The "Reliable Technologies" Rule: What Did the SEC Intend

Do Politics Matter to this Watchdog? The Effects of Ideology on Civil Enforcement at the United State Securities and Exchange Commission John Sivolella My goal in this dissertation is to examine whether the political ideology of the federal courts, as well as the ideology of political principals in Congress and the executive branch, affect the decision making and behavior of an independent U.S. agency. The agency’s decision making pertains specifically to the application of its powers both directly through its politically appointed leadership and bureaucrats, and indirectly through a private litigation regime, in a policy area – civil enforcement – that should normatively be mostly free from politics. As a foundation for the study, I analyze the public civil enforcement program and related policy and procedural components of the United States Securities and Exchange Commission (SEC) to determine whether political ideology – and other factors – influence the agency’s strategic decision making and behavior relating to its direct bureaucratic powers of civil prosecution. I generally focus the analysis on the SEC’s selection of forum in enforcement cases. My research examines whether the agency is less likely to utilize the forum of federal court for civil enforcement actions, and will opt instead for an administrative forum, when the ideology of the court that will likely hear a case is conservative, and whether the agency is more likely to utilize the federal court system when the ideology of the court that will likely hear a case is liberal. My analysis supports a conclusion that although the characteristics of individual civil enforcement cases play a prominent role in the SEC’s strategic decision making, the impact of political ideology is significant and comparable in magnitude. The data analysis reveals that the ideology of the lower federal courts at the district level is a material factor in the strategic decision making of the SEC in its enforcement program. It also shows that the politics of some of the agency’s political principals –congressional committees responsible for the oversight and annual budget of the SEC – significantly affect the agency’s strategic enforcement behavior. This element of my research extends a line of political science literature that analyzes who controls the federal bureaucracy. I then use a different research perspective to broaden my analysis of the SEC’s enforcement behavior by examining its measured role in private securities litigation as a strategic extension of its public civil enforcement program, and explain how the agency carefully leverages the private regime to help achieve its enforcement mission. In this part of the dissertation, I conclude that the SEC actively and directly participates in the private enforcement regime through a strategic program of filing amicus curiae briefs, and participates indirectly through the fruits of its public civil enforcement litigation. This component of the dissertation rounds out my analysis by revealing an unexpected strategic dimension the agency leverages to achieve its mission.

Disgorgement of ill-gotten gain, similar to an unjust enrichment claim, is a common remedy in United States Securities and Exchange Commission (SEC) enforcement. In June 2017, the Supreme Court held in Kokesh v. SEC that disgorgement is a penalty. As such, the statute of limitations in section 28 U.S.C. § 2462 for any “fine, penalty, or forfeiture” bars the SEC from seeking disgorgement for any violation committed more than five years before suit. The Kokesh decision has reverberated through federal enforcement. Most directly, it bars SEC disgorgement claims for long-running frauds, costing the Agency $1.1 billion to date. As is typical for Supreme Court decisions, Kokesh also raised more questions than it answered. If disgorgement is a penalty, then most other enforcement remedies are also penalties and are thus time limited to five years. Moreover, disgorgement in SEC civil actions is not expressly authorized in any statute. If disgorgement is a penalty, then perhaps the SEC cannot seek disgorgement in court actions at all. More than two years after the Kokesh decision, its impact remains uncertain. Using a unique dataset of over eight thousand SEC enforcement actions filed between 2010 and 2018, this Article unravels the impacts of Kokesh. Depending on how broadly lower courts interpret Kokesh, anywhere between twenty and eighty percent of SEC disgorgement is at risk. At the same time, and contrary to claims advanced by SEC leadership, Kokesh does not substantially undermine the Agency’s abilities to compensate investors or to deter misconduct, but it will certainly change the incentives at work during settlement negotiations. However Kokesh is interpreted, one group of defendants—individuals running long-standing frauds targeting small-scale investors—clearly benefits. Many of them will be able to fleece ordinary people of their nest eggs and then keep the money they stole. Even if such defendants cannot be deterred, the result is corrosive because it offends basic notions of fairness and thus undermines the rule of law.

