SEC Advances Plans Dems Oppose Days Before GOP Majority to End (2)

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By Andrew Ramonas

The SEC on June 28 scaled back mutual fund disclosure and moved closer to giving itself more flexibility with its whistleblower award program without any Democratic support as the commission soon loses a Republican majority at least temporarily.

Securities and Exchange Commission members voted 3-2 along ideological lines to adopt the rule that will reduce liquidity reporting requirements for mutual funds and to seek public comment on the whistleblower program amendments.

SEC Chairman Jay Clayton, a right-leaning independent, now may have to wait months before the commission has another chance to consider matters opposed by his two left-leaning colleagues, Commissioners Kara Stein and Robert Jackson. Republican Commissioner Michael Piwowar is set to step down July 7, creating a 2-2 split along ideological lines. That divide could last until December, when Stein’s term officially ends.

Stein said she struggled with the timing of the vote on the mutual fund disclosure regulation in particular. The rule, which the commission proposed in March without backing from Stein or Jackson, will eliminate a pending requirement that funds publicly disclose every quarter on Form N-PORT the percentage of their investments that fall into buckets ranging from “highly liquid” to “illiquid.” Instead, they will be able to use their annual or semiannual shareholder reports to discuss the operation and effectiveness of their liquidity risk management programs.

“As I consider the rollback of public disclosure, I have to ask, ‘Why now?’” Stein said before voting against it.

The whistleblower program plan would give commissioners greater freedom to limit bounties for tipsters in cases that bring at least $100 million in sanctions. Those tipsters would get an award total that is “reasonably necessary” for their help and would encourage other whistleblowers to come forward, but is no less than $30 million, according to an SEC fact sheet.

The SEC also is seeking public feedback on the possibility of paying tipsters whose information doesn’t lead to sanctions that are large enough to get awards and giving commissioners more flexibility to increase payouts to whistleblowers whose tips yield sanctions that are less than $2 million. The SEC awards whistleblowers 10 percent to 30 percent of the money it collects in cases that yield at least $1 million in sanctions.

Tipsters would have to contend with uncertainty and politics under the plan, Jackson said.

“Today’s proposal risks harming investors,” he said before his “no” vote on the plan.

Clayton, however, said investors will benefit from the fund disclosure rule and the whistleblower program would strengthen under the changes proposed. The two matters were among five items that he helped usher through the open meeting.

“Commission staff is actively working on issues that touch all corners of the securities marketplace, including, importantly, our Main Street investors,” Clayton said. “I am pleased that the meeting today shows measurable progress on many commission initiatives.”

Other Votes

Commissioners also voted unanimously to propose a plan intended to facilitate the launching of exchange-traded funds and adopt a rule that will enlarge the pool of “smaller reporting companies” that have fewer disclosure requirements.

The ETF proposal would let many issuers avoid getting exemptive orders from the SEC before they can start. The smaller reporting company changes will let companies with less than $250 million of public float use “scaled disclosures,” raising the threshold from $75 million. Companies without public float and annual revenues of less than $100 million also will get scaled disclosure benefits, which only are available now if their annual revenues are less than $50 million.

Smaller reporting companies don’t need to provide executive risk management policies, compensation analysis, and some other information in their SEC filings under scaled disclosure requirements.

GOP Dissent

SEC members also voted 4-1 to adopt a regulation that will require companies to embed XBRL machine-readable data in their filings. Republican Hester Peirce was the only commissioner to dissent, saying smaller companies will face “disproportionately high costs” in adopting Inline XBRL technology.

The XBRL regulation will require companies to use the data for financial statement information and risk-return summaries and will not require them to post it on their websites as they do now under 2009 regulations. Investors, data aggregators, economic research firms, and SEC staffers are among those that use the machine-readable financial market data to help analyze large amounts of information.

To contact the reporter on this story: Andrew Ramonas in Washington at aramonas@bloomberglaw.com

To contact the editor responsible for this story: Seth Stern at sstern@bloomberglaw.com

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