Five Questions for Our SEC Commissioner Nominees

You may have missed this news, but in a startling turn of events, the Senate Banking Committee has actually decided to do its job: the committee will hold hearings this week for two nominees to the Securities and Exchange Commission, Hester Peirce and Lisa Fairfax.

The committee had delayed hearings on Peirce and Fairfax for months because its chairman, Sen. Richard Shelby, was fending off a primary challenge in his home state of Alabama. Shelby won that race on March 1, and now is catching up on all the people’s business he delayed to barnstorm the Yellowhammer State. (Yes, I looked that last part up.)

In honor of this lurch toward a fully staffed SEC, here are six questions I would like to see the committee put to Peirce (a Republican, replacing Dan Gallagher) and Fairfax (a Democrat, replacing Luis Aguilar).

How would you strike the balance between investor access to information and companies’ ability to raise capital easily?

We have already seen reduced disclosure obligations for newly public companies thanks to the JOBS Act, and the SEC is mulling other ideas such as updating and expanding the definition of accredited investors who can participate in private offerings. In a related vein, we’ve seen a continued march toward using corporate disclosure as a means to advance social policy (the Conflict Minerals Rule, human trafficking disclosures, and the like). How much disclosure is too much? What do investors have a right to know, even if it’s inconvenient for the company to research and report?

Fairfax in particular has done legal work in venture capital, private offerings, public offerings, and the like; she’s also studied shareholder activism and is co-director of a group that promotes putting more women on corporate boards.

What limits would you place on the Public Company Accounting Oversight Board’s efforts to participate in improving corporate audits and governance?

The PCAOB has been more aggressive with its auditing standards in recent years and its effort to squeeze new disclosures out of corporate audit committees by tweaking what audit firms should ask of audit committees. Not everyone has liked PCAOB 2.0, and that led to a movement last year not to re-nominate Chairman James Doty to a second term.

Sure enough, earlier this year SEC Chairman Mary Jo White (who does the nominating of PCAOB chairs) said she would let Doty continue as an interim chair—a convenient and politically smart move, this late into the Obama Administration. Still, Fairfax and Peirce will presumably be part of the next SEC commissioner team who decide Doty’s fate and shape the role of the PCAOB overall. So what would they want to do?

What do you see as the most pressing reforms for equity market structure?

Last week White admitted that plans for sweeping reform of equity markets won’t happen until 2017. Still, the SEC is looking at many different pieces of the problem—everything from regulating dark pools, to studying potential abuses of high-speed trading, to questioning whether for-profit stock exchanges really can self-regulate and act in the best interests of investors. Read the testimony of Stephen Luparello, head of the SEC’s Division of Trading and Markets, who appeared before another Senate committee last week; his list of projects was long.

Hester Peirce

Hester Peirce

The SEC can only do so much, but given that we had two exchange meltdowns last year (July 8 and Aug. 24), clearly the agency must move forward with something—so what do Peirce and Fairfax think? Peirce in particular has studied equity market structure for years. One hint on where she stands: she was editor of a book, Dodd-Frank: What It Does and Why It’s Flawed. That’s not a subtle clue.

What should the audit committee’s reporting obligations be?

Last July the SEC published a concept release asking for thoughts about new required disclosures from the audit committee. Overhauling audit committee disclosure is an idea long-overdue; the SEC last considered the subject in 1999, even before the Sarbanes-Oxley Act was passed. The 2015 concept release asked about everything from oversight of the audit firm, to what conversations the audit committee should have with the audit firm about risks, to gaining a better understanding of internal controls and the problems therein.

We talk so much about broader governance and risk management issues today, we almost forget that the audit committee has a day job overseeing the annual audit of financial reporting, and that internal control over financial reporting can still be a mess. The regulatory language we have for audit committees is now woefully outdated—so what should our expectations be for 2017, 2020, or 2025?

How should board directors’ expertise and diversity be codified, if at all?

First we saw the audit committee buried under new duties after Sarbanes-Oxley was passed in 2002. Then the compensation committee took its lumps in the Dodd-Frank Act with the extensive new disclosures about executive pay and risks of excessive compensation. Now it’s the nominating and governance committee’s turn to be tied to the regulatory whipping post—so how much burden should we place upon it?

Lisa Fairfax

Lisa Fairfax

I suspect Fairfax would have more to say on this subject than Peirce, given Fairfax’s research and experience. Regardless, their answers to this question would be a window into the nominees’ thinking about other efforts to broaden the thinking in corporate boardrooms. It’s a noble goal, but the work required to comply with possible regulation will cost real time and money. So, again: how do we strike the right balance?

Those are the questions on my mind, anyway. Peirce and Fairfax may have very different priorities; we’ll get a better sense of them later this week.


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