Keynote Address at the PLI’s Seventeenth Annual Institute on Securities Regulation in Europe
Director, Division of Corporation Finance
Feb. 1, 2018
Thank you, Brad [Gans] and thanks to the Practising Law Institute and Allen & Overy for hosting today’s event. I am pleased to be here and provide you with a few thoughts on the state of the Division of Corporation Finance.
Given that companies and the markets that we regulate are increasingly global, I greatly appreciate the opportunity to discuss our policies and existing or potential regulations. I hope you find it informative. For us, this annual institute provides a valuable forum for this dialogue, and I look forward to joining the U.S. regulatory developments panel this morning. Your views and perspectives, particularly as representatives or counsel for foreign private issuers (FPIs), are valuable to the SEC. FPIs are a significant component of the U.S. capital market, with a market capitalization of more than $9 trillion.
Since I arrived at the SEC in May 2017, I have spent time getting to know the Division of Corporation Finance and agency staff and becoming more familiar with the depth and breadth of their work and experience. I am proud to serve alongside such dedicated and talented individuals. I have been so impressed by how the staff manages through changes in our economic environment and how well it adapts to changes in the fields we regulate. It is a terrific group.
Chairman Clayton has stated that the SEC’s mission – to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation – is our touchstone. The Chairman has made clear that our efforts must extend to all investors, especially Main Street investors, and that our capital formation efforts should benefit them by enabling businesses to grow and increasing investment opportunities. Today, I want to elaborate on how the Division is implementing that directive and my vision for the Division.
Before I do, I need to give you the standard disclaimer – the views I express today are my own, and do not represent the views of the Commission, individual Commissioners, or other members of the staff.
In developing my vision for the Division, my starting point has also been the SEC’s tripartite mission. Each tenet is equally critical, and fulfilling the mission is at the heart of everything we do. But let me focus on one aspect – capital formation – for a moment. I believe that making the U.S. public markets more attractive for companies to go public – and stay public – will ultimately benefit investors and our markets through increased transparency, liquidity, and investment opportunities. So considering ways to facilitate capital formation is top of mind.
Having spent a career advising private companies as they move along the path to an initial public offering, I have seen how companies and their investors benefit from the evolution from a private company to a public reporting company. Accounting policies are sharpened and explained more cogently, risks inherent in the business are examined and disclosed in the crucible of the public reporting system, the business model and the strategy that drives it are better focused and understood. Management is strengthened, sometimes with the aid of new hires. Typically the board becomes more knowledgeable and more independent, and corporate governance is improved. All of these things combine to create a stronger company. It is a gratifying process and one that I am sure many of you have experienced. And ideally, a new promising young public company emerges that represents an additional investment opportunity, available to a broader range of investors, who can participate in its growth.
The process of becoming a public company can be daunting and a company must be prepared to shoulder the weight of additional regulation, new investor constituencies, and increased public scrutiny. Private companies, particularly those that have grown quickly, often do not have the same rigorous policies and procedures as public companies and must expend considerable time and money to establish them. There is real value in doing so. And, of course, not all IPOs and newly public companies find success. But consider the alternative – if fewer companies find the public alternative attractive, the options for investors focused on public, liquid investment opportunities, typically smaller investors, are more limited.
How can we make our capital markets and the public company alternative more attractive, while also protecting investors? I do not think there is a single answer. There are a multitude of reasons asserted for why companies may choose not to go public, to go public at a later stage, or to exit the public markets. We know from meeting with companies and their advisors that our regulatory environment is a significant consideration. Given that, and the scrutiny of quarterly market expectations and the growing influence of activist investors, it is no surprise that the availability of private capital has led to companies remaining private longer and, in some cases, indefinitely. On top of this, we lose public companies to merger and acquisition activity. While we cannot address all of these issues, we can change, and hopefully enhance, the regulatory environment. We must seek to strike the right balance with the disclosure and other regulatory burdens placed on companies that join the public sphere. Getting that balance right not only benefits regulated companies, it is good for our markets and investors.
In the United States, proponents of new regulatory ideas sometimes view the SEC’s oversight and disclosure regime as the best tool to address broader policy issues, even if those issues are outside of our core focus of capital formation, efficient markets, and investor protection. I can understand how this happens; our agency and the stock exchanges we oversee have robust rulemaking and enforcement frameworks in place to implement such ideas. But the risk of this approach is that it adds to the regulatory burden that public companies face; a burden not shared by other companies operating in the U.S. economy. I believe this can unnecessarily discourage companies from entering the public markets and that over time, this has contributed to more weight being given to the arguments for delaying entry into or avoiding the public markets.
