SEC Commissioners Differ on Key Policies
Just before the end of 2021, Elad L. Roisman, one of the SEC’s five Commissioners, announced his resignation, effective at the end of January 2022. In a statement posted on the agency’s website, he said:
Serving the American people as a Commissioner and an Acting Chairman of this agency has been the greatest privilege of my professional life. It has been the utmost honor to work alongside my extraordinary SEC colleagues, who care deeply about investors and our markets. Over the next several weeks, I remain committed to working with my fellow Commissioners and the SEC’s incredible staff to further our mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.
Chairman Gary Gensler replied publicly, saying:
Today, my colleague and fellow Commissioner Elad Roisman announced his intentions to step away from the agency in January. I’d like to thank Commissioner Roisman for his dedicated service to the Commission and to the American public, both as a Commissioner and as Acting Chairman. While we didn’t always agree on policy matters, I’ve come to rely on his judgment and expertise, and I have enjoyed a positive working relationship with him.
The polite exchange glossed over conflicts that had been on the increase since Gensler’s appointment. The new chair arrived full of plans of his own, plans that didn’t necessarily fit with projects undertaken by the Commission months or even years earlier. He created an agenda that changed priorities already decided on by his colleagues and revived old issues, some of them quite recently decided, for reconsideration. He was the boss, and that was his right to do, but it ruffled the feathers of two of his fellow Commissioners, Roisman and Hester Pierce.
The SEC is governed internally by five Commissioners. All of them are appointed by the sitting President, though they are not all appointed at the time he takes office. They have five-year terms, staggered so that one Commissioner’s term ends on June 5 of each year. (Gensler’s own first term ended on June 5, 2021, and he needed to be appointed to a second term only a little more than a month after he was sworn in. The Chair and the remaining Commissioners may continue to serve for 18 months after the expiration of their terms if they aren’t replaced before then.
The Commission is supposed to be bipartisan, and to that end, only three of its members can be of the same political party. Generally, the Chair shares the President’s affiliation; two of the Commissioners are Republicans, and two are Democrats. (There have, however, been two Independents who served as Chair, both under Obama: Mary Schapiro and Mary Jo White. Jay Clayton, Trump’s nominee was also a registered Independent.)
The Current Commission
Gensler is a Democrat. He was nominated by President Joseph Biden on February 3, 2021, approved by the Senate on April 14, 2021, and sworn into office on April 17, 2021. His predecessor, Jay Clayton, had chosen to leave office in late December 2020; consequently, Elad Roisman was named Acting Chairman on December 23. Roisman was replaced as Acting Chairman by Alison Herren Lee, a Democratic sitting Commissioner. On January 21, 2021. She served in that post until Gensler took office.
Gensler came to the agency with a long list of accomplishments. His interest in finance came early. His father was a vending machine owner who’d take his sons (Gary had a twin brother) to make the rounds of Baltimore, emptying machines and counting nickels. Gensler went on to the Wharton School, worked at Goldman Sachs in the early 1990s, and was then recruited into the Clinton Administration. There, deregulation was in favor. The economy hummed along in the late Clinton years, with the repeal of the Glass-Steagall Act fueling the flames, and the boom continued into the Bush Administration. And then it all came crashing down in 2008. Gensler took note.
Between 2009 and 2014, he was chairman of the U.S. Commodity Futures Trading Commission (CFTC), leading the $400 trillion swaps market reform. He became known as a ferocious reformer. He then took a teaching job at MIT’s Sloane School of Business and assisted in the political campaigns of several prominent Maryland politicians. Gensler’s predecessor, Jay Clayton, had been an attorney, as are many SEC Chairs. Though Gensler doesn’t shrink from enforcement, his central interest seems to be in creating regulatory structures that will promote what he sees as essential reforms.
The two Republican Commissioners are Roisman and Hester M. Peirce. Both were appointed by Trump in 2018. Roisman’s term would have expired in 2023 had he not decided to cut it short. Peirce was confirmed in December 2017 and sworn in in January 2018. Hers was one of those odd terms that expired on June 5; in this case, on June 5, 2020. She was immediately confirmed to a second term, which will expire in June 2025. She’s an enthusiastic supporter of cryptocurrencies; her fans in the industry affectionately call her “crypto mom”. She gives lively, entertaining speeches but takes a tough stance when she feels her ideas must be defended.
