SEC Halts Fraudulent Offering by Florida Investment Adviser (SEC Release)SEC Evaluates Possibility of Granting Relief During Catastrophic Hurricane Laura (BrokeAndBroker.com Blog)SEC Charges BorgWarner for Materially Misstating its Financial Statements (SEC Release)SEC Modernizes the Accredited Investor Definition (SEC Release)
Joint Statement on the Failure to Modernize the Accredited Investor Definition (SEC Commissioners Allison Herren Lee and Caroline Crenshaw)
SEC Adopts Rule Amendments to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors Under Regulation S-K (SEC Release)
Modernizing the Framework for Business, Legal Proceedings and Risk Factor Disclosures (SEC Chair Jay Clayton)Statement at Open Meeting on Modernization of Regulation S-K 101, 103, and 105 (SEC Commissioner Hester M. Peirce)
[C]oral Gables and Coggins solicited investors for a private fund they managed by misrepresenting the fund's past performance, the amount of assets they were managing, and Coggins' experience as a portfolio manager. For example, the complaint alleges that one document Coggins provided to investors and potential investors showed 37 months of positive monthly performance even though, in reality, in approximately 26 months during the specified timeframe the Fund had negative performance. The complaint further alleges that Coral Gables and Coggins falsified brokerage records and investor account statements and created and sent fake audit opinions to investors and third parties. As alleged, within hours of receiving a request from the SEC to preserve documents, Coggins destroyed evidence related to his fraudulent conduct. According to the complaint, Coggins misappropriated investor funds for personal use, including a luxury vehicle and travel.
[F]rom 2012 to 2016, BorgWarner failed to report over $700 million in liabilities associated with future asbestos claims. According to the SEC's order, BorgWarner did not conduct any substantive quantitative analysis to estimate these asbestos claims, despite possessing nearly 40 years of historical raw claims data. According to the order, BorgWarner erroneously relied on untested assumptions in concluding that it could not estimate its liabilities for these claims, including, for instance, that its products were unique among asbestos defendants and that industry benchmarks were inapplicable for purposes of calculating an estimate. The SEC order finds that as a result of this accounting error, BorgWarner's financial statements were materially misstated. As set forth in the SEC's order, in early 2017, BorgWarner reported a charge for these claims and, in 2018, BorgWarner restated its financial statements to report the charges in the appropriate periods dating back to 2012, aggregating $703.6 million related to the asbestos claims. BorgWarner also disclosed that its internal controls over financial reporting were ineffective.
We are adopting amendments to the definition of "accredited investor" in our rules to add new categories of qualifying natural persons and entities and to make certain other modifications to the existing definition. The amendments are intended to update and improve the definition to identify more effectively investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements, and related investor protections, provided by registration under the Securities Act of 1933. Specifically, the amendments add new categories of natural persons that may qualify as accredited investors based on certain professional certifications or designations or other credentials or their status as a private fund's "knowledgeable employee," expand the list of entities that may qualify as accredited investors, add entities owning $5 million in investments, add family offices with at least $5 million in assets under management and their family clients, and add the term "spousal equivalent" to the definition. We are also adopting amendments to the "qualified institutional buyer" definition in Rule 144A under the Securities Act to expand the list of entities that are eligible to qualify as qualified institutional buyers
We are expanding the definition of accredited investor to include an alternative to the wealth test for natural persons - specifically, persons who hold certain professional certifications and designations and other credentials from accredited educational institutions. The Commission will be able to designate these by Order based on a number of criteria. The initial certifications include the Financial Industry Regulatory Authority, Inc. (FINRA) Licensed General Securities Representative (Series 7), Licensed Investment Adviser Representative (Series 65), and Licensed Private Securities Offerings Representative (Series 82) certifications. There is no doubt persons who have successfully obtained these certifications - and maintained them in good standing - are sufficiently financially sophisticated to participate in the private markets.During the notice and comment period, there have been several criticisms of these modest, incremental efforts to modernize our accredited investor rules that I would like to address. It has been suggested that expanding the accredited investor definition to include these clearly sophisticated persons will result in more private financings. Some think this is a positive development, some think it is negative. When you look more closely, and in particular recognize that there are many segments in the private markets and many types of private financing, it is only positive. Any expansion in private financing due to these amendments, given the limited nature of the expansion of the accredited investor definition, is likely to be most meaningful in the area of small, local business financing. Adding clearly financially sophisticated persons to the pool of persons eligible to participate in these financings is a laudable and unassailable policy goal. Of course, many have asked us to go much further in expanding the pool of eligible investors, citing, for example, the wealth gaps faced by underrepresented founders and the importance of improving access to capital for underserved businesses and communities. A number of commenters on the Commission's efforts in the private markets space have noted that women, minority and other underrepresented entrepreneurs, as well as those outside of the coastal urban areas where traditional venture capital investment has been more focused, often do not have an existing network of wealthy friends and family and, as result, struggle to access capital. . . .
The accredited investor definition is the single most important investor protection in the private market. Today's amendments purport to "update" that definition while leaving in place 38-year old wealth thresholds, declining to index the thresholds to inflation, and declining to provide economic analysis to show how the failure to index will affect American investors-the bulk of whom are seniors-going forward.With its actions today, the Commission continues a steady expansion of the private market, affording issuers of unregistered securities access to more and more investors without due regard for the risks they face, and without sufficient data or analysis to ensure that our policy choices are grounded in fact rather than supposition. . . .= = = = = Private offerings lack the traditional investor protections that attach to registration, most importantly transparency and liquidity. Thus, the principal means of protecting investors in private markets is to work to ensure that those offering unregistered securities can only sell to investors who can assess and bear the heightened risks in private markets. Some argue that such an effort is paternalistic and that all investors should be free to risk their livelihoods as they see fit. But that evinces a disregard for the very reason the SEC was created and the fundamental differences between the public and private markets. The SEC's core mission is to protect investors and we should not substitute a policy of "caveat emptor" for meaningfully carrying out that mission.
