Remarks at Meeting of the SEC Investor Advisory Committee

Good morning and thank you, Christopher [Mirabile]. Today’s agenda is particularly hefty. Much of the day will be taken up by four separate panel discussions covering a dizzying range of topics: human capital management; the Commission’s recent proposals regarding swaps and beneficial ownership reporting; and ESG investing. Following these panel discussions, the Committee will consider three distinct sets of draft recommendations, each of which is lengthy and detailed. I appreciate the Committee’s enthusiasm, which this agenda evidences.

Each of these issues, however, deserves greater breadth of perspective than today’s schedule permits. The Committee is most valuable when it truly probes all angles of an issue, rather than presuming a uniform investor perspective. I urge the Committee to foster lively panel discussions and afford Committee members the opportunity to ask questions, offer their views, and deliberate with one another. I made a similar point at the June meeting which—perhaps because of time constraints—did not allow for counter-perspectives or much Committee discussion on the climate proposal.[1] That discussion, however, forms the basis for one of today’s recommendations. Absent procedural changes to allow broad, open discussion, the Committee risks undermining its ability to contribute to the Commission’s work. How am I to weigh a recommendation that appears to be the product of a one-sided panel, virtually no intra-Committee discussion after the panel, and only ten minutes for discussion set aside on today’s calendar? I understand that you are trying to keep pace with a packed Commission regulatory agenda, but some Commission habits are not worth emulating.

You are all volunteers, and I deeply appreciate your willingness to give generously of your time and expertise. I offer these observations as someone who believes in the IAC’s unique role and wants to see this Committee live up to its full potential. With many members having recently joined the Committee, now is a wonderful time to recommit the IAC to thoroughly exploring issues before making recommendations. Accordingly, I look forward to your spirited discussions today.

To stimulate that debate, let me raise a few questions for each of the panel discussion topics and draft recommendations.

Panel Discussion Regarding Human Capital Management and Labor

• In 2020, the SEC adopted a more principles-based requirement for public companies to disclose material “human capital resources.” Why are these disclosures insufficient to inform investors?
• A company’s employees are key to its success, but the human capital measures relevant to one company may not be relevant to another. Identifying common metrics for comparability may obscure real differences across companies. Assuming the SEC should prescribe specific human capital metrics, how can these measures work across a broad swath of companies and industries?
• Would mandating the disclosure of certain human capital data points change how companies interact with their employees? Is that the objective of some proponents of these measures?

Panel Discussion Regarding Proposed Rule 10B-1 Position Reporting of Large Security-Based Swap Positions/Asset-Based Swaps

Proposed rules 9j-1 and 10B-1, which are the subject of this panel, address important issues—fraud, manipulation, and transparency in the security-based swap market. The proposed solutions, however, may be costly and disruptive to the market.

• The prohibitions of rule 9j-1 would reach not just activity around the entry into a security-based swap or the novation or termination of a security-based swap, but any actions taken (or, in some cases, not taken) in connection with obligations or rights under security-based swaps. Would the proposed safe harbors be sufficient to give market participants comfort to, for example, make disputed margin calls or hedge credit exposure to borrowers?
• The Commission’s rules reach attempted fraud, deceit, and manipulation. Would that aspect of the rules create additional uncertainty for market participants who may be concerned about how the Commission or counterparties will assess even innocuous conduct in retrospect?
• Proposed rule 10B-1 requires firms to report publicly large security-based swap positions and their positions in any related securities. Given that reporting under the Commission’s security-based swap data reporting rules began about a year ago, should the Commission wait to require additional disclosure until it has had some experience with the data reported and publicly disseminated under these existing rules?

Panel Discussion Regarding Schedules 13D and 13G Beneficial Ownership Reports

• While timelines for 13-D filings were originally set in the 1960s when paper filings and fax machines were the standard, the non-technological justification for delay remains unchanged—allowing an investor who has put in the work to identify an undervalued company to profit from that effort. Is the current ten days, the proposed five days, or some other number of days the right number to foster both appropriate transparency about impending changes of control and the healthy dynamism that vigilant investors bring to the market?

Panel Discussion Regarding ESG Fund Disclosure

• ESG funds have proliferated partly because asset managers have found them profitable. A natural concern is that asset managers might be selling something as ESG that is not actually ESG. We can bring, and already have brought, greenwashing cases using existing rules, so why is additional rulemaking necessary? Should our focus instead be on identifying where there may be gaps in Commission rules and tailor any new rulemaking accordingly, rather than producing a new rule that is arguably redundant?

Draft Recommendation Regarding Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure

• The draft cybersecurity recommendation, acknowledging that issuers may have trouble assessing materiality, suggests that the Commission consider taking necessary steps “to mitigate any confusion around the circumstances under which an issuer would be expected to report cybersecurity incidents to investors.” How could the Commission help companies to assess the materiality of isolated cyber-incidents?
• The proposal requires companies to disclose previously undisclosed individually immaterial cybersecurity incidents that have become material in the aggregate. What would investors want to have disclosed under an imprecise requirement like this one?

• The Commission sometimes seeks, under the cover of the disclosure framework, to insert itself into how companies manage their affairs. Are the proposed mandates substantive requirements masquerading as disclosure requirements?

Draft Recommendation Related to Climate-Related Disclosure Rule Proposals

• The Commission’s March climate disclosure proposal likely will be very expensive in terms of direct costs, forgone opportunities, and increased litigation risks. What changes should the Commission make to moderate the cost of the rule?
• The proposal would require disclosure of certain climate-related financial statement metrics when they reach or exceed 1% of a financial statement line item. Why would information disclosed pursuant to such a low threshold be useful to investors?
• Are you concerned that the proposal’s use of non-standard materiality measures, its heavy reliance on assumptions and models, and its long time horizons could undermine the hoped-for comparability and consistency of climate disclosures?
• How are you thinking about the indirect effects of the proposal on, for example, small private companies and farmers, whom public companies covered by the rule’s scope 3 requirements may replace with larger enterprises capable of producing emissions data?

Draft Recommendation Regarding Accounting Modernization

• The Financial Accounting Standards Board does have a number of items on its technical and research agendas that respond to investor concerns. Should that fact be reflected better in the recommendation?
• Should the draft recommendation reflect concerns about the SEC taking on issues that might better be left to the FASB? One example is the SEC staff’s recently issued SAB 121 on crypto asset custody?
• The draft recommendation related to the FASB rightly underscores the importance of the independence of the accounting standard setter. It also identifies as examples of “pressing accounting issues,” “measurement of the financial impacts of climate change and energy transition.” These issues invite controversy. What can the Commission, as a steward of FASB’s independence, do to ensure that efforts to modernize do not become efforts to politicize FASB?

Thank you again to all who have made today’s meeting possible, with special thanks to today’s moderators and panelists, the IAC leadership, Adam Anicich, and Mark Sharma, who is ably filling in for Rick Fleming until a new Investor Advocate is named.