A policy agenda for Wall Street’s new sheriff
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The writer is president of Better Markets and was a member of the Biden administration’s team guiding its transition into office
The Trump administration’s financial deregulation has exposed investors to predators, markets to manipulators and capital formation to wealth extraction. That must change.
Under its new chair Gary Gensler, the Securities and Exchange Commission must take steps to fulfil the Wall Street regulator’s mission to protect investors; promote fair, orderly and efficient markets; promote capital formation; and strengthen the resilience of the financial system.
Remedying the Trump administration’s deregulation will only be part of the required agenda. Gensler, a former head of the Commodity Futures Trading Commission, will have to tackle multiple, complex reforms to make currently rigged markets work better.
These include completing the unfinished business of the Dodd-Frank reforms ushered in in the wake of the 2008 financial crisis and addressing regulatory gaps exposed by market developments such as the GameStop trading frenzy and the Archegos family office implosion.
On the Trump era fixes, there is much work to do. First, the SEC should tackle the misleadingly labelled “Regulation Best Interest”, a standard of conduct introduced in 2019 for brokers. It claims to require them to act in their clients’ interests when recommending a securities transaction or investment strategy.
This standard is so flawed that it threatens to do more harm than good, weakening previous standards by relying more on vague disclosure rather than specifying requirements for broker behaviour. It needs to be changed into an actual fiduciary duty for brokers to put their customers’ best interests first. After all, it’s their customers’ money.
Second, shareholders, who are supposed to be owners of public corporations, must have their full rights to submit resolutions for voting at company meetings restored. The Trump administration raised the thresholds for “proxy access”, requiring higher shareholding stakes for such moves. Rules introduced last year requiring proxy firms to share rebuttals to their advice from executives with clients also need to be lifted. Such material should be independent of the biased influence of company management. Finally, Gensler must reverse the deregulation that weakened the SEC’s wildly successful whistleblower programme.
Many longer-standing issues also need to be tackled. The unfinished Dodd-Frank agenda includes requiring all money market funds to allow their net asset values to fluctuate more freely. Such funds have traditionally sought to maintain a fixed NAV of $1 per share. But in times of market stress, the NAV can sometimes slip below this, triggering a rush of redemptions from investors. The weak reform that came into effect in 2016 only compelled a small subset of such funds to “float their NAV”. This is why the industry required another bailout in the market turmoil last year, just like in 2008.
The expansion of dark, high-risk private markets at the expense of the public markets must also stop. That means ensuring that exemptions from SEC registration are narrowly calibrated and that participation is limited to only the wealthiest investors who can withstand significant losses.
In addition, the SEC must enact pay rules that require corporations to claw back ill-gotten gains from executives and regulate compensation schemes that give incentives for excessive risk-taking. And the watchdog must finally fix the conflict-ridden business model of credit-rating agencies that allows issuers to pay for their rating. This virtually guarantees inflated ratings.
Furthermore, the SEC must ensure that a consolidated audit trail, a database for regulators to track stock orders in near real-time, is completed and implemented. This would finally give the SEC the ability to comprehensively monitor the markets and detect the predators who manipulate them.
It also has to address distortive market practices such as payment for routing orders, a practice that discourages brokers from seeking best prices for clients from multiple exchanges.
Finally, the SEC has to respond to recently exposed regulatory gaps. For example, the GameStop saga raised issues such as the oversight of high-frequency traders and the exploitation of retail investors. Another example is the implosion of Archegos. That highlighted the need to better regulate the derivatives built up by the firm, and family offices in general.
As he proved at the CFTC, Gensler is experienced in moving multiple issues through the policymaking process simultaneously. He needs to do the same at the SEC.