On June 19, 2012, Republican Darrell Issa (CA), Chair of the House Oversight And Government Reform Committee, sent a 15-page letter (the "Letter") posing 34 enumerated questions to Securities and Exchange Commission Chair Mary Schapiro, in which he asserted that the disastrous Facebook IPO launch on NASDAQ had revealed "substantial flaws" in the outdated Securities Act of 1933. Accordingly, Issa sought Schapiro's "input on the current regulatory structure relating to Initial Public Offerings (IPOs)."
The Letter set forth, as its premise, the following:
On February 1, 2012, Facebook Inc. officially announced plans for its widely anticipated IPO, which was eventually executed on May 17, 2012. Following its official announcement, Facebook issued registration statements that expressed caution about revenue growth, increased the IPO price range, and increased the total number of shares offered. In the week preceding the IPO, underwriters held a "road show" for investors - all while in-house analysts were simultaneously downgrading internal forecasts. These new forecasts were not directly disclosed during the road show; nonetheless, consistent with the law select institutional investors were privileged with the negative information . . ."
Expressing a frustration likely now felt by many disappointed Facebook IPO purchasers, Issa observed that:
underwriters have discretion to determine the price of an IPO, while subject to conflicts of interest stemming from economic relationship with those institutional clients that ultimately will purchase the bulk of an issuance. In conjunction with this discretion, communications restrictions and legal liability enable underwriters to provide information to institutional clients, while precluding access to the broader public.
Issa then launched into a extended riff on the themes of market-based versus non-market-based approaches to pricing IPOs; and whether the imposition of a regulatory mandated "Quiet Period" constitutes a disservice to the investing public. In advancing his thesis for market-based pricing, Issa favorably cited the Google IPO (a Dutch Auction)as "a rare glimpse into a market-driven system that many would argue was fairer than what was done at Facebook."
In concluding the Letter and urging Schapiro to take action, Issa warns that:
In this day and age, under fierce global competition for capital, we must modernize regulations alongside our vastly changing economic landscape. If we stand still while the global economy evolves, we will be left behind. China, Brazil, India, Singapore, Turkey, Canada, Chile and other markets current work to devise, or already provide, more attractive regulatory environments that draw capital away from the United States . . .
Press reports indicate that SEC Chair Schapiro recently responded to Issa and indicated that the SEC could review the "quiet period" rules but that she saw benefits in retaining some of the present restrictions as a means of ensuring an even playing field for all investors in terms of the public dissemination of material information.
Castaways On The Same Boat
Sigh. Yes, an audible one!
Issa and Schapiro are castaways on the same boat.
He prods her to action on behalf of a dysfunctional Congress that has us headed off a fiscal cliff amidst partisan bickering.
She responds on behalf of a dysfunctional SEC that just deadlocked over reforming both consolidated audit trail and money market rules.
And while Issa and Schapiro row in opposite directions, the pillars of Wall Street crack, the foundation splits, and the masonry falls on our heads.
Four Score And Seven Years Ago
Much of what Issa highlights is commendably on point. The cornerstone of our securities regulatory scheme was laid in 1933 and is now nearly 80 years old. Keep the four score and delete the seven years ago, and you have about the same span of time as from the birth of our nation to Lincoln's speech at Gettysburg. That's a long time. The idea of a Quiet Period in an online age of bloggers, social media, instant messaging, and YouTube is uncomfortably quaint. Wish that it were otherwise, but the bad guys are getting the inside dope, despite the existence of a Quiet Period. In the fight between our aspirations and reality, reality is kicking butt.
Three Commissioners, constituting a majority of the Commission, have informed me that they will not support a staff proposal to reform the structure of money market funds. The proposed structural reforms were intended to reduce their susceptibility to runs, protect retail investors and lessen the need for future taxpayer bailouts.
I - together with many other regulators and commentators from both political parties and various political philosophies - consider the structural reform of money markets one of the pieces of unfinished business from the financial crisis.
While as Commissioners, we each have our own views about the need to bolster money market funds, a proposal would have given the public the chance to weigh in with their views as well. However, because three Commissioners have now stated that they will not support the proposal and that it therefore cannot be published for public comment, there is no longer a need to formally call the matter to a vote at a public Commission meeting. Some Commissioners have instead suggested a concept release. We have been engaging for two and a half years on structural reform of money market funds. A concept release at this point does not advance the discussion. The public needs concrete proposals to react to. . .
SIDE BAR: For a more detailed and nuanced view of this crisis of consensus at the SEC:
Issa makes a number of good points; however, fifteen-page letters to the dysfunctional SEC are not exactly calculated to accomplish much beyond publicity. Congress needs to comprehend an essential truth: The SEC should be fighting fraud not reading letters and drafting and re-drafting rules.
Similarly, as Schapiro laments, the SEC cannot endlessly convene roundtables, prepare White Papers, and then have commissioners posturing to the press about the need for more roundtables, white papers, and drafts.
To Issa's credit, he seems to understand that there are primordial forces on Wall Street, and that those seminal rules and regulations have deep seated consequences. I just wish that the Congressman recognized that the SEC is an ossified bureaucracy beyond redemption. Issa needs to aim his sights higher and consider the biblical admonition about not putting new wine in old wineskins. You can't revise the outdated regulations from the 1930s but retain the outdated regulator.
One last word of caution. When tampering with primordial economic forces, it's not a good idea to resort to amateur hour. This project calls for measure twice and cut once. We need competent mechanics. As the recent Knight Capital fiasco proved, you can't simply unplug and reboot your way out of market problems. The regulation of Wall Street is not a high stakes game of Jenga - let's just see what happens if we pull this stick out and . . . oops!