Piwowar Drops Big Hints on Future SEC Policy

Acting SEC Chairman Michael Piwowar gave a speech Friday that hit all the major themes compliance offices should expect from the SEC under the Trump Administration: a push for simplified disclosure, fewer corporate penalties, and easier standards for raising capital.

Although, in one surprise twist, Piwowar did say he supports corporate penalties for violations of the Foreign Corrupt Practices Act.

Piwowar gave his remarks at the annual SEC Speaks conference, hosted by the Practising Law Institute. Yes, Piwowar is only acting chairman, until the Senate gets around to confirming Jay Clayton as the Trump Administration’s choice for permanent chair. But all Piwowar’s actions so far have been in political step with what Team Trump and Republicans in Congress want to achieve, so his words bear close reading.

The very title of Piwowar’s speech, “Remembering the Forgotten Investor,” gives compliance officers lots of clues. Almost all his major points were riffs on the idea that laws and regulations have unintended consequences and costs imposed on innocent parties: the forgotten investor. As noble as the impulses behind those laws might be (conflict minerals! bloated CEO pay!), the burdens they impose on others make them not worth the cost—at least, not from the perspective of the SEC, whose mission is to protect investors and maintain healthy capital markets.

Now, are there people in this country who might disagree with Piwowar? Yes. But the Republicans are in power, and his thinking is a stalking horse for things to come. So let’s take a look.

Retreat From Social Policy Disclosure

Piwowar has already re-opened the Conflict Minerals Rule and the CEO Pay Ratio Rule for new comment, presumably a prelude to finding some way to ease the compliance burdens or make the rules go away entirely. Congress killed off the Extractive Payments Disclosure Rule at the start of February.

Piwowar suggested we’re going to see more moves like that soon: “The Dodd-Frank Act is rife with examples of burdens ultimately borne by the forgotten investor through shareholder money and company resources being expended to provide non-material disclosures.”

Yes it does, although I’m not sure “rife” is the correct adjective to use for disclosure rules specifically promulgated by the SEC. Title XV of the Dodd-Frank Act is where all those specialized disclosure rules reside. Beyond the three that Piwowar cited above, the only other one is a disclosure about mine safety, which most companies don’t worry about because they operate no mines.

More interesting is that Piwowar did not mention disclosure about climate change or executive compensation. The requirements around those disclosures exist beyond the Dodd-Frank Act, and you can easily argue that both issues are materially important to a reasonable investor. Climate change will affect the operations of many businesses. Bloated compensation can tempt executives to misconduct, or simply be too much for a CEO who’s not that impressive.

So what happens to disclosure rules like those? We don’t know yet.

Let’s not kid ourselves. Under this Republican regime, any social policy disclosures tied to the Dodd-Frank Act are dead rules walking. But if the SEC or other parts of the Trump Administration start repealing disclosures that do have material importance to investors, simply because the ideas behind them are politically incorrect to the GOP—well, that will be an interesting debate.

More Caution on Corporate Monetary Penalties

Surprising precisely no one, Piwowar said his default is that monetary penalties for corporate misconduct mostly hurt the shareholder—who, theoretically, already suffered from whatever misconduct the company foisted onto shareholders in the first place.

The easy example of that is accounting fraud. A rogue senior executive cooks the books, a restatement is announced, and share price plummets. Who feels the squeeze there? The investor. So we should certainly hang that rogue executive out to dry, but why punish shareholders again by taking away a chunk of money that otherwise would have gone to the company as earnings?

That logic might pass muster for accounting fraud, but those cases are the easy examples. Even Piwowar acknowledged that other types of corporate misconduct aren’t as clear-cut, and perhaps do merit monetary penalties—such as FCPA enforcement actions.

Why is the FCPA different? Because, Piwowar said, investors are already informed of FCPA enforcement risk, and that risk has been factored into the share price. What’s more, share price generally doesn’t fall when a company discloses an FCPA violation (certainly nothing like the plummet after a restatement).

I’d also argue that the SEC enforces books-and-records provisions of the FCPA, and faulty books and records are a company’s responsibility, rather than a person’s. So in that case, the company should be punished for maintaining sloppy systems. But that’s just me.

Compliance officers can parse out the various securities risks that investors do or don’t know, and the merits of monetary penalties for specific infractions, all day long. The main point, however, is that Piwowar is not alone in his view that monetary penalties should be used more sparingly. As soon as Clayton is confirmed as SEC chair, he won’t be in the minority any longer, either. So monetary penalties aren’t going to vanish, but they are going to recede.

Accredited Investor Standards

Piwowar spent a fair bit of time talking about the standards of income and net worth that investors need to exceed so they qualify as accredited investors—wealthy people who supposedly are more sophisticated about markets and investing, and therefore get easier access to securities offerings like hedge funds, private placements, and the like. Piwowar would like those standards to go away, so that more pedestrian investors have equal access to those more lucrative deals.

Most corporate compliance officers don’t need to pay attention to the details here, unless you work in the investment world somehow. I include it because it reminds us what “Dodd-Frank reform” really means to the Trump Administration: easing rules for capital formation.

Any time you hear Donald Trump babbling away, however incoherent he may be, if the words “Dodd-Frank” or “regulatory reform” spill out of his mouth, this is what he means. He just wants to repeal rules that, as he said, prevent his friends from getting billion-dollar loans on Wall Street. (In fairness, my friends aren’t getting billion-dollar loans on Wall Street either.)

So as Piwowar, Clayton, and the rest of the Republican gang settle into office—whenever that may happen—I suspect we’ll foremost hear about Dodd-Frank reforms that ease restrictions around banking and securities offerings.

What about all those other disclosures, and wrangling with the SEC over civil enforcement? Piwowar’s words are a good indicator of what’s to come. They’re not a surprise, and they’re not anything this country hasn’t seen before. Not all compliance officers or investors may like it, but they can live with it.