SEC Chairman Cox Speaks at PLI
By David Feldman at 13 November, 2008, 5:09 am
As you know I am attending the PIPE Conference which started yesterday and continues today at the New York Hilton. Ironically, another important conference for securities lawyers, the PLI securities regulation institute, is taking place at the same time in the same hotel. I have been shuttling back and forth, and will have a report on what I have seen at the PIPE Conference after it is over. But as I saw SEC Chairman Christopher Cox speak yesterday at PLI, I thought I would provide a brief report about his remarks.
The Chairman noted the cataclysmic events and changes in the last year and particularly the last few months. In fact, he said, it is hard to see what has not changed in the last year. But in order to find some perspective, he then focused on what he believes is constant - that the US remains the most productive nation on Earth, that we are undergoing a calm transfer of power with “incredible grace,” and that our capital markets remain the ”largest, deepest and most liquid” on the planet.
However, he said, our regulatory framework has not kept up with these dramatic changes. He feels that there are simply too many agencies overseeing our securities markets with overlapping rules. But he indicated that reform is difficult to achieve and that overcoming inertia is incredibly difficult in Washington.
Cox believes that Congress should set up a select committee to find ways to deal with this. He knows it will be hard to overcome jurisdictional boundaries. One suggestion it sounded like he favored was combining the SEC and Commodity Futures Trading Commission (CFTC) into one agency. In the banking area he suggested that there are six different federal regulatory agencies, and then a state level of regulation as well. He also thinks the Investment Advisers Act of 1940 should be revamped.
He does admit there are regulatory gaps and they should be addressed. For example, the SEC regulates broker-dealers, but there is no statutory regulator of investment bank holding companies. He said that now defunct Lehman Brothers had 200 subsidiaries of which 193 were outside the SEC’s jurisdiction.
While some say the SEC should be replaced, he feels it is the only truly independent agency. The Federal Reserve, for example, has six governors appointed by the very banks they regulate, but of course the SEC is not controlled by the industry it regulates. He feels the Commission’s strengths remain its strong law enforcement capabilities, fostering capital formation, and mandating transparency through its disclosure requirements.
I had to leave his remarks early as the panel I was speaking on downstairs at the PIPE conference was getting started. But a former colleague (thanks Gariel!) told me he did not announce that he was resigning or had been asked to leave by President-elect Obama. But I’m sure that day is coming.
My view: in addition to looking at the Investment Advisers Act, it is time to take a complete fresh look at the 75 year old Securities Act of 1933 and Securities Exchange Act of 1934. The world is vastly different from the Depression era, and the patchwork set of amendments and rulemakings since then is not sufficient. I hope this unfortunate crisis will include an opportunity for some serious updating of the regulatory environment to foster growth in companies seeking to raise money and go public in the USA.
The “small public company business,” from funding to reverse mergers to PR to nearly every other aspect of the business is almost entirely drained of fuel. This was the case before the crisis became public. The “outing” of the financial crisis has only acted as a giant wool blanket being thrown upon what was a tiny spark flame potential. The reality is that funders are not funding (those who are still in business that is) because the risks of outlaying capital now *far* outweigh the potential gains. This is fed by the fact that it is incredibly challenging to register securities to sell, and frankly the markets are not buying these securities with enough volume to support much selling anyway, if one wanted to sell. FINRA and the SEC have squeezed the brokers and high volume selling account-holders so tight that, especially when it comes to equity, that the buyers of securities from issuers say “why am I going to give a small company my money — as an investor — take paper — and hope that I can get my stock registered, cleared for sale … etcetera etcetera … without someone placing a stop on the stock or the account or cause me to incur thousands of dollars in legal fees in order to answer questions if the SEC decides they want to ask me about the risk that I took?” Your points about the issues with 144 are well taken, but they are only the tip of the iceberg. The entire system is completely and extemely broken. And it fell apart on the watch of a “pro-business” conservative Republican! People in this business must be active and loud and work together like never before to correct things. Thanks for your leadership.
Thanks OOBC. As you know I am a bit more optimistic than you seem to be. I agree that a restructuring of the regulation of the securities markets is necessary. I think our President-elect also realizes that. But at least in our shop deals are happening. We recently closed several big reverse mergers and are currently working on a good number more that are moving forward with financing committed. Are deals taking longer? Amounts invested smaller? Some reverse mergers with no financing? Yes to all. Will it be tough for at least the next year? I think so. Will the PIPE market survive and ultimately thrive again as a source of financing for small public companies and those going public? I think so. Hang in there. Use this time to strengthen your existing relationships, work harder to get new ones and maybe take a day off and go fishing.