SEC Commissioner Stein Offers Regulatory Priorities

SEC Commissioner Kara M. Stein discussed future SEC efforts to bring transparency and accountability to the markets. At a recent conference, Commissioner Stein identified the most pressing initiatives:(i) exchange-traded funds (“ETFs”); (ii) proxy rules; (iii) market structure improvements; (iv) shortened “T+2” settlement cycle for securities transactions; and (v) the “private/public market divide.”

Specifically, Commissioner Stein made the following recommendations:

  • ETFs: Commissioner Stein remarked that the SEC needed to: (i) “carefully review the roles of authorized participants and market makers in facilitating ETF operations and trading”; (ii) “continue looking for opportunities to enhance accountability as well as investor protection with respect to ETFs; (iii) “finish analyzing the events of August 24, and work with the exchanges and other market participants to take appropriate action”; and (iv) “think about a roadmap for holistic regulation of ETFs and other exchange traded products.”
  • Proxy Rules: Commissioner Stein stated the position that the SEC should not limit the voting rights of investors “based solely upon whether they are able to attend a meeting in person or vote by proxy” (known as the “‘bonafide nominee rule,’ which allows only nominees who have consented to be named in the proxy statement to be included on the proxy card”).
  • Market Structure Improvements: Commissioner Stein called for finishing the remaining rules under the Dodd-Frank Act, which “need to be completed prior to even initiating the dealer regime.” These include requirements for capital and margin, obligations for segregation and recordkeeping, and standards for business conduct. Commissioner Stein also discussed the Consolidated Audit Trail (“CAT”) as another area of focus in 2016, in order to “properly understand” flash crashes and the events of August 24, 2015.
  • T+2 Settlement Cycle: Commissioner Stein commented that “protracted settlement times are costly, increase risk, and are simply inefficient.” “Given the consensus behind T+2, [the SEC] certainly should be able to make it a reality this year,” she said.
  • The Private/Public Market Divide: Commissioner Stein said that “there are both risks and rewards that flow from private markets” and the SEC “should thoughtfully assess the sheer volume and dollar value of capital raising in the private realm and derive lessons from this space.” Commissioner Stein also pointed out the need for “an approach that rewards [private companies’] innovation but that also balances the need for transparency and accountability” by referencing the 2015 “hype” surrounding “so-called ‘unicorns'” (private start-ups valued at over $1 billion).

SEC Commissioner Kara M. Stein delivered her remarks at the “SEC Speaks Conference: What Lies Ahead? The SEC in 2016.”

Lofchie Comment: Commissioner Stein’s underlying preference for more regulation is the common thread throughout her remarks. It is implicit in, for example, her comments as to the private/public market divide, where she questions the “hype” that surrounds private companies. Her questions always point in the same predictable direction: where can we impose more regulation? Can we impose it on ETFs? Can we impose it on swap dealers, on trading markets, on capital raising?

Regulators should also ask: where could we have less regulation? Are registered investment companies overburdened with rules that impose costs on retail investors? Has Regulation NMS created market fragmentation? Why do issuers avoid the U.S. public markets as long as they are able to do so?

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