Among the more contentious issues discussed within the oil & gas industry recently are: Are the United States Securities and Exchange Commission (SEC) definitions of Proved oil and gas reserves obsolete, too narrow and/or unrealistic for today's oilfield technology?Are the SPE/WPC definitions of Proved oil and gas reserves much more realistic and responsive to today's comparable reporting needs?Has the meaning of the word ‘Proved' changed over the last twenty-five years?Has the meaning of the expression ‘Reasonable Certainty’ changed over the last twenty-five years? The contention here is that the answers to each of these four questions is ‘No’. This paper advances the idea that there are no material differences between the Proved oil and gas definitions promulgated by the two organizations if the original common cornerstones are honored within the true spirit of the words engaged in those definitions. The allegation that the SEC definitions for Proved oil and gas are in some way out-of-date in terms of the application of modern oilfield technology is examined and found to be without legitimate foundation. The distinctive variation between the two organizations is discussed; the SEC as a regulatory authority with responsibilities for ensuring comparable reporting by listed corporations within its jurisdiction versus the SPE as a Technical Society without such responsibilities or the structure for offering guidance regarding definitional compliance. As the ‘interpretation drift’ in the application of the SPE/WPC Proved reserve definition continues unabated, the search for an International Standard by other organizations (particularly the United Nations) only further complicates the matter. The question is posed as to whether the lack of proactive contributions in this regard from the SPE, as an organization, places the very integrity of the Society's broader reserve definitions at stake. The SPE membership are reminded that very few years ago, the SPE/WPC/AAPG definitions were very credibly put forth for adoption as the essential International Petroleum Industry Standard.

Stock Market Reaction to Elimination of the Reconciliation from IFRS to U.S. GAAP in the USA

This paper offers new methods to navigate the United States Securities and Exchange Commission (SEC) modernized reserves regulations to help oil and gas companies understand and minimize the negative financial implications of overbooking Proved Undeveloped (PUD) reserves. We show how revising SEC disclosures to represent PUD volumes in two parts, (1) development for the next three years and (2) development beyond three years, aligns with both SEC disclosures and lending requirements, thus reducing uncertainty. Since 2009, roughly half of all exploration and production (E&P) SEC filers have not complied with its Five-Year Rule, revealing a trend of overbooked reserves that have influenced hundreds of corporate bankruptcies impacting billions of dollars. These bankruptcies could have been avoided with an exemption to the Five-Year Rule, which SEC regulations allow under specific circumstances, yet rarely grant. Many operators fund the development of PUD reserves through reserve-based loans (RBLs), which require repayment in three to five years with semi-annual redeterminations. This disclosure revision does not require a change in SEC regulations; it simply requires more SEC flexibility in granting exemptions to the Five-Year Rule, ultimately providing comparability of reserves volumes, reasonable certainty to capital availability, and clearer financial analysis for investors. We compiled PUD reserves data from 2009 to 2022 using a database of over 3,500 annual filings spanning 226 companies, comparing operators' ability to convert PUD reserves to proved developed producing (PDP). Our PUD conversion analysis involved first calculating a company's Annual PUD Conversion Rate, which the SEC and financial analysts expect to equal 20% per annum. Percentages below 20% have a higher risk of receiving an SEC comment letter requesting additional information on a filer's PUD development plans. Over the 14 years of data reviewed, 65% of companies did not achieve a PUD conversion rate of 20%, and 50% did not achieve a rate of 15%. These results are not problematic when viewed in the context of newly established or growing companies. Additionally, if PUD reserves grow, the annual conversion rate should not necessarily equal 20%. This metric offers limited insight into a filer's ability to convert PUD reserves over a five-year period but still elicits scrutiny from the SEC. Working from the Annual PUD Conversion Rate, we then calculate the Five-Year PUD Conversion Rate. This approach produced the most noteworthy findings. This method calculates whether a company converted all its PUD reserves to PDP within five years based on SEC guidelines. After culling data resulting from bankruptcy, acquisitions, or poor data quality, we found that roughly half of E&P operators did not convert their PUD reserves to PDP over five years. This research shows that the overbooking of PUD reserves continues to be an industry issue that could be remedied through modified disclosures and leniency in PUD development timing. These revisions provide a solution for booking reserves volumes within the existing SEC regulations.