The Democratic Commissioners were also appointed by Trump. Allison Herren Lee was nominated in 2019; her term expires in 2022; Caroline A. Crenshaw took the position in 2020 and will serve until 2024. Lee’s passion is ESG investing. The “ESG” stands for “Environmental, Social, and Governance.” It’s also called “impact investing” and “sustainable investing.” Obviously, it appeals to young people and to older ones who want to keep the planet healthy. One primary concern is addressing climate change, but if addressed on a global scale, it would extend as well to the kind of products that will be manufactured and the natural resources used to make them. Gensler favors aggressive disclosure of climate risk, and he appears to be supported in this by investors. Desirable as it may be, it could also be extremely costly. Crenshaw, like Lee, is interested in requiring new and more stringent ESG disclosures. She also believes that in some areas, the SEC isn’t demanding as much data as it needs in order to regulate properly. For example, she’s concerned that “The amount of capital raised via exempt offerings now far outpaces the amount raised on the public markets… And yet, while these markets have been expanding, the information we are collecting about them has not.” She’d like to see expanded disclosure requirements for Regulation D offerings, among other things.
We’ve seen that the Commissioners come from different backgrounds and have different interests and priorities. But in the past, despite whatever disagreements they may have had in private, they’ve, for the most part, presented a polite and unified front to the public.
That has changed.
The Battle Lines Are Drawn
Gensler didn’t ease into his new job, relying on others to show him the ropes. He took charge quickly and forcefully. Shortly before his arrival, things were as usual: Hester Peirce was giving remarks at a British blockchain conference; Allison Lee was addressing the Center for American Progress about climate change and ESG investing. On April 14, the four sitting Commissioners issued a joint statement:
A warm congratulations to Gary Gensler on his Senate confirmation to become Chair of the SEC. He will be joining a dedicated staff that works tirelessly day in and day out on behalf of investors and our markets. We welcome him back to public service and look forward to working together to execute our vital mission.
The happy mood was shattered on June first. That day, The SEC’s Division of Corporation Finance issued a statement on the Commission’s 2019 guidance on the applicability of the Proxy Rules to Proxy Voting Advice. Although that had for two years been considered a settled matter, Gensler apparently felt differently. Corp Fin noted:
At the direction of the Chair, we are now considering whether to recommend that the Commission revisit the 2019 Interpretation and Guidance and the 2020 Rule Amendments. In light of this direction, the Division of Corporation Finance has determined that it will not recommend enforcement action to the Commission based on the 2019 Interpretation and Guidance or the 2020 Rule Amendments during the period in which the Commission is considering further regulatory action in this area.
While it is true that certain groups expressed displeasure with various policy outcomes over the course of the rulemaking (a circumstance that occurs in every rulemaking), the Commission’s process in adopting these amendments was beyond reproach. During the years-long rulemaking process, the Commission considered all policy arguments, including those in opposition to the proposed amendments. The rule’s adopting release discusses the Commission’s analysis of these points in the context of the rule’s entire administrative record. The rule we adopted reflected the broad range of input we received on the proposal.
Roisman and Peirce were not happy. To make matters worse, on June 4, “the Commission” announced the removal of William D. Duhnke III from the board of the Public Company Accounting Oversight Board (PCAOB). In the release, Gensler commented that he intended to work with the staff of the PCAOB to “set it on a path to better protect investors by ensuring that public company audits are informative, accurate, and independent.” It was further announced that the SEC intended to “seek candidates to fill all five board positions on the PCAOB.”
Roisman and Peirce responded the same day. Their obvious effort not to show their anger is admirable:
Although the Commission has the authority to remove PCAOB members from their posts without cause, in all of our actions, we should act with fair process, fully-informed deliberation, and equanimity, none of which characterized the Commission’s actions here. Instead the Commission has proceeded in an unprecedented manner that is unmoored from any practical standard that could be meaningfully applied in the future. We are unaware of any similar action by the Commission in connection with its oversight of the PCAOB. These actions set a troubling precedent for the Commission’s ongoing oversight of the PCAOB and for the appointment process, including with respect to attracting well-qualified people who want to serve. A future in which PCAOB members are replaced with every change in administration would run counter to the Sarbanes Oxley Act’s establishment of staggered terms for Board members, inject instability at the PCAOB, and undermine the PCAOB’s important mission by suggesting that it is subject to the vicissitudes of politics.
