For the SEC, the roadmap to avoid litigation is clear. The Administrative Procedures Act is intended to require collaboration with the industry in rulemaking.
The U.S. equities markets are the most liquid and efficient in the world, and that’s not by accident. For more than 80 years, since the passage of the Investment Company Act of 1940, regulators and investors have worked together to develop a stock market that has been extraordinarily beneficial for retail and institutional investors, as well as public companies that employ millions of American workers.
Today, that historical norm of collaboration has been broken. The SEC continues to propose rules at an unprecedented rate of 47 rulemakings (more than double the 22 rulemakings of the last Democratic Chair Mary Jo White, who presided over implementation of Dodd Frank), with effectively little time for industry input. There are no roundtable discussions. The SEC bases its policy proposals on data it declines to publish or share. Questions from industry and from Congress about the Commission’s methods go unanswered. “Comment letters” are a facade because it is all but impossible for the market to digest, process and respond to thousands of pages of draft regulation in only a few months’ time, and regardless, their points are often dismissed without meaningful study or explanation.
The industry (brokers and exchanges alike) are left with the only remaining tool at their disposal – a tool of last resort – litigation against the Commission.
Suing government entities is not at the top of anyone’s wish list. Most would agree that suing the fire or police departments sounds like a bad idea. But if you keep calling 911, and no one picks up the phone, what other choice is there?
Two recent lawsuits against the SEC illustrate the situation. Six financial trade associations this month sued the SEC over its new Private Funds Adviser Rule, saying “the SEC exceeded its statutory authority and acted arbitrarily and capriciously in adopting the PFA Rule.” In late August, asset manager Grayscale won its litigation against the SEC after an appeals court said the SEC’s decision to reject the Grayscale Bitcoin ETF application was “arbitrary and capricious.
This is all further compounded by the fact that SEC Chair Gary Gensler has not heeded the calls of fellow Democrats to slow down the pace of rulemaking. Last year, a dozen Senate Democrats, including Sen. Raphael Warnock (D-GA), Sen. Kyrsten Sinema (D-AZ) and Sen. Mark Warner (D-VA), sent a letter to Gensler urging him to slow down and provide time for the public to evaluate rules.
The consequences of Gensler’s approach to the Main Street investor cannot be overstated. Of the roughly 320 million Americans in this nation, more than sixty percent are invested in the US equities markets, either directly through individual accounts or indirectly through 529 college savings plans, 401k retirement plans, public or private pension plans, or otherwise. The U.S. should be proud of this broad level of investor participation, compared with less than 33% for the United Kingdom and 15% for Germany. As a result of market automation, the cost of trading has been reduced to pennies on the dollar, with a combination of thoughtful, collaborative regulation and technological innovation paving the way for the most efficient trading in history.
Yet the Commission’s proposals – their breakneck speed, scope of 3,765 pages so far, and interconnectedness – risk turning back progress for retail and institutional investors. Consequences include uncertainty regarding higher trading fees eating into returns for 529 plan college savers, 401k and pension fund retirement savers, as well as concerns about liquidity and market stability.
Throughout the last 80+ years, the process of formulating market structure regulation entailed collaboration through roundtables, public-private partnerships of market participants, and other public forums that fostered an air of industry working collaboratively with regulators for what is best for investors – be it transparency, investor protection, or lower fees. Decisions were made based on data analysis, peer review and thoughtful commentary, with the SEC listening in good faith to industry.
Fixes to problems in Washington are never easy, but they can be straightforward. For the SEC, the roadmap to avoid litigation is clear. The Administrative Procedures Act is intended to require collaboration with the industry in rulemaking. The Commission should take that mandate seriously, and:
Democratize Access and Analysis of SEC Data. The SEC should disclose to the public data that it uses in its analysis and proposals. SIFMA requested this data in December to evaluate the market structure proposals, and there is no awareness that the Commission has yet provided any response at all. The industry and the public must be allowed to peer-review and challenge the Commission’s work, as any respected (data) scientist will attest. If the Commission does not actively seek peer-review for these extremely complex issues and proposals, no one can be confident in the outcome.
Provide Serious Analysis of the interaction of the Many Proposals on the Table. In particular, the Commission has avoided this responsibility with respect to the four December 2022 market structure proposals and related rules, putting forward a procedural argument that each proposal “must stand on its own.”
Listen to What Congress Says. It is important that the SEC respect the views of Congress, elected by constituent investors. Whereas the last Democrat Chair of the SEC, Mary Jo White, adhered to the mandates of Congress – with 59% of her proposals mandated by Congress, for SEC Chair Gensler, only 17% of the Commission’s proposals are mandated by Congress, according to a report from the Committee on Capital Markets. The vast majority of the SEC’s market structure proposals – including the four equity market structure proposals – are neither mandated by Congress, nor a response to a market failure. Where there are market failures to be addressed – particularly in the unregulated space of crypto assets – consumers and industry alike have asked for protections and for regulatory clarity. Yet the SEC has so far provided only lawsuits, without clarity or clear regulatory guidelines. The crypto space cries out for sound policy proposals; meanwhile, the equity markets are all right.
Focus on Bipartisanship. With more than half of Americans invested in the stock market directly or indirectly, the equity markets are too important to govern in the partisan way we have seen in the last two years. When it comes to an individual’s stock market nest egg, partisanship and ideology should not have a seat at the table.
The SEC and the regulatory statutes and framework in the U.S. governing equity trading have long been a strong pillar of successful investment and capital raising. So as we move forward, the SEC, on behalf of the investors it serves, would be wise to study its own public mission statement, which states: “As we oversee more than $100 trillion in securities trading on U.S. equity markets annually, it is our job to be responsive and innovative in the face of significant market developments and trends.”
Kirsten Wegner is CEO of the Modern Markets Initiative, an education and advocacy association for innovation in today’s markets.
