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SEC Testifies At House Financial Services Committee Hearing

On September 24, 2019, all five SEC commissioners gave testimony to, and were questioned by, members of the U.S. House of Representatives Committee on Financial Services.  Commissioner Robert J. Jackson, Jr. also gave an opening statement at the Committee hearing.

Commissioner Jackson’s Opening Statement

Commissioner Jackson’s short opening statement was consistent with his prior public views, consisting of a list of three areas in which he believes legislation should intervene to prevent corporate insiders from spending shareholder money to advance their own interests over those of investors.

His first recommendation is to shorten the current four-day 8-K filing requirement in which a company must notify the public of certain material events.  For an overview of 8-K filing categories, including the categories that require an advance filing (Regulation FD) or lesser time period than the standard four days, see HERE.  Commissioner Jackson states that there is “evidence that corporate insiders often trade during the ‘gap’ between key business events and when our rules require that event to be revealed to the public.”  Trading on material insider information is illegal.  Although I think a company could file an 8-K in a shorter period of time, persons that are engaging in illegal activity are not likely to stop; they would just have less time to do so.

His second recommendation is to limit stock buyback programs.  Commissioner Jackson has been vocal in his disdain for stock buyback programs, including in a speech last year and a separate letter to Senator Van Hollen this spring.  Commissioner Jackson believes that when a company engages in a stock buyback program, it is, more often than not, company insiders that are selling back to the company.  He also believes that a company’s performance declines after a stock buyback program.

I don’t have enough information to argue against Commissioner Jackson’s views on this, but I do know that insiders, especially in smaller-cap companies, are often compensated in stock, which stock is very hard to liquidate.  In addition to regulatory hurdles, including Section 16 limits on short-swing profits, Rule 144 controls on share rules including drip rules, insider-trading rules and a few open-trading windows, there are the optics and negative market impact resulting from an insider selling.  Add to that the challenges with supporting a stock price in the face of selling pressure, and I think that for a smaller public company with cash reserves, a stock buyback program that an insider happens to participate in can benefit the company as a whole.  The insiders of smaller public companies do not make millions of dollars in compensation like their large-cap counterparts might.  Some liquidity can be a big motivator for hard work.  However, with that said, I am a staunch believer in full disclosure, and as such if insiders are selling into a stock buyback company, of course they should be filing their Form 4’s in a timely manner.

Jackson’s third recommendation is to require public companies to disclose direct and indirect political expenditures.  Jackson believes that money is often filtered to political parties, candidates or other political causes through third parties furthering the personal political interests of executives and insiders.  Again, I do not have enough information to effectively address this belief; however, this could turn into a rabbit hole.  I can see requiring a company to disclose a direct contribution on behalf of a particular political candidate if the amount is material, but what is or isn’t political could be amorphous.  For example, would it be a political expenditure if an executive chooses one vendor over another because he/she supports the political beliefs of that vendor?  Moreover, companies may have valid business reasons for supporting candidates in a particular jurisdiction, such as where they have operations and an employee base.  If the amount is not material, such a disclosure may be confusing without providing any additional investor protection or useful information.


Below is a summary of the written testimony on behalf of all five Commissioners.  In addition, the House Committee spent several hours questioning each of the Commissioners.

The SEC begins its testimony with a brief summary of their purpose and responsibilities.  As is often repeated, the SEC’s mission is to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation.  The SEC has almost 4,400 employees in Washington over 11 regional offices and oversees (i) approximately $96 trillion in securities trading annually on U.S. equity markets; (ii) the disclosures of approximately 4,300 exchange-listed public companies with an approximate aggregate market capitalization of $33 trillion; and (iii) the activities of over 26,000 registered entities and registrants including, among others, investment advisers, broker-dealers, transfer agents, securities exchanges, clearing agencies, mutual funds and exchange-traded funds (ETFs), who employ over one million people in the United States.  The SEC also has oversight of self-regulatory organizations (SROs) such as the Financial Industry Regulatory Authority (FINRA), the Municipal Securities Rulemaking Board (MSRB) and the Public Company Accounting Oversight Board (PCAOB).

Strategic Plan

The SEC then talked about its Strategic Plan for 2018-2022 (see HERE) and the progress that has been made on the plan.  The first goal in the plan is focusing on the interests of long-term Main Street investors, a group the SEC mentions in almost all public communications since the first publication of the Plan.  In furtherance of this goal, the SEC holds town hall meetings and outreach tours, and uses digital tools and other outreach methods.  The testimony cited several specific examples of town hall meetings.

