Apr. 06, 2022
April 6, 2022
1. Background.
I am an attorney in private practice in Irvine, California. I am writing in my individual capacity and not on behalf of my law firm or any of my law firm's clients. I previously served as California's Commissioner of Corporations and in that capacity administered and enforced California's securities laws. I have taught courses in securities regulation and administrative law at the University of California, Irvine and corporate governance at Chapman School of Law. I have also served as a member of the California Senates Commission on Corporate Governance, Shareholder Rights Securities Transactions, Co-Chairman of the Corporations Committee of the Business Law Section of the California State Bar, and Chairman of the Business and Corporate Law Section of the Orange County (California) Bar Association. I am a co-author of the 5th Edition of MARSHS CALIFORNIA CORPORATION LAW and a practice consultant to the leading treatise on Californias securities laws, Marsh Volk, PRACTICE
UNDER THE CALIFORNIA SECURITIES LAWS. As indicated above, I am writing in my individual capacity and not on behalf of any other person.
2. The Securities and Exchange Commission (Commission) should not adopt new Form SR without establishing the benefits of the requirement.
The Commissions notice of proposed rulemaking includes almost no evidence to support either the imposition of a new disclosure requirement or the proposed frequency of reporting. For example, the Commission asserts that asymmetries may exist and that those asymmetries could exacerbate some of the potential harms (emphases added). In fact, the conditional word could can be found at least 90 times in the Commissions notice. The Administrative Procedure Act requires that the Commission articulate a rational connection between the facts found and choice made. Burlington Truck Lines, Inc. v. U.S., 371 U.S. 156, 158 (1962). Simply, put the notice sets forth only speculation, not facts. Moreover, the speculation that stock buybacks are motivated by managements desire to boost earnings-per-share (EPS) compensation s contradicted by the Commissions staff report to Congress. See SEC Staff Response to Congress: Negative Net Equity Issuance (Dec. 2020) and SEC Runs Away From Its
Staff's Response To Congress (Dec. 17, 2021) (avail. at https://protect2.fireeye.com/v1/url?k=31323334-50bba2bf-3132d782-4544474f5631-176651c61ac60801&q=1&e=44d45f9e-3c72-4f68-9e31-fddf2a803180&u=https%3A%2F%2Fwww.calcorporatelaw.com%2Fsec-runs-away-from-its-staffs-response-to-congress). Adoption the proposed rule on the basis mere speculation would be arbitrary, capricious and an abuse of discretion within the meaning of 5 U.S.C. 706(2)(A).
3. Proposed Form SR should define business day.
Neither the Securities Exchange Act of 1934 (1934 Act) nor the Commissions rules define the term business day. The term is ambiguous in several respects. The referent is unclear does the term refer to the business day of the issuer, the business day where the purchase is executed, or the business day of the Commission? Specifying the referent is important because issuers are located, and purchases may be executed, in different time zones across the world. While Rule 0-2(a) under the 1934 Act establishes the business hours of the Commission, it is unclear whether this is equivalent to a business day under proposed Form SR.
4. The phrase before the end in Proposed Form SR should be clarified.
The phrase before the end is unclear. Does the before the end mean by the 5:30 p.m. deadline set forth in Rule 13(a)(2) of Regulation S-T, the 10 p.m. deadline set forth in Rule 12(c) of Regulation S-T, or the end of the business day where the issuer is located or the purchase was effected?
5. The Commission Must Comply with Executive Order No. 13563 (Jan. 18, 2011).
Executive Order No. 13563 requires the Commission to, among other things, propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs (recognizing that some benefits and costs are difficult to quantify) . . .. Executive Order No. 13563 is applicable to the SEC pursuant to Section 7(a) thereof which provides that the term agency has the meaning set forth in section 3(b) of Executive Order No. 12866 (Oct. 4, 1993). As noted above, the SECs proposal is based on speculative benefits. For example, the Commission repeatedly states that information could reveal time-sensitive information, could be valuable, and could help investors. The Commission, however, admits that It is difficult to determine the incremental contribution of the proposed amendments and thus the magnitude of this potential benefit. The Commission may not adopt the proposal unless it is able to make a reasoned determination that its benefits justify its costs. The fa
ct that it may be difficult to quantify the benefits does not relieve the Commission of this obligation.
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