SEC, PCAOB Investor Advisory Committee Developments

Following is an update on some recent developments with the SEC's Investor Advisory Committee (IAC), and a similar committee formed at the PCAOB.

Earlier this week, the SEC announced SEC Investor Advisory Committee Forms Three Subcommittees to Tackle Ambitious Agenda on Behalf of Investors. The three subcommites are:

• Investor Education (chaired by Dallas Salisbury, president and CEO, Employee Benefit Research Institute)
  
• Investor as Purchaser (chaired by Mercer Bullard, founder and president of Fund Democracy, Inc. and associate professor of law, University of Mississippi School of Law)
  
• Investor as Shareholder (chaired by Stephen Davis, executive director of Yale School for Management's Millstein Center for Corporate Governance, and board member of Hermes Equity Ownership Service)

The SEC's press release notes that the next meeting of the IAC will be held in early October, and further information is available on the SEC's IAC Spotlight Page. [UPDATE: On Sept. 21, the SEC posted a Sunshine Act Notice, announcing the SEC IAC will meet on Mon. Oct. 5.]

The initial meeting of the SEC IAC took place on July 27; highlights were posted in the July 29 Announcement From the SEC Investor Advisory Committee.

Separately, James Ritchie, publisher of http://www.corpgov.net/, provided his own summary of the July 27 SEC IAC meeting (see CorpGov.net news posts for July). Ritchie, one of the moving forces behind http://www.shareowners.org/, observed regarding the SEC IAC July 27 meeting:

If there was any real bombshell at the meeting, it was an attempt by Stephen Davis to make a motion that the IAC recommend the Commission adopt a rule requiring all exchange listed companies require majority voting for the election of directors. There appeared to be a consensus belief among IAC members in the value of majority vote requirements, so Davis appears to have been attempting to move the agenda with what he termed a "shovel ready" proposal.

However, it soon became apparent that although other IAC members may believe in majority voting, they want more discussion around mechanics, to tie the issue to part of a larger package, or delay for some other reason. No vote was taken but expect this issue to be one of the first of many out of what appears to be a relatively dynamic committee. The SEC may actually be going back to its roots as the "investor's advocate."

SEC's IAC was formed under the Federal Advisory Committee Act (FACA), and the IAC's Charter notes the committee will have a two-year life (set to terminate June 24, 2011), subject to extension in accordance with FACA. As previously reported, proposed legislation to effect financial regulatory reform includes a provision to make the IAC a permanent committee of the SEC.

PCAOB Announces Members of Its Investor Advisory Group

In a parallel move, the Public Company Accounting Oversight previously announced it would form its own Investor Advisory Group (IAG), and yesterday announced the inaugural members of the PCAOB IAG.

As noted in the PCAOB IAG's Charter, the IAG is formed by the PCAOB under PCAOB's authorities established under the Sarbanes-Oxley Act. (Accordingly, there is no preset time limit on the life of the committee, although the Charter includes a provision that no member of IAG can serve for more than 9 consecutive years.)

Among other differences of note in how the PCAOB IAG will operate vs. the SEC IAC, the PCAOB IAG Charter states: "At the discretion of the Chair, the IAG’s meetings or portions thereof may be open to the public" - which tells me that the PCAOB IAG may also, in theory, hold meetings that are not open to the public/not webcast. This possibility differs from the requirements placed on the SEC IAC by the Federal Advisory Committee Act, Section 10 (a) (1), (as posted on http://www.accessreports.com/) which states: "Each advisory committee meeting shall be open to the public."

My Two Cents: The Role and Composition of Advisory Committees
My two cents (I remind you of the disclaimer which appears in the right margin of this blog):

(1) Readers of this blog will note I am a strong supporter of public (i.e., open to the public/webcast) vs. private advisory meetings, particularly when the advisee (i.e. governement agency, quasi-government agency, or standard-setter) cites "recommendations" or a "consensus" obtained from an official advisory committee as part of the basis of rulemaking.

(2) I have also observed there are benefits to convening a heterogenous vs. homogeneous advisory committee; I believe cross-discussion between representatives of "investors," "preparers/issuers," "auditors," "attorneys," "regulators" etc. in one place at one time can have some useful benefits in providing the regulator/standard-setter with an efficient and effective forum for matching up and hearing counter-arguments (and counter-counter-arguments) on particular issues, taking into account all points of view.

An example of an advisory group which I believe has shown a healthy balance of diverse interests among its membership is PCAOB's Standing Advisory Group or SAG. By convening a diversely populated advisory group like the SAG, regulators gain efficiency and effectiveness in obtaining a 360 degree view, with the benefit of cross-discussion among representatives of different constitutent groups face to face in real time (vs. going back and forth between groups); this is particularly important in achieving the difficult balancing act of weighing costs, benefits, consequences and potential unintended consequences. [UPDATE: Another example of a diversely populated advisory committee would be the SEC's Advisory Committee on Improvements to Financial Reporting or CIFiR, chaired by Robert Pozen, which issued its final report last year.]

The selection of committee members with broad backgrounds, even if their primary constituency belongs in one area or another (e.g. as 'investor representatives') , can also help provide a wider perspective, even within a given constituency. I noted that 4 members named to the PCAOB IAG are also members of FEI (Prof. Joe Carcello, Peter Nachtwey, Robert (Bob) Tarola, and former SEC Chief Accountant Lynn Turner), with three of those 4 having currently or formerly served at some point in their career as CFOs (Nachtwey, Tarola and Turner), among other positions (including positions with audit firms).

Regulators and standard-setters also engage in discussions with a variety of constituents and constituent groups on a more informal basis throughout the year, such as at meetings and conferences, which is also helpful to obtaining that 360 degree view. (For example, FEI's Committee on Corporate Reporting is one of FEI's committees which meets from time to time with regulators, and our annual Current Financial Reporting Issues (CFRI) conference - taking place this year on Nov. 16-17 in NYC) provides an opportunity to receive updates from regulators and for panelists and attendees to ask questions during Q&A.)

So, there are various opportunities for regulators and standard-setters to get feedback from various constituent groups; I just sound a note a caution about convening single-constituency advisory groups (vs. diversely populated or multiple-constituency advisory groups), particularly when they are official advisory committees formed by and for the benefit of the regulator/standard-setter, and when the recommendations of that advisory committee will presumably receive significant weight as part of the basis for conclusions in rulemaking.

For further discussion on this topic, see our earlier post, (which cites to some related remarks by Broc Romanek in TheCorporateCounsel.net blog) Yin-Yang Time for Regulators, Standard-Setters.

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