Tuesday, October 23, 2018

Jackson frames competition as ‘fourth pillar’ of SEC’s mission

By Anne Sherry, J.D.

SEC Commissioner Robert Jackson told attendees at an Open Markets Institute event that despite being known for having a tripartite mission, the SEC was founded in part on the basis of competition being a critical element of the capital markets. The concentration of power in the capital markets should inform the agency’s policy choices, and competition economics should be formalized as part of its work.

Jackson noted that competition was on the mind of the drafters of the Securities Act and that even today, the ’33, ’34, and ’40 Acts require SEC commissioners to “consider, in addition to the protection of investors, whether [an] action will promote efficiency, competition, and capital formation” when making rules. Fostering competition is thus the fourth pillar added to the SEC’s tripartite mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation.

The commissioner emphasized three areas of the capital markets in which competition is absent, but said it is a potential problem in nearly every aspect of the SEC’s oversight. The fact that there are 13 public stock exchanges sounds like competition until you learn that 12 of them are owned by three corporations, Jackson said. He also cited the fact that small companies still pay investment bankers 7 percent to go public, the same IPO fee as when he was a banker himself twenty years ago. “It makes little sense to address the decline in smaller public companies without grappling with the 7% IPO tax,” the official said.

Finally, Jackson pointed to a lack of competition among credit agencies, where three firms rate most debt securities. There are only four major accounting firms, two major proxy advisory firms, and a single company that counts the votes in corporate elections. Because of the lack of competition in these areas, “ordinary investors are driving on roads riddled with tollbooths.”

Jackson suggested four ways in which the SEC can begin to foster competition in the capital markets. The first is to consider the absence of meaningful competition in the agency’s policy decisions. A fully competitive market may not need conflict of interest rules, for example, but investor protections need to be strengthened when investors have fewer options. Jackson has also called for the creation of an Office of Competition Economics within DERA to formally bring this field into the SEC’s work.

The agency should also collaborate more closely with the Federal Trade Commission to oversee the markets together. Finally, Jackson cautioned against the SEC’s simply withdrawing from regulation in hopes that this will jumpstart competition. Despite some arguments that burdensome regulation is the reason for lack of competition, there is little reason to think that deregulation alone will bring in new competitors to challenge the established players.