Securities Industry Commentator by Bill Singer Esq

SEC Proposes Amendments Regarding Rule 10b5-1 Insider Trading Plans and Related Disclosures / The proposal would strengthen the requirements to access the affirmative defense to insider trading and improve related transparency around insider transactions in company securities (SEC Release)

Stock Trading Plans Should Prevent - Not Enable - Insider Trading: Statement on Proposed Amendments to Rule 10b5-1 by SEC Commissioner Allison Herren Lee

Statement on Rule 10b5-1 and Insider Trading Proposing Release by SEC Commissioner Hester M. Peirce (SEC Release)

SEC Proposes Amendments to Money Market Fund Rules / Proposed amendments would improve the resilience and transparency of money market funds (SEC Release)

Statement on Proposed Money Market Fund Reforms by SEC Commissioner Allison Herren Lee

SEC Proposes New Share Repurchase Disclosure Rules / The proposal would establish new Form SR for reporting issuer share repurchases and enhance existing periodic disclosure (SEC Release)

Enhancing Transparency Around Stock Buybacks: Statement on Corporate Share Repurchase Proposal by SEC Commissioner Allison Herren Lee

Dissenting Statement on Buybacks Disclosure Proposal by SEC Commissioner Hester M. Peirce

SEC Proposes Rules to Prevent Fraud in Connection With Security-Based Swaps Transactions, to Prevent Undue Influence over CCOs and to Require Reporting of Large Security-Based Swap Positions (SEC Release)

Standing Up the Security-Based Swap Regime: Statement on Proposed Rules for Antifraud, Position Reporting and CCO Support by SEC Commissioner Allison Herren Lee

San Diego Man Indicted for Multimillion-Dollar Investment Scheme (DOJ Release)

SEC Charges San Diego-Based Companies and Their Principal with Operating $15 Million Ponzi Scheme (SEC Release)

CEO of Shreveport Federal Credit Union Pleads Guilty to Charges in Federal Court (DOJ Release)

Virtual Remarks at the Center for American Progress and Sierra Club: Down the Rabbit Hole of Climate Pledges (Speech by SEC Commissioner Caroline A. Crenshaw)

FINRA Arbitrators Award $1 In Response to $1 Million In Damages Sought (Sort of) 

(BrokeAndBroker.com Blog)

The proposed amendments to Rule 10b5-1 would update the requirements for the affirmative defense, including imposing a cooling off period before trading could commence under a plan, prohibiting overlapping trading plans, and limiting single-trade plans to one trading plan per twelve month period. In addition, the proposed rules would require directors and officers to furnish written certifications that they are not aware of any material nonpublic information when they enter into the plans and expand the existing good faith requirement for trading under Rule 10b5-1 plans.

The amendments also would elicit more comprehensive disclosure about issuers' policies and procedures related to insider trading and their practices around the timing of options grants and the release of material nonpublic information. A new table would report any options granted within 14 days of the release of material nonpublic information and the market price of the underlying securities the trading day before and the trading day after the disclosure of the material non-public information. Insiders that report on Forms 4 or 5 would have to indicate via a new checkbox whether the reported transactions were made pursuant to a Rule 10b5-1(c) or other trading plan. Finally, gifts of securities that were previously permitted to be reported on Form 5 would be required to be reported on Form 4.

Working to keep markets fair by protecting against insider trading is one of the most fundamental jobs we have at the Commission. Enforcement in this area is key to our mission, but prophylactic measures designed to prevent the misconduct (rather than punish it after the fact) are vital. Because if companies and corporate insiders profit by trading on information that is available only to them, they not only disadvantage other shareholders, but also erode investor confidence and thereby undermine the integrity of our markets. So today's proposal seeks to ensure our rules are operating as intended to prevent, rather than shield, trading on inside information and bolster investor confidence in our markets.

* * *

Corporate insiders are routinely exposed to material nonpublic information. They also need to be able to trade fairly in the stock of their companies. Thus, the Commission adopted Rule 10b5-1 in 2000 to help clarify when liability may arise for insider trading.[1] The rule sets forth certain conditions, which, if met, give rise to an affirmative defense against insider trading liability. Those conditions created a safe harbor for trading pursuant to a plan entered into in good faith before the person trading under the plan is aware of material nonpublic information.[2] The idea being if a person establishes "a regular, pre-established program of buying or selling [their] company's securities,[3]" that trading, when it later occurs, will not be considered to be on the basis of material nonpublic information potentially acquired after the adoption of the plan.

We've now had over two decades of experience with plans operating under this safe harbor. In that time, 10b5-1 plans have proliferated and lawmakers, regulators, courts, investors, and commentators have all observed the potential for abuse.[4] Our ability to comprehensively evaluate the use of these plans is unfortunately hampered by the lack of related disclosure requirements. Nevertheless academic studies have produced compelling findings that suggest opportunistic use of 10b5-1 plans, including through such practices as trading shortly after the adoption of plans, and the use of multiple overlapping plans and single-trade plans.[5] This is troubling evidence to suggest Rule 10b5-1 may be used to enable rather than avoid trading on the basis of inside information. Our rule should offer a safe harbor, not a pirates' cove.

So I am very pleased that today's proposal contains a package of amendments that would create new, common-sense conditions for the 10b5-1 safe harbor and enhance transparency around the use of 10b5-1 plans. In particular, the proposal requires cooling-off periods for issuers and individuals after the adoption of plans before trading can commence, restricts the use of multiple overlapping plans and single-trade plans, and requires officers and directors to certify they are adopting plans in good faith and are not aware of material nonpublic information, among other measures.[6] In addition, the proposal would impose new disclosure requirements, including quarterly disclosure regarding the adoption, termination, and terms of 10b5-1 plans, and disclosure of a company's insider trading policies and procedures.[7] Taken together with the issuer share repurchase proposal we also consider today, the new disclosure requirements would considerably enhance transparency around issuer and executive trading in a company's securities and related policies, procedures, and practices.[8]

The proposal seeks to curb potential abuses of our rules and enhance transparency for investors, while not unduly restricting issuer and individual trading in a company's securities for foreseeable, appropriate purposes. I hope the public will weigh in to help make sure we got the balance right. For example, are the cooling-off period durations-four months for individuals, 30 days for issuers-adequate? Is there sufficient need for single-trade plans to permit them under the safe harbor, or should they be prohibited altogether? Should the disclosure requirements be more specific regarding the policies and procedures information that investors may find useful? I look forward to reviewing comments on these and other aspects of the proposal.

* * *

I want to thank the staff for their thoughtful work on this proposal. With respect to this proposal and the other items we're considering today, I know you all have worked long and hard through the holiday season, and I'm very grateful for your dedication. I want to particularly commend Corey Klemmer in the Chair's Office for her hard work and thoughtful diplomacy in shepherding this proposal through the Commissioners' offices. Thank you and I'm pleased to support the proposal.

