The House of Representatives passed a significant regulatory reform legislation Tuesday — and while the bill’s fate in the Senate is unclear, compliance professionals should examine what’s not in the bill. That tells us a lot about how regulatory reform will probably unfold in 2018 and 2019 anyway.
The legislation, formally known as the Jobs and Investor Confidence Act of 2018, passed by a vote of 406-4. It’s actually a collection of 32 smaller bills the House Financial Services Committee had developed over the last 18 months, almost all of them focused on easing the path for smaller companies to raise capital.
Some of the specifics include…
- HR 1585, a bill that expands the definition of accredited investor (people eligible to participate in hedge funds and other lucrative private offerings) to include an investor’s education and experience, rather than net worth and income level. So now smart people can invest in such deals, in addition to rich people.
- HR 3903, a bill that lets all public companies file confidential registration statements with the SEC ahead of an IPO or a follow-on offering. Pre-IPO companies would also have more discretion to approach institutional investors to talk up their offerings without running afoul of federal securities law.
- HR 4566, a bill that exempts non-bank financial firms (insurers, for example) from stress tests required by the Dodd-Frank Act. The SEC and CFTC would still have discretion to require those firms to conduct reviews of their financial conditions under tough economic scenarios.
- HR 6320, a bill that calls for tighter regulation of “Rule 10(b)-5-1 plans,” which corporate insiders use to sell stock without violating insider trading rules.
Congress did enact some Dodd-Frank reform earlier this year. That law originated in the Senate, and focused on rolling back Federal Reserve oversight of all but the largest financial firms in the United States.
This legislation from the House is everything that first reform didn’t address. The chairman of the House Financial Services Committee, Jeb Hensarling, wanted to include all these questions about raising capital in that first reform push, but the Senate had no appetite for it. So the deal was to pass banking oversight reform first, with promises that the Senate would entertain Hensarling’s wish list later.
Now it’s later. When will the Senate consider this legislation, if at all? That’s hard to say. The chamber has its hands full with a Supreme Court nomination, spending bills that must pass by Sept. 30, and election season. Plus the matter of a President Trump who’s clearly cuckoo for cocoa puffs, and whatever crisis of the day he lobs into Congress via random tweet.
Missing: SOX Reform
Astute readers will have noticed that my list above omits mention of Sarbanes-Oxley compliance, or corporate governance rules, or any of the other bread-and-butter concerns that corporate compliance officers have. That’s because there’s hardly any mention of those concerns in this legislation.
You read that right: the House passed regulatory reform that did not include broad reform of SOX — specifically, the Section 404(b) requirement for an annual audit of internal control over financial reporting.
The only move on SOX reform was HR 1645, a bill to exempt certain startups with less than $50 million in annual revenue from Section 404(b) even if they no longer qualify as Emerging Growth Companies (small, young firms that are exempt from 404(b) anyway). This bill is a favor to the biotech industry, since those startups can toil for years before seeing a dime in revenue.
But the more ambitious rollback proposals we’ve seen before, such as raising the 404(b) threshold from $75 million in market cap to $500 million, are absent from what the House just passed.
Also absent is any legislation addressing the CEO Pay Ratio Rule, or shareholder say-on-pay votes, or the power of proxy advisory firms. Those have all been targets of Hensarling and his henchmen for years.
Compliance officers can take that as a sign that Republicans in Congress are leaving SOX and corporate governance rollbacks to the SEC. At the end of June, for example, the SEC voted to expand the definition of “smaller reporting companies” so more filers qualify for the reduced disclosures that SRCs get to make. One such disclosure that SRCs can skip: the CEO Pay Ratio rule Hensarling hates so much.
We’re going to see more of that in the future. For example, last month’s move to expand smaller reporting company status does not include exemptions from Section 404(b). SEC chairman Jay Clayton, however, said he wants to revisit the $75 million threshold and bring it into alignment with smaller reporting company status.
So don’t be surprised if we soon see an SEC proposal to raise the 404(b) exemption to companies with market cap below $250 million. That’s a considerable expansion, but not as huge as the $500 million threshold Republicans in Congress once proposed.
We could also see the SEC chip away at corporate governance standards via no-action letters, a nifty way to get Clayton’s agenda pushed without forcing an awkward policy vote among SEC commissioners.
For all you financial reporting specialists out there: also omitted from the House legislation is HR 5054, a bill that would have exempted most companies from filing financial statements “tagged” in XBRL. That’s the data language that lets computer software find and display financial data more easily.
The SEC never wanted that XBRL exemption to go forward, and now it won’t. XBRL has been mandatory for all filers since 2011 anyway, and last month the SEC also approved a mandate for “Inline XBRL” — a next-generation version of the technology with simpler filing steps and lower compliance costs, which were never significant to begin with.
That’s another example of the Washington two-step going on here. Congress proposes something radical, SEC adopts a milder posture in the same direction. Repeat, at least until November.