A few days later, on June 8, Gensler dropped another “statement,” in which he explained that “On behalf of the Commission I am soliciting nominations for all five of the Board seats, including the Chair.” He then proceeded to offer application instructions to interested candidates.
Roisman and Peirce appear to have been blindsided by Gensler’s actions. Did he tell them of his plan in advance? Did he solicit their opinions? They don’t say. Lee and Crenshaw did not comment publicly on the controversy. The rest of June, and all of July, passed quietly.
Then on August 2, Gensler let loose once again, announcing that amendments to the SEC’s whistleblower program adopted in September 2020 appeared to him to be problematic: “Various members of the whistleblower community, as well as Commissioners Lee and Crenshaw, have expressed concern that two of these amendments could discourage whistleblowers from coming forward.” (We discussed his arguments in detail in an article from August 2021.) Therefore, he’d directed staff to prepare “potential revisions” and have them ready for the Commission’s consideration later in the year.
Was that high-handed? Peirce and Roisman thought so. In their own statement, they note once again that while it’s within the Chair’s prerogative, it is unfortunate:
This course of action is unwise and continues a troubling and counterproductive precedent: If a rule challenge is pending in court when the presidential administration changes, the Commission believes it may immediately abandon proposed, noticed, and adopted rules at the majority’s will via public statements. Abandonment of duly-adopted rules without notice and request for comment raises the prospect that the rules that the Commission adopts in compliance with the Administrative Procedure Act may be interim at best, and transitory at worst. This reduces the certainty of the law, a consequence that does not bode well for the Commission or those it regulates.
To make sure his orders would be obeyed, Gensler issued a statement called PROCEDURES FOR THE COMMISSION’S USE OF CERTAIN AUTHORITIES UNDER RULE 21F-3(B)(3) AND RULE 21F-6 OF THE SECURITIES EXCHANGE ACT OF 1934. The 8-page statement was filed with Edgar. At the end, it’s noted that “[p]ublication for notice and comment is not required under the Administrative Procedure Act … In accordance with the APA, we find that there is good cause to establish an effective date less than 30 days after publication. The Commission believes that establishing an effective date less than 30 days after publication of this document is necessary to clarify how the SEC will proceed…”
At that point, what further objection could be made? Gensler had succeeded in creating his own Rule that wasn’t exactly a Rule but couldn’t be argued with.
Problems Related to the Amended Rule 15c2-11
Throughout the summer of 2021, market participants with interests in the OTC market nervously awaited the arrival of the compliance date for the amended Rule 15c2-11. Thanks to a lack of clarity in parts of the rule itself and in part to incorrect assumptions made by OTC Markets, there was a good deal of uncertainty about how the rollout would go.
OTC Markets had assumed, or at least hoped, that in its role as an IDQS, it would be allowed to charge issuers for verifying that they made “current information” available to the public by posting it at the OTC Markets website. FINRA, however, made its own submission to the SEC that had a bearing on OTC Markets’ request: it was an amended version of its own Rule 6432. One of the changes would be that an IDQS like OTC Markets would be required to submit a modified Form 211 in connection with each initial information review it conducts. Another would be that the IDQS would not be allowed to charge for this service.
A more critical issue had to do with what would happen to all the companies—OTC Markets estimated there’d be 2,800 of them—that would on September 28 no longer qualify as providing “current information.” As far as the SEC was concerned, they should be sent to the Grey Market, where they’d trade without published quotations. OTC Markets had its own nifty idea: an “Expert Market,” where those stocks could trade with quotations only broker-dealers, accredited investors, and institutions could see. Naturally, the Expert Market would be run by OTC Markets. It, in fact, already existed, in a sense, and had since before the proposed amendments to Rule 15c2-11 were introduced by the SEC in September 2019.