This chapter examines how COVID-19 has impacted cryptocurrency enforcement at the state level. This author employs a qualitative single case study method and investigates the cryptocurrency enforcement actions of the United States Securities and Exchange Commission (SEC) in 2020. The data were collected from SEC cryptocurrency press releases and public statements. The US Securities and Exchange Commission (SEC) has brought 28 enforcement actions against companies and individuals in the crypto industry in 2020 regarding the three types of cryptocurrency enforcement actions and trading suspensions (trading suspension, litigation, and administrative proceeding). Among them, litigation is the most common type of cryptocurrency enforcement action taken by the SEC. This author concludes that the law enforcement agencies in the United States faced several challenges before and during the pandemic. Finally, the author suggests some measures that law enforcement agencies can take to address the above challenges.

The United States Securities and Exchange Commission (SEC) issued an interpretative release ostensibly mandating the disclosure of the impact that climate change may have on the registrant. One means of enforcement for this release is through the use of comment letters. Prior empirical studies have supported the argument that the SEC oversight through issuing comment letters is effective in enhancing the quality of firms’ disclosures (Asthana & Boone, 2009; Johnston & Petacchi, 2017). With a total of 27 comment letter cases (34 comments based on the topics) regarding climate change disclosure, we do not find clear evidence strongly supporting that the SEC implements its oversight process through systematic procedures and that SEC comment letters enhance the quality of firms’ climate change disclosure. Although some firms responded to the comments proactively, qualitative analysis reveals that the firm’s revisions were not sufficient to provide useful information for market participants in general. The overall finding suggests that the current oversight mechanism for climate change disclosure needs to be significantly improved to enhance the quality of firms’ climate change disclosure.

The United States Securities and Exchange Commission (SEC) is a government agency focused on protecting investors, maintaining capital markets, and facilitating capital formation. Starting in early 1930s, the SEC has been the key organization overseeing federal securities law compliance and bringing enforcement actions against violators. The SEC is headed by five commissioners appointed by the US President. Its 3500 employees are organized into 5 divisions and 19 offices as well as 11 regional offices. Bearing part of the blame for the recent stock market crashes, the SEC is now in the process of upgrading its structure, functions, and key operations.

Oil and gas reserve value disclosures and bid-ask spreads

International oil and gas companies listed in New York must publish the information of oil and gas reserves under the SEC (United States Securities and Exchange Commission) standards every year. For greatly improving the SEC reserve, the SEC reserve value and the SEC reserve substitution rate, in this article not only the SEC reserve equations have been determined but also the SEC reserve value models have been established. The SEC reserve value models have been verified as correct. Based on these models, the multivariate function calculus method, the multivariate function limit method and the function recurrence method have been adopted to research parameter sensitivity differences rules, parameter adjustment directions, parameter adjustment degrees and SEC reserve parameter linkage adjustment rules. The research is significant, because there are great differences between SEC standards and China’s in reserve management mode, reserve estimation method system and financial management system. It is just these differences that cause the frequent adjustment of SEC reserve parameters during the process of SEC reserve submissions each year. As a result, this article reaches some conclusions. Above all, the article has clarified the parameter quantitative conditions that lead to the sensitivity between the SEC reserve and the initial production to begin stronger and weaker than the sensitivity between the SEC reserve and the price in production exponential, hyperbolic and harmonic decline types. Furthermore, the article has clarified the parameter quantitative conditions that lead to the sensitivity between the SEC reserve value and the initial production to begin stronger and weaker than the sensitivity between the SEC reserve value and the price in common production exponential decline types. Moreover, the article has clarified reserve parameter linkage adjustment rules and found the most significant parameter whose least adjustment will cause the largest reserve increase. In addition, the function calculus method adopted to disclose reserve parameter sensitivity rules will expand the parameter sensitivity analysis method that took the previous statistical mapping method as the main analysis method.

