SEC Commissioners Testify To House Committee

Author:Mr Cydney Posner
Profession:Cooley LLP

All five SEC Commissioners testified yesterday at an oversight hearing held by the House Financial Services Committee, the first time all five have appeared since 2007, according to Chair Maxine Waters. (Here is their formal testimony.) These hearings are, of course, broken up into bite-size five-minute Q&A sessions, so there is not much opportunity for in-depth questioning. And most often, it seemed that the Representatives directed their questions to the Commissioners that were most likely to provide gratifying answers—meaning a Commissioner of the Representative's own party. There were, however, some notable exceptions, such as Representative Katie Porter's pointed questioning of Commissioner Hester Peirce with regard to her views on ESG disclosure. In the end, the hearing did provide some insight into the current thinking and expectations of many of these legislators and regulators.

(Based on my notes, so standard caveats apply.)

Chair Waters opened the hearing by making plain her view that the SEC was just not doing its job:

"I believe that it is important for this Committee to hear testimony from each of the Commissioners, including its Chairman, because they each hold a vote on important regulatory and enforcement matters, and they each hold unique views that the Committee should be aware of. This is especially important since the SEC is not fulfilling its mission as Wall Street's cop. Key rules, like the Volcker rule, have been rolled back, while rules to implement other important reforms on issues like executive compensation—which Congress enacted back in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act—remain incomplete. Other regulations, such as the SEC's so-called Regulation Best Interest, fail to protect retirement savers from unscrupulous financial advisers."

Notable among the opening statements was Commissioner Robert Jackson's, which identified three areas where he believed the SEC and/or Congress needed to address regulatory gaps:

The 8-K disclosure rules, which typically allow four days prior to disclosure, during which, he suggested, studies have shown that insiders were trading. Legislation should close that trading gap, he suggested. SideBar

An academic study, reported in 2015 in the WSJ, showed that corporate insiders consistently beat the market in their companies' shares in the four days preceding 8-K filings, the period that the researchers called the "8-K trading gap." The study also showed that, when insiders engage in open market purchases—relatively unusual transactions for insiders—during that trading gap, insiders "are correct about the directional impact of the 8-K filing more often than not—and that the probability that this finding is the product of random chance is virtually zero." (See this PubCo post.)

A similar problem occurs with insider sales after the announcement of stock buybacks. According to Jackson, many insider sales occur just after a buyback is announced, and company performance declines afterward. SideBar

In remarks in 2018 before the Center for American Progress, Jackson discussed research he had recently conducted on corporate stock buybacks, in light of the substantial increase in buybacks following the 2017 Tax Cuts and Jobs Act. He called on the SEC to update its buyback rules "to limit executives from using stock buybacks to cash out from America's companies." If executives are so convinced that "buybacks are best for the company, its workers, and its community," Jackson suggested, "they should put their money where their mouth...

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