[1] See Selective Disclosure and Insider Trading, Final Rule, Release No. 33-7881 (Aug. 15, 2000) ("This rule provides that a person trades 'on the basis of' material nonpublic information when the person purchases or sells securities while aware of the information.").

[2] Id. (explaining that the safe harbor "will be available only if the contract, instruction, or plan was entered into in good faith and not as part of a scheme to evade the prohibitions" of the rule").

[3] See Selective Disclosure and Insider Trading, Proposed Rule, Release No. 33-7881 (Dec. 20, 1999) ("This provision is designed to apply in the case of an insider who wishes to establish a regular, pre-established program of buying or selling his or her company's securities.").

[4] See, e.g., Waters and McHenry Introduce Bipartisan Legislation to Curb Illegal Insider Trading, Press Release (Jan. 18, 2019) (announcing the introduction of a bill, H.R. 624, the Promoting Transparent Standards for Corporate Insiders Act, to require the SEC to "consider certain types of amendments to Rule 10b5-1 that would ensure corporate insiders are unable to indirectly engage in illegal insider trading through changes to their trading plans"); Letter from Chairman Jay Clayton to Congressman Brad Sherman (Sept. 14, 2020) ("I believe that companies should strongly consider requiring all Rule l0b5-1 plans for senior executives and board members to include mandatory seasoning, or waiting periods after adoption, amendment or termination before trading under the plan may begin or recommence."); In re Immucor Inc. Sec. Litig., 2006 WL 3000133, at *18 n.8 (N.D. Ga. Oct. 4, 2006) (noting that "a clever insider might maximize their gain from knowledge of an impending price drop over an extended amount of time, and seek to disguise their conduct with a 10b5-1 plan."); Prepared Written Remarks of Jeffrey P. Mahoney General Counsel, Council of Institutional Investors, before U.S. Securities and Exchange Commission Investor Advisory Committee (June 10, 2021) ("CII agrees that public confidence that our securities markets are fair to all participants serves the interests of companies and investors. And when public company executives conduct transactions in company stock through a 10b5-1 plan using practices that are inconsistent with the spirit of the rule, public confidence in corporate management teams and the markets can erode."); David F. Larcker, Bradford Lynch, Philip Quinn, Brian Tayan, and Daniel J. Taylor, Gaming the System: Three "Red Flags" of Potential 10b5-1 Abuse, Stanford Closer Look Series (Jan. 19, 2021) ("We show that a subset of executives use 10b5-1 plans to engage in opportunistic, large-scale selling of company shares.").

[5] See Larcker et al., supra note 4 (identifying plans with short cooling-off periods, single-trade plans, and plans adopted in a given quarter that commence trading before the quarter's earnings announcement as "red flags" of 10b5-1 abuses and finding that "[s]ales made pursuant to these plans avoid significant losses and foreshadow considerable stock price declines that are well in excess of industry peers"); see also Artur Hugon and Yen-Jung Lee, SEC Rule 10b5-1 Plans and Strategic Trade around Earnings Announcements (2016) (finding, among other things, "evidence consistent with insiders using 10b5-1 plans to sell stock in advance of disappointing earnings results").

[6] As a condition of the availability of the affirmative defense under Rule 10b5-1, the proposal would impose a 120-day cooling-off period for officers and directors and a 30-day cooling off period for issuers, prohibit multiple overlapping plans for open market purchases or sales of the same class of securities, limit the use of single-trade plans to one per 12-month period, and require officer and director certifications. See Rule 10b5-1 and Insider Trading, Proposed Rule, Release No. 33-11013 (Dec. 15, 2021) [hereinafter Proposing Release].

[7] Specifically, the proposal would require quarterly disclosure of whether the issuer or any officer or director had adopted or terminated a plan during the last fiscal quarter, and information including the date of the adoption or termination, the duration of the plan, and the amount of securities to be purchased or sold under the plan. Proposing Release at 31-32. The proposal would also require issuers to disclose whether (and if not why not) a company has adopted insider trading policies and procedures, and if so, to disclose those policies and procedures. Id. at 35.

[8] Other features of the proposal include requiring that trading plans be operated in good faith as a condition of the safe harbor, requiring the structuring of disclosures under the rule, and requiring the reporting of dispositions of bona fide gifts of equity securities on Form 4.

Thank you, Chair Gensler.  Given our many policy disagreements and-spoiler alert-my resulting dissents on various matters today, I was beginning to feel a bit like the Grinch this holiday season.  Singing in Whoville on Christmas morning caused the Grinch's heart to grow three sizes that day,[1] but it was my fellow Commissioners' willingness to collaborate and engage on this release with the help of Renee Jones and her staff and Corey Klemmer on the Chair's staff that won me over and led me to support this proposal.

I support today's proposal to address potential abuses of Rule 10b5-1(c) trading arrangements.  The proposed cooling-off periods of 120 days for officers and directors and 30 days for issuers, and restrictions on multiple overlapping plans strike me as reasonable changes designed to ward off abuses in this context.  The proposed limitation of one single-trade plan during any twelve-month period also seems narrowly tailored to address problematic behavior while preserving the need of insiders to seek liquidity in an emergency or one-off situation. 

At the risk of sounding like a seasick crocodile,[2] other aspects of the proposal raise concerns for me and I am eager to hear commenters' views on these matters.  First, the proposed certification requirement would require a director or officer to certify at the time of the adoption of a plan that she is not aware of material nonpublic information about the issuer and that she is adopting the plan in good faith.  The director or officer would be expected to retain this certification for ten years.  Is the minimal benefit of reinforcing existing obligations under Rule 10b5-1 outweighed by the burdens associated with this requirement?  The release notes that the proposed certification would not be an independent basis for liability, but should we specify that in the text of the rule itself? 

Second, the proposed condition that the plan be "operated" in good faith may raise an unintended incentive for directors or officers to consider their Rule 10b5-1 plans in connection with corporate actions long after establishing their plans.  The general idea behind a Rule 10b5-1 plan is for the director or officer to "set it and forget it" to ensure that she is not trading on the basis of material nonpublic information.  Are we inadvertently rendering the safe harbor a "sort-of safe harbor" by making its availability contingent on ongoing good faith to be judged in hindsight? 

Third, are the proposed disclosure requirements relating to insider trading policies and procedures necessary?  Fourth, the proposed disclosure requirements relating to spring-loaded options seem designed to discourage the use of such equity-based compensation.  I do not support the indirect regulation of corporate activity through our disclosure rules and hope that commenters will provide insights on the materiality of the proposed disclosures and how it will affect executive compensation decision-making. 

