Recent Insights from the SEC Regarding Dodd-Frank Rulemaking and Initial Coin Offerings
By: Alexandria Kane
On January 22, 2018, US Securities and Exchange Commission (SEC) Chairman Jay Clayton gave the opening remarks at the Securities Regulation Institute. His comments provided helpful guidance on several noteworthy topics including the SEC’s approach to the remaining mandatory rulemaking provisions under the Dodd-Frank Act, and expectations for market professionals involved in initial coin offerings (ICOs).
Mandates under Dodd-Frank
In July 2017, the SEC had altered certain rulemaking priorities for the year, moving the clawback, pay versus performance disclosure and hedging disclosure proposals required by Dodd-Frank from the proposed action section of the unified agenda of regulatory actions (which lists regulations that the SEC expected to propose or finalize within the next year) to the long-term actions section of the agenda. In his remarks on January 22, Chairman Clayton reaffirmed the SEC’s commitment to complete the rulemaking mandates imposed under Dodd- Frank. Chairman Clayton commented that the speed of implementation of the remaining rules is based upon multiple variables including “mission-critical demands and the complexity of the mandates themselves” and stated that the SEC will have to be “flexible in timing, in sequence and in content because there are many factors beyond our control that can dictate how to apply the agency’s limited resources.”
In analyzing the rules which remain to be implemented, Chairman Clayton broke them into four categories. The first category is the remaining rules related to security-based swaps. Clayton commented that the final implementation of these rules should be done holistically since many of these rules are substantially interrelated. The SEC is also seeking to harmonize its rules with those governing swaps adopted by the Commodity Futures Trading Commission (CFTC) in order to increase effectiveness and reduce complexity and costs. Clayton reported that discussions with the CFTC are well underway in this regard.
Clayton grouped the executive compensation rules into the second category and commented that “we are writing on an already very colorful canvas and different constituencies see the rules as serving different, and sometimes inconsistent, goals.” Clayton indicated that he believed a serial approach would be most efficient. He highlighted the new interpretive guidance issued by the SEC with respect to pay ratio disclosure which, while true to the statutory mandate, was intended to help companies reduce compliance costs and indicated that he is discussing implementation of the remaining executive compensation rules with the same themes in mind.
The third category is specialized disclosure rules such as resource extraction disclosure. The SEC had previously adopted two sets of rules for resource extraction issuers; the first were vacated by a U.S. District Court in 2013 and the second were repealed by Congress in 2017. Clayton indicated that the SEC’s task is challenging and that while various groups stand ready to challenge any rulemaking, it does not relieve the SEC of their responsibility to implement a rule.
The last category is for rules in which market developments have mitigated some of the concerns which led to the initial statutory requirements. Clayton cited the compensation clawback rules and noted that numerous companies have already implemented policies in excess of what would be required under the proposed rules and that some have even attempted to clawback compensation under such policies. He indicated that SEC priorities, and the rules themselves, should reflect these market developments.
Expectations for Market Professionals
Chairman Clayton admonished market professionals, especially lawyers, for the recent roles they have played in certain ICOs and stated that “they can do better.” In particular, he highlighted scenarios in which lawyers assist promoters in structuring offerings that have many features of securities offerings but advise clients that the products are not securities, and in which lawyers take a step back from key issues, including whether a coin is a security and whether the offering qualifies for an exemption from registration, even in circumstances where registration is likely required. Chairman Clayton indicated that the SEC will be on high alert for ICOs that are “contrary to the spirit of our securities law and the professional obligations of the U.S. securities bar.”
Additionally, Chairman Clayton cautioned public companies against changing their name or business model to capitalize on blockchain or distributed ledger technology without any meaningful track record and without providing significant disclosure to investors about the changes and the risks involved.