Chairman Wolf Serves Notice on the SEC’s Pitt –Important New Disclosure Guidelines Must Remain in Place

(Washington, D.C.): Shortly before Congress began its August recess, the chairman of the House Appropriations Committee responsible for the Securities and Exchange Commission’s funding put down an unmistakable marker with that organization’s newly confirmed leader. In this correspondence (see the attached), Rep. Frank Wolf (R-VA) impressed upon SEC Chairman Harvey Pitt the importance he and his congressional colleagues attach to preserving a determination unveiled two months ago by then-Acting SEC Chairman Laura Unger.

Following lengthy deliberations, Ms. Unger and the professional staff advised Rep. Wolf on 8 May that the SEC had determined that national security, human rights and religious freedom concerns represent new material risk factors about which American investors are entitled to be informed. That correspondence validated the William J. Casey Institute’s long-standing belief that these new material risk factors require expanded disclosure by foreign registrants — specifically with respect to the company in question’s activities in countries under U.S. sanction regimes — so as to ensure that U.S. institutional and individual investors are adequately protected.

Rep. Wolf was moved to serve this notice on Chairman Pitt in the wake of testimony the latter provided during his confirmation hearing before the Senate Banking Committee. On that occasion, Mr. Pitt declared:

There are some who suggest that we may be changing the standards of materiality to lower the threshold because the end result may be a better one. And that’s, to me, not a step that the SEC should take lightly. It’s a step the SEC should understand. And before it opines on that, it should make sure it understands that information is material within the traditional meaning of that term unless, for some reason, there is a desire to have the SEC take a different position with respect to an issue. And that, I think, is a policy judgment that would require congressional directive.

Mr. Pitt evidently thought it ill-advised to come right out and declare his opposition to the 8 May guidelines prior to his confirmation. It is not hard to discern in the foregoing remarks, however, a determination on his part to water-down — if not to eviscerate completely — this prudent and natural evolution of the definition of material risk in the markets and the attendant, non-disruptive measures designed to protect investors.

The notion that an incoming SEC Chairman would challenge the standard of materiality agreed to by the agency’s professional staff is both shocking and troubling. By publically questioning the fact that his agency may have exercised a lower standard of materiality to effect a desired political outcome, Chairman Pitt has insulted the apolitical, discriminating judgement of senior SEC officials and damaged the agency’s credibility — the centerpiece of its standing in the markets.

The Bottom Line

It can only be hoped that Rep. Wolf’s forceful shot-across-the-bow to Harvey Pitt in advance of their 20 August meeting will be understood by the latter as the “iron-clad” determination of Rep. Wolf, other members of Congress and the NGO community to ensure that these non-political, evolving interpretations of material risk are properly made available to investors.