The SEC Speaks About the Registration Statement Process

Draft Registration Statement Attorneys

Securities Lawyer 101 Blog

The Securities and Exchange Commission recently announced the issuance of Commissioner Elisse B. Walter’s statement, “The Commission’s Registration Process: How to Better Administer an Ounce of Prevention”.  The release is a reminder of the importance of preventive action by the SEC and the securities industry at the registration statement stage to nip securities violations in the bud.  This statement addressed the registration statement phase of a going public transaction as well as the registration phase applicable to market participants.

The SEC’s statement is based upon the premise that the first contact it has with an issuer is when the issuer seeks to offer securities on a registration statement filed with the SEC.

Registration Statement Process l The SEC’s First Shot at Preventing Fraud

The registration statement process is also the SEC’s first chance to assess regulated securities market participants including broker dealers, investment advisers, municipal advisors, exchanges, alternative trading systems, clearing agencies, ratings agencies, securities information processors and transfer agents. Walter notes that it is at the registration stage that the SEC can institute proceedings to block the registration of entities if they do not meet the requirements of the securities laws and so prevent future violations.

The SEC’s Statement

The Commission’s Registration Process: How to Better Administer an Ounce of Prevention Commissioner Elisse B. Walter U.S. Securities and Exchange Commission July 31, 2013, “A stitch in time saves nine.” “An ounce of prevention is worth a pound of cure.”

Throughout history, people have understood the value of taking early action.  Most of us agree that the best way to deal with potential problems is to handle them when they are nascent, or even before they arise.

Yet there is a reason why proverbs such as the ones above have survived hundreds of years, and it is not just that we agree with the sentiment.  It is because we need the reminder.Simply put, people have a hard time expending a lot of effort on issues that are not immediate, and preventative measures, almost by definition, address issues that lie further down the road, that are probabilities rather than certainties.  This statement is a reminder of the importance of early action and an entreaty to the Commission and the securities industry community that they not put off until tomorrow what they can do today.

In securities regulation, the first interaction the Commission has with the entities regulated under the securities laws is when such entities apply to register with the Commission.In 2011, when the Commission was proposing a registration regime for securities based swap intermediaries, I advocated for – and the Commission committed to – the publication of a concept release that would provide a comprehensive review of the Commission’s registration program.  [1] I urged that we undertake this review in part because, as I have stated before, I believe that retrospective reviews of rules by agencies is generally a good idea to ensure that regulations and programs are achieving their intended purpose.  But I believe that the Commission’s registration program is particularly in need of a comprehensive review to see how we can strengthen the registration process, which in turn will strengthen the soundness of registrants and thus protect investors, promote fair and efficient markets, and facilitate capital formation.

The registration process is the Commission’s first opportunity to assess regulated market participants – the broker dealers, investment advisers, municipal advisors, exchanges, alternative trading systems, clearing agencies, ratings agencies, securities information processors and transfer agents – all of the entities that make the securities markets function.  It is the Commission’s first opportunity to take a close look at those entities — their business plans, their managements, their financial resources, their operations, and their history.It is the Commission’s first opportunity to determine whether such entities are capable of running their businesses, and to do so in a way that complies with the law and protects investors.  It is the Commission’s first opportunity to engage in a dialogue with prospective registrants’ managements regarding their operational risks, in order to help mitigate those risks.And it is the Commission’s first opportunity to institute proceedings to disapprove the registration of entities if they do not meet the requirements of the securities laws.

The registration process provides the Commission the opportunity to take all of these actions, to administer an ounce of prevention.  The Commission should be taking full advantage of this opportunity to help prospective registrants address shortcomings before we grant them a license to do business as an SEC-regulated entity and before they can become a potential threat to investors.  Accordingly, the Commission should undertake a comprehensive assessment of the registration process and invite input from commentators.  Since this could lead to a significant change in the Commission’s registration process, the natural first step in this assessment would be the publication of a concept release.

