Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on December 16, 2020, under the Government in the Sunshine Act.

Today, we take another step in a winding, resource-consuming, decade-long journey to implement Section 1504 of the Dodd-Frank Act. In 2010, Section 1504 added Section 13(q) to the Securities Exchange Act of 1934, which directed the Commission to issue rules, commonly known as the “resource extraction rules,” requiring resource extraction issuers—in essence, certain companies publicly traded on U.S. exchanges—to disclose information about payments made to a foreign government or the Federal government for the purpose of the commercial development of oil, natural gas, or minerals.

The Commission has finalized these rules twice already. Yes, that’s correct. Two prior Commissions have gone through the Administrative Procedure Act, or APA, process of developing proposals, publishing those proposals for comment, and then adopting final rules implementing Section 13(q). The first time the Commission went through the APA process and promulgated final rules in 2012, those final rules were vacated by the U.S. District Court for the District of Columbia. The second time the Commission went through the APA process and promulgated final rules in 2016 (the “2016 Rules”), those final rules were disapproved by a joint resolution of Congress pursuant to the Congressional Review Act, or the CRA, in 2017.

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Background

Over the past several years, the exposure of U.S. investors and our capital markets to companies with significant operations in emerging markets, including China, has increased. [1] This increased exposure carries with it a number of significant risks and challenges, many of which we described in our statement of December 7, 2018 [2] and our more recent joint statement along with other SEC staff, Emerging Market Investments Entail Significant Disclosure, Financial Reporting and Other Risks; Remedies are Limited, on April 21, 2020. [3]

Among other relevant issues related to emerging market investments, we noted that the Public Company Accounting Oversight Board (PCAOB) continues to be prevented from inspecting the audit work and practices of PCAOB-registered audit firms in China on a comparable basis to other non-U.S. jurisdictions. This limitation on inspections also includes PCAOB access to audit work and practices of Hong Kong-based audit firms, to the extent their audit clients have operations in mainland China.

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Thank you, John [Williams].

It is wonderful to be back with the Economic Club of New York. You are a sophisticated, experienced, outcome-oriented, tough and fair audience, interested in economic and wage growth and improving our society more generally. Just the way it should be.

As John noted, today’s program proceeds in two parts, (1) remarks from me on our regulatory activities over the past three-plus years (time flies) and—at the end of that part—a discussion of some of the areas that I believe need continued attention and (2) a Q&A session with market and policy experts Harold Ford, Barbara Novick, Gary Cohn and Glenn Hutchins.

As a focal point for today’s review and outlook, I will use my first speech as Chairman, which was before this very body in July 2017. [1] In that speech, I set forth the eight core principles that would guide my Chairmanship. [2] Before I report with specificity on implementing those principles in practice, I want to go beyond principles. I want to dig a bit deeper, and explain how the women and men of the SEC achieved historic results over the past three and a half years. [3] The short story is we designed and pursued a granular, yet flexible three year plan; and we were blessed with a talented, driven team of mutually supportive professionals. I will go into more detail.

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Chairman Crapo, Ranking Member Brown and Senators of the Committee, thank you for the opportunity to testify before you today about the work of the U.S. Securities and Exchange Commission (SEC or Commission or agency). [1] I am honored to discuss the great work of the women and men of the SEC over the past year in furtherance of our tripartite mission of protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation.

Before I get to the substance of my testimony, I first want to address my recent confirmation that, consistent with my longstanding and previously disclosed expectations, I plan to conclude my tenure as SEC Chairman at the end of this year. [2] It has been the privilege of a lifetime to work alongside the women and men of the SEC. I am honored to call them colleagues and friends, and I could not be more proud of the work they have done each and every day on behalf of investors, especially this year in the face of many significant and unanticipated professional and personal challenges resulting from COVID-19 and other events.

I also want to acknowledge the support and assistance Congress has provided the SEC during my tenure. In many ways, Congress, and in particular, this Committee, serves as the SEC’s board of directors, and I have appreciated the thoughtful and candid engagement over the past few years on issues of importance to investors, our markets and market participants.

