SEC Commissioner Hester Peirce openly wondered what the SEC rulebook might look like if the agency did not automatically carry over its rules from one year to the next in a recent speech before the Center for Accounting Research and Education (CARE) conference held in Leesburg, Virginia. In remarks titled Sunsets, Russets, and Rule Resets, Peirce asserted that as the SEC writes its rules, the agency needs to be thinking of ways it can inject flexibility into the obligations it imposes to make them better able to change with the times.
The commissioner’s own private Idaho. Commissioner Peirce began her remarks by noting that the rules on Idaho’s state books sunset every year unless they are reauthorized. Usually they are, but this year, they were not, she observed. Peirce then turned her attention to the SEC’s rules, observing that the agency has accumulated a lot of regulations over the years, and she pondered what things might look like if SEC rules had to be similarly reauthorized annually. She concluded there would be fewer and simpler rules in place of the “complex tangle” now in place.
Nonetheless, the commissioner acknowledged that unlike the state of Idaho, “getting rid of antiquated rules at the SEC involves more procedural hurdles,” perhaps having the Administrative Procedures Act and other regulatory niceties in mind. Notwithstanding, Peirce called for the flexible application of SEC rules, as well as developing a culture of revisiting the agency’s rules on a periodic basis. She then turned to a number of “hot topics” where her lighter touch regulatory approach would be appropriate and yield meaningful benefits.
Sarbox, small players, and missed opportunities. The commissioner noted that the SEC recently moved to update Section 404(b) of the Sarbanes-Oxley Act which requires public companies to have their internal controls audited by an independent auditor. Specifically, the SEC proposed to allow certain small, low-revenue companies to opt out of the auditor attestation requirement which has proved to be quite costly for these market participants.
The commissioner observed that many small companies and their investors have expressed concern about the diversion of desperately scarce resources to the 404(b) audit. She also pointed to one small company CFO that told the SEC the auditor attestation would add 20 to 33 percent to his independent auditor bill.
Although Peirce views the recent proposal as a positive step for making SEC rules more flexible, an opportunity to make the rules simpler was missed last year when the Commission amended certain rules which defined a Smaller Reporting Company (SRC). At the time, amendments were adopted that expanded the pool of companies eligible for scaled disclosure. However, the SEC did not make complementary changes to the 404(b) exemption. According to Peirce, another opportunity to simplify requirements was similarly missed last week when the Commissioner adopted a limited definition for accelerated filers in connection with the auditor attestation requirement under 404(b).
Finalizing security-based swap rules mandated by Dodd-Frank. Another hot topic Commissioner Peirce identified was the recent SEC rule proposal regarding security-based swap markets. She noted the challenges of building a new regulatory framework for the security-based swap market in the U.S results from our domestic market being only part of a larger global market that developed mostly free of the burdens of potentially conflicting national regulatory requirements.
In Peirce’s view, U.S. and foreign regulators have had to work to determine where U.S. rules should end and those of overseas regulatory counterparts should begin. Peirce observed that the recent rule proposal is an attempt to lay out a workable framework that allows for an appropriate level of oversight of these large markets without imposing duplicative or conflicting regulation on global firms attempting to serve a global, sophisticated clientele.
Looking to early action in another jurisdiction. Peirce also observed that while international harmonization is important, sometimes one jurisdiction’s early action in an area helps other jurisdictions to think about how they address the same area. As an example, the commissioner looked towards the experience of Bermuda in connection with digital asset regulation to assess potential regulatory approaches in this realm. She observed that the Bermuda Monetary Authority recently released draft guidance for crypto custodial services which addresses how to store private keys for hot and cold storage while preserving necessary liquidity, what safeguards should be in place to prevent unauthorized access, and how to frame internal audit of transactions to ensure their integrity.
Lastly, Commissioner Peirce noted the SEC had much to learn from academics like those in attendance at the CARE conference. She concluded, “Given the value that research can have for our research agenda, we are always eager to hear ideas about how we can work more productively with academics.”
Looking to early action in another jurisdiction. Peirce also observed that while international harmonization is important, sometimes one jurisdiction’s early action in an area helps other jurisdictions to think about how they address the same area. As an example, the commissioner looked towards the experience of Bermuda in connection with digital asset regulation to assess potential regulatory approaches in this realm. She observed that the Bermuda Monetary Authority recently released draft guidance for crypto custodial services which addresses how to store private keys for hot and cold storage while preserving necessary liquidity, what safeguards should be in place to prevent unauthorized access, and how to frame internal audit of transactions to ensure their integrity.
Lastly, Commissioner Peirce noted the SEC had much to learn from academics like those in attendance at the CARE conference. She concluded, “Given the value that research can have for our research agenda, we are always eager to hear ideas about how we can work more productively with academics.”