Walking And Chewing Gum At the SEC

November 21, 2014

Yeah, I know . . . I'm getting older and grouchier and if I were nominated for Curmudgeon of the Year, I would probably complain about that accolade and then refuse to attend the award ceremony. In keeping with that spirit, I'm no fan of the proliferation of forums, roundtables, conferences, break-out sessions, and all sorts of get-togethers at which government and private sector types interact. Why, you might ask?  (And if you didn't ask, humor me, ask). Because it's just a colossal waste of time and resources. We all know how this crap works. You recycle the same old folks with the same old connections round and round and round at these confabs.  At one year's meeting, they speak out for the private sector. At the next year's, they are high-minded public servants attending for the government. At the following year's session, they often criticize the very positions that they had earlier espoused.  

In the end, we get the White Paper. That makes its way to Congress and to various agencies. It gets sliced. It gets diced. It gets eviscerated. It may or may not get proposed as some legislation, but if it does, it will likely die in committee. And in the rare event that something - anything - ever emerges from this inefficient dynamic, it often proves an indecipherable and unworkable bit of legislation that takes on an after-life as an equally corrosive rule on some agency's books.

In that uplifting spirit, I see that there was a 2014 Securities and Exchange Commission Government-Business Forum on Small Business Capital Formation. Mind you, this is the 33rd such iteration of that forum.  READ the details in the official program 

A letter to all forum participants from the SEC's Chief of the Office of Small Business Policy, Sebastian Gomez Abero, states, in part:

The Securities and Exchange Commission has conducted this forum annually since 1982. The event provides small businesses, their advisors, and their investors with an opportunity to share perspectives and views on a variety of topics important to them. This is an effective way for the agency and its staff to learn more about the important capital formation issues that the small business sector is facing and helps us take a practical and effective approach in our rulemaking and interpretation.

With all due respect, I think it's pretty obvious that I don't view these interactions as an "effective way" for the SEC and its staff to learn about anything. Frankly, it tends to smack of yet another way for influential players in the private sector to spend some quality time with influential players at the SEC, who, over time, often become influential players in the private sector and the door spins round and round, ad infinitum.  You'd sort of think and hope that those regulating the capital markets would already be aware of the "important capital formation issues" and would maintain regular communication with participants in the small business sector. Similarly, if these forums were, in fact, effective, then how is at that after 33 years of holding this particular small business forum that the SEC's track record is anything but "practical and effective" in terms of its rulemaking and interpretation in this sector?  Oh, sure - just give ‘em one more year and it will all get better.

Finally, the more you read the itineraries of SEC Chairs, Commissioners, and Staff, the more you note the globetrotting and jet-setting nature of their jobs.  Which may explain why there are so many inexplicable delays in starting investigations, completing investigations, initiating charges, conducting hearings and trials, pursuing appeals, and deliberating on so many pending matters.  Personally, it seems to me that taxpayers are funding far too many trips and seminars for folks at the SEC who should be spending more time in their chairs, at their desks, and protecting the public and preserving the markets.  But, as I said earlier, I'm just a cranky bastard to start with. I also recently filed a complaint with the SEC's Office of Inspector General because I can't get a straight answer about how much longer it will take for a particular department to act on a matter involving a client.  The department at issue would likely have me believe that it is under-staffed, over-worked, under-budgeted, and doing the best it can. I don't buy it.

On a recent trip to Los Angeles's "Silicon Beach," I had the privilege of visiting a technology venture accelerator at University of Southern California's Viterbi School of Engineering called the Start-Up Garage. The people I met, as well as their ideas, were truly exciting. I think there actually might be one or two of you here with us today.

I guess it's worthwhile for one of the four sitting SEC Commissioners to leave Washington, D.C. and visit a college "technology venture accelerator."  I'm not sure what the jargon actually means but, then again, we do live in an age where it's important to make up terms to describe things that were once known by simpler descriptions but for the fact that you didn't seem like an insider unless you used an edgier, newer bit of argot. You like that word "argot?" Hey, some folks say that I am a "thought leader" and a "disruptor." That sounds much better than Bill Singer, that cranky, pain-in-the-ass.

I took great comfort from Commissioner Stein's comment that:

At the same time, I also share Commissioner Aguilar and others' concerns about the practical realities and risks when dealing with smaller issuers and less liquid (especially retail over-the-counter) markets. We have to be smart, practical, and willing to both experiment and adapt as we see issues emerge.

