In remarks at the Economic Club of New York on July 12, SEC Chairman Jay Clayton outlined eight “guiding principles” for the Commission. The need to examine the cost of compliance and potentially burdensome disclosures was one recurring theme.

Relationship to President’s Core Principles
Clayton’s articulation of eight guiding principles for the SEC – and his comments on putting principles in to practice, arrive as the U.S. Treasury Department is in the midst of preparing reports on all nine  member agencies of the Financial Stability Oversight Council (FSOC), which includes the SEC, on each agency’s support of President Donald J. Trump’s Core Principles for Regulating the U.S. Financial System (the “core principles”).

The President’s core principles, contained in an Executive Order issued on February 3, are:

1. empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
2. prevent taxpayer-funded bailouts;
3. foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
4. enable American companies to be competitive with foreign firms in domestic and foreign markets;
5. advance American interests in international financial regulatory negotiations and meetings;
6. make regulation efficient, effective, and appropriately tailored; and
7. restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.

The Executive Order also mandated that Treasury issue a report(s) on each agency’s support of the core principles within 120 days of the Executive Order. The first such report, on the depository system (banks and credit unions), was issued in June, 2017.

SEC’s Guiding Principles
Following are the SEC’s eight guiding principles, as articulated by Clayton:

1. The SEC’s mission is our touchstone.
2. Our analysis starts and ends with the long-term interests of the Main Street investor.
3. The SEC’s historic approach to regulation is sound.
4. Regulatory actions drive change, and change can have lasting effects.
5. As markets evolve, so must the SEC.
6. Effective rulemaking does not end with rule adoption.
7. The costs of a rule now often include the cost of demonstrating compliance.
8. Coordination is key.

Cost of compliance
Consistent with the President’s core principles, Clayton detailed some planned actions that underlie the SEC’s guiding principles.

Noting the SEC’s three-part mission includes investor protection, maintaining fair and orderly markets, and facilitating capital formation, he said, “each tenet of that mission is critical,” and “if we stray from our mission, or emphasize one of the canons without being mindful of the others, investors, companies (large and small), the U.S. capital markets, and ultimately the economy will suffer.”

Citing the 50% decline in IPOs over the past 20 years, he acknowledged that while many factors may drive the decision whether to be a public company, “increased disclosure and other burdens may render alternatives for raising capital,” making the public markets less liquid. “The potential lasting effects of such an outcome to the economy and society are, in two words, not good.”

“It is incumbent on the Commission to write rules so that those subject to them can ascertain how to comply and — now more than ever — how to demonstrate that compliance,” said Clayton.  Alluding to a Sarbanes-Oxley certification requirement, he observed that demonstrating compliance can be expensive, going “well beyond a prudent management and control architecture.”

“When third parties, such as auditors, outside counsel, and consultants, are involved, the costs — financial costs and, in many ways more important, the cost in terms of time — can skyrocket,” he added.

“This may be the appropriate regulatory approach, and to be clear, in some areas I think it is,” said Clayton.  “However, the Commission needs to make sure at the time of adoption that we have a realistic vision for how rules will be implemented as well as how we and others intend to examine for compliance.” Of note: in a Congressional hearing on July 18, industry representatives called for the expansion of certain exemptions from Sarbanes-Oxley Section 404(b) requirements.

Companies finding themselves in situations in which burdensome disclosures do not seem to materially add to the total mix of information, could seek relief, said Clayton. “Under Rule 3-13 of Regulation S-X, issuers can request modifications to their financial reporting requirements in these situations.  I want to encourage companies to consider whether such modifications may be helpful in connection with their capital raising activities and assure you that SEC staff is placing a high priority on responding with timely guidance.”

Cybersecurity
Clayton also commented on a hot topic: cybersecurity. The Commission requires issuers to make certain disclosures relating to how they address cybersecurity risk and any actual events impacting the company, but at the same time, regulators are aware of the need to protect the confidentiality of certain information, to not backfire by putting too much information in the wrong hands.

“Information sharing and coordination are essential for regulators to address potential cyber threats and respond to a major cyberattack, should one arise,” said Clayton.  “The SEC is therefore working closely with fellow financial regulators to improve our ability to receive critical information and alerts and react to cyber threats.”

Read the full text of the SEC Chairman’s speech.