There was no mention of any Expert Market in the Proposed Rule; it was first broached in the Final Rule, which was published in September 2020. However, in it, the staff made clear that in order to create such a market, OTC Markets would have to apply for exemptive relief pursuant to Section 36 of the Exchange Act. Several months later, in December, OTC Markets got round to requesting that exemptive relief in a letter to the SEC’s Division of Trading and Markets. The following day, Trading and Markets tiled its own Notice of Proposed Conditional Exemptive Order.
Nothing further was heard of the matter for months. And then unexpectedly, on August 2, 2021, the Division of Trading and Markets issued a Staff Statement on the Proposed Expert Market, in which it said:
On December 22, 2020, the Commission issued notice of and requested comment on a proposed exemptive order that, if adopted, would grant a conditional exemption from Rule 15c2-11 for certain publications of broker-dealer quotations on an expert market operated by OTC Link LLC.
This proposed order is not on the Chair’s agenda in the short term. Accordingly, on September 28, 2021, the compliance date for the amendments to Rule 15c2-11, we expect that broker-dealers will no longer be able to publish proprietary quotations for the securities of any issuer for which there is no current and publicly available information, unless an existing exception to Rule 15c2-11 applies.
Evidently, this was another issue on which Gensler chose to weigh in.
On September 28, OTC Markets assigned the issuers without current information to its “Expert Market,” but no quotations are provided to any market players.
On September 24, Peirce took an opportunity to fume about it. In a footnote to a statement we shall shortly discuss, she noted that although the Commission’s amendments “were intended to enhance Rule 15c2-11’s ability to combat fraud by ensuring that issues of securities being quoted in the OTC market make current financial information publicly available,”
In the OTC equities context, the rule also could have unintended harmful consequences on certain shareholders. The establishment of an expert market, had it been allowed, could have mitigated these adverse consequences.
She then pointedly explains that disallowing the creation of the Expert Market was apparently a unilateral decision by Gensler. In this case, we believe she fails to understand what kind of companies these are. A great many are custodianship shells being passed off as actual companies of some kind; others are, in a sense, companies, but they have no business and no money. They are precisely the kind of issuers the authors of the amended Rule 15c2-11 intended to drive out of the market.
The September 24 statement itself is about a genuine problem with the new Rule 15c2-11 that was uncovered by a Bloomberg reporter who found a joint letter sent to the SEC in early August 2021 by the Securities Industry and Financial Markets Association (SIFMA) and the Bond Dealers of America (“BDA”). In it, the two organizations explained that the new Rule 15c2-11 would also apply to nearly every bond traded over-the-counter in the U.S. markets, which is to say most bonds; perhaps as many as 2.5 million.
We won’t go into detail; we wrote an exhaustive story about it at the time. What we didn’t include, because we published it before it appeared, was the no-action letter sent by the staff of the Division of Trading and Markets to the Director of Capital Markets Policy in the Office of General Counsel at FINRA on September 24th. In it, the staff explains that it will not recommend enforcement action against any issuer of fixed income securities until January 3, 2022.
Back in September, Peirce was concerned about the length of time allowed for some kind of resolution: only three months. Her own proposal, which makes sense, was to “issue longer Commission-level no-action relief and reopen the rulemaking as part of a broader fixed-income modernization initiative.”
On December 16, 2021, the SEC issued a second no-action letter to FINRA. It sets up three phases for securities that qualify to become compliant:
- Phase 1 – the fixed income security or its issuer meets one of the criteria in Appendix A, or that there is current and publicly available financial information (consistent with Rule 15c2-11(b)) about the issuer. Phase 1 will be in place for a one-year period (from January 3, 2022, until, and including, January 3, 2023).
- Phase 2 – the fixed income security or its issuer meets one of the criteria in Appendix B, or there is current and publicly available financial information (consistent with Rule 15c2-11(b)) about the issuer. Fixed income securities sold pursuant to Rule 144A that do not otherwise meet the criteria in Appendix B would no longer qualify for Phase 2 unless the broker or dealer determines that there is current and publicly available information (consistent with Rule 15c2-11(b)) about the issuer. Phase 2 will be in place for a one-year period (from January 4, 2023, until, and including, January 4, 2024).