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Good morning. This is an open meeting of the U.S. Securities and Exchange Commission under the Government in the Sunshine Act.

Today we consider a recommendation from the Division of Corporation Finance that would harmonize, simplify and improve various structural and procedural aspects of our exempt offering framework under the Securities Act of 1933. The recommended amendments reflect a comprehensive, retrospective review of a framework that has, over time, unfortunately become difficult to navigate, for both investors and businesses, particularly smaller and medium-sized businesses. Some have referred to it as a “patchwork”—I will explain this in a bit more detail later. Today’s amendments would rationalize that framework, increase efficiency and facilitate capital formation, while preserving or enhancing important investor protections.

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Good afternoon and welcome to the SEC’s Staff Roundtable on Regulation Best Interest and Form CRS. [1] We hope that this event provides useful information to broker-dealers and investment advisers in complying with these key regulatory enhancements. Staff from the Commission’s Division of Trading and Markets, Division of Investment Management and Office of Compliance Inspections and Examinations, together with staff from FINRA, will present some insights and feedback as we approach the four-month anniversary of the June 30 Reg BI and Form CRS compliance date.

The Commission adopted Regulation Best Interest, or Reg BI, and Form CRS to enhance significantly the quality and transparency of relationships between broker-dealers and investment advisers—together, “firms”—and retail investors. Reg BI and Form CRS, together with related interpretations adopted at the same time by the Commission, are designed to bring the legal requirements and mandated disclosures for firms serving retail investors in line with reasonable investor expectations. Collectively, they also are designed to preserve retail investor access—in terms of both choice and cost—to a variety of investment services and products, fostering healthy, transparent competition.

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Good morning. This is an open meeting of the U.S. Securities and Exchange Commission, under the Government in the Sunshine Act. This morning, we have two items on the agenda.

Before we begin with today’s agenda, I want to note the passing of Justice Ruth Bader Ginsburg and the joint statement of the Commission recognizing her as a giant of the law who authored many opinions that meaningfully impacted the lives of all Americans, including our nation’s investors. Of particular relevance to our work at the Commission was United States v. O’Hagan, which upheld the misappropriation theory of insider trading and has served as a critical element of our securities law framework.

At today’s meeting, we are considering amendments to the rules governing the Commission’s whistleblower program. Over the past ten years, the whistleblower program has been a critical component of the Commission’s efforts to detect wrongdoing and protect investors and the marketplace, particularly where fraud is well-hidden or difficult to detect. Enforcement actions from whistleblower tips have resulted in more than $2.5 billion in ordered financial remedies, including more than $1.4 billion in disgorgement of ill-gotten gains and interest, of which almost $750 million has been, or is scheduled to be, returned to harmed investors.

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I appreciated our discussion last month on a number of policy issues related to good corporate hygiene, including issues related to executive compensation and trading when in possession of material non-public information. I believe you and I agree generally on the importance of a robust control environment for senior executives and on a number of specific, related points, and wanted to provide you with more detail regarding my views.

Importance of a Strong Control Environment.

As I have emphasized to market participants on many occasions, the importance of good corporate hygiene cannot be overstated, nor can the importance of related controls designed to prevent not only insider trading but also, ideally, the appearance of impropriety or misalignment of interests. This perspective and related controls are especially important in times of heightened market volatility and uncertainty. In such circumstances, the potential for executives to possess material non-public information increases as we have witnessed during this time of COVID-19-induced economic and market stress.

