Vacancies at SEC, PCAOB: Impact on rulemaking
[UPDATED 1/6/17 - see below] As we move into 2017 and await the inauguration of a new President, vacancies among Commissioners of the U.S. Securities and Exchange Commission, and Board Members of the Public Company Accounting Oversight Board, mean that change will take place at both agencies.
Whether the new appointees will mark a shift in policy remains to be seen; as with any turnover between parties following an election, some believe President-Elect Donald Trump’s administration will seek a policy shift through its direct appointment (subject to Senate confirmation) of a new SEC Chair and two additional SEC Commissioners, and the administration’s indirect influence on the SEC’s appointment of new Board Members at the PCAOB.
The SEC, charged with regulating securities markets and protecting investors, currently has 3 of its 5 Commissioner seats filled, and that number will go down to two between now and inauguration day, given the previously announced decision by SEC Chair White to leave the SEC at the end of President Obama’s administration. The remaining two sitting commissioners are Kara M. Stein (D) and Michael Piwowar (R). As to appointments to the Commission, “To ensure that the Commission remains non-partisan, no more than three Commissioners may belong to the same political party.”
A Reuters report entitled Contenders for Senior Jobs in Trump’s Administration lists the following as potential appointees as SEC commissioners, including a new SEC Chair:
- Debra Wong Yang, a former U.S. attorney who was appointed by former President George W. Bush
- Ralph Ferrara, a securities attorney at Proskauer Rose LLP
- Paul Atkins, a former SEC commissioner who heads Trump's transition team for independent financial regulatory agencies
- Daniel Gallagher, Republican former SEC commissioner
Reuters’ Sarah N. Lynch previously reported, “Former SEC Republican Commissioner Paul Atkins is heading Trump's transition team for independent financial regulatory agencies, including the SEC,” and that following Chair White’s departure from the Commission, “[Commissioner Michael] Piwowar, as the sole Republican commissioner, will likely be designated by incoming President Donald Trump to serve as acting chairman until a permanent chairman is selected.”
Will a temporary moratorium on new rulemaking at the SEC or government-wide be issued on Inauguration Day? To what extent will a phenomena called ‘midnight rulemaking’ take place prior to that day? Some current views on this subject are discussed at: Midnight Rulemaking (GWU Regulatory Studies Center) with a historical perspective (circa 2012) published by the Congressional Research Service. See also: GOP Leaders Want No New Wall Street Regulations Until Trump Takes Office, and Presidential Transitions: A Primer on Rulemakings (Cooley LLP).
Moving to the subject of the PCAOB, created under the Sarbanes-Oxley Act of 2002 following the downfall of Enron, WorldCom, and other major companies amid accounting scandals, the organization oversees the public company auditing profession, by establishing auditing standards, conducting inspections and enforcement actions. The 5-member PCAOB Board currently stands at four sitting members, following the resignation last week of PCAOB Board Member Jay Hanson; additionally, the terms of two board members – Chair Jim Doty and Board Member Jeanette Franzel – ended in 2015 and 2016, respectively; they continue to serve pending SEC action to reappoint them or appoint new board members. In related news, Bloomberg BNA’s Laura Tieger-Salisbury reported, PCAOB’s Doty Serene as Agency Sails Into Trump Era.
Although the SEC will be down to two Commissioners for a period of time upon Chair White’s announced departure, rulemaking and enforcement action could theoretically continue apace, since the laws were revised in 1995 to permit two or even one Commissioner to constitute a ‘quorum’ under particular circumstances, as described in 17 CFR 200.41 :
200.41 Quorum of the Commission.
A quorum of the Commission shall consist of three members; provided, however, that if the number of Commissioners in office is less than three, a quorum shall consist of the number of members in office; and provided further that on any matter of business as to which the number of members in office, minus the number of members who either have disqualified themselves from consideration of such matter pursuant to §200.60 or are otherwise disqualified from such consideration, is two, two members shall constitute a quorum for purposes of such matter. [60 FR 17202, Apr. 5, 1995]
The PCAOB’s quorum requirements do not appear to be negatively impacted by the fact that the 5-member board currently has one vacancy.
New in 2017: Engagement Partner Disclosure
One major change effective in 2017 for auditors of public companies is the PCAOB final rule requiring disclosure of the name of the audit engagement partner and certain other audit participants, via PCAOB Form AP. The rule had been hotly debated during the proposal stage, with preparers, auditors, audit committee members, the legal community and investors addressing pros and cons of the potential impact of naming the engagement partner on individual and firm liability and on audit quality. The final rule incorporates the PCAOB’s consideration of feedback through comment letters, roundtables and outreach with stakeholders.
Roundup of SEC, PCAOB remarks at December, 2016 AICPA Conference
Here are some links to summaries of key remarks on current standard-setting and practice/compliance issues made by SEC, PCAOB and FASB leadership at the AICPA National Conference on Current SEC and PCAOB Developments, held earlier this month, published by:
BDO, Deloitte, EY, KPMG, Grant Thornton, PwC
UPDATE 1/6/17: Jay Clayton picked as nominee for SEC Chair
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On January 4, 2017, President-Elect Donald Trump announced his selection of Jay Clayton, a partner at law firm Sullivan and Cromwell, as his nominee for Chair of the SEC. See the press release issued by the President-Elect's transition team: President-Elect Donald J. Trump Nominates Jay Clayton Chairman of the SEC.
Wall Street Journal reporters Dave Michaels and Liz Hoffman reported earlier this week, SEC Pick Jay Clayton is a 180 from Chairman Mary Jo White.
In the days leading up to the announcement of Clayton as nominee for SEC Chair, Francine McKenna of Marketwatch reported that the SEC's current disclosure effectiveness initiative may return to what some viewed as an earlier iteration - an initiative aimed at cutting back on disclosure requirements to stem 'disclosure overload,' in her article, Trump's SEC May Take Aim at Corporate Disclosure.