News organizations reported in July 2009 that, in response to a request from a member of Congress, the SEC delivered an informal “wish list” of changes it would like made to the federal securities laws. While the SEC generally has broad authority to enact rules and regulations under the federal securities statutes, it may only do so within the parameters set forth in the statutory framework. Changes to the statutes themselves, including enhancements of the SEC’s authority, must be made by Congress via the legislative process.
The 42-item list contains proposed alterations to the statutory framework that the SEC believes would improve the efficiency and enforceability of the securities laws and regulations. The proposals cover a wide range of topics including corporate finance, mutual funds, enforcement, broker-dealer regulation and accounting. The changes include both technical tweaks and significant changes to the statutory framework. For public companies, the more notable proposed changes include:
- Beneficial Ownership Reporting
- Amend provisions of the Securities Exchange Act of 1934 to give the SEC the authority to accelerate the deadline for certain Schedule 13D filings and beneficial ownership reports of officers, directors and 10 percent owners. The SEC argues that these changes would help the markets receive more timely information concerning interests in an issuer that may be important for the purposes of accurate pricing of any listed securities.
- Eliminate the Exchange Act requirements to send initial and amended beneficial ownership reports to an issuer and the national securities exchange where its securities are traded, on the grounds that these provisions impose an unnecessary burden on investors to disseminate reports that are already required to be publicly filed with the SEC and are available on EDGAR.
- Securities Whistleblower Incentives and Protection Act. Authorize the SEC to pay awards to individuals who provide information to the agency leading to successful enforcement of the federal securities laws.
- Aiding and Abetting under the Securities Act of 1933 and the Investment Company Act of 1940. In 1995, Congress gave the SEC authority over aiding and abetting violations of the Exchange Act, thereby enabling the SEC to bring enforcement actions against persons who knowingly aid and abet primary violators. The SEC requests the addition of similar provisions for the other securities laws enforced by the SEC in order to assist its enforcement program.
- Clarification to Knowledge Requirement for Aiding and Abetting Provisions. Amend the aiding and abetting provisions to clarify that the knowledge requirement may be satisfied by recklessness.
- Extraterritorial Jurisdiction of the Antifraud Provisions. Clarify U.S. extraterritorial jurisdiction under the antifraud provisions of the federal securities laws. Because these laws are currently silent as to their extraterritorial application, a court must determine whether a securities law claim based on an overseas transaction has a sufficient nexus to the United States to justify application of the U.S. securities laws. To make that determination, courts have developed two jurisdictional tests – a “conduct” test and an “effects” test – to evaluate the merits of the U.S. connection to the transaction in dispute. The SEC would prefer to overwrite the disparate judicial tests by combining both tests, granting U.S. courts jurisdiction over “conduct occurring outside the United States that has a foreseeable substantial effect within the United States.”
- Whistleblower Protection against Retaliation by a Subsidiary of an Issuer. Amend the Sarbanes-Oxley Act of 2002 to make clear that subsidiaries and affiliates of issuers may not retaliate against whistleblowers, eliminating a defense often raised by issuers in actions brought by whistleblowers. Currently, whistleblower protection is available only against retaliatory actions taken by the issuer itself and does not explicitly apply to any such actions taken by subsidiaries or affiliates of that issuer.
While how many of the SEC’s proposals are likely to be enacted by Congress is unclear, most of the items on the list are consistent with the intentions expressed by a number of members of Congress to strengthen regulation of the financial services industry. These items are unlikely to be proposed in Congress as legislation on their own, but some or all of them may be attached to a larger bill in the future.