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Over the past three years, we have engaged in a number of retrospective reviews of the rules that implement our securities law framework. These reviews often, but not always, have yielded the unassailable conclusion that modernization is necessary and appropriate. This should come as no surprise given how much has changed in the past 20, 30, 40 or more years since key rules were last comprehensively reviewed. At a macro level, I note that interaction among market participants, including trading, disclosures and other information-based interactions, is now largely electronic, adding tremendous efficiencies but also new challenges. Virtually all trading in equities is electronic. The days of disclosure reports and proxy materials being filed in paper form, but not electronic form, with the Commission are well behind us. In addition, as I have noted at other recent open Commission meetings, our Main Street investors generally have shifted from investing directly in our public companies to investing through mutual funds and ETFs. [1] For many small and medium-sized companies, our private capital markets are the only reasonable means for obtaining financing to grow their businesses. As I often say, the core principles are the same as they were in the 1930s, but the landscape is far different.

As just a few examples of our modernization efforts, I note our recent amendments to the accredited investor definition, where for the first time we recognized that individuals who meet clear, established measures of financial sophistication should be allowed to participate in our private capital markets, rather than limiting participation to only those who meet blunt net worth or income tests. We also recently updated the business, legal proceedings and risk factors disclosure requirements under Regulation S-K. As part of those amendments, the Commission modernized our disclosure requirements to recognize that human capital accounts for—and drives—long-term business value at many companies in many different ways, much more so than it did 30 years ago.

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Today [Aug. 26, 2020], the Commission adopted final rules to modernize and add much needed flexibility to the definition of “accredited investor” by adding new categories of qualifying individuals and entities that have demonstrated financial sophistication such that they should not be excluded from the very large, multifaceted and important private capital markets. The private capital markets are important to investors and issuers of various types, as well as our economy more generally. The accredited investor definition is the principal test for investor participation in significant segments of our private capital markets. It also plays an important role in other state and federal securities law contexts.

The test for individuals to qualify as accredited investors has largely remained unchanged for over 35 years. [1] This test relies exclusively on a person’s income and net worth. If you make enough money or have sufficient assets, you are eligible to participate, and if you do not, you generally are not eligible. The Commission’s use of income or wealth as the exclusive proxy for an individual’s financial sophistication and ability to assess and bear risk has long been unsatisfactory. Individual investors who do not meet the wealth tests, but who clearly are financially sophisticated enough to understand the risks of participating in unregistered offerings, are denied the opportunity to invest in our private markets. For example, using only a binary test for wealth disadvantages otherwise financially sophisticated Americans living in lower income/cost-of-living areas.

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Good morning. This is an open meeting of the U.S. Securities and Exchange Commission, under the Government in the Sunshine Act. Today we have two items on the agenda, both examples of our continued work to enhance transparency for investors and at the Commission. [1] Today’s agenda items illustrate that the Commission’s transformative work in the area of modernizing our disclosure framework and Commission transparency need not pause while the Commission is also monitoring, and responding to, the effects of COVID-19 on our markets, our registrants and our investors.

Tailored Shareholder Reports, Treatment of Annual Prospectus Updates for Existing Investors, and Improved Fee and Risk Disclosure for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements

I will now turn to the first item. Over the past few years, our staff—across Divisions and Offices—have worked tirelessly to modernize and improve our disclosure system. [2] Today’s proposal would transform, for the benefit of investors, our disclosure framework for mutual funds and exchange-traded funds (“ETFs”), increasing accessibility, readability and transparency. As I discussed at our last Open Commission Meeting a few weeks ago, mutual funds and ETFs have become the primary way in which many Main Street investors access our capital markets. To put in perspective the importance of these investment products, and, as a result, the importance of clear, concise fund disclosure, we should look at the number of Americans this proposal would impact. Over 101 million individuals—representing almost 45 percent of U.S. households—own shares in registered investment companies, while almost 100 million individuals own shares in mutual funds in particular. If recent trends persist, these numbers will continue to increase in the coming years.

