SEC concerned about regulating too tightly?
April 20, 2011 — In the fallout from the financial crisis, the Securities and Exchange Commission has frequently been criticized for its failure to take on some of the country’s largest commercial entities. Now, some investor advocates are raising another concern: that, even as much of the work of reforming financial regulation remains incomplete, the commission may be laying the groundwork for efforts to lift regulations and weaken investor protections that apply to smaller and more closely-held companies.
The objections stem from SEC Chairwoman Mary Schapiro’s announcement, in a letter to Rep. Darrell Issa, that the Commission is in the process of forming a new Advisory Committee on Small and Emerging Companies. That advisory group, Schapiro wrote, will be one source of information for the Commission’s broader effort to “reduce the regulatory burdens on small business capital formation in a manner consistent with investor protection.”
While most coverage of Schapiro’s letter has focused on the signals it sends about the Commission’s oversight of large, closely-held companies like Facebook, some investor advocates worry that, depending on its composition, the advisory group could become an SEC-sanctioned platform for opponents of new financial regulations.
The trouble last time
In particular, critics point to the SEC’s last small business advisory committee, convened in 2005, shortly after the Enron and WorldCom scandals prompted passage of the Sarbanes-Oxley law. That group “was a disaster for investors,” said Lynn Turner, a former chief accountant of the SEC who now sits on the board of a major public pension fund, and who spoke before the advisory panel. He and others noted the committee’s proposal to exempt most so-called “microcap” and “smallcap” companies — which account for nearly 80 percent of publicly listed businesses — from a central provision of Sarbanes-Oxley that required outside auditors to attest to the integrity of a company’s financial controls, on the grounds that the requirement was too costly and other rules provided adequate protections.
That sweeping proposal never became law. But the report, said Barbara Roper, director of investor protection for the Consumer Federation of America, influenced the subsequent debate, in which the SEC repeatedly delayed implementation of the rule. And last year, in the Dodd-Frank financial reform law, Congress granted a permanent exemption to companies with market values up to $75 million, and directed the SEC to consider whether to extend the exemption to businesses worth up to $250 million. “These things take on a life of their own,” Roper said.
Critics of the last small business group note that the 21-member committee had only one investor representative, who dissented from the exemption proposal, as did two representatives of accounting firms. In a letter to Schapiro last week, Roper urged that the new advisory group have more balanced representation. But she also questioned the wisdom of appointing the committee at all without “empirical evidence that there is a problem that needs to be solved” with respect to small companies’ access to capital.
Concern about potentially broad loopholes
Denise Voigt Crawford, who recently retired after a long career as the top securities regulator in Texas, said she believes small companies do face some unnecessary obstacles in their search for capital. But the SEC, which holds annual public forums on small business capital formation, already has a vehicle through which to address those burdens, she said.
Crawford said she was concerned that a special advisory group might recommend overly broad measures, such as exemptions from disclosure requirements, that would weaken the ability of state regulators to oversee small companies — a worry that she said stemmed from her assessment that the SEC’s response to Issa “appears to be political, rather than practical.”
Judith Burns, a spokeswoman for the SEC, said the new advisory group would operate on an ongoing basis, while the existing small capital forums meet once a year. But she declined to answer questions about what the advisory committee’s membership would look like, or what specific problems it might address that the annual forums do not, saying only that the Commission would have no comment beyond what was in Schapiro’s letter.
“Leading with the small business card”
The SEC’s latest moves on the small business front come amidst numerous proposals in Congress to scale back financial and other business regulation, many of which, said Marcus Stanley, policy director for Americans for Financial Reform, employ a strategy of “leading with the small business card.”
For example, the Small Business Regulatory Freedom Act, introduced in March by Sen. Olympia Snowe, a Maine Republican, would require federal agencies to review the impact of their existing regulations on small businesses, and would give the Small Business Administration power to nullify rules that it deems not to have been adequately reviewed.
A narrower measure — and one more directly related to the SEC — is the Small Company Capital Formation Act, introduced last month by Rep. David Schweikert, an Arizona Republican. That bill would allow companies to make public offerings of up to $50 million without registering with the SEC, up from the current $5 million. (The legislation would still allow the Commission to require those companies to file audited financial statements, but would not make that step mandatory.)
Questioning SEC’s priorities
Investor advocates who are wary of deregulatory proposals generally see the Commission today as more committed to effective regulation than it was in 2006, when the last small business advisory group finished its work. But they also argue that the agency has, in Turner’s words, “become very politicized,” and so might be inclined to take its cues from Congress, which controls the Commission’s budget. (Dodd-Frank called for substantial funding increases for the SEC, though in its final 2011 budget Congress appropriated about $100 million less than that law authorized.)
Whatever the motivation, critics questioned why the SEC was announcing a re-examination of small business regulation when parts of the reform effort are incomplete, in some cases due to limited resources. Roper, for example, noted that the Dodd-Frank law mandated creation of a new Investor Advisory Committee, but that group has been put on hold due to budget uncertainty. “If there’s money to do the small company advisory group, there’s money to do the investor advisory group, and the one that’s required by law ought to come first,” she said.
Burns, the SEC spokeswoman, said there is no timetable in place for establishment of the investor committee. She declined to comment on Roper’s statement, or to address the broader criticism that the re-examination of small business regulation could divert the Commission’s resources from other projects.