At the first get-together of all five SEC commissioners at a Congressional hearing since 2007, House Financial Services Committee Chair Maxine Waters (D-Calif.) said the regulator “is not fulfilling its mission as Wall Street’s cop.”
Members of the House Financial Services Committee mentioned concerns about so-called “digital assets,” the surge in stock buybacks as wages for workers remain flat, and the difficulties investors have recovering assets when they are victims of Ponzi schemes at an hours-long full committee hearing Tuesday.
“Key rules, like the Volcker rule, have been rolled back,” Waters claimed. At the same time, SEC “rules to implement other important reforms on issues like executive compensation” remain incomplete, she continued. Other regulations, such as Regulation Best Interest, “fail to protect retirement savers from unscrupulous financial advisers,” Waters said.
Loopholes in existing securities have allowed corporate executives to enrich themselves by “buying or selling securities in their own companies during the 8-K trading gap,” Waters said, referring to the “four-day gap after a major corporate event before the company is required to notify the public and investors of that event.”
Waters and other committee members also mentioned the Supreme Court decision in Kokesh v. SEC, which limited the ability of the SEC to recover wrongful gains from Ponzi scheme operators and return them to victims of these schemes. “The SEC needs stronger tools to protect investors and punish bad actors,” Waters said.
The SEC seems to take a somewhat different view on its endeavors thus far. “The nature and quality of the SEC’s enforcement actions—particularly the quality of these actions—during the last year speak volumes about the hard work” of the agency’s staff, the SEC wrote in testimony submitted to the committee. In fiscal year 2018, the SEC “brought 821 enforcement actions and obtained judgments and orders for $3.945 billion in penalties and disgorgement, while returning $794 million to harmed investors and awarding nearly $50 million in payments to whistleblowers,” the SEC reported.
Also in fiscal year 2018, the SEC’s Office of Compliance Inspections and Examinations conducted more than 3,150 examinations of entities registered with the SEC such as investment advisers, mutual funds, broker-dealers, and others. This represents an 11 percent increase in examinations over fiscal year 2017, the SEC wrote in its testimony.
The Commission has sought to return funds to harmed investors “as promptly as practicable,” the SEC wrote in its statement. As part of its efforts to identify advisors that did not adequately disclose conflicts, the SEC noted self-reporting and cooperation via its Share Class Selection Disclosure Initiative “will result in the return of over $125 million to retail investors.”
A dissenting voice?
SEC Commissioner Robert Jackson Jr., in an opening statement prepared for the hearing, called for investors to have greater transparency into how public companies make political contributions. “A significant amount of corporate political spending is not disclosed under current law,” Jackson said.
“Too many investors remain in the dark about how public companies spend their money on politics,” Jackson said, blaming Congress for using “the appropriations process to block the Commission from developing rules in this area.”
Jackson also maintained the SEC’s disclosure rules have not kept pace with current markets and said the Commission’s rules “give corporate insiders incentives to pursue stock buybacks that maximize executive pay but make no sense for ordinary investors.”
Let’s talk Libra
Asked about systemic risks posed by Libra, a digital asset developed by Facebook, SEC Chair Jay Clayton declined to comment on any specific crypto asset. He did note that while, in general, such assets have benefits, they can also “present a great deal of risk particularly in cases where in form they are the same as securities or the same as currencies or the same as payment systems but they’re not regulated in the same way.” A group at the SEC is focusing on digital assets, he reported.
In June, Facebook announced plans to develop Libra, a digital wallet to store the cryptocurrency Calibra. The Libra Association, in which Facebook is a member, is a not-for-profit organization headquartered in Geneva, Switzerland.
Asked by Rep. Patrick McHenry (R-N.C.) whether Libra is a security, Clayton said he was not prepared to make a decision like that at the hearing. “We have to see how different assets function to decide whether they would be a security, a commodity, a currency, or not,” Clayton said. If an entity “is using a digital asset to raise capital for a project with the idea that you’re going to get a return as a result of investing in that project, [it] sounds like a security,” Clayton said.
The cost of regulation was on the minds of some committee members. “We need to help investors by focusing on policies that make our markets stronger, more attractive, and more competitive, not add regulatory costs and weaken them,” McHenry said at the hearing. “We don’t have to look any further than the impact of mandatory disclosure after mandatory disclosure on a company’s compliance costs,” he continued. Those are real costs borne by real investors “making it more onerous and expensive to be public companies,” McHenry said.
“Companies heavily burdened by costs will choose to stay in the private markets, ultimately depriving retail investors of choices and opportunities in the public markets,” McHenry cautioned.
Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.