The second goal of the Strategic Plan is recognizing significant developments, including technological developments, and trends in evolving capital markets and adjusting efforts to ensure the effective allocation of resources.  The creation of the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) (see HERE) was in furtherance of this goal. FinHub is intended to serve as a public resource for fintech-related issues at the SEC, including matters dealing with distributed ledger technology (DLT), automated investment advice, digital marketplace financing and artificial intelligence/machine learning.

The third goal of the Strategic Plan is to elevate the SEC’s performance by enhancing analytical capabilities and human-capital development.  The SEC did not site any specific performance parameters related to this goal.

Fiscal Year 2019 Initiatives

The SEC testimony then turns to its 2019 initiatives starting with enforcement proceedings.  In FY 2018, the Commission brought 821 enforcement actions and obtained judgments and orders for $3.945 billion in penalties and disgorgement, while returning $794 million to harmed investors and awarding nearly $50 million in payments to whistleblowers.  The actions have covered many topics including investment management, securities offerings, issuer reporting and accounting, market manipulation, insider trading, broker-dealer activities, cyber-related conduct and the Foreign Corrupt Practices Act, among many others.

In the enforcement arena the SEC has created (i) the Retail Strategy Task Force; (ii) the Cyber Unit; and (iii) the Share Class Selection Disclosure Initiative.  The Retail Strategy Task Force has two primary objectives: (i) developing data-driven, analytical strategies for identifying practices in the securities markets that harm retail investors and generating enforcement matters in these areas; and (ii) collaborating with internal and external partners, such as OIEA and the Department of Justice, on retail investor advocacy and outreach. I notice that the SEC files multiple actions, almost daily, taking actions against defendants involved in fraud and other misconduct affecting retail investors.

In September 2017, the SEC created a specialized Cyber Unit within enforcement to combat cyber-related threats to investors focusing on potential violations involving distributed ledger technology (blockchain), digital assets, cyber-intrusions and hacking to obtain material, non-public information.  The Cyber Unit has resulted in many actions for fraudulent or unregistered initial coin offerings (ICOs) and works closely with the SEC’s FinHub to monitor this area.  In addition to an enforcement focus, the SEC has been focused on digital asset and distributed ledger technology in general, including their impact on capital markets and company disclosures.

Another area of 2019 initiatives has been monitory and addressing market developments and risks, including the potential impact of Brexit on U.S. capital markets and company disclosures related to Brexit risks.  The SEC also has been focused on the transition away from LIBOR as a benchmark for short-term interest rates and the financial market risks that the transition may present.  Earlier this year, Chairman Clayton created a new position, the Senior Policy Advisor for Market and Activities-Based Risk, to manage and coordinate a cross-disciplinary SEC staff committee that is responsible for identifying, monitoring and responding to market risks, including activities-based risks. Additionally, the SEC plays an active role and contributes to various domestic and international organizations that focus on market and systemic risks.

Cybersecurity risks at the SEC itself have also taken a front row.  The topic of cybersecurity and improved technology in general was covered in depth in the testimony.  After the SEC EDGAR system was hacked, the agency has dedicated resources to improving systems.  For more on the hacking and cybersecurity issues in general, see HERE and HERE.  The SEC has also reduced the collection of personal information such as Social Security numbers and dates of birth as unnecessary in light of the risks.  A new Chief Data Officer will be put in place to ensure that the SEC only collects data it needs to fulfill its duties and that it can effectively manage and secure.

Regulatory and Policy Agenda

The SEC Commissioners highlighted some of the regulatory actions of the last year including the proposed amendments to the “accelerated filer” and “large accelerated filer” definitions (see HERE); adding test-the-waters for all companies (see HERE); proposed amendments to 15c2-11 (see HERE and the expansion of Regulation A for reporting companies (see HERE), among others.  The SEC also highlighted its efforts to improve exempt offerings and private markets, including the concept release published this summer (see HERE).

Committee Questions

As mentioned, the House Committee spent several hours questioning the SEC in what turned out to be a fairly expected bipartisan manner.  The democratic Committee members criticized the SEC for not doing a great job as “Wall Street’s Cop” and expressing a need for additional regulations, including those related to ESG matters (see HERE).  The Republicans were more complimentary and urged further efforts in improving capital formation.

The Author

Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm

Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including sitting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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