A concept release would discuss the current state of the Commission’s registration program, allowing both the Commission and the public to consider and comment upon a variety of issues concerning the registration process — including how the registration process among categories of registrants varies, whether the current process we have reflects the realities of today’s market and investors’ needs, and how we can leverage resources in order to increase the robustness of the registration process.  I discuss each of these issues briefly below.

First, the elements of the registration process vary greatly among the entities that the Commission regulates.  Of course, at least some of these differences logically follow from differences among the categories of registrants – a process for registration of a small broker-dealer will never look identical to the registration process for a new exchange.But many differences, in my view, are not justified, and it is possible that elements of the registration process from one regime might be beneficial to another.  We should also look at the approaches that other jurisdictions take, and determine whether elements from registration regimes in other jurisdictions might make sense for our programs.

Another issue is whether the registration process matches the current state of the securities markets.  While there have been some changes to the registration process – and to the categories of registrants – since the securities laws were first passed, these changes seem modest relative to the vast transformation that technology and innovation have brought to the securities markets in recent decades.  We need to consider whether the information we collect from registrants provides an accurate picture of an entity’s operations and risks, and whether the additional measures we take to assess a registrant are sufficient and appropriate.

Finally, the Commission should use this concept release as an opportunity to consider how to leverage its limited resources in ways that can strengthen the process.  If I had my druthers, every single entity that applies for Commission registration, that requests our imprimatur and a license to do business, would go through a thorough pre-registration examination.  Of course, if I had my druthers, the Commission would also be a self-funded agency that that had ample resources to fulfill its statutory missions.  That is not the world we live in, and the Commission must do more with not enough.  But I am confident that there are methods the Commission can use to increase the robustness of its registration program even with its limited resources.  This could include the use of risk-based assessments of registration filings in order to focus examination and other resources on applications that have red flags, certifications by management or third parties, reviews by independent third parties, or conditional registration in order to assess initial operations.

A concept release about the Commission’s registration process would be a good first step toward tackling these issues.  It would provide regulated entities, investors, and the public an opportunity to evaluate and comment upon the current state of the Commission’s registration process, and begin a dialogue on how we can improve it.

As I stated above, the Commission committed to publish just such a release almost two years ago.  Staff from virtually all the divisions and offices in the Commission have worked toward developing a release that tees up the issues discussed above in a balanced, open manner, and that invites a public dialogue.  It is a release that, in my view, is ready for public consumption so that we can begin just such a dialogue, and I commend the staff for their work on it.  Unfortunately, it is unlikely that the Commission will approve its publication before my five year tenure as a Commissioner comes to an end.  I am disappointed that this is the case.  There are, of course, other unresolved matters that I care deeply about that I hope the Commission tackles, such as market structure reform (including regulations that mitigate the conflicts that can arise from SROs being for profit companies), fiduciary duty and harmonization of investment adviser and broker-dealer regulations, and reform of the municipal securities market; however, these issues are already subject to public debate and consideration.  Reform of the registration process merits the same serious consideration and opportunity for public input, and that is why I am choosing to highlight it today.

It is no secret that the Commission is in the midst of a period of tremendous demands on its resources, which results in competing priorities.The Dodd-Frank Act and the JOBS Act have made time and resources scarce for Commission staff and Commissioners alike, and they must be our most immediate priorities.  With the weight of the agenda, we understandably focus on those mandates and the immediate pressures they bring to bear.  But while we fulfill those mandates,we should also continually assess our effectiveness as a regulator and consider ways we can improve – because no matter how well the Commission promulgates the regulations required by Dodd-Frank or the JOBS Act, or any other regulations down the road, those regulations are only as effective as the market participants that must comply with them.And while we have made vast improvements to our examination and enforcement programs to help cure the ills of lax compliance, we cannot rely on after-the-fact tools alone.  We must focus on prevention, and to do that, we must focus on the beginning of the process – to make our best effort to ensure that those who choose to register with the Commission have the capability to do their jobs.  Investors deserve no less.

Market participants in going public transactions should expect more scrutiny of registration statements filed under the Securities Act as well as the Exchange Act.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
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Boca Raton, Florida 33432
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