Industry Associations Raise Concerns about Proposed Financial Legislation
SIFMA and the Security Traders Association ("STA") raised several concerns about legislative proposals on capital formation and corporate governance currently under consideration by the U.S. Senate Committee on Banking, Housing and Urban Affairs (the "Committee"). SIFMA and the STA submitted separate letters to (i) Committee Chair Senator Mike Crapo (R-IA) and (ii) Senator Sherrod Brown (D-OH).
SIFMA stated that it supports the following measures:
- the Fostering Innovation Act of 2017, which would grant a five-year exemption from the auditor attestation requirements of Sarbanes-Oxley for certain smaller companies;
- the Encouraging Public Offerings Act of 2018, which would allow issuers of public securities to engage in "testing the waters" of investor interest without filing a registration statement or providing for confidential submissions of draft registration statements;
- the Fair Investment Opportunities for Professional Experts Act, which would allow individuals to qualify as accredited investors by virtue of their education and job experience;
- the Small Business Audit Correction Act of 2018, which would exempt certain small broker-dealers not holding customer assets from using a Public Company Accounting Oversight Board-registered audit firm;
- the Options Markets Stability Act, which would require the banking regulators to reconsider their capital treatment of options used for hedging purposes;
- the National Senior Investor Initiative Act of 2018, which would require ongoing studies of the financial exploitation of senior investors; and
- the Improving Investment Research for Small and Emerging Issuers Act, which would require the SEC to conduct a study on how to increase the production of investment research on small issuers.
The SIFMA letter indicated that it was withholding judgement on the Exchange Regulatory Improvement Act, which would amend the SEC's authority to regulate "facilities" of national securities exchanges, albeit in ways that SIFMA found unclear. SIFMA expressed its opposition to:
- the Brokaw Act, which would materially expand Exchange Act Section 13 reporting to (i) require that public company stockholders reaching a certain level of stock-ownership disclose such ownership and (ii) require disclosure of short positions;
- S. 2499, introduced by Senator Elizabeth Warren (D-MA) and Senator John Kennedy (R-LA), which would require FINRA broker-dealers to pay arbitration awards against other broker-dealers that become insolvent; and
- the Small Business Mergers, Acquisitions Sales & Brokerage Simplification Act, which would reduce the regulation of broker-dealers involved in small business mergers and acquisitions transactions.
In a separate letter, the STA focused on the proposed JOBS and Investors Confidence Act of 2018, legislation intended to build on a number of the initiatives of the Jumpstart Our Business Startups Act ("JOBS Act"). The STA:
- expressed support for provisions of the proposed legislation that would expand "testing the waters" provisions for issuers who wanted to gauge investor reaction to a potential public offering;
- expressed material reservations provisions concerning venture securities exchanges;
- urged the SEC to consider how to motivate the production of research regarding small issuers; and
- supported measures that would call on bank regulators to rethink and reduce the capital requirements imposed on options positions that are risk-reducing.
Commentary
The legislative proposal introduced by Senators Warren and Kennedy is both irrational and potentially destructive. As proposed, S.2499 would effectively require solvent, law-abiding broker-dealers to pay damages awarded against other broker-dealers who violated the law and then became insolvent. Consider this: Two firms are in direct competition with each other. Firm A devotes money to compliance, follows the law, and treats its customers well. Competitor Firm B takes business away from Firm A through false advertising and cheats its customers, and then its owner absconds with customer money and so is unable to pay arbitration awards against it. S.2499 would make Firm A liable for the harm caused by Firm B, even though (i) Firm A did nothing wrong, (ii) had no control over Firm B, and (iii) was, in fact, itself injured by losing business to Firm B. By what possible logic could the above scenario be justified? The proposed legislation is not just unfair in that it would raise costs to Firm A and to Firm A's customers. What is worse is that such legislation would likely drive law-abiding firms out of the securities industry, after punishing them for crimes committed by other fly-by-night firms who may open shop and then shut down when problems emerge.