Part 5: Highlights from LACBA’s 52nd Annual Securities Regulation Seminar – Keynote Speaker: SEC Commissioner Robert J. Jackson, Jr.

Keynote Speaker: SEC Commissioner Robert J. Jackson, Jr.

The Keynote Speaker during lunch at LACBA’s 52^nd Annual Securities Regulation Seminar was U.S. Securities and Exchange Commission (SEC) Commissioner Robert J. Jackson Jr. – and it was awesome.  SEC Commissioner Jackson spoke passionately and energetically to an eager crowd.  The bold headlines below are the main takeaways followed by a brief discussion. 

The Success of Regulation Best Interest will be determined by the way firms respond to it

Regulation Best Interest, adopted by the SEC in June 2019, regulates the relationship between investors and broker-dealers.  In his testimony before the House Financial Services Committee, SEC Commissioner Jackson explained that Regulation Best Interest fails to put investors first.  He also provided a detailed analysis as to why he respectfully dissented to the final rule which is based on his opinion that the rule was not clear and instead created a “muddled standard.”

The SEC is optimistic about the creation of the Consolidated Audit Trail (CAT) and plans to address concerns about how personally identifiable information is collected, used, secured and protected

During the hearing entitled “Oversight of the Status of the Consolidated Audit Trail,” U.S. Senator Mike Crapo (R-Idaho), Chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs, explained that the Flash Crash and a number of other market disruption events triggered the creation of the CAT, a real-time tracking system to track securities orders across all markets throughout the life-cycle of the order—from origination, to routing, cancellation, modification or execution. 

When the CAT was originally conceived, it intended to collect, store and transmit a lot of personally identifiable information such as social security numbers, tax identification number, names and addresses of customers.  In light of security concerns, since the CAT’s original conception, this view has changed.  In an attempt to make the CAT a much less attractive target for cyber criminals, officials intend to exclude social security numbers, dates of birth, account numbers and other personally identifiable information.  Furthermore, the CAT must be limited to use by trusted parties due to cybersecurity risk.

If the SEC had a rule regarding initial coin offerings, it would be inadequate for the market we have today

The SEC has taken every possible step to invite people to discuss their fintech questions and one example is FinHub, which allows individuals to engage with the SEC staff, such as Valerie A. Szczepanik, Senior Advisor for Digital Assets and Innovation, who leads the team in Washington DC.  There is also a lot of guidance in this area by SEC officials such as speeches like “Digital Asset Transactions: When Howey Met Gary,” a speech by William Hinman, Director, Division of Corporation Finance. Coinbase recently co-founded the Crypto Rating Council, a member organization purposed with assisting cryptocurrency companies to determine if they comply with current U.S. federal securities law.  Therefore, the current framework allows companies to go in the direction of their choosing so long as they do not violate the federal securities laws.

While there is concern in Washington DC about public vs. private equity raises, the market drives the balance

The markets have changed dramatically since the days of Bear Stearns. There is concern in Washington DC that many of the start-ups that have tested the IPO market in 2019 have failed or withdrawn.  It is frustrating because the hypothesis was that if regulations were rolled back, such as in the JOBS Act, then this will lead to more IPO activity. Therefore, while there is concern in Washington DC about public vs. private equity raises, the market drives the balance.

As SEC Commissioner Jackson highlighted, it is frustrating to almost always see a 7 percent spread, or commissions paid to investment bankers, for IPOs.  Direct listings have challenged this assumption because they don’t have the same underwriting spread.

Cybersecurity Incident Disclosures on Form 8-K may be a good idea and SEC Commissioner Jackson would love to hear your opinion on this

SEC Commissioner Jackson stated that disclosing cybersecurity incidents on Form 8-K is one way to manage the risk of selective disclosure.  However, Katherine J. Blair, Partner, Manatt, Phelps & Phillips, LLP, added to the conversation be stating that filing a Form 8-K within four business days on behalf of issuers she represents would be a very difficult task to achieve.  She went on to explain that managing disclosure of a cybersecurity risk is challenging because, on the one hand, when a cybersecurity attack is in progress and law enforcement has been notified, law enforcement does not want it publicly disclosed so that they can work behind the scenes to catch the wrongdoers.  On the other hand, investors and others impacted by a cybersecurity attack will want to know about it as soon as possible to take protective measures, among other things.  Katherine Blair also noted that an issuer may not want to file a Form 8-K because it may cause the stock price to drop or give other hackers a roadmap on how to hack a system by exposing vulnerabilities in the space.

SEC Commissioner Jackson considered her thoughts and then shocked the crowd when he revealed the following statistic: that only 10 % of companies report cybersecurity breaches in a Form 8-K.

After lunch, SEC Commissioner Jackson approached Katherine Blair and they had a robust discussion on this topic.

Mandatory Shareholder Arbitration Clauses have pros and cons that should be carefully considered

On the one hand, if you get rid of private litigation, then more resources must be allocated to the SEC.  Currently, the SEC budget is only $1.746 billion dollars.  You can read more about the huge responsibility that the SEC is tasked with by reading the first paragraph of my previous blog here.  On the other hand, class action lawsuits are perhaps another mechanism to combating fraud.

There are gaps in Rule 10b-5 and it is remarkable that we don’t have a statute that provides clarity on Insider Trading

Rep. Jim Hines, sponsored H.R. 2534 – Insider Trading Prohibition Act (the Act) to provide clarity on Insider Trading.  The Act attempts to remove obstacles that the SEC has faced with respect to the knowledge requirement and personal benefit requirement established by Dirks v. SEC.  The Act also attempts to, among other things, make it clear that there are certain other acts within its purview such as the wrongful use of information and breaches of fiduciary duty, whether or not there was knowledge of such use or breach.

Environmental, Social and Governance (ESG) risk factor disclosure should be assessed by issuers

While investors care about environmental sustainability standards, it is not for the SEC to determine what is important. If a topic is material, the people who own the company should judge whether or not this information should be disclosed. You can read more about ESG matters such as this Securities and Federal Corporate Law Report or some papers published by the Harvard Law School Forum such as this one.

Kokesh’s holding limited the SEC’s ability to impose disgorgement, its most important enforcement tool

Kokesh v. SEC had an enormous impact on the work done in the SEC Division of Enforcement.  Read this helpful academic paper on Kokesh to evaluate the market response.

SEC Commissioner Jackson asked the crowd: What year was the first and last time the Washington Nationals won the World Series?

One person got it right – it was in 1933, the year the Securities Act became law. It was only appropriate that following this Q&A, the Washington Nationals won the world series! Congrats to the Nats!

Please email me with questions or leave a comment below!