I would like to see those arguments weigh in favor the public markets, so when I arrived at the SEC, I challenged the Division staff to take a fresh look at our work to see where we can make a difference. That challenge has been met with enthusiasm. We are currently reviewing our rules to find areas where we can reduce compliance burdens. We are also examining our guidance, our processes, and how we interact with registrants, investors, and other stakeholders and considering enhancements. As we do this, I have stressed three hallmarks of good regulation – collaboration, transparency, and efficiency. With those principles in mind, we are considering changes we can make in both the near term and longer term.
Guidance and Policy Updates
As you know, for some time the Division has accepted non-public submissions of registration statements by foreign private issuers and foreign governments. The scope of that policy varied over time and is now primarily utilized by FPIs that are pursuing both a U.S. and non-U.S. listing. In 2012, the JOBS Act provided a similar accommodation for emerging growth companies (EGCs) engaging in an IPO. A qualified foreign private issuer could choose to take advantage of either the EGC or FPI accommodation.
Shortly after my arrival, we began taking actions to enhance our guidance and operations. The Division expanded the non-public review process for draft registration statement submissions to all issuers conducting IPOs, initial Securities Act registrations, and initial Exchange Act registrations under Section 12(b). We also decided to accept draft registration statement submissions for follow-on offerings within one year of an IPO or initial Section 12(b) registration. We are pleased that companies are taking advantage of this policy. Since we announced it, we have received draft submissions for more than 20 IPOs of companies that exceed $1 billion in revenue or otherwise do not qualify to submit as EGCs, and from over 35 companies engaged in follow-on offerings. These options, which are also available to FPIs, smooth the capital-raising process for first-time registrants and newly public companies. It can reduce uncertainty for these companies and allow them to raise capital with less exposure to market volatility, which is good for the companies and their investors.
We also updated guidance to provide greater clarity about what financial information is required when submitting draft registration statements or filing publicly. The statutory framework of the JOBS Act and the FAST Act affords certain accommodations to EGCs not available to other issuers. Our intent is to streamline the process and put EGCs and non-EGCs on as level a playing field as possible.
Under the FAST Act, an EGC may omit from a filed registration statement financial information that relates to a historical period that the company reasonably believes will not be included at the time of the contemplated offering. Under our guidance, an EGC may omit from its draft registration statement interim financial information that it reasonably believes it will not be required to present separately at the time of the contemplated offering. Prior to the guidance, EGCs including these interim financials in their draft submissions would often replace them prior to or at the time of public filing. In addition, a non-EGC can omit from its draft registration statements annual and interim financial information that it reasonably believes it will not be required to present separately at the time it files its registration statement publicly. An issuer may not omit any required financial information from its publicly filed registration statements.
We have heard that these accommodations are making a positive difference to issuers. In many cases, they save the equivalent time and money spent to prepare one or more quarterly reports. We think that is significant. We are still able to perform our filing reviews and investors continue to receive the full financial information required when an issuer files publicly.
Another area where new guidance has had a significant impact is pay ratio disclosure. In September 2017, the Commission issued guidance to assist companies in their efforts to comply with the pay ratio disclosure requirement. The Division also updated its interpretations and closely collaborated with staff in the Division of Economic and Risk Analysis to provide guidance on calculating the pay ratio and using statistical sampling. The Commission and staff guidance reflects feedback the SEC received as companies worked to implement the requirement and underscores the flexibility incorporated into the rule.
Most recently, the Division worked closely with the Commission’s Office of the Chief Accountant (OCA) to monitor developments related to changes to the U.S. tax laws and to consider requests for guidance. When the new tax law was enacted in late December, OCA issued a staff accounting bulletin providing guidance about the application of U.S. GAAP when preparing an accounting for certain income tax effects of the law. The Division also clarified that a re-measurement of deferred tax assets to incorporate the newly-enacted tax rates would not be an impairment and thus would not trigger an obligation to file a Form 8-K. Overall, the guidance takes a practical approach to the challenges companies face as they integrate the new tax laws into their financial accounting and reporting. The guidance provides a measurement period of up to one year to assist registrants in assessing the impact of, and finalizing the accounting for, these complex changes to the tax laws. It also outlines the disclosures we expect to see in periodic filings until the accounting under U.S. GAAP is complete. If you have questions about your particular situation, do not hesitate to reach out to us.
