By Anne Sherry, J.D.
All five SEC commissioners testified before the House Financial Services Committee on a range of issues including enforcement, ESG disclosure, public capital, and cryptocurrency.
The House Financial Services Committee heard from all five SEC commissioners on a range of issues surrounding the Commission’s mission to protect investors, maintain the markets, and facilitate capital formation. While commissioners and committee members sometimes split along party lines, particularly on the topic of disclosure of environmental, social, and governance issues (ESG), all united on the need for robust enforcement and investor access to the public markets.
Enforcement. Representative Bill Posey (R-Fla) focused his time on the Stanford Ponzi scheme. In the nearly 10 years since, the court-appointed receiver has recovered only a few cents per dollar of investor losses, and half of the recovery has gone into the receiver’s pocket, Posey said. He asked the commissioners whether it was appropriate for the receiver to have barred investor claims against banks that may have aided and abetted the fraud. Commissioners Peirce and Jackson said they will look into the matter, with Jackson adding that the most troubling thing Posey said was that he had a constituent who had not gotten a response from the estate.
Chairman Clayton said that while he is fully briefed on the issues and that the claims bar was a judgment call on which minds can differ, the overall recovery "is not an acceptable result at all." The SEC is looking for any way to get money back to victims faster. Commissioner Roisman called the result a "travesty" that shakes faith in the system, while Commissioner Lee said she had seen firsthand the damage as an enforcement attorney and supports any effort to return funds to victims.
The topic resurfaced later in the hearing when Representative Ben McAdams (D-Utah) asked Clayton about the Supreme Court’s Kokesh decision applying a five-year statute of limitations to disgorgement claims and the congressional effort to extend that time period. Citing the Stanford Ponzi scheme, Clayton said that a person should not be able to keep the proceeds of a fraud just because the fraud was well-hidden. He added that there are many more examples of hidden frauds in the private markets, where disclosures are not necessarily as frequent or robust.
Representative Jim Himes (D-Conn) asked the commissioners about insider trading and the pending bipartisan legislation to create a standalone crime of insider trading. Specifically, Himes asked for the witnesses’ thoughts on exclusivity: whether insider trading cases should be charged only through the standalone provision, without also relying on the general antifraud provisions of the securities laws. Clayton said that he would not want to lose the body of law that has developed over time, especially in terms of what are good or bad ways of obtaining information. Jackson agreed, adding that clarity is the goal. Eliminating longstanding law will create more uncertainty.
Disclosure and ESG. The Commission was less unified on the subject of ESG and other disclosures. Several lawmakers referenced Peirce’s quip that ESG could stand for "enabling shareholder graft." When pressed by Rep. Katie Porter (D-Calif), Clayton said he did not feel that way. Cautiously, he allowed that "there are disclosures in each of those categories [environmental, social, and governance] that can be quite meaningful." On questioning by Andy Barr (R-Ky), Clayton said that materiality should be the touchstone and that the SEC’s approach to disclosure should be principles-based so that it can adapt to changing markets and a changing concept of what is material.
Lee, who with Jackson has invited the public to comment on additional aspects of the SEC’s Regulation S-K proposal, reiterated to Rep. Juan Vargas (D-Calif) that the proposal allows companies too much discretion to determine what is material. This hampers comparability, which is extremely important to investors, she said, and the proposal was a missed opportunity to highlight investors’ need for disclosure on climate risk. Jackson added that at a broader level, it is clear that it is investors who determine what is material. He reiterated this point in response to questions from Rep. Sean Casten (D-Ill) on climate-change disclosure. Shareholders do care about the issue, he said, and shareholder proposals often ask for more climate risk disclosure.
Porter also asked Jackson about political spending disclosures, framing the question by reference to executive compensation. Jackson said that the same conflicts that make executive compensation disclosure important also exist for political spending.
Capital formation. Clayton also discussed the SEC’s focus on enabling capital formation. He said that the Office of the Advocate for Small Business Capital Formation is looking at whether there are requirements that the SEC could lift without sacrificing investor protection. It is also looking at areas of the country that have been successful at fostering businesses to see what elements are present and whether they could be replicated in other places. Small businesses need access not just to financial capital but also human beings who can help you grow, as well as professionals who facilitate engagement. Areas that have a critical mass of that tend to foster entrepreneurship, he told John Rose (R-Tenn).
It bothers Clayton that more growth capital comes from private markets because of the SEC’s more limited oversight there, he told Rep. William Lacy Clay (D-Mo). He also understands why money managers have invested in a mix of public and private equities. As a professional investor, if you see a greater percentage of equity is in private markets, you will need to think about allocating some money there as well. On questions from Rep. Vicente Gonzalez (D-Ohio) about liquidity, Clayton said that the Commission is evaluating whether it should take a different approach to thinly traded stocks. With such stocks, any trade can move the price, and people may hesitate to buy in if they may not be able to get back out.
Cryptocurrency. Several representatives tried unsuccessfully to pin Clayton down on issues relating to the regulatory status of cryptocurrencies. Representative Al Green (D-Texas) brought up Facebook’s plan for a Libra currency, noting that Facebook contemplates both a coin and a token. Green posited that at some point the token will be integrated into the coin so as to produce an investment return, potentially bringing it into the realm of a security. Clayton said many people in the industry are trying to find out where that line is and that he will not make a judgment.
Gonzalez said that while blockchain technology thrives in the U.S., people are moving operations to places including Singapore, Switzerland, and the U.K. to actually implement the technology because of a lack of regulatory clarity in the United States. The SEC’s position seems to be that until the agency sees it operate, it doesn’t know whether it’s a security, while blockchain companies are reticent to start operating without knowing whether it’s a security. Clayton again cited difficulty drawing a clear line, saying that each project is different.
Representative Warren Davidson (R-Ohio) said that Peirce nailed it when she explained that the SEC should be concerned not only about fraud, but also about opportunity. The failure to find regulatory clarity fails investors on both counts, he added.
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