Thank you again to the Chair and his staff, the staff of the Division of Corporation Finance, the Division of Economic and Risk Analysis, the Office of General Counsel, and others throughout the building for your hard work on this release. 

 

[1] The Grinch's heart grows, YouTube (June 7, 2013), https://www.youtube.com/watch?v=fGSs33DQ1F0. 

[2] You're a Mean One Mr. Grinch, Original Version - 1966 (HD), YouTube (Aug. 12, 2011), https://www.youtube.com/watch?v=35WgpMq6e3o. 

The proposed amendments would increase liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions. The proposed amendments also would remove provisions in the current rule permitting or requiring a money market fund to impose liquidity fees or to suspend redemptions through a gate when a fund's liquidity drops below an identified threshold. These provisions appeared to contribute to investors' incentives to redeem in March 2020 as some funds' reported liquidity levels declined.

To address concerns about redemption costs and liquidity, the proposal would require institutional prime and institutional tax-exempt money market funds to implement swing pricing policies and procedures that would require redeeming investors, under certain circumstances, to bear the liquidity costs of their redemptions.

Further, the proposal would amend certain reporting requirements to improve the availability of information about money market funds and enhance the Commission's monitoring and analysis of these funds.

The SEC began evaluating the need for further money market fund reforms following the events in March 2020. The proposal follows a request for comment the SEC issued to gather public feedback on potential money market fund reforms, including reform options discussed in a December 2020 report of the President's Working Group on Financial Markets.

Today, the Commission is once again proposing reforms for money market funds after once again observing vulnerability in these products during times of financial market stress -- this time during the events in March 2020 at the beginning of the pandemic.[1] The 'dash for cash' that occurred at that time put severe stress on these funds and prompted federal intervention in the form of a backstop for the second time in just over a decade.[2]

It is clear that money market funds continue to raise both investor protection and market stability concerns. And while I support the success of these products, and I preliminarily support today's proposed reforms, I look forward to reviewing public comment on how best to address the complex challenges these products pose.

Since their creation in the 1970s, money market funds have grown and evolved to become an integral part of wholesale funding markets.[3] They serve a variety of roles within the financial system and are held by a broad swath of investors - businesses, non-profits, 401(k) plans, and many others.[4] The growth in size of this asset class has been notable, expanding from roughly $2 billion in the mid-1970s to roughly $4.6 trillion today.[5] They serve as a critical source of financing to a variety of borrowers, and have also been large investors in the commercial paper market.[6] These funds are generally designed to provide principal stability and liquidity, and frequently serve as short-term cash management vehicles for investors.[7] As a result, money market fund investors have been considered to be generally less tolerant than other mutual fund investors to incurring even small losses.[8]

But, of course, these funds are indeed capable of incurring losses, and they suffer from inherent structural vulnerabilities. Thus, the Commission engaged in an analysis of the money fund rules in the aftermath of the 2008 financial crisis when the Reserve Primary Fund "broke the buck," prompting widespread redemptions and prompting the Federal Reserve to step in and create a liquidity facility to support credit supply.[9]The 2010 reforms were largely designed to enhance liquidity and create more transparency for the public and the Commission about a money market fund's holdings.[10]

Those reforms were tested in March 2020 when money funds were under stress again.By that time, the Commission had completed additional reforms in 2014, subjecting the funds to valuation and risk-limiting regulations - such as the requirement for institutional prime and institutional tax-exempt funds to use a "floating" net asset value.[11]Perhaps even more significant than the floating net asset value requirement, the Commission gave funds tools to stem heavy redemptions with liquidity fees and redemption gates. Commissioner Stein (and others) expressed concern at that time about the use of fees and gates in this way, noting that the possibility of a redemption gate could instead incentivize investors to redeem ahead of others.[12] Her concerns proved largely correct.

As uncertainty about the pandemic loomed, investors sought stability and capital preservation by moving into cash and short-term government securities.[13] This created severe pressure in short-term funding markets, and investors sought heavy redemptions in institutional prime and tax-exempt money funds.[14]In fact, the potential imposition of fees and gates as a result of decreases in fund liquidity appeared to fuel redemption behavior.[15]

Hence today's proposal is a necessary continuation of our focus on addressing weaknesses of these funds, and providing investors and markets with key information about them. I'd like to highlight three significant areas of today's reforms: increasing liquidity thresholds, removing the fees and gates requirements, and an obligation for certain funds to use swing pricing they have net redemptions.[16]

I look forward to comment in each of these areas. Specifically, I'm interested in the foreseeable impacts of swing pricing. Will it disincentivize first movers to help stem a run as contemplated? How might it impact investor choice?

In addition, I'm pleased to see the proposal includes a requirement to notify both boards and the public when liquidity drops below certain thresholds. Broadly, the idea is not to discourage the use of liquidity in times of stress, but to offer transparency once significant amounts of liquidity have been drained (essentially once half of the liquidity reserves have been utilized). But, is that enough? Should the Commission require reporting whenever a fund's liquidity drops below the regulatory requirements? Are investors likely to overreact to such reporting or would the increased transparency help them make better decisions? These are just a few of my questions - and I welcome the public's views and robust, data-driven analysis and comment on all of the questions in today's proposal.

Finally, before I conclude my remarks today, I want to thank the staff in the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of the General Counsel- some of whom have worked on money fund reform for over a decade. You have been tireless and astutely inquisitive in developing today's recommendations. I greatly appreciate your continued dedication to developing a strong regulatory framework so that money market funds can better withstand inevitable future market stresses.

Thank you.

[1] See infra text accompanying nn.13-15.

[2] See, e.g., Press Release, U.S. Department of Treasury: Treasury Announces Temporary Guaranty Program for Money Market Funds (Sept. 29, 2008), available at https://www.treasury.gov/press-center/press-releases/Pages/hp1161.aspx; Press Release, Federal Reserve Board announces establishment of a Commercial Paper Funding Facility (CPFF) to support the flow of credit to households and businesses (Mar. 17, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200317a.htm (CPFF will provide a "liquidity backstop to U.S. issuers of commercial paper" as a result of the strain on the commercial paper market in March 2020).See also Federal Reserve Policy Tool, Money Market Mutual Fund Liquidity Facility, available at https://www.federalreserve.gov/monetarypolicy/mmlf.htm (establishing the Money Market Mutual Fund Liquidity Facility on March 18, 2020 in an effort to enhance market functioning and flow of credit to the economy).

[3] Protecting Investors: A Half Century of Investment Company Regulation (May 1992), at 506, available at https://www.sec.gov/divisions/investment/guidance/icreg50-92.pdf (providing a high-level description of the process through which money market funds were borne).

