Regulation Best Interest

SEC Chair Clayton testified on December 11, 2018 before the U.S. Senate Committee on Banking, Housing and Urban Affairs.  In his testimony, Chair Clayton reviewed the Commission’s Strategic Plan and outlined the agency’s priorities.  Consistent with his remarks delivered at Columbia University, Chair Clayton reviewed some of the principal accomplishments in 2018, including proposed Regulation Best Interest, the amendments to the smaller reporting company definition, the disclosure simplification amendments, and the proposed changes to financial disclosures for guarantors.  He noted that there were other proposals “on the horizon,” including:

  • A proposal to amend the definition of “accelerated filer” (triggering SOX 404(b) attestation);
  • Extension of the test-the-waters accommodation to non-EGCs;
  • Rulemaking to expand Regulation A eligibility to public reporting companies;
  • A release soliciting input on reducing compliance burdens on reporting companies with respect to quarterly reports;
  • A concept release on the exempt offering framework;
  • Changes to Rule 701 to address the comments received on the Commission’s concept release on the exemption;
  • Improvements to the proxy process;
  • Regulation of proxy advisory firms;
  • Revisions of the offering rules for BDCs as required by the Small Business Credit Availability Act; and
  • Revisions of the offering rules for closed-end funds as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act.

In a speech yesterday, Securities and Exchange Commission Chair Jay Clayton provided an overview of the Commission’s significant accomplishments in 2018.

Chair Clayton noted his approach to the Reg Flex agenda and the setting of more realistic rulemaking priorities.  In the last year, he noted that the Commission advanced 23 of the 26 rules on the Commission’s near-term agenda.  Among the key accomplishments in 2018, Chair Clayton cited the Commission’s work with regard to proposed Regulation Best Interest.  With respect to capital formation, Chair Clayton noted the Commission’s amendments to the smaller reporting company definition and the disclosure effectiveness related updates.

In terms of priorities for 2019, Chair Clayton again cited completion of the Commission’s work on proposed Regulation Best Interest as one of the most important projects.

Chair Clayton also pointed to proxy plumbing as another key objective for 2019.  Addressing regulation of proxy advisory firms, Chair Clayton noted that “there should be greater clarity regarding the division of labor, responsibility and authority between proxy advisors and the investment advisers they serve. We also need clarity regarding the analytical and decision-making processes advisers employ, including the extent to which those analytics are company- or industry-specific. On this last point, it is clear to me that some matters put to a shareholder vote can only be analyzed effectively on a company-specific basis, as opposed to applying a more general market or industry-wide policy.”

Chair Clayton cited changes in the capital markets and reaffirmed the commitment to review initiatives “to facilitate access to capital for issuers and to make sure Main Street investors have the best possible mix of investment opportunities.”  Based on prior comments, this would appear to allude to opportunities to invest in private companies, including unicorns.  The Commission also is considering expanding test the waters communications to non-emerging growth companies, evaluating quarterly reporting requirements, and streamlining or harmonizing securities offering exemptions.  He noted that the staff is working on a concept release to solicit input about key topics, including whether the accredited investor definition is appropriately tailored to address both investment opportunity and investor protection concerns.

Chair Clayton noted that the Commission is monitoring three risks:  (1) the impact to reporting companies of the United Kingdom’s exit from the European Union, or “Brexit”; (2) the transition away from LIBOR as a reference rate for financial contracts; and (3) cybersecurity.  Among other things, the Commission staff will focus on disclosures related to Brexit risks.  Chair Clayton noted that he “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.”  Chair Clayton also noted that the transition away from LIBOR is a significant risk for many market participants—whether public companies who have floating rate obligations tied to LIBOR, or broker-dealers, investment companies or investment advisers that have exposure to LIBOR.  Finally, he commented on cybersecurity.  The full text of yesterday’s remarks can be found: https://www.sec.gov/news/speech/speech-clayton-120618.