June 18, 2014

On Its 80th, How Can the SEC Renew Its Mission?

Hester Peirce

Former Senior Research Fellow
Summary

The Securities and Exchange Commission turned 80 earlier this month with hardly a celebration. Given its likely near perpetual existence, the 80-year-old SEC is but a child in human years. Nevertheless, eight past decades warrant some thoughts on the agency's future. How should this octogenarian change the way it fulfills its threefold mission-protecting investors, facilitating capital formation, and maintaining fair, orderly, and efficient capital markets?

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The Securities and Exchange Commission turned 80 earlier this month with hardly a celebration. Given its likely near perpetual existence, the 80-year-old SEC is but a child in human years. Nevertheless, eight past decades warrant some thoughts on the agency's future. How should this octogenarian change the way it fulfills its threefold mission-protecting investors, facilitating capital formation, and maintaining fair, orderly, and efficient capital markets?

The SEC particularly prides itself on protecting investors. "We are the investor's advocate since June 6, 1934," beams the SEC website. That's a noble part of the agency's mission, but one that is hard to implement. The SEC's approach too often entails making decisions for investors, rather than providing them a framework within which to make their own choices. Examples include preventing disfavored financial products from making it to market, imposing uniform corporate governance mandates on companies, or insisting that price be the sole factor dictating where an order is executed. 

The more the SEC makes decisions on investors' behalf, the more reliant they become on the SEC, and the less vigilant and inquisitive they are. It is not surprising then that when they incur losses on their investments, victims often call upon the SEC to reimburse them for their losses.

Rather than encouraging investors to rely on the SEC's ability to ensure that financial products are safe, appropriate, and profitable, the SEC should work to ensure that investors do their own homework. The SEC should foster investor skepticism with the goal of ensuring that investors ask lots of probing questions before investing their hard-earned money. The SEC did something like this more than a decade ago when it set up a mock scam website. Would-be investors in the too-good-to-be-true McWhortle Enterprise were told that they were mock-scammed and warned not to be so gullible in the future.

The SEC should take care not to inadvertently harm investors. Costs imposed on companies are passed through to investors. The SEC often imposes penalties on companies to punish missteps by management, but shareholders-often the same shareholders who were victims of the underlying misconduct-foot the bill. In another example, in April, the SEC released revised guidance governing waiver decisions for companies that would otherwise be ineligible to rely on rules that facilitate their communication with investors. The SEC should not be stingy in granting these so-called WKSI waivers, because they benefit investors by getting more information to them faster. As SEC Commissioner Daniel Gallagher warned, punitively "stripping a company of WKSI status could make shareholders less informed, compounding the harm to investors and impeding price discovery and capital formation to the detriment of the broader market."

Protecting investors is just one part of the SEC's mission. The agency ought also to renew its commitment to the other two-thirds of the mission-facilitating capital formation and maintaining fair, orderly, and efficient capital markets. Chair Mary Jo White recently pledged to take on the latter part of the mission in a Michael Lewis-inspired speech pledging a review of equity market structure. The SEC should not let the fascinating equity markets crowd out issues of perhaps more pressing importance in the municipal and corporate bond markets. SEC commissioners Gallagher and Michael Piwowar have pointed recently to the importance of reforms in these areas.

Eight decades can dull the memory, and too often, the SEC forgets that the capital markets exist for a powerful purpose and one that inures to the whole society's benefit. Capital markets, if they work properly, enable people with money to find businesses with promising ideas. Together these investors and businesses generate the economic growth and prosperity that benefit all of us. Among the most important ways the SEC can show its commitment to facilitating capital formation is to allow the smallest businesses to raise capital without expending more time, money and attention than is reasonably necessary to ensure that investors in those ventures can make informed decisions. Judging by the many regulatory roadblocks to small business capital formation, the SEC has been reluctant to do this in the past.

Because agencies don't die, an 80-year agency is not old enough to be set in its ways. As the SEC embarks on another decade, it should take advantage of its relative youth to make needed changes in its approach to its investor protection, capital formation, and market facilitation mission.