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September 4, 2020

SEC Continues its Pro-Wall Street and Pro-Corporate Streak with New Changes

The SEC recently approved two rules friendly to corporations and Wall Street. Better Markets’ Lev Bagramian gives an insider’s perspective of the changes and their possible negative implications for Main Street families.
The SEC continued its pro-Wall Street and pro-corporate streak by allowing companies to reduce the information they disclose to investors and authorizing itself to change the definition of Accredited Investor whenever it wants to do so. I talk about each of these in detail below.
Regulation S-K Modernization
Securities regulation is at its core a disclosure regime. Its bedrock premise is that companies must disclose publicly and in a timely fashion all material information investors needs to make informed decisions. Our securities laws and the rules by which they are administered have been built on that foundation. Giving issuers more flexibility in deciding what to disclose for their investors can impact the availability, quality, completeness and timeliness of material information that investors (and all those who serve investors, including analysts, journalists, academics, among others) need to make more informed investment decisions. Investors fare better when they have access to high-quality information that our current regulatory regime mandates, but which this new rule would weaken.
The rules are predicated on the false notion that there is too much disclosure. The so called  “disclosure overload” is a myth created by the U.S. Chamber of Commerce and Wall Street and propagated by their lobbyists and their champions in the financial regulatory agencies and Congress. I don’t know of any investor who has complained that there is too much information provided by companies. If anything, investors of all types demand detailed, comparable, consistent, and machine-readable data on environmental, social and governance (“ESG”) related costs and risks current issuers face.
Today, more than 80% of public corporations voluntarily disclose some ESG data, and yet only 29% of investors are confident in the quality of the ESG information they are receiving. This is a perfect example of how disparate disclosures—with too much management discretion—negatively impact the standards, quality, consistency and comparability of data, and creates uncertainty and knowledge asymmetry in financial markets. 
Beyond the structural and regulatory need for harmonization, disclosure of ESG factors has the potential to drastically decrease inherent systemic risk in any marketplace by ensuring boards and executives commit time, thought, and resources to long-term value and risk factors when making decisions. For example, when credit risk that is driven by climate policy or poor governance can continue unidentified and unmanaged, this could concentrate in banks’ and investors’ lending portfolios and create a systemic risk to financial stability. ESG disclosure would address these risks by eliminating a lack of knowledge and informational asymmetry surrounding risks of all kinds. 
And, so, instead of heeding the calls of millions of investors who invest trillions of dollars in the U.S. markets, fueling jobs, economic growth and capital formation, to earnestly begin the process of requiring the disclosure of comparable, consistent and high-quality ESG data, the Trump administration’s SEC is giving more discretion to companies to NOT disclose information that is necessary for a more informed investment decisions.
I discussed these issues in greater detail in our comment letter filed in response to the proposal (which is now an approved rule, much to our dismay).
Accredited Investor Definition
The “Accredited Investor” construct is one of the Commission’s most important retail investor protection methods. For decades, the Accredited Investor construct has allowed the SEC to effectively draw a line between investors who have the financial means and financial knowledge to fend for themselves and those who lack such sophistication or wherewithal. This clear demarcation has helped the Commission to better protect those who need such protection and has allowed market participants, including broker-dealers, underwriters and companies, to more effectively target their solicitations and offerings. The SEC should not tamper with this time-tested and time-proven construct. If anything, inflation has already caused hundreds of thousands of more investors to qualify as an Accredited Investor since the definition was set in law in 1982 (and updated in 1989).
The SEC has failed thus far to show that retail investors who lack the financial wherewithal to withstand the higher-than-normal probability of loss associated with risky private offerings actually want to invest in such offerings. The SEC has also failed to demonstrate how these retail investors would fare if they invest in public markets or indices that track them vs. investing in dark markets—especially, if these investors would now have less information (since, exempt offerings, by definition, don’t have to disclose much information) upon which to make informed investment decisions. Finally, the Commission has failed to demonstrate that companies that have prospects for growth actually lack reliable sources of funding. Without analyzing these outstanding questions, the SEC should not have proceeded forward with tampering with a long-standing pro-investor construct.
I drafted a press release on the SEC action and discussed these matters in much detail in two letters:
Lev Bagramian is a Senior Securities Policy Advisor at Better Markets. He brings a comprehensive understanding of legislative processes and Congressional oversight of financial industry and regulatory agencies and a nuanced understanding of the most effective methods of providing actionable insight.


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