SEC Commissioner Caroline A. Crenshaw identified private securities markets, Regulation Best Interest disclosures and the Consolidated Audit Trail ("CAT") as areas where the SEC should obtain more information to ensure data-driven rulemakings.
At the 8th Annual Conference on Financial Market Regulation, Ms. Crenshaw stated that the SEC should prioritize:
- the collection of information on the success of investor participation in private securities offerings, with a view toward determining whether investors do better in private or public securities offerings;
- investor testing on various Forms CRS, which Ms. Crenshaw explained was necessary since (i) the SEC's investor testing on a sample Form CRS (prior to the finalizing of Regulation Best Interest) indicated that some disclosures were not understood by investors and (ii) the SEC has not done investor testing on any real forms, which vary from the sample tested;
- investor testing of the effectiveness of other Regulation Best Interest disclosures, which, Ms. Crenshaw pointed out, the SEC has never commissioned; and
- the completion of the CAT - which is still lacking customer and account information - given its potential to help SEC staff understand market activity, such as the GameStop event.
Additionally, Ms. Crenshaw stated that the SEC, among other things, should:
- require corporate insiders to electronically disclose when they sell restricted shares under Securities Act Rule 144 ("Persons deemed not to be engaged in a distribution and therefore not underwriters") pursuant to a 10b5-1 plan to better detect abuse of such plans, as well as to disclose the date the 10b5-1 plan was adopted;
- require "decision-useful" disclosures by corporate issuers regarding environmental, social, and governance measures;
- consider whether it has sufficient information with respect to short selling and securities lending activity in light of the GameStop market event; and
- discern whether the data reported under its security-based swaps data reporting framework are sufficient to enable it to "detect the buildup and concentration of risk exposures," in light of the Archegos event.
Commentary - Steven Lofchie
Commissioner Crenshaw should be applauded for pushing the regulators to conduct testing of their regulatory theories, both before adopting and after implementation. It is all to the good that the SEC and other financial regulators (i) slow down the pace of reaction to market events, such as GameStop, to allow time for consideration, and (ii) generally conduct more testing both before adopting rules and again after implementing them to test their effectiveness.
Testing, however, will improve results only if (i) the questions asked are meaningful, (ii) the tests are well designed, and (iii) the results are fairly interpreted. By way of example, the Rand Report comparing broker-dealers and investment advisers is generally considered one of the most significant bases of support for the notion that there should be greater regulation of broker-dealers providing recommendations to clients. Regardless of whether such regulation is appropriate, the report itself does not provide much in the way of support for it. In fact, it generally concluded that investors were equally pleased with the services that they received from broker-dealers and investment advisers.
Here are two recommendations for further testing. One, the SEC should explore the impact of the regulation of investment research on the production of research and the economics of such production. And two, the SEC might also consider whether Regulation Best Interest has resulted in a reduction of the willingness of broker-dealers to provide "full service" brokerage to retail investors.
Unless questions like these are addressed, there is a material risk that the regulators will use empirical research to confirm their preferences, rather than to test them.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
