SEC Commissioner Warns SEC Deregulation Endangers Investors
Commentary by Steven Lofchie
SEC Commissioner Caroline A. Crenshaw warned that recent Commission actions are eroding fundamental investor protections and market transparency.
In remarks at the Brookings Institution, Ms. Crenshaw asserted that the SEC is devaluing investor rights by reducing disclosure requirements, and pushing retail investors into riskier private markets without adequate safeguards. Ms. Crenshaw highlighted four concerning policy trends that are being implemented through staff statements and compliance date extensions without notice-and-comment rulemaking.
First, she argued that the Commission has made it harder for investors to communicate with issuer management, has shown hostility to proxy proposals, and has allowed public issuers to force shareholders into arbitration.
Second, she reported that the agency plans to reduce the frequency of public company filings, which will leave investors with less timely financial information and force them to rely on stale data or company-selected disclosures. Ms. Crenshaw raised additional concern about potential rollbacks of the Order Protection Rule, which she said could shift trading away from transparent exchanges to dark markets.
Third, Ms. Crenshaw criticized new policies on opening private markets to retail investors, including retirement assets, calling this "risky and reckless." She claimed private markets lack the transparency that standardized disclosures, fraud detection tools, and fee disclosures provide that protect retail investors in public markets.
Fourth, she warned that the Commission is weakening enforcement by dismissing pending cases, reducing civil penalties based on a "corporate benefit" fiction, pardoning convicted securities fraudsters, curtailing whistleblower awards, and allowing mandatory arbitration clauses that eliminate private rights of action.
Ms. Crenshaw said that the manner in which these efforts are being undertaken violates the Administrative Procedure Act and denies investors the opportunity to comment. She analogized current deregulation efforts to the period before the 1929 stock market crash.
Ms. Crenshaw called for policies promoting long-term investing based on company fundamentals rather than speculation, more nimble and interdisciplinary government collaboration across financial regulators, new frameworks to address artificial intelligence risks, policies that actually support small businesses rather than large private issuers, and ethical governance that respects public servants and provides regulators adequate tools.
Commentary
The shift in policy from the Biden SEC to the Trump SEC is profound. Under the prior administration, the SEC embraced a philosophy that regulation was equivalent to safety, and ignored its costs. Under the present administration, the SEC is embracing an approach that economic growth depends upon freeing up markets and market participants. With the new philosophy comes greater risk. Consider how much was lost (think FTX) as a result of the prior administration refusing to provide a workable crypto regulatory scheme.
There is a policy debate that can be had as to any action, or every action, that the SEC takes. If one generally believes that regulation should be constantly accretive, or that regulation equates to social progress, then those who hold that view will not be happy with the current SEC.
On Commissioner Crenshaw's allegations that the new policy direction violates the Administrative Procedure Act, it is notable that the former SEC and its staff may have set a record on the number of judicial defeats they suffered for violations of the APA. Her remarks on current actions for small business compare unfavorably to actions the former SEC took to support small business; indeed, were any significant or effective? Finally, comparing the current regulatory world to market regulation as it existed in 1929 is beyond hyperbole; our "rulebooks" are many thousands of pages of statutes, rules, guidance, interpretations and so on. By ignoring the substantiality of regulation and bemoaning that we now live in a world where anything goes, Commissioner Crenshaw foregoes meaningful, necessary and thoughtful debate about which rules in those very large rulebooks make sense.