[4] See ICI Report of the COVID-19 Market Impact Working Group: Experiences of US Money Market Funds During the COVID-19 Crisis (Nov. 2020) ("2020 ICI Report"), at Figure 3.2, available at www.sec.gov/comments/credit-market-interconnectedness/cll10-8026117-225527.pdf.Money market funds typically invest in short-term assets.See, e.g., 2020 ICI Report, at Figure 3.3; Federal Reserve Money Market Funds: Investment Holdings Detail (Oct. 1, 2021), available at https://www.federalreserve.gov/releases/efa/efa-project-money-market-funds-investment-holdings-detail.htm. See, e.g., Matthew P. Fink, The Rise of Mutual Funds: An Insider's View (Jan. 2011), at 80-82.

[5] ICI Money Market Fund Assets (Dec. 9, 2021), available at https://www.ici.org/research/stats/mmf; 2020 ICI Report, at 3 (noting that in 1980, assets in money market funds totaled $75 billion and by 2020, they exceeded $4.6 trillion).See also Matthew P. Fink, The Rise of Mutual Funds (Jan 2011), at 82 (noting that money market fund assets went from less than $2 billion in 1974 and exceeded $3 trillion in 2007).

[6] See, e.g., 2020 ICI Report, at 6 (noting that "[p]rime money market funds provided $432 billion in financing to businesses and financial institutions through holdings of commercial paper ($213 billion; 21 percent of commercial paper outstanding) and CDs ($217 billion; 12 percent of CDs outstanding), and Eurodollar deposits ($2 billion).").

[7] See 2020 ICI Report, at 6 (noting that "[m]oney market funds provide the bulk of their funding to the federal government. As of June 2020, money market funds had assets of $4.6 trillion. Of that, $4.1 trillion (88 percent) was in short-term US Treasury securities, US agency debt, and repos, most of which is collateralized by US government securities").See also Financial Stability Board, Final Report: Policy Proposals to Enhance Money Market Fund Resilience (Oct. 11, 2021), at 13 (available at https://www.fsb.org/wp-content/uploads/P111021-2.pdf). ICI Report of the Money Market Working Group (Mar. 17, 2009) ("2009 ICI Report"), at 15, available at https://www.ici.org/system/files/attachments/pdf/ppr_09_mmwg.pdf.

[8] Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release No. 31166 (July 23, 2014) [79 FR 47735 (Aug. 14, 2014)] ("2014 Amendments"), at text accompanying n.34, available at https://www.sec.gov/rules/final/2014/33-9616.pdf.See also 2009 ICI Report, at 15; Patrick E. McCabe, The Cross Section of Money Market Fund Risks and Financial Crises (Sept. 12, 2010), at 6, available at https://www.federalreserve.gov/pubs/feds/2010/201051/201051pap.pdf, (noting that "[b]ecause of the relative safety of their portfolios and sponsors' practice of absorbing losses when they have occurred, MMFs are usually recipients of flight-to-quality inflows during periods of high uncertainty and market turmoil.").

[9] See, e.g., Press Release, U.S. Department of Treasury: Treasury Announces Temporary Guaranty Program for Money Market Funds (Sept. 29, 2008), available at https://www.treasury.gov/press-center/press-releases/Pages/hp1161.aspx.See also 2014 Amendments, at pp.29-32.

[10] Money Market Fund Reform, Investment Company Act Release No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)], available at https://www.sec.gov/rules/final/2010/ic-29132.pdf. But see Statement of SEC Chairman Mary L. Schapiro on Money Market Fund Reform (Aug. 22, 2012), available at https://www.sec.gov/news/press-release/2012-2012-166htm (stating that the three Commissioners at the time would not support a proposed structural reforms to money market funds that were intended to "reduce their susceptibility to runs, protect retail investors and lessen the need for future taxpayer bailouts").

[11] The floating NAV requirement was designed to disincentivize heavy redemptions in times of market stress.See 2014 Amendments, at Section III.B.

[12] Statement of Commissioner Kara M. Stein (Jul. 23, 2014), available at https://www.sec.gov/news/public-statement/2014-07-23-open-meeting-statement-kms (noting that "while a gate may be good for one fund because it stops a run in that fund, it could be very damaging to the financial system as a whole").

[13] Report of the President's Working Group on Financial Markets: Overview of Recent Events and Potential Reform Options for Money Market Funds (Dec. 2020) ("2020 PWG Report"), at 11, available at https://home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-2020.pdf.

[14] Staff of the Division of Investment Management, Primer: Money Market Funds and the Commercial Paper Market (Nov. 9, 2020), at 2, available at https://www.sec.gov/files/primer-money-market-funds-commercial-paper-market.pdf (discussing the commercial paper market in March 2020, and particularly noting that money market funds may have decreased their commercial paper holdings due to anticipated investor redemptions).See also 2020 PWG Report, at 14 (noting that "[a]mong institutional prime MMFs offered to the public, outflows as a percentage of fund size exceeded those in the September 2008 crisis.").

[15] Shelly Antoniewicz, Previous Reform Made Prime Funds Less Resilient This Time Around, (Apr. 21, 2021), at 3, available at https://www.ici.org/system/files/2021-05/21_view_covid_mmf2_print.pdf (noting that "respondents to the ICI's survey reported that a major factor for accessing the MMLF was to bolster their prime funds' weekly liquid asset ratios-keeping them well above the 30 percent tripwire.").See also 2020 PWG Report.

[16] Today's reforms also include recommendations to specify calculations for "dollar-weighted average portfolio maturity" and "dollar-weighted average life maturity," require money market funds to file reports on Form N-CR in a structured data language, and require money market funds to disclose more information about the composition and concentration of their shareholders.

The proposed rules would require an issuer to provide a new Form SR before the end of the first business day following the day the issuer executes a share repurchase. Form SR would require disclosure identifying the class of securities purchased, the total amount purchased, the average price paid, as well as the aggregate total amount purchased on the open market in reliance on the safe harbor in Exchange Act Rule 10b-18 or pursuant to a plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c).

The proposed amendments also would enhance existing periodic disclosure requirements regarding repurchases of an issuer's equity securities. Specifically, the proposed amendments would require an issuer to disclose: the objective or rationale for the share repurchases and the process or criteria used to determine the repurchase amounts; any policies and procedures relating to purchases and sales of the issuer's securities by its officers and directors during a repurchase program, including any restriction on such transactions; and whether the issuer is making its repurchases  pursuant to a plan that it intends to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) and/or  the conditions of the Exchange Act Rule 10b-18 non-exclusive safe harbor.

The proposed rules apply to issuers that repurchase securities registered under Section 12 of the Securities Exchange Act of 1934, including foreign private issuers and certain registered closed-end funds.