- Phase 3 – the fixed income security qualifies for Phase 2 and: (1) the fixed income security is foreign sovereign debt or a debt security guaranteed by a foreign government; or (2) there is a website link, on the quotation medium on which the security is being quoted, directly to the current and publicly available information about the issuer (consistent with Rule 15c2-11(b)), provided that the broker or dealer has determined at least on an annual basis that the website link and its underlying information is current (“Phase 3”). Phase 3 commences at the expiration of Phase 2 (on or after January 5, 2024).
It sounds like an enormous headache.
The Infighting Continues
In a clever speech called “Lawless in Austin” that Crypto Mom Peirce gave before the Texas Blockchain Summit, she brought up Gensler’s “habit of calling the cryptoverse the ‘Wild West’.” She offers an elaborate historical account of the real West, painting it as a genuine land of opportunity, governed by “numerous forms of effective private regulation,” which she describes in detail. She sees her cryptoverse in the same way; she suggests Gensler does not. She complains—not without reason—that the SEC has a tendency to try to regulate through enforcement, letting companies guess what may get them into trouble rather than follow clearly and thoughtfully composed regulations.
Gensler shouldn’t find that view distasteful. He’s an enthusiastic regulator. But he doesn’t have a light touch; Peirce would, it seems, rather see as little regulation as possible. It appears that for her, the most important part of the SEC’s mission is the part about aiding in capital formation.
But the contentious relationship between the Chairman and the two Republican Commissioners continued. Gensler’s firing of the PCAOB board still rankled. On December 15, all the Commissioners commented on the new budget for 2022, which had just been approved. Lee and Crenshaw were cautiously enthusiastic. Peirce was her usual feisty self, noting with no small amount of snark that:
The troubling decision earlier this year to remove the board impaired the PCAOB’s effectiveness as an independent audit regulator. The new board now faces a credibility deficit for which no amount of money in the budget we are considering today can compensate. The one thing that can offset that deficit, however, is an unwavering and demonstrated determination by the Board to stick to the PCAOB’s mandate and avoid extraneous political or social issues. The Board, for example, should not attempt to recast itself as an environmental, social, and governance regulator despite the allure of such issues in Washington these days. Each of the new Board members instead should leave politics at the door and focus solely on bringing his or her considerable talent and expertise to bear in a united effort to improve the quality of financial audits.
Roisman said he had confidence in the new members, but…
Nevertheless, I remain deeply troubled by the lack of transparency and process with which the Commission removed and replaced the previous Board Chairman and sought to fill all five Directors’ seats, including those that were occupied by Directors whose terms had not ended. I have expressed my views elsewhere, so I will be brief today, but I do not want to brush my concerns under the rug.
Reliable financial statements are a pillar, if not the cornerstone, of our excellent capital markets. The PCAOB is charged with overseeing the audits of public companies and SEC-registered brokers and dealers in order to protect investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The budget before us is reasonable and will provide funding for the PCAOB to carry out its important work…
The Commission’s actions earlier this year risked tainting the independence of the Board and undermining the steadiness of its work and its perception in the markets. I am saddened that the new Board will inherit these added challenges. Nevertheless, I believe each Director will work hard to further the agency’s important mission, and I wish them only success.
Perhaps it was his reconsideration of the matter of the PCAOB board that persuaded Roisman it was time for him to go; only five days later, he announced his pending resignation.
The bad feelings that seem to permeate this new regime at the SEC are unusual. Probably many Commissioners in the past have had differences and disagreements with each other and with their Chairmen, but none—or very little—of that was ever seen by the public. If a Chair wanted to make personnel changes, he at least discussed it with the other Commissioners; if he wanted an action taken, he didn’t simply issue a personal order making it so. What he’s doing may, in the short term, prove effective, but the other Commissioners, even the Democrats, must find it belittling. He was, however, seen as a very successful Chairman of the CFTC at an extremely difficult time, and he stuck it out for five years. Perhaps he can work the same magic at the SEC.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 200 E. Palmetto Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, by email [email protected] or visit www.securitieslawyer101.com. 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.