SEC Commissioner Uyeda Addresses Information Asymmetry in the Capital Markets

SEC Commissioner Mark T. Uyeda offered perspective on a regulatory framework necessary to achieve a healthy capital market and considered the "symbiotic" relationship between investor protection and capital formation.

In his remarks before the Institute of International Bankers, Mr. Uyeda identified challenges (e.g. fraud and market manipulation) faced by securities regulators. He analyzed the famous "Lemons Problem," which addressed the impact of information asymmetry between buyers and sellers, and applied it to the capital markets. Mr. Uyeda asserted that the regulatory framework must address these asymmetries, however, regulations that are "excessively burdensome" risk dampening economic growth in the capital markets.

Investor Fears

To account for the "Lemons Problem" within the securities market and provide material information to investors when making investment decisions, Commissioner Uyeda outlined four essential investor fears regulators must address:

1. A lack of information regarding investment offerings. Mr. Uyeda stated that jurisdictions must enforce the following in order to ensure investor confidence in information offered by corporate issuers raising capital: (i) mandatory financial reporting, (ii) standardized accounting, (iii) oversight of auditing and (iv) effective enforcement.
2. Abuse by securities market intermediaries. To combat abuse by intermediaries, such as misleading statements or unauthorized trading, Mr. Uyeda emphasized the importance of (i) registration and recordkeeping requirements, (ii) supervisory and enforcement regulations, (iii) disclosure rules, (iv) rules dictating specific types of conduct and (v) regulatory examinations and enforcement.
3. Inefficient market prices. Within the "regulatory toolset" to prevent market manipulation, Mr. Uyeda pointed to antifraud regulations, market surveillance and enforcement practices.
4. Failure by intermediaries. If investors are prevented from accessing their wealth due to failure by a broker-dealer or cyber security, Mr. Uyeda stated that investors will not hold their wealth with an intermediary. To prevent this from happening, he prescribed a regulatory framework that includes (i) transparency and disclosure, (ii) inspections and enforcement, (iii) business continuity planning, (iv) cyber safeguards and (v) capital rules and margin requirements.

Cross-border Complications

Mr. Uyeda also identified several elements that contribute to the complexity of cross-border jurisdictions. He stated that the international securities market could benefit if regulators consider:

• the legal parameters and regulatory scoping for entities that operate internationally so that they have cross-border clarity on the rules that do and do not apply to them;
• jurisdictions with conflicting laws so that entities understand when they cannot lawfully operate across such jurisdictions;
• duplicative regulations that address regulatory issues in an "unnecessarily" redundant manner and instead in such cases, Mr. Uyeda recommended that jurisdictions collaborate to recognize compliance (or non-compliance) by a foreign-based entity; and
• gaps in a foreign regulatory framework that a home jurisdiction believes to be important.