SEC Commissioner Gallagher Discusses the SEC's Agenda (with Lofchie Comment)

At the Annual Securities Regulation Seminar in Los Angeles, SEC Commissioner Daniel Gallagher delivered remarks in which he discussed the "incredible burden imposed" by Dodd-Frank and which initiatives the SEC should prioritize going forward.

According to Commissioner Gallagher, the SEC is on a "precipice, teetering on the edge of irrelevancy as we devote a wildly disproportionate amount of resources to implementing an agenda that is no less political than other, more widely discussed pieces of single party legislation."

Commissioner Gallagher explained that the principles upon which Dodd-Frank is based bear no relation to the financial crisis, and that its passage allowed Dodd-Frank to become a vehicle for "every orphaned wish list item of policymakers and special interest groups" – for items that include conflict minerals, extractive resources, the proxy access rule and the Volcker Rule. Commissioner Gallagher's most recent example of Dodd-Frank being used as a vehicle was the passing of the credit risk retention rule, which, according to Commissioner Gallagher, "codifies the worst features of the failed federal housing policy that led to the crisis."

He also mentioned "flashes of hope" that show the SEC is still on track – particularly non-Dodd-Frank-mandated initiatives, including the Consolidated Audit Trail rulemaking and last year's release of FAQs on the supervisory liability of compliance and legal personnel.

Going forward, Commissioner Gallagher said, the first priority of the SEC's initiatives should be the fixed income markets. To reform these markets, Commissioner Gallagher said, the SEC must (i) bring transparency to the markets for retail investors, (ii) ensure there are no regulatory impediments to the development of electronic fixed-income trading platforms, and (iii) facilitate bond market liquidity.

Commissioner Gallagher explained that the second important initiative for the SEC is capital formation for small businesses. He stated that the SEC should commit to finalizing rulemaking on crowdfunding, as well as facilitate the development of a secondary market for small businesses on which equities can be traded after an initial offering. Commissioner Gallagher added that he has been an outspoken advocate for the creation of "Venture Exchanges" – national equities exchanges with rules tailored for smaller businesses. On these exchanges, shares would be exempt from state blue sky registration and the exchanges themselves would be exempt from the SEC's national market structure and unlisted trading privilege rules.

In his conclusion, Commissioner Gallagher mentioned a few other initiatives that the SEC should consider: (i) completing the removal of references to credit rating agencies from its rulebook, (ii) revisiting the Securities Investor Protection Act, and (iii) finalizing rules for the SEC's 17(h) broker-dealer risk assessment program.

Lofchie Comment: Underlying Commissioner Gallagher's policy positions are two fundamental points about process. The first is that not all regulation makes the economy better or safer. Think of regulation as an array of drugs: they can cure what ails you; they can make you sleepy; they can give you hives; or they can kill you. More does not equal better. The fact that Dodd-Frank runs to 2,000 printed pages, and likely more than 100,000 when all the underlying rules are adopted, is not good news if those 100,000 pages will give the economy hives. The second point is this: even if one believes that Dodd-Frank is objectively good, neither regulators nor market participants have infinite capacity. One must make choices and pick those regulatory initiatives that provide the most societal value given the limited resources available. By that measure, it is very hard to justify expending resources on rules governing conflict minerals (a problem that the SEC is not likely to fix) when the SEC does not have sufficient resources to attend to issues of securities market structure.

See: Commissioner Gallagher's Speech. Related news: SEC Commissioner Stein Discusses Capital Formation and Regulation A+ (October 24, 2014); SEC Commissioner Gallagher Speaks about the SEC's Future Agenda (with Lofchie Comment) (October 17, 2014).