SEC Commissioner Hester Peirce’s prepared remarks at the Northwestern Securities Regulation Institute on January 27 provide some insight into the probable direction of the securities regulator under a new chair, new party control, and new regulatory regime.
She offers her agency seven pointed directives for charting a new path forward, mandating fewer onerous disclosures and engaging in less enforcement – and she is particular in how these recommendations are enunciated.
Let’s take a deeper dive.
The overarching message
Before she got more granular, Peirce stated the overarching principle upon which her remarks rested: That a public company’s singular focus should be on building corporate value for shareholders, which precludes companies from spending time and resources on matters that do not contribute to the company’s long-term value.
That means, she said: “No pet projects for executives, no non-financial targets to afford managers the freedom to claim success when the company is failing financially, no spending simply to silence the loud hawkers of the controversial issue du jour, no commandeering of the company’s resources to further one shareholder’s favorite cause.”
She then turned to the principles she believes will put the SEC back on the right path in enabling public companies to meet this singular objective, with fewer roadblocks, resource diversions, confusion, and distractions.
1: The SEC has a limited mission
Peirce said the SEC has one role: To ensure investors have the information they need to channel funds to the companies that can put that money to the best use by delivering the products and services people demand.
This limited mission means getting understandable, relevant and material information to investors – and leaving the decision-making to them.
2: Fend off outside influence
Peirce says public companies are tempting target for people who want information from companies for reasons other than deciding whether to invest.
“If this trend continues, companies’ securities disclosures will bury information material to investors in an unwieldy catalog of responses to special interest groups’ demands,” she said. “The best course is for all of us to retreat to a place where materiality from the perspective of the reasonable investor is the sine qua non for disclosures,” she said.
She hopes people from all across the political spectrum will come together “to remember that we do not need to invite our political disagreements into every corner of our lives.”
She adds a dig at Europe, noting its aggressive regulatory posture particularly regarding mandatory sustainability disclosure, as “unmoored from materiality,” saying “companies are losing focus on corporate value maximization,” which she says offers the SEC a cautionary tale.
3: Avoid contentious social and political issues
Peirce says the securities watchdog must stop pressuring asset managers to push public companies into contentious social and political issues.
She laments that funds were instructed in 2003 – with the requirement being doubled down on in 2022 – to disclose votes by category, such as “environment or climate,” “human rights or human capital/workforce,” and “diversity, equity and inclusion.”
The problem with the requirements is that it does more than just capture the characteristics of fund voting, it makes “asset managers sitting ducks for pressure campaigns from social and political activists and scrutiny by ESG rating providers,” she maintains.
And she says fiduciary duty alone should guide asset managerial decisions on whether or how to exercise a vote.
4: Re-examine ownership thresholds in Rule 14a-8
To protect investors from the expensive corporate diversions she has already referenced, she said her agency should re-examine the ownership thresholds in Rule 14a-8 and other available tools to ensure that a proponent has some meaningful economic stake or investment interest in a company.
“A proponent with such a commitment is more likely to submit a proposal that is actually in the interest of the company,” she observes.
(SEC Rule 14a-8 of the Securities Exchange Act of 1934 provides a framework allowing a public company shareholder to request that a proposal be included in the company’s proxy statement, to be voted upon at a company’s shareholder meeting.)
5: Don’t use enforcement actions to help manage companies
Peirce says the SEC must refrain from using enforcement actions to override managerial decision-making.
She offers a recent example of management through enforcement, noting the agency used Rule 13a-15(a), which requires companies to have “disclosure controls and procedures,” to punish a company for “lacking controls and procedures … to collect or analyze employee complaints of workplace misconduct” given that it disclosed a risk factor “related to its workforce and how its ability to attract, retain, and motivate skilled personnel might materially impact its business.”
In her view, this is requiring companies to establish disclosure controls for information that is not important for disclosure purposes – basically nudging companies to manage themselves “according to the metrics the SEC finds interesting at the moment.”
6: Offer guidance to companies
Peirce says SEC staff in the Division of Corporation Finance and Office of the Chief Accountant should strive to up the ante in providing guidance to companies about the many disclosure issues that arise in the normal course of business.
And the guidance should be interactive, dynamic and not formulaic, she adds.
7: Even today, no politics in the capital markets regulatory scene
Peirce observes that some people could be very excited by the possibilities of a new securities regulatory environment, herself included. But she says the agency and regulated businesses should work hard to ensure that the capital markets do not become a playground for politics of any kind.
She hopes people from all across the political spectrum will come together “to remember that we do not need to invite our political disagreements into every corner of our lives.”
