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A Regulatory Philosophy At Last

A Regulatory Philosophy At Last
By Paul Atkins

SEC Chairman Jay Clayton recently delivered a highly encouraging maiden-run speech at the Economic Club of New York that set forth a fundamental roadmap for his tenure at the SEC. The ultimate outcome should be less partisan politics at the agency and more focus on core issues confronting investors and the capital markets.

After starting with a recitation of the SEC’s mission (protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation), the Chairman continued the themes from his confirmation hearing and outlined other basic principles that should be part of freshman “Regulation 101” and thus familiar to SEC leaders, but unfortunately, have seemingly been largely ignored in recent years:

1.      Renewed focus on the needs of real investors (versus politicized special interest groups claiming to represent investors);

2.      Reaffirmation of disclosure as the SEC’s regulatory philosophy – giving investors the information they need to make informed decisions – rather than command-and-control “merit-based” regulation that positions the government to direct investor options;

3.      Enhancing the attractiveness of U.S. capital markets for their basic purpose of raising capital,

4.      Using cost-benefit analysis as the crucible for regulatory decision making;

5.      Conducting regular, holistic reviews of prior rules for effectiveness and unintended consequences; and

6.      Co-ordinating with other regulators to create a functioning regulatory environment.

The Chairman also provided some examples of putting these principles into action, including:

1.      Enforcement – for example, looking out for the little guy by focusing on crimes that prey on vulnerable investors, such as pump-and-dump schemes;

2.      Capital formation – increasing the attractiveness of and lowering barriers of entry to the public capital markets, including a renewed focus on fostering a robust IPO market; and

3.      Market structure – launching a pilot program to test price controls imposed by Regulation NMS Rule 610 on access fees, extending the life of the SEC’s Equity Market Structure Advisory Committee, and a long-overdue focus on the fixed income markets, including the creation of a Fixed Income Market Structure Advisory Committee.

Looking back at the public image of previous SEC chairmen before and after taking on the role, history is not necessarily kind. Some of it is deserved, some not. They all enter with an agenda, but are overtaken by events. Few put forth a regulatory philosophy that can serve as a lens through which the agency can focus its work. It is refreshing to see that Chairman Clayton intends to redirect the SEC to focus on the its mission and re-establish a regulatory philosophy that will put the SEC on a path toward better outcomes for investors, the markets, and, as a result, even the agency itself.

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