While the Division stands ready to assist companies in complying with the federal securities laws, we want to make sure that message is reaching everyone. The Division staff has engaged in outreach efforts to make sure that companies know we are open for business and that we want to be as transparent and collaborative as possible. For example, we have reminded companies that we will consider requests made under Rule 3-13 for modified financial statements. We will consider the specific facts and circumstances in each case, and while we may not always agree that an accommodation is warranted, we are willing to consider requests. We encourage companies and their advisers to reach out to discuss the matter with us before developing extensive applications for relief. This should ultimately save companies time and money. Our Division’s Office of Chief Accountant has updated the Financial Reporting Manual to provide the names and contact information for staff that can assist with requests. I encourage you to utilize this resource.
While much of what I have discussed is relevant to capital formation in the public markets, we appreciate that significant and growing amounts of capital are raised pursuant to our private, non-registered offering exemptions. In order to better understand these private offering markets and their participants, we have sought to engage with a wide range of stakeholders at meetings and conferences around the United States. In October, Chairman Clayton and I attended a high tech jobs summit in Montana. The summit brought together lawmakers, regulators, and businesses – both large and small – to discuss job creation and capital formation, among other things. We held our annual Government-Business Forum on Small Business Capital Formation outside Washington, D.C. this year by meeting in Austin, Texas. Trips like that give us the opportunity to hear from smaller companies seeking to grow their businesses, and to talk about the ways smaller companies can utilize Regulation Crowdfunding and Regulation A to raise capital. I also participated in a conference at the Berkeley Center for Law, Business and the Economy with a variety of private and public companies and their advisors. We candidly discussed the benefits and challenges for companies seeking to grow and raise capital, become public companies, and stay public companies. It was useful to hear views about what is working and what could be enhanced under our regulatory regime.
As you can tell, we are very focused on outreach and I hope that you will engage with us on things of importance to companies and their investors.
Future Areas of Focus
As we move forward, we will continue to keep transparency, efficiency, and collaboration in mind in everything we do. What’s next on the Division’s agenda? We are looking for ways to make our internal processes more efficient, thereby benefitting us and registrants. For example, we are considering areas such as filing reviews and no-action requests and examining whether we may be able to better our response times. We are working to update our Financial Reporting Manual and our Compliance and Disclosure Interpretations to make sure they are current, transparent, and easy to use. We want to collaborate with registrants to address challenges they face while still maintaining a disclosure regime that results in capital markets that generate global confidence, trust, and respect.
We are also considering whether additional areas exist where guidance is needed. One area that we have identified is cybersecurity disclosure. The Division issued guidance in 2011 to assist companies in assessing what disclosure, if any, might be required about cybersecurity risks or incidents, based on their particular facts and circumstances. Since that time, companies have continued to face increasing cybersecurity risks and incidents. We are working on recommendations for the Commission for further guidance on the disclosure requirements that may be implicated by cybersecurity risk and incidents, such as risk factors, MD&A, and board risk oversight.
In addition, we are continuing our work on a full rulemaking agenda. We are preparing recommendations for a proposal to implement the resource extraction issuer disclosure provision of the Dodd-Frank Act. The Division is also continuing to identify disclosure requirements that we can simplify and make more effective, without reducing investor protections. In the coming months, I anticipate that the Commission will consider rulemaking to raise the threshold companies need to stay below to qualify for smaller reporting company eligibility. We will also make recommendations for final rules to update and simplify disclosure requirements that are outdated, or are overlapping or duplicative with other Commission rules or U.S. GAAP. We are also preparing recommendations for proposals to amend the rules for financial information required for acquired entities (Regulation S-X Rule 3-05), as well as Regulation S-X Rule 3-10 for disclosures by guarantors and issuers of guaranteed securities. And we are developing recommendations for updating Industry Guide 3 to modernize the disclosure requirements for financial institutions. Our work on these rulemakings have benefitted from public comments and I encourage you to provide comments on any new proposals that the Commission issues.
As you can tell, the Division has a very full plate and we are working as expediently as possible. I am pleased by what the Division accomplished in 2017, and 2018 is off to a fast and productive start. I look forward to working alongside my colleagues in continuing our important work on behalf of investors, companies, and our markets.
Thank you again for having me here today. Enjoy the rest of the conference.
 The United States Securities and Exchange Commission (SEC), as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues on the staff of the Commission.
 This number is an approximation as of December 2017, and is based on the SEC staff’s analysis of filings and market information.
 See Chairman Jay Clayton, U.S. Securities and Exchange Commission, Remarks at the Economic Club of New York (July 12, 2017), available at https://www.sec.gov/news/speech/remarks-economic-club-new-york.
