SEC News at MarketWatchBy Francine • Jul 19th, 2015 • Category: Food for Thought
Last week was a busy one. The Dodd-Frank anniversary party season began and everyone wants to either celebrate or take an opportunity to bash it. On July 21 Dodd-Frank will be five years old. If I hadn’t been through the same thing with Sarbanes-Oxley now twice, I’d be more excited. But the partisan rancor on this law is even worse. At least with Sarbanes-Oxley it was either regulatory or anti-regulatory rhetoric and there was no real party split amongst those who didn’t and still don’t know what internal controls over financial reporting are.
From the Harvard Law School Corporate Governance Forum by way of Jason M. Halper, a partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP.
In recent months, issues related to internal control systems and reporting have taken on an increased profile and significance. For example, as previously noted by the authors here and here, the SEC has sought to prioritize compliance with internal controls by initiating a growing number of investigations into companies based on allegations of inadequate internal controls.
By way of background, “internal controls” refers to the procedures and practices that companies use to manage risk, conduct business efficiently, and ensure compliance with the law and company policy. Public companies are required to maintain sufficient internal controls by the securities laws. In particular, Section 404 of the Sarbanes-Oxley Act (as amended by the Dodd-Frank Act) requires, among other things, that: (i) company management assess and report on the effectiveness of the company’s internal control over its financial reporting, and (ii) the company’s independent auditors verify management’s disclosures. Sarbanes-Oxley also created the Public Company Accounting Oversight Board (“PCAOB”) to oversee public company audits, including the audits of internal control reporting. The PCAOB, in turn, conducts regular inspections to ensure compliance with laws, rules and professional standards.
Recently, the business community has criticized the PCAOB’s inspection regime as it relates to internal control systems. On May 29, 2015, Tom Quaadman, Vice President of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce (the “CCMC”) wrote a letter to the PCAOB and the SEC (which has oversight authority over the PCAOB) detailing the perceived problems with the inspections. While the letter recognized the importance of “[h]igh standards and superior performance systems,” the CCMC conveyed its view that the current inspection regime promotes “excessive compliance activities” for which “the costs clearly exceed the benefits.” According to the CCMC, this “excess” has “erod[ed] judgment” and increased costs and burdens without leading to more effective controls and audits.”
The US Chamber of Commerce letter complaining about the PCAOB inspections was one of the first things I wrote for MarketWatch.
This week I wrote two pieces that highlight how fractious the SEC, in particular, has become.
The first piece was about Section 956 of the Dodd-Frank act, a rule that still has to be finalized that will curb excessive incentive pay practices at financial services companies.
It’s called, “Dodd-Frank rule to curb bank incentive pay likely last to finish line” and it was fun because I had to call almost all the agencies I cover for a comment. You see, it’s one of those rules that requires agreement between seven of them including the Fed, SEC and OCC. Good luck with that…
The fifth anniversary of the Dodd-Frank Wall Street bank reform law is being marked in Washington, but one element still seems years away.
Section 956, intended to curb excessive incentive compensation at financial services organizations, is one important rule that’s nowhere near finished. It is one of a package of Dodd-Frank rules covering executive compensation that have been slow to make it to the finish line. Others add additional disclosures connecting pay with performance and pay ratios, expand on the Sarbanes-Oxley compensation clawback provisions, and cover hedging transactions by executives.
And then there’s the contentious battle over the open Democrat Securities and Exchange Commissioner seat by two different factions of the party. Yeah, great move on the part of the party that will be leaving the White House soon and wants to retain it. Get into a down and dirty fight over who will be responsible for one of five votes over arcane securities laws. I kid you, though, it’s a key spot, it matters a lot who serves, and it’s too bad those in charge are not thinking about the candidate that may be best for the markets, investors, and best at working through the current partisan dysfunction of the panel.
The title of that one is “Democrats’ corporate and progressive wings dicker over SEC opening,” and for it I talked to quite a few of the progressive groups that are pushing an alternative to the Administration’s candidate. I also spoke to Keir Gumbs and Phillip Khinda, the Administration’s reported potential candidates. I remember meeting Keir a few years back at a party his law firm, Covington & Burling, held in conjunction with the Compliance Week conference. Time flies…
Although none of the organizations said to be active in advancing the names of prospects for the Aguilar position would admit to having a list, more than one said there is, in fact, “a list” and was willing to nod physically at names that have been volunteered. Purportedly on it are former U.S. Rep. Miller and Damon Silvers, director of policy and special counsel for the AFL-CIO, who have been active in testifying on the Hill as Democratic witnesses on investor, consumer and regulatory issues. The Consumer Federation’s Roper and law professor J. Robert Brown of the University of Denver are also on it. Both are members of the SEC’s Investor Advisory Group, and Roper is a former longtime member of the Public Company Accounting Oversight Board’s Standing Advisory Group.
Law professors Jennifer Taub, Mercer Bullard and Heath Abshure of the Vermont Law School, the University of Mississippi and the University of Arkansas, respectively, are also mentioned. Abshure is a former commissioner of the Arkansas Securities Department.
The purpose of coming up with names is not to make formal recommendations or endorsements, according to the spokesman from Rootstrikers, but to raise awareness of qualified candidates who do not have professional debts or ties to Wall Street.
It’s also a sign of the time that has gone by that I know and speak to four of the candidates named above. I look forward to meeting the rest. After all, this is Washington and it seems it is inevitable.