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In his recent remarks before the Practicing Law Institute’s 55^th Annual Institute on Securities Regulation, SEC Commissioner Mark Uyeda succinctly captured key concerns raised by issuers about the SEC’s disclosure rulemaking agenda and process.

Among them:

• Unrealistic evaluation of the direct and indirect costs of the rules to companies and investors, both on a standalone basis and in the aggregate
• Inappropriate use of the agency and rulemaking process to address issues unrelated to share valuation
• Issuance of final rules that vary significantly from the proposed rules and/or after the passage of an extensive period of time without further economic analysis or opportunity for public comment on the changed proposal
• Meaningful, tiered, scaled disclosure that considers the disproportionate impact of the rules on a wide range of smaller companies

Commissioner Uyeda cited the SEC’s 2022 pay versus performance disclosure rule as an example where the SEC did not follow best practices in rulemaking. He noted that the SEC failed to conduct an updated economic analysis since the rule was first proposed in 2015 or to seek input on a revised methodology for calculating “compensation actually paid.” Under the final rule, about one-third of companies have reported negative compensation actually paid, a disclosure of questionable value to investors. The final rule also imposes significant costs on many issuers, primarily because companies have to retain consultants to make equity award fair value calculations not otherwise required by the Commission’s prior compensation rules. “A rule that is both costly and ineffective is something that a regulator must avoid,” Uyeda observed.  

Commissioner Uyeda identified the proposed climate rule as an appropriate candidate for a reproposal in the event the final rule will differ substantially from the proposal, which is anticipated based on the 16,000+ comments, as well as the passage of time from the initial proposal (March 2022) to issuance of a final release. He also noted the SEC’s unrealistically low hourly outside professional billing rate used for purposes of cost estimations in its rulemakings generally, which was $400/hour from 2006 to the latter part of 2022, at which point it was inflation-adjusted to a still unrealistically low average of $600/hour. The proposed climate rule still reflects the $400/hour average.

See these articles and posts: “SEC commissioner suggests ‘re-proposing’ climate risk disclosure rule” (CFO Dive); “Commissioner Uyeda has some suggestions about the rulemaking process” (Cooley), and “Commissioner Uyeda Urges SEC to Improve Rulemaking Process” (Fried Frank).

                 This post first appeared in the weekly Society Alert!