sec.gov/rules/final/2011/33-9175.pdf.
7Mine Safety Disclosure, Release No. 33-9286 (December 21, 2011), available at http://www.sec.gov/rules/final/2011/33-9286.pdf.
8 Net Worth Standard for Accredited Investors , Release No. 33-9287 (December 21, 2011), available at http://www.sec.gov/rules/final/2011/33-9287.pdf.
9 Conflict Minerals , Release No. 34-63547 (December 15, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63547.pdf.
10 Disclosure of Payments by Resource Extraction Issuers , Release No. 34-63549 (December 15, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63549.pdf.
11 Disqualification of Felons and Other “Bad Actors” From Rule 506 Offerings , Release No. 33-9211 (May 25, 2011), available at http://www.sec.gov/rules/proposed/2011/33-9211.pdf.
12See Public Comments on SEC Regulatory Initiatives Under the Dodd-Frank Act, available at www.sec.gov/spotlight/regreformcomments.shtml.
13S.E.C. v. Ralston Purina Co., 346 U.S. 119.
14 The Securities Acts Amendments of 1964, Pub. L. 88-467 (August 20, 1964).
15 The asset threshold has been increased on several occasions, most recently to $10 million in 1996. See Relief From Reporting by Small Issuers, Release No. 34-37157 (May 1, 1996), available at http://www.sec.gov/rules/final/34-37157.txt.
16 Exemption From Registration Under Section 12(g) of the Securities Exchange Act of 1934 for Foreign Private Issuers , Release No. 34-58465 (September 5, 2008), available at http://www.sec.gov/rules/final/2008/34-58465.pdf.
17 Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers, Office of the Chief Accountant, U.S. Securities and Exchange Commission (included as Appendix to Commission Statement in Support of Convergence and Global Accounting Standards, Release No. 33-9109 (February 24, 2010), available at http://www.sec.gov/rules/other/2010/33-9109.pdf) .
18 Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers — An Analysis of IFRS in Practice, Division of Corporation Finance and Office of the Chief Accountant, U.S. Securities and Exchange Commission (November 16, 2011), available at http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-paper-111611-practice.pdf; Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers — A Comparison of U.S. GAAP and IFRS, Office of the Chief Accountant, U.S. Securities and Exchange Commission (November 16, 2011), available at http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-paper-111611-gaap.pdf.
19 First-Time Application of International Financial Reporting Standards , Release No. 33-8567 (April 12, 2005), available at http://www.sec.gov/rules/final/33-8567.pdf.
20Termination of a Foreign Private Issuer’s Registration of a Class of Securities under Section 12(g) and Duty to File Reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, Release No. 34-55540 (March 27, 2007), available at http://www.sec.gov/rules/final/2007/34-55540.pdf.
21 Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP, Release No. 33-8878 (December 21, 2007), available at http://www.sec.gov/rules/final/2007/33-8879.pdf.
22 Exemption From Registration Under Section 12(g) of the Securities Exchange Act of 1934 for Foreign Private Issuers , Release No. 34-58465 (September 5, 2008), available at http://www.sec.gov/rules/final/2008/34-58465.pdf.
23Foreign Issuer Reporting Enhancements, Release No. 33-8959 (September 23, 2008), available at http://www.sec.gov/rules/final/2008/33-8959.pdf.