In recent years, corporate share repurchases, or buybacks, have grown exponentially. Even amidst a relative slump in share repurchases in 2020, buybacks reached nearly $700 billion in volume.[1] And interest in, and the need to understand, these share repurchases has grown accordingly. Today's proposal would enhance transparency for investors and markets around share repurchases by requiring more detailed, timely, and structured disclosures.

Companies may determine to allocate capital towards share repurchases for a number of different reasons. However, one of those reasons should not be for the opportunistic, short-term benefit of executives. The proposal we consider today does not prescribe how or why companies may elect to engage in share repurchases. Rather it requires disclosures intended to enhance the ability of investors to evaluate how, why, and to what effect companies are engaging in buybacks. In other words, to help put investors on more equal informational footing with companies and their officers and directors who make the decisions to engage in these transactions.

The Commission last addressed disclosure requirements for share repurchases in 2003.[2] In recent years, amidst record high volumes of share repurchases and increased interest in that activity, there have been calls for the Commission to revisit its rules to ensure they are keeping pace with market developments and getting investors timely and relevant disclosures.[3] Indeed, in comments in response to the Commission's 2016 Regulation S-K concept release, commenters favored enhanced share repurchase disclosure requirements by a margin of nearly two to one.[4]

Today, based on thoughtful analysis by the staff, the Commission is proposing rules that would require more detailed and more frequent disclosures of share repurchase activity and would provide greater insight into issuers' share repurchase programs. In particular, the proposal introduces new Form SR, which would require repurchase disclosure within one business day of the repurchase, thereby providing investors with more timely and more granular information on repurchases.[5] At present, investors may have to wait months to get repurchase data and then only in aggregated form.[6] In addition, the proposal would add new narrative disclosure requirements in periodic reports, including disclosure of the objective and rationale for repurchases, and any policies and procedures governing officer and director purchases or sales of a company's shares during a repurchase.[7] Finally, and importantly, the proposal would require information under both new and existing disclosure requirements to be structured in a machine-readable data language.[8]

Share repurchases have increased by orders of magnitude in recent decades.[9] In fact, public markets have been described by one incisive commentator as a "place where companies return money to shareholders" rather than one where capital is raised.[10] This phenomenon should be thoroughly and accurately disclosed and well understood by investors and markets. To the extent companies are making smart and thoughtful choices regarding buybacks, this increased transparency will serve them well. On the other hand, if anticipated disclosure operates to dampen enthusiasm for buybacks, that may well arise from flaws in the strategy behind the practice at certain companies.

I hope the public will weigh in to help us get the final rules right. For instance, is the proposed timing of these disclosure what it should be? Is it appropriate to require furnishing rather than filing of Form SR as proposed? Is there additional information that investors need to understand share repurchase activity? I look forward to reviewing comments on these and other aspects of the proposal.

I'll conclude by thanking our staff for their excellent work. I'm happy to support publishing the proposal for comment.

[1] See Share Repurchase Disclosure Modernization, Proposed Rule, Release No. 34-[] (Dec. 15, 2021) ("During 2020, share repurchases accounted for approximately $670 billion.") [hereinafter Proposing Release].

[2] The Commission adopted Item 703 of Regulation S-K in 2003 to require quarterly disclosure of share repurchase information. See Purchases of Certain Equity Securities by the Issuer and Others, Final Rule, Release No. 33-8335 (Nov. 10, 2003).

[3] See, e.g., Letter from Council of Institutional Investors (Jul. 8, 2016) (expressing support for enhanced repurchase disclosures, noting that "[r]eturning cash to shareholders instead of reinvesting in the business may impact overall leverage, incentive-based compensation and long-term profitability"); Letter from the SEC Investor Advisory Committee (June 15, 2016) (observing that current Item 703 repurchase disclosure "does not result in the identification of information that many investors would likely find material"); Testimony of Jesse M. Fried on Stock Buybacks before the U.S. House of Representatives Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets (Oct. 17, 2019) (suggesting that requirements should be tightened to require disclosure of share repurchases within two days).

[4] See Comments on Concept Release: Business and Financial Disclosure Required by Regulation S-K, File No. S7-06-16.

[5] See Proposing Release at 11.

[6] Current repurchase data is required in periodic reports aggregated at the monthly level. See 17 CFR § 229.703.

[7] See Proposing Release at 22.

[8] See id. at 29.

[9] The Proposing Release provides that "[a]ggregate repurchases have grown significantly over the past four decades, but the increase relative to aggregate market capitalization has been significantly more modest due to the accompanying growth in aggregate market capitalization." Further "[f]irms that exclusively pay dividends are increasingly rare whereas the proportion of firms that regularly conduct repurchases has increased over time, consistent with repurchases being a partial substitute for dividends." Proposing Release at 37-38; see also Karen Langley, Buybacks Hit Record After Pulling Back in 2020, Wall Street Journal (Dec. 12, 2021) ("S&P 500 buybacks plunged from nearly $199 billion in the first quarter of 2020 to just under $89 billion in the second, as companies reeling from the onset of the pandemic moved to conserve cash. Share repurchases increased in each following quarter, approaching $199 billion again in the second quarter of 2021.").

[10] Matt Levine, Money Stuff: Public Markets Don't Matter Like They Used To, Bloomberg (August 5, 2020).

Thank you, Chair Gensler.  Both dividends and share repurchases are ways companies return cash to shareholders.  Yet, say "dividend," and nobody gets angry, but say "share buyback," and the rage boils over.  Today's proposal channels some of that rage against repurchases in a way that only a regulator can-through painfully granular, unnecessarily frequent disclosure obligations.  This proposal requires daily repurchase disclosure to be furnished with the Commission one business day after execution.  Because I do not support the indirect regulation of corporate activity through disclosure requirements, I respectfully dissent. 

Today's proposal unpersuasively attempts to justify itself by pointing to information asymmetries that may exist between issuers and affiliated purchasers, on the one hand, and investors, on the other.  Let me quote from the release here:

[W]e are concerned that, because issuers are repurchasing their own securities, asymmetries may exist between issuers and affiliated purchasers and investors with regard to information about the issuer and its future prospects.  This, in turn, could exacerbate some of the potential harms associated with issuer repurchases.[1] 

Why not address such a concern through a more tailored requirement to disclose buyback announcements and terminations? 

