Congress jerks the SEC’s leash

Larry Ribstein —  13 April 2011

Last week I argued that the SEC’s considering relaxing the rule requiring 1934 act registration of stock classes with more than 499 shareholders was not what it seemed.  I noted that while this might look like a move toward liberalization by permitting more Facebook-style markets, it actually furthered a trend toward closing US securities markets by effectively excluding ordinary investors.

John Carney cited my post and argued that

The SEC wants to preserve its authority in public markets and refuses to reduce the regulatory burden of companies with public stock. The investment banks want to increase their fees, and find that they can do this in private markets more easily than they can public market, where they are forced to compete with low cost brokers. So Wall Street and the SEC are cutting a deal that keeps both sides happy.

He added that in making this move the SEC ironically would be encouraging “some of the very practices the SEC and other regulators fought so hard to eliminate not so long ago” — specifically, using hot stocks as leverage to get high brokerage fees from clients. 

More recently we got news of a 17-page March 22 letter from Congressman Darrell Issa, chair of the House Oversight and Government Reform Committee, to SEC Chair Schapiro asking a lot of questions about what the SEC is and is not doing.  Issa wanted to know, among other things, what the SEC thought about why the US IPO market had declined and what the SEC was doing about it, and the costs and benefits and constitutionality of rules shutting off issuer communications during the “quiet period.”

Interestingly, Issa seemed particularly interested in the costs of the 499 shareholder rule in terms of inhibiting liquid markets in non-publicly traded shares, and whether this rule really serves to protect investors.  This letter would seem to explain the SEC’s latest deregulatory wobble and why the SEC is not as concerned about these private markets as Carney and others expected it to be.

But this leaves unanswered the question of what is the best overall policy:  encouraging more private markets or freeing public markets from their regulatory shroud.

Perhaps the SEC should pay more attention Issa’s whole letter, including the part about what happened to IPOs, and another part requesting information about who, if anybody, was analyzing regulatory costs and benefits at the SEC. The minority Republican SEC members have been urging this sort of cost-benefit analysis.

But as Carney noted, the politicians currently in charge of regulating the securities markets are not exactly taking the long and deep view.  Congress jerked their leash, and they seem to be sniffing down the path of least resistance.

Larry Ribstein

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Professor of Law, University of Illinois College of Law