It's nice that a sitting SEC commissioner recognizes the need to be "smart" and "practical" and willing to experiment and adapt.  I'm sure those were meaningful revelations to the forum's attendees. I'm certain that those observations were deemed truly exciting by those in the private sector. Of more pith, were Commissioner Stein's comments:

In short, I am very focused on working through the issues you're discussing today. As part of that effort, I want to see the Commission move quickly toward finalizing three very important rules related to capital formation - crowdfunding, the new Regulation A (or "Reg A+"), and certain investor protections under Rule 506.

Moreover, as I've said before, we should be able to walk and chew gum at the same time: even as we work to rationalize and improve the entire system, we should move as quickly as possible to finalize the proposals that are before us. These rules arise from laws passed two and a half years ago, and Congress is looking to us to get them done.[3] Congress worked hard to make sure that the Commission had authority to establish appropriate protections around new ideas like crowdfunding, so that they could blossom into healthy, durable markets.[4] I hope we can move quickly on these and on all of our Congressionally mandated obligations. Quite frankly, I don't think we're very far away on some of these rules. Let's get them done.

Yeah, okay, let's get ‘em done!  Let's all walk and chew gum at the same time. As to the hardcore characterization of our goals, why, they are as well-defined as one would expect from such an intersection of government and private sector types. We have to work towards rationalizing and improving the entire system. Not just part but the entire system! On top of that we must move "as quickly as possible to finalize the proposals." Nothing like finalizing proposals, but for the fact that we never seem to be able to quite agree on drafting any proposals but so much for details. In the end, however, if we can just all get along and walk and chew gum in unison, we will pave the way for "healthy, durable markets." Who wouldn't want that?

In addition to Commissioner Stein, Commissioner Daniel Gallagher also weighed in with his own remarks.  As Gallagher has amply demonstrated during his relatively brief tenure, he's not a big proponent of going along for the sake of getting along. He is a regulator with strong opinions and prejudices, as he clearly asserts here:

Moreover, there's a long-standing need for better, more liquid markets for smaller post-IPO companies. We should consider better scaling of the periodic reporting regime for small companies, to match commonly-accepted market definitions of "microcap" and "nanocap." Venture Exchanges or exchanges with similar scaled listing standards may help here as well. Companies barely clinging to a NASDAQ or NYSE listing could fit more comfortably at a Venture Exchange, and companies currently trading OTC may be willing to up their game if the hurdle to become exchange-traded wasn't so insurmountable.

Finally, I wanted to touch briefly on the second panel today, regarding changes to the accredited investor definition. Frankly, I have yet to be persuaded that this is an issue that we should be taking up at this time. Dodd-Frank's removal of the value of the primary residence for purposes of the net worth test was already a significant change to the accredited investor definition. But more fundamentally, I am baffled by continued insistence from some quarters that we need to significantly revise the accredited investor definition. Why should we spend limited Commission resources "protecting" the wealthiest 2-3% of investors in this country? This obsession with "protecting" millionaires-potentially at the cost of hindering the wildly-successful and critically-important private markets-strains logic and reason. Millionaires can fend for themselves. That additional government paternalism could also negatively impact the availability of capital for small companies is a double whammy, and rather than pressing our luck, we should be yelling "stop"-and instead spend our time focusing on actually facilitating capital formation.

Kudos to Commissioner Gallagher!  Finally, someone at the SEC recognizes that there are limited resources that must be allocated in an effective manner.  There are only so many dollars and so many men and women on staff.  Imagine, a regulator who is mindful of "logic" and "reason."  Perhaps there is hope?

In the end, Commissioner Gallagher isn't one of those government types who drinks the Kool-Aid. As even he concedes:

As I don't want to take any more time away from what I hope will be a great discussion today, I will conclude with a final thought. This Forum has advanced some truly excellent recommendations in the past, and I'm sure will continue to do so in the future. And yet there is at least a perception that these recommendations are not given their due. So I hope that, going forward, we can commit to respond to each Forum recommendation in writing, as a way of validating that the proper attention has been paid to your voices. If the Commission cannot make that commitment, at least this Commissioner will.

As we in the private sector are always mindful, when there is a problem, someone must own it. In an age of finger pointers, it's nice to see that someone, particularly a federal regulator, is prepared to pull the emergency brake and try to get things under at least a semblance of control. Moreover, Commissioner Gallagher says that he will take responsibility and make a personal commitment. Assuming that's more than so much chatter, that is a refreshing posture.