Summary This paper provides background information on the US Securities and Exchange Commission's (SEC) newly defined term, reliable technology, which plays a prominent role in the SEC's modernized regulations for reporting oil and gas reserves. This background information will include criteria that reliable technology must meet to ensure that it will provide the confidence level required to categorize certain resources as reserves of any category (proved, probable, or possible). The new SEC rules for disclosing reserves no longer require that a limited number of rigidly specified technologies be used to establish the confidence level of reserves that a filer discloses. Reasonable certainty was required in the past because only proved reserves could be disclosed, and, as an example, reasonable certainty of economic production required either flow tests or actual production to the surface except in the deepwater Gulf of Mexico. The new rules allow any technology that has been proved empirically to lead to correct conclusions, including proprietary technology, to be used to determine the proper classification for a given petroleum accumulation. Unfortunately, the industry has been provided with only limited guidance on which technologies will be satisfactory and which technologies will not. This paper will present an analysis of SEC publications for possible insight into its thinking about this important issue. Proper disclosure of reserves will depend vitally on a proper interpretation of reliable technology. Note: The opinions expressed in this paper are the author's alone. They represent the opinions of neither the US SEC nor its staff members.

Learnings from a Worker Welfare Program Implementation for Employees

We use United States Securities and Exchange Commission (SEC) comment letters and accounting restatements to investigate the SEC’s Division of Corporation Finance (DCF) financial reporting oversight procedures. We investigate how DCF compares with “other monitors” in identifying disclosures requiring restatement and how these restatements differ. Our tests focus on DCF as a whole and on the individual industry offices that comprise the DCF. We conclude that, while there are significant variations across DCF offices in the prompting of restatements, company variables used by the SEC to select firms for review appear consistent with SOX section 408 criteria. We also find the oversight process focuses on companies with weaker “other monitors,” i.e. audit firms. Our results provide evidence for the debate on whether or not an SEC type review and comment letter monitoring process could serve as the model for achieving the oversight for IFRS enforcement that is critical to international capital markets.

PurposeThe purpose of this study is to examine the association between revenue-based earnings management in the periods immediately before and after firms’ initial public offerings (IPOs) and regulatory scrutiny by the United States Securities and Exchange Commission (SEC) during review of IPO firms’ registration statements.Design/methodology/approachThis paper uses conditional discretionary revenues (Stubben, 2010) as its measure of earnings management, and revenue recognition comments delivered by the SEC as its measure of regulatory scrutiny. The authors use ordinary least squares regression (OLS) models, as well as a supplemental count model, to assess the association between conditional discretionary revenues and revenue recognition comments delivered by the SEC.FindingsThis study finds evidence of a positive association between earnings management measures in the pre-IPO period and the number of revenue recognition comments received by those firms during the SEC’s review. Furthermore, this study provides evidence that greater numbers of comments are associated with declining earnings management measures in the post-IPO period. However, the evidence suggests that these associations apply only to income-decreasing earnings management.Originality/valueThis paper extends the IPO earnings management literature by using conditional discretionary revenues as the measure of earnings management, and contributes to a nascent research stream in the accounting literature by investigating the SEC’s comment letter process and its association with, and impact upon, earnings management in the IPO process.

Summary The United States Securities and Exchange Commission (SEC), on 29 December 2008, adopted new rules for disclosing oil and gas reserves. The definitions contained within these rules are broadly consistent with the SPE Petroleum Resources Management System (PRMS); the definitions in the previous rules differed from PRMS in a number of specific instances (SPE 2007). A notable difference in the new rules is inclusion of more nontraditional resources as potential oil and gas reserves rather than as mining reserves. With new disclosure rules, new questions arise about the manner in which reserves in nontraditional resources are to be reported.