January 28, 2021
With an evenly split Senate, a bitterly divided electorate and a pandemic battering the nation’s physical and economic health, the Biden-Harris administration faces seemingly overwhelming choices about where to expend its energies and political capital over its first 100 days.
President Joe Biden has made clear that getting Congress to pass his $1.9 trillion COVID-19 relief plan is the administration’s top priority. As for the rest, as Vice President Kamala Harris told NPR less than a week before inauguration day: “We have to multitask, which means, as with anyone, we have a lot of priorities and we mean to see them through.”
One of those many priorities will be strengthening investor protections after four years during which the Republican-led Securities and Exchange Commission largely prioritized capital formation often to the detriment of investor protection.
Democratic Senate wins in Georgia that give the vice president the tiebreaking vote should make it easier to win Senate approval for the administration’s pick, former Commodity Futures Trading Commission Chair Gary Gensler. Gensler, a former Goldman Sachs executive who is deeply familiar with Wall Street, revitalized the moribund CFTC and enacted tough rules governing the derivative products at the heart of the last financial crisis. He is widely seen as a strong pro-investor choice for the job.
For Cohen Milstein Partner Laura H. Posner, mapping the road ahead starts with a look back at opportunities missed and problems exacerbated under the Trump administration. Ms. Posner offers a regulator’s perspective on the question. As former Chief of the New Jersey Bureau of Securities, she was that state’s top securities regulator. She also served as Chair of Enforcement for the North American Administrator Association, where she helped set regulatory enforcement priorities for securities regulators. Ms. Posner outlined some of her priorities for the SEC as part of a “Symposium on Financial and Corporate Regulation in the Biden Administration” hosted by Business Scholarship podcaster Andrew K. Jennings. Below are excerpts from Ms. Posner’s comments, edited for style and brevity.
Restoring Confidence in the Markets
The Biden administration, Congress, and whoever becomes Chair of the SEC, will be highly focused on recovering the economy after the pandemic. A critical part of that recovery will require taking meaningful steps to renew confidence in the public markets and in the ability of investors, particularly retail investors, to grow their retirement assets. To effectively do that, this administration is going to have to deal with the deregulation and focus on capital formation that the SEC under the Trump administration focused on, and instead turn to investor protection and putting back up some of the guardrails and protections necessary to give investors confidence in the markets.
You’re going to see [a shift] in terms of the regulatory priorities of the agency: the types of rules that they propose and what they’re focused on. But it will also impact how they handle enforcement. We’ll see more focus on public companies. Rather than the smaller private exemption type of fraud or Ponzi schemes, we’ll hopefully see a renewed focus again on accounting fraud. This has been I guess a real pet peeve of mine—and this is not unique to this administration—but we have seen very little oversight of the accounting industry post Sarbanes-Oxley. While certainly the number of restatements has come down, the amount of accounting fraud has not. So I anticipate we’ll see a focus on enforcement. And enforcement of public companies and of accounting fraud gives real confidence to folks investing in the markets that there is a regulator on the beat—that someone is overseeing these companies and ensuring that they act appropriately.
Regulation Best Interest
Ed: The SEC’s 2019 Regulation Best Interest (Reg BI) established a standard of conduct for broker-dealers and investment advisers to act “in the best interest” of their clients but fell short of imposing stricter fiduciary standards of duty, loyalty and care like those required of pension trustees and professionals. Ms. Posner says this is especially important, given the number of investment professionals who wear “dual hats” in their roles as stockbrokers and investment advisors.
It was an absolute mistake not to put in place a fiduciary duty rule. Protecting investors, particularly retail investors, is critical to a well-functioning market and it is particularly important right now, given that retirement savings fall far short of what is necessary.
Not having some form of a uniform fiduciary duty rule across brokers, investment advisors and folks dealing with retirement accounts makes it very confusing both for the financial professional to keep track of their various and often conflicting requirements and for the investor. It raises further issues of compliance oversight by the institutions that employ these financial professionals as well.
While it may not be feasible to entirely change Reg BI and transform it into a fiduciary duty rule—although I do hope that is considered—there are changes that can be made to give Reg BI some real teeth. First, from an enforcement perspective, actually bringing cases to enforce the law. From an examination perspective, ensuring that these regs are being followed. And from a regulatory guidance perspective, the SEC can define what “best interest” means, because the rule certainly doesn’t do that now. And it could be defined in a way that makes it much more in accordance with a fiduciary duty obligation. I think that’s something this administration will be focused on. It was part of the Democratic platform this year and I would expect to see something along those lines
Environmental, Social, and Governance (ESG)
With regard to ESG and climate risk factors, I think there is uniform desire by the institutional investor community for these types of factors to be set forth in public disclosures. You saw the SEC’s Investor Advisory Committee recommending that public companies issue more thorough disclosures explaining their ESG commitments and citing that asset managers consider ESG policies important to their investment strategies.
The Biden administration has put climate and racial justice as two of its top four priorities. This seems like a very opportune place for them to establish some sort of new disclosure requirements, hopefully uniform ones, that will make a real difference in the governance of companies and the ability of companies to withstand these systemic, market-changing issues.
Forced Arbitration Clauses
We’ve seen the proliferation of forced arbitration in basically every aspect of our lives—from our telephone contracts to the TVs we buy to our employment agreements—and there has been a renewed effort, largely driven by Professor Emeritus Hal Scott at Harvard, to include forced arbitration agreements in the bylaws or certificates of incorporation of public companies. I think that is a huge mistake for many, many reasons, not the least of which is that you largely lose the deterrent effect of private litigation when securities fraud class actions no longer exist. Further, arbitration is conducted largely out of public sight. There is no development of the law or best practices for companies to follow when there is no public law.
Perhaps most importantly from an investor perspective is that you lose the ability to provide real and meaningful recoveries to investors in many circumstances. The private securities bar is infinitely more effective at returning money to investors than the SEC, and the SEC and state regulators have regularly said that private litigation is a necessary component to oversight of the financial markets. Regulators simply do not have the resources or personnel necessary to pursue all these cases and to recover the kind of money that private litigation does for investors.
Recent Changes to Proxy Rules
The SEC has made it significantly more difficult for investors, particularly retail investors, to propose new rules and changes or to renew proposals over time. This impedes the voice of shareholders bringing to a company’s attention things that they need to pay attention to. And research has shown time and time again that shareholder proposals can generate positive long-term returns for companies and that limiting the ability of shareholders to submit proposals is quite harmful to companies.
In addition, we’re seeing over time that shareholder proposals are gaining significantly more support. The percentage of shareholder voting in support of proxy proposals has increased dramatically and putting in these proxy proposal rule changes will likely serve to stifle campaigns that have been building momentum over years.
The proxy rule changes were a solution looking for a problem. The number of shareholder proposals is very modest. It accounts for less than 2% of voting items at U.S. shareholder meetings and, on average, only 13% of Russell 3000 companies even receive a shareholder proposal in a given year. And these proposals have played a valuable role in making changes in corporate governance policies, in corporate reporting, in practices on environmental and social matters. They include rules on board and committee independence, board diversity, independent board leadership, shareholder rights (including a majority-vote standard in elections for directors), accounting for stock options—a whole host of things that have been not only good for shareholder value but good for good corporate governance and good corporate citizenship.