The release justifies a more burdensome approach by pointing to "opportunistic share repurchases" that may be designed to enhance executive compensation and insider stock value.  However, as the footnotes in the economic analysis reveal, studies on the issue are decidedly mixed as to whether this is a real issue.  Indeed, as noted in the release, last year the SEC staff reported the results of its study of the 50 firms that repurchased the most stock in 2018 and 2019 and concluded that "82% of the firms reviewed either did not have EPS-linked compensation targets or had EPS targets but their board considered the impact of repurchases when determining whether performance targets were met or in setting the targets."[2]  The staff's overarching conclusion is also helpful context for today's proposal:

[R]easons for repurchases where the connection to efficient investment is less clear are unlikely to motivate the majority of repurchases since stock prices typically increase in response to repurchase announcements, suggesting that, at least on average, repurchases are viewed as having a positive effect on firm value.[3]

Why are we so quick to discount our own staff's recent study on the matter?  All data sets and studies have their limitations, and this study is not determinative, but today's proposal might accord it at least as much weight as it accords rumors of opportunism.   

Opposition to buybacks is often rooted in the idea that surplus corporate cash ought to be reinvested in the company-in the form of higher salaries for employees, more research and development, new property, plant, and equipment, and so forth-rather than being returned to shareholders.  Such an argument assumes that the politician, regulator, or academic making it is in a better position than management to assess corporate opportunities and determine appropriate levels of cash in company coffers.  History is replete with examples of central planners allocating resources poorly, and I expect this experiment will end no better.

Thank you to the staff of the Division of Corporation Finance, Division of Economic and Risk Analysis, and Office of General Counsel for your hard work on this release.  Although I cannot support it, I greatly appreciate your efforts in preparing it and engaging with my office.  I look forward to reviewing comments on the proposal and welcome engagement from the public regardless of your viewpoint. 

 

[1] Share Repurchase Disclosure Modernization Proposing Release at 10. 

[2] SEC Staff Response to Congress: Negative Net Equity Issuance (Dec. 23, 2020), at 42, available at https://www.sec.gov/files/negative-net-equity-issuance-dec-2020.pdf.

[3] Id. at 6-7.

Specifically, the proposed new Rule 9j-1 would prohibit fraudulent, deceptive, or manipulative conduct in connection with all transactions in security-based swaps, including misconduct in connection with the exercise of any right or performance of any obligation under a security-based swap. Further, proposed new Rule 15Fh-4(c) would prohibit personnel of an SBS Entity from taking any action to coerce, mislead or otherwise interfere with the SBS Entity's CCO.

Finally, proposed new Rule 10B-1 would require any person, or group of persons, who owns a security-based swap position that exceeds the threshold amount set by the rule to promptly file with the SEC a statement containing the information required by Schedule 10B on the SEC's EDGAR filing system. The filings will be publicly available. Such transparency could provide relevant parties with advance notice that certain market participants are building large positions and could facilitate risk management and inform pricing of security-based swaps.

This year marks the thirteenth anniversary of the 2008 financial crisis and the 11th anniversary of the Dodd Frank Act.[1] Title VII of Dodd-Frank, which established a new regulatory framework for swaps and security-based swaps, and was among the Act's most significant reforms.[2]

Today, with a new generation of Wall Street bankers who were in high-school or college at the time of the crisis, the Commission has finally completed most of those reforms. The proposed antifraud and anti-manipulation rules comprise a critical component of the overall rule package. That's because it is vital to have antifraud rules that are tailored to the specific structure and trading patterns of the security-based swap market. Thus, the Commission is re-proposing an antifraud rule that would prohibit specific misconduct in connection with security-based swaps, accounting for their unique characteristics by, among other things, explicitly addressing misconduct involving the ongoing payments and deliveries occurring during the life of a security-based swap. The re-proposed rule reflects the Commission's experience with the security-based swap market as well as more recent market developments such as the proliferation of manufactured credit events and other opportunistic credit default swap strategies.

Today's proposal also includes a rule aimed at protecting the independence and objectivity of security-based swap entities' chief compliance officers (CCOs) by prohibiting actions to coerce, manipulate, mislead, or otherwise interfere with them. CCOs play a very important role in preventing fraud and manipulation, and today's proposal is designed to help promote their independence and effectiveness by targeting undue influence and encouraging forthright communication.

Finally, today's proposal would include proposed new rule 10B-1 generally requiring any person with a security-based swap position that exceeds a certain threshold to file with the Commission a schedule disclosing certain information related to its security-based swap position, its position in any security or loan underlying the security-based swap, and its position in other instruments related thereto.[3] This increased transparency could benefit both regulators and market participants, including promoting enhanced risk management by security-based swap counterparties.[4]

I'm pleased to support today's proposal which is thoughtfully tailored to address the specific fraud risks in this complex market, and, importantly, to facilitate enhanced transparency and oversight for the protection of investors. I want to thank the staff for their diligent and thoughtful work on these proposed rules, and I look forward to reviewing comments.

[1] See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (July 21, 2010) ("Dodd-Frank Act").

[2] See Pub. L. 111-203, 701 through 774.

[3] The public disclosure in proposed rule 10B-1 would cover the reporting of the security-based swap position, positions in any security or loan underlying the security-based swap position and any other instrument relating to the underlying security or loan, or group or index of securities or loans. See Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps; Prohibition against Undue Influence over Chief Compliance Officers; Position Reporting of Large Security-Based Swap Positions, Exchange Act Release No. 93784 (Dec. 15, 2021).

[4] See e.g., https://www.federalreserve.gov/supervisionreg/srletters/SR2119.htm (discussing the March collapse of Archegos Capital Management and the significant losses sustained by certain prime brokers showed, among other things, the risks of concentrated exposure to a counterparty and the importance of robust due diligence and risk management practices to identify, assess and mitigate risks).

[B]hakta solicited investments in his companies, Fusion Hotel Management, LLC and Fusion Hospitality Corporation (collectively "Fusion"). Bhakta falsely told investors that Fusion routinely acquired discounted blocks of hotel rooms from Hilton, which Fusion then sold to United Airlines at a higher price for a significant profit. Instead of buying blocks of hotel rooms with investors' funds, however, Bhakta used the money for personal expenses and to make payments to other investors.

The indictment alleges that Bhakta provided investors with fabricated documents, including bank records that purported to show payments from Fusion to Hilton and fake agreements between Fusion and United Airlines.  These documents gave the false appearance that Fusion bought large blocks of hotel rooms from Hilton and sold them to United Airlines. According to statements made in court, Bhakta laundered the proceeds of his fraud scheme by using investor funds from Fusion's bank accounts at various casinos, including the ARIA Resort & Casino and The Cosmopolitan of Las Vegas. 

