SEC Commissioner Stein Discusses How to Facilitate Capital Formation to Support Innovation

SEC Commissioner Kara Stein discussed improving SEC rules to support innovation and facilitating capital formation. She delivered her remarks at the Stanford University Rock Center for Corporate Governance.

Commissioner Stein asserted that part of the SEC’s mission is to facilitate investment in innovative companies and “make venture funds’ deployment of capital work as smoothly as possible.” She also stated that the SEC is focused on new capital-raising methods, and must ensure its securities laws are flexible enough for a wide variety of companies and funding needs.

Commissioner Stein explained the SEC is considering several new options to “promote and enhance capital formation and help U.S. companies remain at the forefront of innovation.” She stated that Regulation A+, which would enable companies to offer up to $50 million in a 12-month period without registering its securities with the SEC, is one potential fundraising option for small and medium-sized businesses. Reg. A+ would allow small businesses to raise money from the public with a “streamlined approach to oversight” by the SEC.

In addition, Commissioner Stein focused on newer forms of capital raising, stating that equity crowdfunding is a challenging concept. She stated that equity crowdfunding is a “new regime” that “does not neatly fit into our 80-year old securities law framework.” As to the success of crowdfunding in the long-run, Commissioner Stein explained that the SEC’s rules will “matter more than ever.” Additionally, she suggested considering whether crowdfunding would work better by pooling each class of crowdfunding investors into a fund vehicle.

Commissioner Stein discussed the idea of regional exchanges, a subject recently promoted by other SEC Commissioners. She explained that these exchanges could allow small companies to exclusively trade their shares, providing a “new runway for growth for smaller companies.” Commissioner Stein stated that she supports the SEC issuing a Concept Release to gain perspective on this area.

Lofchie Comment: Innovation to foster investment in the capital markets will require deregulation. Deregulation will likely lead to an increase in economic growth. It will also likely increase the risks of misconduct. The question is who in a position of authority is willing to advocate for taking such risk. Commissioner Stein’s speech reflects ambivalence. On the one hand, she asserts the “need [for regulation] to evolve in the areas of both capital formation and investor protection to adapt to today’s rapidly changing marketplace.” However, in the immediately following paragraph, the Commissioner states:

“But many aspects of our securities laws have held up remarkably well. The basics are strong and simple: clear disclosure to investors, good corporate governance, eliminating conflicts of interest, straightforward approaches to fees and costs, transparent public trading markets, being a good fiduciary when managing others’ money, and so on. Time and time again, these basics have led to some of the strongest, most productive companies in the world. I think it’s no accident that the American approach to capital markets, including SEC oversight, has been emulated by many . . . .”

While it might be that the tidal wave of regulation has slowed, it has not turned. In this regard, please return to Commissioner Gallagher’s graphic illustration of all the new regulations to which the financial industry has become subject under Dodd-Frank. See generally SEC Commissioner Gallagher Issues Statement and Diagram on Aggregate Impact of Financial Services Regulations (with Lofchie Comment).

If government is to examine itself critically, if it is to take a hard look at which regulations work, which regulations don’t, and which are too burdensome, then such an examination must be broader than looking at crowdfunding or small companies in Hawaii. In a broader context, Commissioner Stein’s speech barely scratches the surface. It does nothing to advance a real reconsideration of the regulation of the businesses that drive the economy. Put another way, are we really balancing the goals of growth and investor protection by supporting small stock exchanges in Hawaii if, at the same time, we are imposing hundreds of millions and perhaps billions of dollars in costs by requiring disclosures in regard to conflict minerals or compensation ratios?

FSB and IOSCO Propose Assessment Methodologies for Identifying Non-Bank Non-Insurer G-SIFIs

The Financial Stability Board (“FSB”) and the International Organization of Securities Commissions (“IOSCO”) published a public consultation document titled “Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions.” It is the second consultation document by FSB and IOSCO on the subject.

The publication outlines a methodology for assessing asset managers and investment funds for possible designation as global systemically important financial institutions (“G-SIFIs”), extending the SIFI framework that currently covers banks and insurers to other financial institutions. The proposed methodologies take into account responses received on the first consultation document, which was issued on January 8, 2014.

The proposed methodologies consist of (a) a high-level framework for identifying G-SIFIs that would apply across non-bank non-insurer (“NBNI”) financial entities and (b) detailed NBNI sector-specific methodologies that include (i) near-final methodologies for finance companies and market intermediaries, and (ii) a revised proposal for sector-specific methodologies for asset management entities; i.e., a revised methodology for investment funds (including hedge funds) and a new proposed methodology for asset managers.

Comments on the publication must be submitted by May 29, 2015.

Historical Financial Statistics Takes a Leap Forward

CFS Historical Financial Statistics has just added a substantial amount of new data. Annual data points now total about 150,000, while high-frequency data points exceed 2 million. Coverage extends to 150 countries, though the depth of coverage varies widely.

In the five years since Historical Financial Statistics went online, computers have become faster and have gained memory, so we have consolidated many formerly separate files into a small number of often quite large files, which make data easier to find and use. We have also streamlined the Web format of Historical Financial Statistics so that everything is now accessible from one page.

New data include the following:

  • Extensive financial statistics on Austria-Hungary and the Balkans from the 1800s to World War II, by scholars in the South-East European Monetary History Network (whose impressive work I previously discussed here).
  • Three centuries of British data, by Sally Hills, Ryland Thomas, and Nicholas Dimsdale.
  • Balance sheet data from many currency boards around the world from the mid 1800s to the present, gathered mainly by Nicholas Krus and me.
  • Government finance data for many British colonies in the 19th and early 20th centuries, by Ewout Frankema.
  • Wages in a number of African countries in the 19th and early 20th centuries, by Ewout Frankema and Marlous Van Waijenburg.

We expect to add some other large data sets later this year. By bringing together previously scattered data, Historical Financial Statistics makes possible novel comparisons and new insights.

CFTC Holds Energy and Environmental Markets Advisory Committee Meeting

The CFTC Energy and Environmental Markets Advisory Committee (“EEMAC”) reviewed important new developments in the energy and environmental derivatives markets. EEMAC discussed new challenges and potential regulatory responses to ensure market integrity, competition and consumer protection.
Key takeaways from the meeting include:

Chairman Massad stated that the timing to finalize the position limits rule has not changed and Commissioner Bowen expressed her desire to finish the rule by the end of the year.

Participants indicated that the current position accountability regime works and a one-size-fits-all stance on estimating deliverable supply is not ideal.
Participants generally agreed that current bona fide hedging practices such as anticipatory merchandising, gross hedging, cross commodity hedging and unfixed price hedges should continue.
Some participants expressed concern over the “economically appropriate test” and its new interpretation in the proposed rule, stating that it does not provide any risk management value.

Lofchie Comment: It is hard to understand how the recent crash in energy prices does not detract from the self-assurance of those who were pushing for position limits based on the view that energy prices were driven by (evil) speculators. Fundamentally, this feels like the imposition of regulation because it can be imposed rather than because it will provide a clear benefit. It is not that we should be fundamentally opposed to increased regulation, but rather that we should be skeptical of it. It is not that the government will run out of things to regulate: why not focus on areas where there is at least some consensus that regulation will provide a benefit?