I support the amendments we adopted today because they are our first steps away from the current, single criterion wealth-based system of eligibility. Nevertheless, I would have supported venturing further down this path of expanding the definition to include knowledge-based eligibility. For example, members of the expert staff we have here at the SEC, who review registration statements for material disclosure and investigate potentially fraudulent activity in our markets, will not qualify as accredited investors because the eligibility criteria are still very limited. It certainly seems a strange outcome that so many individuals who enforce our securities laws and regulate financial markets are not considered sophisticated enough to invest in those very same markets. To me, the conclusion is that our work is not done.
The Securities and Exchange Commission today announced that it voted to adopt amendments to modernize the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K. These disclosure requirements have not undergone significant revisions in over 30 years. The amendments the Commission is adopting today update these items to reflect the many changes in our capital markets and the domestic and global economy in recent decades.
The rules we adopt today build on our materiality-based disclosure framework. The effectiveness of this framework in providing the public with the information necessary to make informed investment decisions has proven its merit time and again as markets have evolved when we have faced unanticipated events. This has been widely demonstrated in registrant disclosures regarding the effects of COVID-19. We have seen disclosures shift to emphasize matters such as liquidity, cash needs, supply chain risks, and the health and safety of employees and customers. This has served as a reminder that our rigorous, principles-based, flexible disclosure system, where companies are required to communicate regularly and consistently with market participants, provides countless benefits to our markets, our investors and our economy more generally.One improvement in today's rules I want to highlight is the topic of human capital. I fully support the requirement in today's rules that companies must describe their human capital resources, including any human capital measures or objectives they focus on in managing the business, to the extent material to an understanding of the company's business as a whole. From a modernization standpoint, today, human capital accounts for and drives long-term business value in many companies much more so than it did 30 years ago. Today's rules reflect that important and multifaceted shift in our domestic and global economy.
Both diversity and climate risk generally fall under the rubric of Environmental, Social, and Governance or ESG risks. ESG investing is no longer just a matter of personal choice. Asset managers responsible for trillions in investments, issuers, lenders, credit rating agencies, analysts, index providers, stock exchanges-nearly all types of market participants-use ESG as a significant driver in decision-making, capital allocation, pricing, and value assessments.These factors have been integrated into traditional analyses designed to maximize risk-adjusted returns on investments of all types. A broad swath of investors find ESG risks to be as or more important in their decision-making process than financial statements, surpassing traditional metrics such as return on equity and earnings volatility.In this release and elsewhere, however, the Commission takes the position that it does not need to require or specify these types of disclosures because our principles-based disclosure regime is on the job and will produce any disclosures on these topics that are material. Investors are asked to trust that each individual company has gauged materiality on these complex issues with flawless precision and objectivity.. . .There is room for discussion as to which specific ESG risks and impacts should be disclosed and how. But the time for silence has passed. It's time for the SEC to lead a discussion-to bring all interested parties to the table and begin to work through how to get investors the standardized, consistent, reliable, and comparable ESG disclosures they need to protect their investments and allocate capital toward a sustainable economy.
[I] am concerned that today-in the middle of a crisis affecting all aspects of our market-the majority of the Commission is failing to take the opportunity to provide investors with critical and useful information about key corporate metrics. This rule is presented as a "modernization" of certain provisions of Regulation S-K-but the rule before us today fails to deal adequately with two significant modern issues affecting financial performance: climate change risk and human capital. As Commissioner Lee noted in her statement, the final rule is also silent on diversity, an issue that is extremely important to investors and to the national conversation. The failure to grapple with these issues is, quite simply, a failure to modernize.Although the Commission recognized more than a decade ago the impact that climate change related matters have on certain companies' businesses and operations, today's "modernized" rule will reduce certain environmental risk disclosures by up to 30 percent.And though the Commission has taken a step in the right direction by adding a reference in the final rule to human capital, I worry that the policy choice to impose a generic and vague principles-based requirement will fail to give American investors the information they need about how companies will weather this storm.The question of whether climate change and human capital are material concerns of investors is no longer academic. The 2019 PG&E bankruptcy after the tragic California fires and the more than $220 billion in damages to the U.S. economy from the 2017 hurricane season demonstrate that the risks posed by climate change are here, real, and quantifiable. Companies know how climate change is impacting their businesses, supply chains and the economy overall; so should their investors.
I would have preferred to eliminate the remaining vestiges of a prescriptive approach, such as the requirement to disclose the number of employees. That metric-like others some advocated for inclusion under the human capital rubric-might be material for some companies under some circumstances, but not for others. Investors are likely to receive more meaningful disclosure about a registrant's workforce from the principles-based requirements adopted today. Regardless, I am encouraged by the incremental reforms in this release, including the modified disclosure threshold for environmental proceedings to which the government is a party that provides registrants with flexibility to select an appropriate threshold. I view one reform as a bit of an experiment. We are requiring summary risk factor disclosure if the risk factor section exceeds fifteen pages in length. Will the penalty of having to prepare a summary be sufficient to overcome the fear of litigation that pushes companies to disclose many pages of risks?
The amendments we are considering will allow our public reporting companies to present more clearly the information that they consider material in running their businesses. Such a shift away from dated, prescriptive disclosure requirements to a more principles-based disclosure regime will have tremendous benefits for investors who will now be able to focus their attention on material information that better captures the circumstances of each particular company.