[F]rom at least January of 2016 through January of 2020, Bhakta and the Fusion entities raised funds from investors by falsely telling them that Fusion was in the business of buying blocks of hotel room reservations from major hotel chains and re-selling those reservations at higher rates to Fusion's clients, including a major airline company. To entice investors, Bhakta allegedly touted Fusion's successful track record, when in fact Fusion's business was a sham. According to the complaint, Fusion did not engage in the business of re-selling blocks of hotel room reservations for profit, and the contracts and bank statements Bhakta provided to investors to lend credibility to that business were fabricated. The complaint further alleges that, rather than using investor funds to buy and sell reservations as promised, Bhakta misappropriated those funds for gambling and other personal expenses, and to pay purported returns to earlier investors.

Godfrey-Smith was employed by the Shreveport Federal Credit Union (SFCU) from 1983 to 2017 and during much of that time was employed as the Chief Executive Officer (CEO) of the SFCU. The SFCU was a Shreveport, Louisiana based financial institution under the regulation of the National Credit Union Administration (NCUA).

In October 2016, the SFCU, through Godfrey-Smith, entered into an agreement with the United States Department of the Treasury to buy back certain securities that were part of the Department's Troubled Asset Relief Program (TARP). As part of that process, on December 27, 2016, Godfrey-Smith signed and submitted to the United States Department of the Treasury an Officer's Certificate which certified that all conditions precedent to the closing had been satisfied.

In reality, SFCU had not met all conditions precedent to closing and had suffered a material adverse effect. Unbeknownst to the United States Department of the Treasury and the NCUA, SFCU was in a financial crisis. From 2015 through 2017, another individual who was the Chief Financial Officer of SFCU (Individual 1), had been falsifying call reports to the NCUA which included millions of dollars in fictitious fee income. In addition, she was creating fictitious entries in the banks records to support the false call reports. This created the illusion that SFCU was profitable when, in fact, the bank was failing. In addition, Individual 1, embezzled approximately $1.5 million from the credit union.

By the time Godfrey-Smith signed the Officer's Statement, she had become aware of deficiencies at the credit union. Specifically, she had recently investigated and discovered that there were millions of dollars of fictitious entries on SFCU's general ledger, and the credit union's books were not balanced. However, she failed to disclose this information to the United States Department of the Treasury and signed the false Officer's Statement.

In the Spring of 2017, the institution failed. It was taken over by regulators from the NCUA and placed into a conservatorship. An investigation by the NCUA revealed that SFCU had amassed in excess of $10 million in losses by December 2016.

Thank you Daniella [Gibbs Léger], I am thrilled to be here today. And I want to commend the Center for American Progress and the Sierra Club for the hard work and dedication behind the important research that is being recognized today. Climate change is a crisis that poses an existential threat to our society, and our capital markets will not escape the impact.[1] But before I continue, I must give my standard disclaimer that the views I express are my own and do not necessarily reflect the views of the Commission or its staff.

Net-Zero Pledges

In my role at the Securities and Exchange Commission, my staff and I monitor corporate disclosures and announcements. In other words, like you all, I pay attention to what companies are saying both to the SEC, but also publicly on their website or on social media. In the months and days leading up to COP26, I noted, in particular, many public companies announcing net-zero emission pledges.[2] In fact, recent data show a significant percentage of publicly traded companies around the world have committed to a net-zero strategy.[3] This is, ostensibly, good news. Yet, when I dig a bit deeper, it is sometimes unclear to me how companies will achieve these goals.[4] Nor is it clear that companies will provide investors with the information they need to assess the merits of these pledges and monitor their implementation over time.[5] Investors have noted the importance of understanding how the pledges are being implemented this year, 5 years from now, and 10 years from now; rather than simply waiting to see if, 30 years from now, the goal of net-zero emissions comes to fruition.[6] That is too late. So while net-zero emissions pledges are an important step forward, they underscore the loud, repeated, and sustained calls for decision-useful metrics - metrics calculated using reliable and comparable methodologies that enable investors to decide whether the companies mean what they say.[7] That is a core purpose of the SEC's disclosure obligations.[8]

In thinking about corporate disclosures, net-zero pledges implicate several other important issues. One in particular is political spending. Without disclosures on political spending, executives may spend shareholder money in ways that contradict their public commitments and statements. After the Paris Climate Accords, a number of public companies went on the record in support of the Accords. However, questions remain about whether those companies continue to make political contributions that support opposition to the Accords.[9] And this is just one example.[10] A majority of American shareholders acknowledge that corporate political spending is done at the behest of the executive's interests, rather than for investors.[11] With that level of investor support and repeated calls to action from academics,[12] policymakers,[13] and experts,[14]  it is an issue that should be addressed.[15] 

Accurate and reliable climate metrics are not only important for investors' evaluation of sustainability efforts or how companies are spending shareholder money on politics, it is also critical for assessing fundamental and traditional corporate governance matters, like executive compensation. Recent surveys indicate that more executive compensation is being linked to "sustainability performance."[16] Linking executive pay to achieving ESG or sustainability-related goals can be a positive alignment of incentives. However, without reliable and consistent disclosures about those ESG targets, I wonder whether investors and Boards have the tools to accurately assess if such targets have been met and if that alignment between executive pay and ESG targets has been achieved.

Given these concerns, among others, I am pleased the SEC currently has a climate change disclosure rulemaking on our regulatory agenda. Commissioner Allison Lee, who was then acting Chair, opened a request for information earlier this year that has yielded valuable and important data and input from the public. As I reviewed that comment file with my staff, it became clear that there is significant investor demand for comparable, reliable, and decision-useful climate disclosures. Investors and market participants understand that climate risk poses a threat that is profoundly impacting our capital markets today and will continue to do so in the future. As the SEC advances this rulemaking, it is critical that you engage with us and provide us with the detailed, evidence driven, and well-reasoned research you have produced here today. The staff of the SEC are some of the most dedicated and exceptional experts I have had the privilege to work with. And to help us meet our obligations under the rulemaking process, they consider and grapple with data submitted to the comment file, including submissions like your research.[17] The more detailed and data driven the rationale that undergirds a policy position the more calibrated and meaningful our policies will be. 

Private Markets

Finally, while the importance of disclosure in the public markets cannot be overstated, the lack of similar information in the private markets poses its own obstacles. There is no doubt that America's public markets are the deepest, most liquid, and most dynamic in the world. And the widespread participation in and reliance on them speaks for itself. That being said, private markets are a reality of our financial system and one into which the SEC has significantly less visibility.[18] As you work on and advocate for policy to encourage divestment from carbon intensive activity, it is critical to consider the growing expansion of the private markets and where the capital that fuels those markets originates.[19]   

The SEC has its work cut out for it as well. We should consider the tools we have at our disposal to address these concerns.[20] However, it is possible that we do not have everything we will need.[21] Historically, Congress has acted when the opacity of the private markets turns into darkness.[22]

As we all work to shine a light on these risks to our financial system and formulate plans to address them, we should also work to ensure that the externalities high-carbon emitters put on our environment and in our capital markets do not find relative safe haven in areas of darkness, least resistance, and lowest cost.

