This is the third in a series on the future of the SEC, which has a new chairman with new commissioners due to be named.
Following on from pieces on Commissioner Michael Piwowar’s suggestions about allowing IPOs to prevent shareholder class action lawsuits by allowing them to insert ‘arbitration only’ clauses in their bylaws, and on Chairman Jay Clayton’s speech to the US Chamber of Commerce, now is the time to talk to a former commissioner.
Roberta Karmel is currently Centennial Professor of Law at Brooklyn Law School. She was an SEC commissioner from 1977-80, and a public director of the New York Stock Exchange, Inc. from 1983-89 among many other positions.
I tackled Piwowar’s proposals on arbitration-only clauses first, as potentially one of the more controversial. Professor Karmel’s comments on this were forthright.
“I think it’s questionable whether the SEC would be able to implement such a regulation,” she replied. “You are talking about taking away remedies from shareholders. Commissioner Piwowar is an economist, not a lawyer, and he is very right wing. Arbitration is something the business community likes a lot because proceedings are confidential; there is no publicity surrounding any complaints or trials. But I don’t think you can take away shareholder rights in this fashion, though it’s a very complicated issue, involving state and federal law.”
We then moved to an analysis of Chairman Clayton’s comments, beginning with his clarion call to reduce regulations so that more companies will move from the private to the public sector, citing barriers to listing.
“The smaller number of public companies is such a red herring. It’s just a Republican slogan for reducing regulations,” Karmel said.
“One of the reasons that the number of public companies has gone down is because there have been so many combinations of companies. This is really one of these issues that has nothing to do with regulation, other than a policy not to enforce antitrust laws properly.
“Those are the regulations that are relevant here, the shrinking number of companies has nothing to do with securities regulations. There have been so many combinations and so many of the new companies that are listed have been gobbled up by established companies that of course there are fewer listed companies. It has to do with the conglomeration of business in America.”
While she agreed in principle with Clayton that giving retail investors the ability to benefit from the whole value growth in IPOs by listing them early in their trajectory was important, she did not believe that it was practicable: “It’s a valid point to say that he wants shareholders to get in at the bottom, but in hot markets, retail investors have been defrauded, so there are risks. However, I think that a lot of the reason why retail investors are not benefiting from IPOs has nothing to do with SEC regulations, but the practices of investment bankers, who make sure that their big customers are the ones that benefit.”Karmel was more tractable on the increase in disclosure requirements that have come since she was in office. “There is certainly more disclosure today,” she agreed, “and some of this comes from fear of litigation, some of it comes from the increasing complexity of the business world and of the world in general.” But she was not confident about this SEC or any future SEC being able to roll back any of these disclosure requirements. “The SEC, whether it’s controlled by Republicans or Democrats, is always saying it must reduce regulations, but it doesn’t happen. It doesn’t happen because companies and their lawyers are not anxious to reduce disclosure and stockholders want disclosure.”
Karmel felt that most of the disclosures the SEC has developed over the years have actually been very useful for both shareholders and companies. What were the most useful? “Those that seem the most useful to me are disclosures on climate change risk and those on cyber security protection; I think shareholders want to know this, and the public wants to know. If you look at the reaction to what happened in Charlottesville [Far Right protests], public companies have a lot of constituents, not just shareholders, so they have to be sensitive to their customers and the public, who are also demanding some of these disclosures.”
Staying on the subject of disclosures, and recognising that Clayton, while not being particularly supportive of the CEO/worker pay ratio disclosure, has also not said that he will halt its progress, Karmel saw this as not being of great use.
“It’s very political and it doesn’t seem to be a particularly informative or straightforward disclosure,” she said, “so I think that’s one reason it’s been so bogged down. Most of these companies operate worldwide, so how do you compare the pay of a worker in, say, an African country to the CEO?”
More importantly, she felt that the proposal was indicative of a much bigger problem with Dodd-Frank, the regulation that mandated the SEC to implement it, and partisanship in Washington in general. “A lot of things in Dodd-Frank, frankly, are there for political reasons. The Democrats pushed it through without bipartisanship and this is what happens when you have partisanship in Washington; you don’t get the best legislation from either side.
“For example, the conflict minerals rule had nothing to do with investor protection, it was frankly political even in its justification.
One of the targets of the Financial CHOICE Act was the shareholder resolution process, and it has been a target of both the Chamber of Commerce and the Business Roundtable – organisations on which Karmel would not be drawn to comment on record – and a process on which Clayton has been inimical.
While recognising the importance of shareholder resolutions, Karmel did not believe they hijacked the proxy process, but did admit that they cause headaches at the Commission.
“Shareholder resolutions have always been a problem for the SEC,” she said, “and, every once in a while, the SEC wants to get out of this business of wrestling with shareholder resolutions, but the public companies and shareholders say ‘no, no, stay in it, we don’t want to have to go to court over this’. So, it’s always been a problem for the SEC. Some of the shareholder resolutions are somewhat frivolous, but others are important, and the SEC over the years has tried to draw some kind of a line between these, though it hasn’t always been able to accomplish this.
“I don’t know that the current Commission will be any more successful if they try. ‘Good luck’, is all I can say.
“Even when I was at the Commission,” she continued, “shareholder resolutions were all over the lot. Some of them are very political and some of them are much more financially oriented. A lot of them today are from activist investors and it depends what you think their role is in the market as to whether you think those are good or bad. The SEC views its mission as being friendly to shareholders, but, which shareholders? One of the ideas that Chair Clayton has expressed, which I have to say I applaud, is to try and do more for retail investors. I don’t know what kind of policies he has in mind, but it’s something important that has been lost in the shuffle.”
What of the prospects of regulations being introduced to police proxy advisors?
“I think that there should be some regulation of proxy advisors, particularly since some of them are considering becoming public companies, and there is a conflict of interest there. This is another idea that’s been on the table for a long time but it just hasn’t happened. What that regulation should be… well, that’s the question.“It’s like the rating agencies; it’s always been very hard for the SEC to figure out how the rating agencies should be regulated. With the proxy advisors, it’s very much the same kind of problem; it’s the difficulty of the issue, plus politics.”
The SEC continues to be made up of only three commissioners, including the chair, rather than the statutory five. Karmel felt that this was another partisan problem. “It creates a lot of problems having only three commissioners; especially as you have people who are very partisan. It’s very unlikely that anyone will be appointed until there are two nominees, one a Democrat and one Republican. At the moment it seems that Robert Jackson, from Columbia Law School, is the potential Democratic nominee, while the Republican nominee is still Hester Peirce.”
In conclusion, I asked her whether Chair Clayton had less sympathy with what she felt the primary role of the SEC was: to be friendly to shareholders. “He’s been in office such a short time, it’s difficult to tell. I don’t think he’s going to say that investor protection is not the role of the SEC. Also, the SEC is an independent agency and he is an independent.
“He is someone who was a well-regarded lawyer so I don’t think he’s, all of a sudden, going to change the SEC’s essential mission. He has also represented activist shareholders, as well as corporations, so it also depends which shareholders you talking about, although in his case, of course, most of the activist shareholders he has represented are hedge funds.”