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Good morning. This is an open meeting of the U.S. Securities and Exchange Commission, under the Government in the Sunshine Act. Today we have two items on the agenda, both continuations of our ongoing work to modernize and enhance the accuracy, transparency and effectiveness of our proxy voting system. [1]

I want to make two general observations. First, today’s recommendations are the fruits of a rigorous and well-functioning rulemaking process where final rules reflect and benefit from the input of a wide array of market participants with a myriad of interests and perspectives. The proposing release that the Commission issued for public comment last November was informed by, among other things, SEC initiatives that spanned almost a decade—from the Commission’s 2010 Concept Release on the U.S. Proxy System to the more recent 2018 roundtable that brought together, and engendered robust discussion from, investors, issuers, investment advisors, proxy voting advice businesses and other market participants. [2] A review of the 2010 Concept Release, the 2018 roundtable and the comments received in response to our November proposing release demonstrates longstanding concerns regarding, and the need for Commission action with respect to, the use of proxy voting advice by investment advisers and other market participants.

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Introduction

The U.S. Securities and Exchange Commission’s efforts in response to the COVID-19 pandemic are centered, first and foremost, on the health and safety of our employees and all Americans. The Commission’s recognition of the corresponding need of market participants to also prioritize health and safety while ensuring the continuity of operations essential to the orderly function of our capital markets, drove the prompt actions of the Commission and its staff in the early stages of the pandemic’s effects in the United States. We have assessed these actions in light of developments over the past several months, current conditions and our expectations in order to adjust our efforts as necessary or appropriate. This statement provides a collective, cross-Divisional update based on that assessment.

Below is a summary of the current targeted, temporary relief and assistance provided by the Commission and staff, along with the staff’s views on whether and, if so, how that relief should be adjusted taking into account market outreach and observations. It is clear that the need for certain relief remains, such as relief to ensure continued remote operations and to provide flexibility in light of continued market volatility. Other forms of current relief, however, are unlikely to be extended. For example, the Commission and its staff provided temporary, targeted, and conditional relief and assistance to issuers and registrants from certain filing and delivery deadlines in recognition of the impact of COVID-19 on operations while also maintaining important investor protections. As market participants have worked to implement business continuity plans and adjusted in many cases to a more remote and distributed workforce, the present need for extensions of certain regulatory deadlines has diminished.

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Chairman Sherman, Ranking Member Huizenga and Members of the Subcommittee, thank you for the opportunity to testify today to highlight the U.S. Securities and Exchange Commission’s response to the effects of COVID-19 on our capital markets. [1] COVID-19 has had profound effects on our capital markets and our broader economy. At the outset of the pandemic, in the interest of saving as many lives as possible, we—all Americans—have undertaken, with remarkable spirit and selflessness, a massive restriction in how we interact.

Many of the economic impacts of COVID-19 are a result of the collective, full-mitigation, health-and-safety-first response that resulted in a sharp contraction in many aspects of our economy and increased volatility and uncertainty in our capital markets. Policymakers have responded to the most apparent and acute economic and market consequences with unprecedented monetary and fiscal policy actions. The Commission’s work has been and will continue to be an important factor in our nation’s response to and recovery from the current COVID-19 pandemic. I also want to commend Congress and our regulatory colleagues, especially the Federal Reserve and the Treasury Department, for these swift, resolute responses to our nation’s challenges.

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Thank you, Ed [Bernard]. [1] I would like to welcome everyone to the second meeting of the Commission’s Asset Management Advisory Committee. I am glad that the Committee is able to meet virtually today.

Thank you to everyone participating, including Commissioners Peirce and Lee; our panelists; and the members of the Committee. I would like to particularly thank Ed for his leadership in crafting the agenda for today’s meeting, and Dalia and her team for their many contributions in a compressed timeframe. Thank you also to the Commission staff in the Office of Information Technology and the Office of the Secretary, whose work allowed us to hold today’s meeting remotely. And, importantly, thank you to all of those interested individuals who are listening to our meeting through the Commission’s website.

I look forward to hearing the Committee’s insights into the effects of the pandemic on the asset management industry and, in particular, our long-term Main Street investors. An essential component of our national response to, and recovery from, COVID-19 will be the continuing, orderly operation of our markets and the continued flows of capital and credit throughout our economy. The asset management industry has a pivotal role to play in both orderly market operation and the generation and absorption of capital flows. Investment funds and advisers are an important link between these market realities and the interests of our long-term Main Street investors. As the effects of COVID-19 and our societal response unfold, it is important that we discuss these matters in real time and with clear heads.

