In his first public speech as the newly-appointed head of the SEC, Chairman Jay Clayton delivered an outline of the “guiding principles” that he will look to in guiding his leadership of that agency going forward. Clayton delivered his remarks on July 12th to the Economic Club of New York in New York City. The full text of Clayton’s speech may be found on the SEC’s website.
The primary takeaway from Clayton’s speech is that under his tenure, capital formation issues will likely take a higher profile, and, in turn, the concerns of businesses seeking ways to raise capital will likely be given a heavier weight of consideration than in the past.
In what was generally a bullish speech for the advancement of capital formation, Clayton first and foremost reiterated the SEC’s three-part mission to: (1) protect investors, (2) maintain fair, orderly, and efficient markets, and (3) facilitate capital formation. However, Clayton specifically noted that “each tenet of that mission is critical,” stating that “if we stray from our mission, or emphasize one of the canons without being mindful of the others, investors, companies (large and small), the U.S. capital markets, and ultimately the economy will suffer.”
While reaffirming the soundness of the SEC’s traditional approach to regulation, which relies on disclosure and materiality, Clayton further added that over the years the SEC has “significantly expanded the scope of required disclosures beyond the core concept of materiality.” He then went on to cite the “roughly 50% decline in the total number of U.S.-listed public companies over the last two decades,” noting that “while there are many factors that drive the decision of whether to be a public company, increased disclosure and other burdens may render alternatives for raising capital, such as the private markets, increasingly attractive to companies that only a decade ago would have been all but certain candidates for the public markets.” Clayton further explained:
“Regardless of the cause, the reduction in the number of U.S.-listed public companies is a serious issue for our markets and the country more generally. To the extent companies are eschewing our public markets, the vast majority of Main Street investors will be unable to participate in their growth. The potential lasting effects of such an outcome to the economy and society are, in two words, not good.”
Another related theme in the Chairman’s speech was his stated “desire to enhance the ability of every American to participate in investment opportunities, including through the public markets.” Clayton made the point that:
“When I walk the halls of the agency, how does what we propose to do affect the long-term interests of Mr. and Ms. 401(k)? Are these investors benefitting from our efforts? Do they have appropriate investment opportunities? Are they well informed? Speaking more granularly: what can the Commission do to cultivate markets where Mr. and Ms. 401(k) are able to invest in a better future?”
Some other notable points from the speech include:
- “We must remember that implementing regulatory change has costs. Companies spend significant resources building systems of compliance, hiring personnel to operate those systems, seeking legal advice concerning the design and effectiveness of those systems, and adapting the systems as regulations change. Shareholders and customers bear these costs, which is something that should not be taken lightly.”
- “Vaguely worded rules can too easily lead to subpar compliance solutions or an overinvestment in control systems. We must recognize practical costs that are sure to arise.”
We think the bottom line takeaway is that, while it will obviously take some time to see how the various regulatory matters impacting growth companies and general capital formation ultimately play out at the SEC, at this initial stage of the game, it does appear as though there may be some impetus for incremental changes away from more onerous regulations stymieing capital formation and toward policies that actually benefit capital raising activities.
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Parker MacIntyre provides legal and compliance services to securities issuers, including small businesses, investment advisers, broker-dealers, registered representatives and hedge funds, among others. Our capital formation practice group assists businesses with the complex issues that arise in the course of raising capital at various stages of their formation, operation and growth, including compliance with federal and state laws and rules. Please visit our website for more information.