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From Securities Regulation Daily, November 9, 2017

Experts review regulatory, legislative priorities in new Administration

By John Filar Atwood

Completion of the outstanding Dodd-Frank Act mandates on compensation disclosure are not likely to be a top priority of the SEC under Chair Jay Clayton, according to Shearman and Sterling partner Lona Nallengara. At Practising Law Institute’s Securities Regulation conference, he acknowledged Clayton’s claim that Dodd-Frank issues are "top of mind," but Nallengara believes Clayton’s priorities are protecting the retail investor, easing capital formation and getting more companies to enter the public markets. Nallengara was one of several industry experts that examined the regulatory and legislative priorities under the new Administration.

The remaining Dodd-Frank compensation-related rules yet to be implemented include those on hedging, clawbacks and pay versus performance. Nallengara noted that the SEC has been silent on these rulemakings for some time. He questioned whether the rules are even needed anymore given that many companies already have put in place hedging and clawback provisions, and pay versus performance is widely disclosed in proxy statements.

Meredith Cross, a partner at Wilmer Hale and a former Director of the Division of Corporation Finance, believes that if the Commission does move forward on these rules, it will scrap the existing proposals and rewrite them. This will still be a difficult task, she noted, because Commissioner Michael Piwowar and incoming Commissioner Hester Peirce have said they are not in favor of Dodd-Frank rulemaking. As a practical matter, Cross said, if Clayton wants to move forward with these rules he will need the support of the two Democratic Commissioners.

RegFlex agenda. In Cross’s opinion, the SEC’s priorities include the soon-to-be-released RegFlex agenda, which Clayton discussed in opening remarks at the conference. The agenda will be released in a few weeks, he said, and will include fewer items than it has in the past. Clayton said his RegFlex agenda will include only those initiatives that he believes he can complete within the next year.

Sebastian Gomez Abero, head of the Division of Corporation Finance’s Office of Small Business Policy, confirmed that the RegFlex agenda is next up for his team in the area of regulatory reform. Abero told Wolters Kluwer that for his office this will entail look-backs at the rules under Regulation A, Regulation D and Regulation CF to examine how they are working. This will involve the extensive use of regulatory technology, he said, including analyses from economists in the Division of Economic and Risk Analysis, as well as the wealth of data that is available on Internet-based offerings.

After the RegFlex agenda, Cross expects the SEC to continue its work on disclosure simplification. Progress on this is likely to be incremental, she noted. She believes that Clayton also would like to see more and better disclosure on cybersecurity. Legislation in this area is possible, according to Cross, but would be difficult to pass given that many industry participants feel that added cyber disclosure would make it harder to catch the perpetrators. She believes the SEC may just seek additional disclosure from companies that have been breached.

Legislative developments. On the legislative front, Cross said that she does not think the CHOICE Act will pass. The bill is too big, in her view. Pieces of it might get passed, but she does think it will become law in its current form.

Amy Borrus, a deputy director of the Council of Institutional Investors, focused her remarks on the provisions in the CHOICE Act that would establish a new regulatory scheme for proxy advisory firms. Many CII members feel the legislation is heavy-handed and could drive some proxy advisory firms out of business if it is enacted, an outcome that CII strongly opposes.

Proxy advisory firm reform also was addressed in the October Treasury Department report on capital markets. Nallengara pointed out that both Clayton and CFTC Chair J. Christopher Giancarlo have said that they support the recommendations in the Treasury report, so it serves as some guidance as to what the agencies might do.

Ropes & Gray’s Keith Higgins, another former Corporation Finance Director, indicated that the Treasury report was somewhat muted on proxy advisory firms. There was no call for legislation in the report, he noted. Some people have issues with the proxy advisory forms, but others value their recommendations, so reform could be difficult to accomplish, he said.

SEC guidance. Nallengara concluded by noting that the SEC can do a lot by issuing guidance, as evidenced by its recent Staff Legal Bulletin on shareholder proposals. He expects to see more of this from the Commission. Higgins cautioned that there is a lot of bipartisan antipathy toward the SEC using guidance as rulemaking. Brian O’Shea with the U.S. Chamber of Commerce took it a step further noting recent developments that suggest that if the Government Accountability Office determines that SEC guidance rises to the level of rulemaking, Congress may be able to overturn it under the Congressional Review Act.

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