Another Crenshaw Speech on SEC Policy
SEC commissioner Caroline Crenshaw was at it again last week, delivering another speech about what the Securities & Exchange Commission should do to be a more effective regulator for current times. Compliance professionals should heed her words, since Crenshaw is shaping up to be the resident progressive theorist among the five commissioners. That matters in a Democratic administration.
Crenshaw spoke Friday at a financial regulation conference sponsored by the SEC’s own Division of Economic and Risk Analysis, as well as the CFA Institute and several universities. Ostensibly she was there to talk about the SEC’s need to get better data from businesses, so the agency can develop better policies for emerging issues in the capital markets. That’s a valid point to raise — but when you consider the examples Crenshaw mentioned, one can’t help but think, “OK, this is where businesses might feel the squeeze of new regulation.”
Crenshaw, a Democratic appointee, only joined the SEC last summer. She delivered a startling speech in March outlining a rationale for more aggressive use of penalties in SEC enforcement, and in my opinion she’s a bit of a stalking horse for what SEC chairman Gary Gensler will do at the commission. That is, Crenshaw might stake out relatively far-reaching views about SEC policy, which will give Gensler cover to moderate those positions just a bit, and he can portray the final result as a more centrist policy that still reflects what a Democratic majority wants.
So exactly what did Crenshaw say last week? Let’s take a close read.
It’s About the Data
Crenshaw began by framing the agency’s need for better data. Yes, she said, the SEC needs to handle corporate data carefully, and to think about the burdens of reporting and disclosure requirements. Then came her real point:
However, serious harm can also come from regulating in the absence of relevant data. Without information about the markets that the SEC regulates, we may fail to address problems in our markets, or even make them worse. There is a cost if we fail to obtain the data we need to analyze and to understand the markets — and while the cost may be difficult to quantify, it is very real.
Crenshaw is correct. If you want any evidence of that point, look no further than the collapse of Archegos Capital — that family office investment firm run by Bill Huang, which collapsed in late March and saddled half a dozen Wall Street banks with some $10 billion in losses. Almost nobody had heard of Huang until his $100 billion investment portfolio unraveled over the course of about two days. Why not? Because the SEC exercises hardly an oversight of family offices.
So there was Crenshaw, pointing out the obvious: that if the SEC doesn’t understand what’s happening in the capital markets, it can’t do its job of maintaining fair, orderly, and efficient markets. And the SEC can’t understand what’s happening in the capital markets if it doesn’t have sufficient data about capital markets activity.
“Bad information, or a lack of information, can lead to bad regulation, which can result in both unnecessary burdens and missed opportunities,” she said. “It can also lead to a failure to regulate where regulation would be appropriate, which can result in a failure to address real problems and mitigate harms.”
Examples of More Data Demands
Where should the SEC be seeking more data? Crenshaw offered several examples.
The private markets. For the last several years, the SEC has loosened the rules for investor activity in the private markets. For example, in 2020 the commission expanded the definition of “accredited investors” who are legally allowed to invest in lucrative private offerings (think hot tech startups before the IPO); and it allowed larger and more frequent private offerings.
Now, Crenshaw said, “The amount of capital raised via exempt offerings now far outpaces the amount raised on the public markets … And yet, while these markets have been expanding, the information we are collecting about them has not. For the most part, we do not know who invested in these private market offerings or how their investments performed.”
So Crenshaw said the SEC should revive a proposal from 2013 to expand the Regulation D disclosures that private market players need to make.
Family offices. Well, we already covered that with the Archegos example, and the limited data the SEC collects about such investment firms right now. Crenshaw’s take: “We should also carefully assess whether the data reported under this framework are sufficient to allow us to detect the buildup and concentration of risk exposures.”
Insider stock sales. Crenshaw said the SEC should add a requirement under Rule 144 (which governs the sale of restricted securities) that corporate insiders must disclose when they sell restricted shares as part of a Rule 10(b)5-1 plan, and to disclose the date the plan was adopted. “This would allow the SEC to more easily detect abuse of 10b5-1 plans,” she said. Such abuse has been on the SEC’s radar for a while now.
What Comes Next?
I don’t know what comes next more than any other outside SEC observer. But we do know that Gensler is under pressure from the progressive wing of the Democratic Party to do more on adopting new ESG disclosures and holding executives more accountable for self-enrichment stunts they might try to pull. All of that lines up neatly with Crenshaw’s suggestions for where the SEC might demand more data, so it can pursue such an agenda more forcefully.
So while Crenshaw’s ideas might not come to pass for quite some time, or in quite the form she advocated here, compliance officers would do well to contemplate how you might fit such enhanced disclosure requirements into your existing compliance policies and procedures.
You might also consider how those demands might change certain corporate strategic decisions. For example, what might Bill Huang have done differently at Archegos, if he had to disclose his leverage-laiden holdings to the world?
Meanwhile, I’m going to watch what Crenshaw says next, because she’s saying lots of interesting things.
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