Specific Proposals of the SEC Modernization Act

US CongressI recently made a blog post about Congressman Bachus’ legislation proposing major SEC restructuring.  Here are the changes to the SEC proposed in his SEC Modernization Act:

Consolidation of Duplicative Offices

  • Amend Dodd-Frank Act Section 965 to consolidate the SEC Office of Compliance, Inspections, and Examinations (OCIE) and its employees into the Divisions of Trading and Markets (TM) and Division of Investment Management (IM). A new Office of Compliance, Inspections, and Examinations would be created within the TM and IM divisions to house all examination, inspection, and compliance staff. Each new office would have a deputy director who would report to his or her respective division director. The SEC’s regional offices will report to the Division of Enforcement, the Division of Investment Management, and the Division of Trading and Markets.
  • Amend Dodd-Frank Section 965 to consolidate the Division of Risk, Strategy and Innovation and its employees into the Divisions of Corporation Finance, Enforcement, Investment Management and Trading and Markets. A new Office of Risk, Strategy and Innovation would be created within the four remaining SEC divisions. Each office would have a deputy director who would report to their respective division director.
  • Decouple the SEC’s chief economist and the Division of Risk, Strategy and Innovation since the legislation eliminates this Division. The chief economist would report to the SEC chairman.
  • Amend Dodd-Frank Section 342 to consolidate the pre-existing SEC Office of Equal Employment Opportunity into the newly established Office of Minority and Women Inclusion. The Office of Equal Employment Opportunity will have a deputy director who reports to the director of the Office of Minority and Women Inclusion.
  • Amend Dodd-Frank Section 915 to consolidate the Office of the Investor Advocate as established by the act and integrate its functions into the preexisting SEC Office of Investor Education and Advocacy. The investor advocate would be a deputy director who reports to the director of the Office of Investor Education and Advocacy.

Managerial and Ethics Reforms

  • Combine the functions of the existing SEC Executive Director (ED) into the functions and role of the existing SEC Chief Operating Officer.
  • In light of recent questionable ethics guidance, the SEC Office of Ethics Counsel shall memorialize guidance provided to all SEC employees. Those records and memos shall be made available to the SEC Inspector General if an investigation so demands.
  • Not later than Jan. 31 of every calendar year, the SEC Chairman shall submit in writing the agency’s agenda for that year to the House Committee on Financial Services and the Senate Banking Committee.
  • Codify that the SEC Inspector General is an independent office within the Commission that reports directly to the Chairman.
  • The Office of the Chairman will expand to be composed of the COO, the Office of General Counsel, the Secretary, and the Chief Accountant. Also, the Offices of International Affairs, Legislative and Inter-Governmental Affairs, and Public Affairs will be consolidated into a new Office of External Affairs.  External Affairs will also be housed within the Office of the Chairman.
  • The following SEC offices shall report to the COO: Office of Acquisitions; Office of Administrative Services; Office of Financial Management; Office of FOIA, Records Management, and Security; Office of Human Resources Office of Information Technology; Office of Interactive Disclosure; Office of the Administrative Law Judges.
  • To avoid potential conflicts of interest within the commission after employees leave employment, the SEC Office of Ethics Counsel shall develop a system of documenting employee recusals. To accomplish this goal, the SEC shall establish a database to document recusals and to identify potential conflicts of interest by documenting matters for which the employee was personally and substantially involved while an SEC employee.

Additional Improvements

  • Although the Dodd-Frank Conference Committee adopted an amendment offered by Subcommittee Chairman Garrett to create an independent SEC Ombudsman in Section 919D, this provision was inexplicably altered by the Senate Conferees to have this new ombudsman report to the Office of the Investor Advocate, which negates the entire function of an ombudsman to interact with market participants without fear of reprisal by SEC staff. The legislation would restore the Garrett amendment and establish the ombudsman as an independent office reporting directly to the SEC Chairman. As Dodd-Frank confers new prudential regulatory authorities to the SEC, the SEC needs to emulate the prudential regulators and have an independent ombudsman to receive complaints and questions from regulated entities.

I remind you again that this is a wonderful opportunity to address SEC restructuring issues specifically affecting smaller business going public, particularly as they currently hamper smaller business capital formation, such as:

  • Modification of SEC Prospectus Delivery Rules to allow smaller public companies going public that file full SEC registration statements on Form S-1 to use the internet to attract investors.
  • Allowing internet advertising and solicitation of Regulation D Rule 506 qualified Private Placements as long as all other requirements of Rule 506 are met.

As previously noted, I will be writing to the Congressman in the near future and will post my letter on the site when I send it.  I encourage all readers of this site to do the same.

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