 See id.
 See SEC Division of Corporation Finance, Non-Public Submissions by Foreign Private Issuers (Dec. 8, 2011, updated May 30, 2012), available at https://www.sec.gov/divisions/corpfin/internatl/nonpublicsubmissions.htm.
 See Title I of the Jumpstart Our Business Startups Act (JOBS Act), Pub. L. 112-106 (Apr. 5, 2012) providing for confidential submissions of draft registration statements, available at https://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf.
 See Press Release, SEC’s Division of Corporation Finance Expands Popular JOBS Act Benefit to All Companies (June 29, 2017), available at https://www.sec.gov/news/press-release/2017-121 and SEC Division of Corporation Finance, Draft Registration Statement Processing Procedures Expanded (June 29, 2017 [supplemented Aug.17, 2017]), available at https://www.sec.gov/corpfin/announcement/draft-registration-statement-processing-procedures-expanded.
 See SEC Division of Corporation Finance Compliance and Disclosure Interpretations, Fixing America’s Surface Transportation Act (FAST Act), Question 1 (updated Aug. 17, 2017), available at https://www.sec.gov/divisions/corpfin/guidance/fast-act-interps.htm. See also SEC Division of Corporation Finance Compliance and Disclosure Interpretations, Securities Act Forms, Section 101, Question 101.05 (updated Aug. 17, 2017), available at https://www.sec.gov/divisions/corpfin/guidance/safinterp.htm#101.05.
 See Title I of the JOBS Act, available at https://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf.
 See Title LXXI of the FAST Act, Pub. L. 114-94 (Dec. 4, 2015), available at https://www.gpo.gov/fdsys/pkg/PLAW-114publ94/pdf/PLAW-114publ94.pdf.
 See SEC Division of Corporation Finance FAST Act Compliance and Disclosure Interpretations, Question 1 (updated Aug. 17, 2017), available at https://www.sec.gov/divisions/corpfin/guidance/fast-act-interps.htm.
 See id and SEC Division of Corporation Finance Securities Act Forms Compliance and Disclosure Interpretation 101.05 (updated Aug. 17, 2017), available at https://www.sec.gov/divisions/corpfin/guidance/safinterp.htm#101.05.
 See Commission Guidance on Pay Ratio Disclosure, SEC Release No. 33-10415 (Sept. 21, 2017), available at https://www.sec.gov/rules/interp/2017/33-10415.pdf.
 See Pay Ratio Disclosure, SEC Release No. 33-9877 (Aug. 5, 2015), available at https://www.sec.gov/rules/final/2015/33-9877.pdf. See also Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), Pub. L. 111-203 (July 21, 2010), available at https://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW-111publ203.htm.
 See SEC Division of Corporation Finance Compliance and Disclosure Interpretations, Regulation S-K, Section 128C (updated Sept. 21, 2017), available at https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
 See SEC Division of Corporation Finance Guidance on Calculation of Pay Ratio Disclosure (Sept. 21, 2017), available at https://www.sec.gov/corpfin/announcement/guidance-calculation-pay-ratio-disclosure.
 See Tax Cuts and Jobs Act, Pub. L. 115-97 (Dec. 22, 2017).
 See Press Release, Commission Staff Provides Regulatory Guidance for Accounting Impacts of the Tax Cuts and Jobs Act (Dec. 22, 2017), available at https://www.sec.gov/news/press-release/2017-237 and Staff Accounting Bulletin, Release No. SAB 118 (Dec. 22, 2017), available at https://www.sec.gov/interps/account/staff-accounting-bulletin-118.htm.
 See SEC Division of Corporation Finance Exchange Act Form 8-K Compliance and Disclosure Interpretation 110.02 (Dec. 22, 2017), available at https://www.sec.gov/divisions/corpfin/guidance/8-kinterp.htm.
 See Rule 3-13 of Regulation S-X.
 See Communications with the Division of Corporation Finance’s Office of Chief Accountant, available at https://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf#communications.
 See SEC Division of Corporation Finance Disclosure Guidance: Topic No. 2 Cybersecurity (Oct. 13, 2011), available at https://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm.
 See Regulatory Flexibility Agenda, SEC Release No. 33-10424 (October 6, 2017), available at https://www.sec.gov/rules/other/2017/33-10424.pdf and Unified Agenda of Regulatory and Deregulatory Actions (Fall 2017), available at https://www.reginfo.gov/public/do/eAgendaMain.
 See Section 1504 of the Dodd-Frank Act, available at https://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW-111publ203.htm.