Completing Regulation Best Interest and related rules will be a key priority for the SEC in 2019, Chairman Jay Clayton said in remarks at Columbia University. In giving a sneak peek at the agency’s to-do list, the chairman also reviewed accomplishments over the past year and discussed key risks the SEC is monitoring, including Brexit, the transition away from LIBOR, and cybersecurity issues.
Progress on 2018 agenda. After trimming the near-term rule making agenda to a more achievable size, the Commission advanced 23 of the 26 rules on the list. The year’s highlights included:
- Proposals to improve standards of conduct to investment professionals, designed to maintain the access of retail investors to investment advice and help investors understand the duties owed to them. The SEC proposed three related rule sets, including Regulation Best Interest to require broker-dealers to act in the best interest of their customers; amendments to reaffirm and clarify the fiduciary duty owed by investment advisers; and the introduction of the Customer Relationship Summary.
- Final rules to facilitate capital formation, including an expansion of the definition of "smaller reporting company" and the elimination of requirements that were outdated, overlapping, or duplicative of other Commission rules or U.S. GAAP.
- Market structure initiatives, including the creation of the Fixed Income Market Structure Advisory Committee (FIMSAC), three round tables to explore key markets issues, and rule amendments to enhance transparency requirements for alternative trading systems (ATSs).
2019 priorities. Chairman Clayton outlined the agency’s priorities for the coming year:
- Complete the standards of conduct rules for financial professionals, incorporating feedback from retail investors via public round tables and a new webpage;
- Improve the proxy process, including overhauling proxy "plumbing," considering changes to ownership and resubmission thresholds for shareholder proposals, and reviewing issues involving proxy advisory firms;
- Facilitate access to capital for issuers and make sure Main Street investors have the best possible mix of investment opportunities, through initiatives including JOBS Act 3.0 rulemaking and a concept release on the private offering framework;
- Encourage long-term investment by examining whether quarterly reporting and other aspects of the reporting system drive an overly short-term focus;
- Continue to address issues involving distributed ledger technology, digital assets and initial coin offerings. The SEC recently announced the formation of a new Strategic Hub for Innovation and Financial Technology ("FinHub"), which helps keeps the door open to those who seek to innovate and raise capital in accordance with the law.
Key market risks. Chairman Clayton discussed three key risks the agency is monitoring:
- Brexit. The chairman has significant concerns relating to the impact to reporting companies of the United Kingdom’s exit from the European Union, including that possible effects are underestimated, and that based on reporting disclosures, some effects are already occurring. The SEC is discussing and planning for Brexit other U.S. financial authorities, U.K. and EU. counterparts, and market participants. Clayton would like to see companies providing more robust disclosure about how management is considering Brexit and the impact it may have on the company and its operations.
- Transition away from LIBOR. Clayton said it is important that market participants plan and act appropriately for the transition from LIBOR to a new rate such as SOFR, particularly with respect to existing contracts that will still be outstanding at the end of 2021. For example, what will happen to floating rate notes based on LIBOR if the benchmark stops being published? Questions include what the documentation provides; whether fallback language exists and whether it works correctly; and if there is not fallback language, whether consents will be needed to amend the documentation.
- Cybersecurity. The SEC approaches cyber security risk from several angles, including providing interpretive guidance for public companies in preparing disclosures; prioritizing cyber security in examinations of market participants; assessing and improving the SEC’s own cyber risk profile; targeted cyber-related misconduct in the securities markets; and informing investors about cyber security hygiene and red flags of cyber fraud, in order to prevent investors from becoming victims in the first place.
Clayton concluded that he is pleased with the SEC’s accomplishments in 2018. With new challenges to come, he believes the agenda for 2019 is ambitious yet pragmatic.
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