The SEC has been leading “spring-cleaning exercises” for years to simplify financial reporting and investor disclosures while maintaining appropriate investor protections. These actions, individually and collectively, are designed to modernize outdated disclosure requirements, eliminate unnecessary ones, improve the readability of disclosure documents, and lower compliance costs. The challenge is to streamline the process while making sure investors get the information they need to make informed decisions.
How is it going?
A few examples of the SEC’s rulemaking efforts in 2019 may help gauge the agency’s progress thus far: 1) the proposed amendments to Regulation S-K, the SEC’s central disclosure resource, 2) the approved final revisions to the “Volcker Rule 2.0,” the prohibitions on proprietary trading, and 3) the proposed concept release on ways to simplify, harmonize, and improve the framework for exempt offerings. Also, we can’t overlook the Regulation Best Interest package, designed to enhance the quality and transparency of retail investors’ relationships with their financial professionals.
The SEC is using a more “principles-based approach,” as opposed to prescriptive requirements, to elicit more relevant disclosures. A laudable endeavor, but the attendant results are not more manageable rulemaking releases. Consider the length of the example rulemakings: 1) Volcker 2.0 is more than 300 pages (1.0 was 272 pages), 2) the concept release on offerings is 211 pages, and 3) the proposed revisions to Regulation S-K are a modest 116 pages. Together, these still fall short of the Regulation Best Interest package, which comes in at a whopping 1,400 pages.
Legal and compliance professionals will have to spend time and resources on deciphering hundreds of pages of rulemaking documents, not to mention the costs of engaging external resources to help understand and implement these requirements.
The SEC hopes its efforts will result in cost savings, but in the short-term, the opposite is more likely. In addition to the time and costs involving legal and compliance mentioned above, it doesn’t help that the SEC’s approach may result in missing guidance on essential aspects of a final rule. An example of this kind of introduced lack of clarity involves Regulation Best Interest. The final rule does not include a definition of “best interest.” Firms will make initial firm‐specific interpretations but may have to adjust them as incremental guidance becomes available from the SEC and industry groups.
Next, these efforts are not without their challenges. Let’s look at two examples.
Regulation Best Interest faces lawsuits and strong objections within the SEC and in Congress, and it is spurring questions of preemption in states opting for their own fiduciary standard laws. Firms may mistakenly delay compliance, and then find themselves facing the unpleasant consequence of having to rush implementation by the compliance date of June 20, 2020.
Five years following the initial 2014 implementation, Volcker Rule 2.0 has not eliminated concerns. Former FDIC Chairman Martin Gruenberg raised objections to the latest revisions, and investor advocacy groups denounced the gutting of protections they view will lead to more risks and, ultimately, Main Street footing the bill.
Lastly, which division within the SEC will have the final say on the adequacy of required disclosures? Will the SEC’s Division of Enforcement assume the role of final authority during sweep reviews and enforcement actions? And will compliance officers and lawyers need to more actively police compliance with these requirements than they are already doing so now?
Stay tuned, but don’t sit back. Firms will need to consider costs, implementation, and compliance risk in their project plan, all while monitoring anticipated interpretive guidance effecting inevitable changes as implementation realities take hold.
Read about other trends our analysts are following as part of our Bloomberg Law 2020 series.