I want to thank you again for having me and for your tireless and committed work.

= = =

 

[1] See, e.g., Sarah Kaplan, Crucial Antarctic Ice Shelf Could Fail Within Five Years, Scientists Say, Wash. Post (Dec. 13, 2021).

[2] The research presented shows that many net-zero pledges in the financial sector lacked concrete targets or timelines, failed to directly address banks support of fossil fuel companies, and relied on watered down "intensity" targets on emissions instead of absolute targets.

[3] See Net Zero Tracker, Press Release, Post COP26 Snapshot (last visited Dec. 13, 2021) (622 of the 2,000 largest of largest public companies around the globe have made such pledges).

[4] It is sometimes unclear to me what policies and procedures companies have to manage and implement these goals. See, e.g., Albert Carrillo Pineda et. al., Foundations for Science-Based Net-Zero Target Setting in the Corporate Sector, Science Based Targets (Sept. 2020) ("While corporate net-zero targets are often treated as equivalent and assumed to have comparable ambition, when examining them in detail significant differences can be found amongst them."); Paasha Mahdavi et al., Using Earnings Calls to Understand the Political Behavior of Major Polluters, Global Environmental Politics (forthcoming) ("[There may be] cause for skepticism about the proliferation of voluntary climate pledges on the part of oil and gas firms."); Eloise Barry, As More Companies Make Net-Zero Pledges, Some Aren't as Good as They Sound, Time (Nov. 15, 2021); Laurie Goering, Greenwash or Lifeline? Tough Rules Needed for Credible Net-Zero Plans, Reuters (June 28, 2021). Internal controls play a crucial role in ensuring corporate disclosures are consistent and reliable. See Caroline Crenshaw, Commissioner, Sec. & Exch. Comm'n, Remarks at the PepsiCo-PwC CPE Conference: Controlling Internal Controls (Nov. 16, 2021) (internal controls are "vital to identifying risks to the financial statements so leadership can manage them and prepare. . .disclosures accordingly").

[5] See sources cited supra note 4.

[6] See, e.g., The Investor Agenda, Investor Climate Action Plans, Expectations Ladder, at 6 (May 2021); Publish What You Pay, Comment Letter on Climate Change Disclosures (June 11, 2020) ("Today's investors and lenders seek to track emissions to measure and hold companies accountable for promised reductions, in order to arrest both specific and systemic collapses in asset values and businesses. They desire clarity as to whether management's capital expenditures are consistent with announced climate strategies, both in substance and magnitude. To do this, they want a standardized tool to compare how companies plan to contribute to and survive in a net-zero economy. And they want honesty about how claims about net-zero commitments are being met. Investors and lenders want this information to both protect their investments in (or loans to) individual companies as well as to protect their portfolios from the systemic risks of climate change.").

[7] See Crenshaw, supra note 4 ("More than 550 unique comment letters were submitted in response to the then Acting Chair Lee's call for information. Three out of every four of these responses support mandatory climate disclosure rules.")

[8] As with all disclosures, companies should carefully consider whether the information they include in sustainability reports or on their websites or social media, including information related to net-zero pledges, should be included in their reporting that is filed with the SEC. See Staff, Sec. & Exch'h Comm'n, Sample Letter to Companies Regarding Climate Change Disclosures (Sept. 2021).

[9] See, e.g., Bruce Freed, Center for Political Accountability, Collision Course: The Risks Companies Face When Their Political Spending and Core Values Conflict and How to Address Them (June 19, 2018).

[10] See, e.g., Caroline Crenshaw & Michael E. Porter, Transparency and the Future of Corporate Political Spending, Harv. L. Sch. Forum Corp. Gov (Mar. 15, 2021) (noting commitments from companies to halt campaign contributions to certain elected officials after the siege on the Capitol on Jan. 6, 2021 and also noting the hundreds of millions of dollars pharmaceutical companies to lobby for weakened federal and state opioid regulations).

[11] See Mason-Dixon Polling & Research, Corporate Political Spending: A Survey of American Shareholders (2006) (finding that some 73% of American shareholders believe that corporate political spending is undertaken to advance the, private interests of executives rather than the interests of the company).

[12] See Committee on Disclosure of Corporate Political Spending, Petition for Rulemaking (Aug. 3, 2011).

[13] See Sen. Menendez, Press Release, Menendez Makes Clear SEC Must Move Forward on Corporate Political Spending Disclosure (Apr. 7, 2016).

[14] See Freed, supra note 10.

[15]However, as many of you know, the SEC's funding is conditioned on not finalizing a rule that requires disclosure of corporate political spending. See Consolidated Appropriations Act, 2021, H.R. 133, Pub. Law No. 116-260, Sec. 631 ("None of the funds made available by this Act shall be used by the Securities and Exchange Commission to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.").

[16] See, e.g., Janice Koors, Executive Compensation and ESG, Harv. L. Sch. Forum Corp. Gov. (Sept. 10, 2019).

[17] The SEC is required, under the Administrative Procedures Act, to consider the relevant data, views, or arguments submitted after notice of the proposed rulemaking. See Administrative Procedures Act, 5 U.S.C. § 553.

[18] See, e.g., Caroline Crenshaw, Commissioner, Sec. & Exch. Comm'n, Statement on Harmonization of Securities Offering Exemptions (Nov. 2, 2020) (noting that "because private markets are so opaque" there is not sufficient data to calibrate our regulations around exempt offerings but noting more generally about private markets that the opaqueness "highlights a persistent problem with our approach to the private markets, in that issuers do not report the data needed to allow us to study them and their results, and thereby develop appropriate regulatory strategies")

[19] To be very clear, this is not a caution against taking appropriate steps in the public market. Rather, a recognition of the difficulties of solving this problem holistically. 

[20] For example, we do have three rulemakings on our regulatory agenda to address issues in the private markets. See Securities and Exchange Commission. See Fall 2021 Agency Rule List (Rule 144 Holding Period and Form 144, Regulation D and Form D Improvements, Revisions to Definition of Securities Held of Record).

[21] See, e.g., Allison Herren Lee, Commissioner, Sec. & Exch. Comm'n, Going Dark: The Growth of Private Markets and the Impact on Investors and the Economy (Oct. 12, 2021) (outlining events that have led to the exponential growth of the private markets and suggesting issues for the SEC to consider when thinking about the public-private divide).

[22] Id. (noting that Congress acted to shine a light in creating the Securities Act and Exchange Act and then again in the early 1960s as the over-the-counter markets grew by commissioning a study that was implemented through the enactment of Section 12(g) of the Exchange Act).

• Securities Industry Commentator
• Bill Singer