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From a systemic risk point of view, the SEC’s primary responsibilities [1] in this period of stress are three-fold:

1. Market function. Using our authority, expertise and experience to help ensure the continuing, orderly and fair function of the securities markets—including equities, fixed income securities, funds and other products.
2. Market monitoring. Monitoring market prices and price movements, flows of capital and availability of credit to assess functionality and resiliency of the capital markets—and taking action, including providing regulatory relief and guidance, as appropriate.
3. Corporate and other issuer disclosure. Monitoring and providing guidance concerning, and emphasizing, timely and accurate issuer and other disclosures, recognizing that transparency and broad disclosure of material information are fundamental to market function and resiliency.

Before I give a few specifics on each of these three areas, and at the risk of repeating prior public comments, I will make a few general observations on our capital markets.

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Thank you, Anne (Sheehan). I really appreciate your prompt response to our request to reconvene a special meeting of the Investor Advisory Committee to focus on issuer-investor engagement in the context of the challenges posed by COVID-19, including, in particular, disclosure considerations.

Over the last several weeks, my colleagues and I have had multiple teleconferences with retail and institutional investors, investor advocates, including members of this Committee, auditors, public company executives and board members. There were two common themes in those meetings—(1) the importance of keeping markets functioning and (2) the importance of keeping investors and markets apprised about the evolving impact of, and responses to, COVID-19—in other words, the importance of timely, accurate and decision-useful information. Today, it is my hope that we focus on the information point, and I will start by sharing some personal thoughts on this point.

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The PCAOB’s Inability to Inspect Audit Work Papers in China Continues

Introduction [1]

Over the past several decades, the portfolios of U.S. investors have become increasingly exposed to companies that are based in emerging markets [2] or that otherwise have significant operations in emerging markets. [3] This exposure includes investments in both U.S. issuers and foreign private issuers (“FPIs”) that are based in emerging markets or have significant operations in emerging markets. During this time, China has grown to be the largest emerging market economy and the world’s second largest economy. [4]

The SEC’s mission is threefold: protect our investors, preserve market integrity and facilitate capital formation. Ensuring that investors and other market participants have access to high-quality, reliable disclosure, including financial reporting, is at the core of our efforts to promote each of those objectives. This commitment to high-quality disclosure standards—including meaningful, principled oversight and enforcement—has long been a focus of the SEC and, since its inception, the PCAOB.

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The SEC’s three part mission—maintain market integrity, facilitate capital formation and protect investors—takes on particular importance in times of economic uncertainty. Disclosure—providing the public with the information necessary to make informed investment decisions—is fundamental to furthering each aspect of our mission. [1]

In the coming weeks, our public companies will be issuing earnings releases and conducting analyst and investor calls. We urge companies to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning. In an effort to facilitate robust disclosure and engagement, we provide the following observations and requests (discussed in more detail below):

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Over 57 million American households are invested in our securities markets. The interests of these individuals—our long-term Main Street investors—are the lens through which we evaluate whether we are effectively advancing the SEC’s mission. The 4,500 women and men of the SEC are committed to these investors and the integrity of our markets. The uncertainties caused by COVID-19 have not changed our perspective or commitment.

Approach to Allocation of Resources, Oversight and Rulemaking

In recent weeks, the Commission has been assisting market participants in their efforts to continue business operations, including investor service operations, in the face of various challenges caused by COVID-19. [1] Many of our actions have focused on operational issues, including facilitating the shift to business continuity plans that are consistent with health and safety directives and guidance. For example, we have worked with various market participants to help facilitate the move by securities exchanges to an all-electronic trading environment. [2] Other actions have involved targeted, conditional and temporary relief relating to filing deadlines that could be significantly impacted by COVID-19. [3]

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