By Amy Leisinger, J.D.
In recent remarks, SEC Commissioner Hester Peirce discussed the agency’s initiatives to evaluate existing rules to promote functionality and efficiency and to consider how to change and/or adopt new rules to fulfill the SEC’s mission to promote fair and orderly markets and protect investors. According to the commissioner, it is not appropriate to “nostalgically hang on” to old rules that may have served a purpose in the past when markets have changed dramatically over time. The cost of unnecessary regulatory burdens is borne by both companies and investors and can stifle innovation, she said.
Rule evaluation. Capital markets match people with ideas with people with money, and this can lead to products that improve society, Peirce explained. When government agencies step in to innovation and capital allocation processes, it risks ruining progress and development efforts, she said. Some regulators are reluctant to throw out rules, even those that outside observers see as unnecessary or standing in the way of innovation, according to the commissioner. However, she noted that SEC Chairman Jay Clayton has made it a priority to take a hard look at the SEC’s rules in response to the declining in the number of public companies, barriers to entry for smaller companies, developments in technology, and fragmentation of international markets.
“As the Commission has made these evaluations, some well-functioning rules have been left alone, some rules have been tweaked to better fit with modern markets, and some rules have been completely overhauled or removed,” Peirce stated. “As we engage in regulatory housekeeping, we have to take care not to add to the regulatory burden by adopting new requirements that do not solve a real problem,” she stressed.
Changes and initiatives. To support public companies, Peirce noted that the Commission has recently proposed to eliminate the Sarbanes-Oxley requirement that auditors attest to the effectiveness of the company’s internal controls for certain pre-revenue companies and small entities and endorsed disclosure modernization measures to cut unnecessary costs while ensuring that investors get reliable information they consider meaningful. The agency is also considering means by which to streamline registration exemptions to keep capital flowing during company development, she explained.
With regard to the retail asset management sector, Peirce discussed the SEC’s adoption of a package of rules related to the provision of investment advice to retail clients and noted that the agency is working on a rule for exchange-traded funds. The Commission is also evaluating how its rules governing markets serve issuers and investors and has taken steps to ensure that investors have information to assess execution quality. Disclosure regarding alternative trading systems is improving under a new rule requiring the provision of more comprehensive information regarding the operation of these platforms, the commissioner explained, and the upcoming transaction fee pilot will help the agency assess how exchange fees and rebates affect equity markets.
Going forward. Peirce opined that new rules to accommodate digital assets are necessary and suggested that forcing all digital assets into the existing framework may not be the best way to protect token purchasers and marketplaces. However, she noted, the current requirements governing environmental, social, and governance issues and the “materiality” standard for disclosure should not change. This standard ensures that investors receive the information necessary to make informed decisions, and changing the approach could undermine efforts to minimize costs and avoid unnecessary disclosures, the commissioner concluded.