Last week, at a meeting of the SEC’s Investor Advisory Committee, SEC Chair Jay Clayton delivered an opening statement, part of which addressed two governance topics of recent debate. One of the topics—dual-class share structures—was on the Committee’s agenda, while the other—mandatory shareholder arbitration provisions—was not. In both cases, Clayton’s mission was to explain “why they are not on my list of near-term priorities.”
In Clayton’s view, the SEC has limited rulemaking capacity and resources, which should be reserved for matters that are more pressing for investors and markets, more central to the SEC’s core “mission” and are ripe for consideration and addressable with a reasonable time commitment. To Clayton—and, in his view, Main Street investors and others who take a broad view of the markets and economy—these matters
“currently include, among others, (1) standards of conduct for investment professionals, (2) an examination of equity and fixed income market structure, (3) the regulation of investment products, including ETFs, (4) the impact of distributed ledger technology (including cryptocurrencies and ICOs), (5) FinTech developments, (6) the elimination of burdensome regulations that do not enhance investor protection or market integrity with an eye toward facilitating capital formation, and, of course, (7) Congressionally-mandated rulemaking, as well as inevitable issues that we have not yet identified but will emerge as pressing.”
Rulemakings that fit within these categories were included in the SEC’s Regulatory Flexibility Act agenda. (See this PubCo post.) Notably absent from this list of priorities are both of these topics du jour.
With regard to mandatory shareholder arbitration provisions, as Clayton has previously testified (see this PubCo post), he is “not anxious for this issue to come before the agency. This is a complex issue that invokes divergent and deeply held perspectives and could inevitably exhaust a disproportionate share of the Commission’s resources.…This does not mean that the topic is not worthwhile to discuss, and I encourage those with strong views to support their position with robust analysis.” Moreover, Clayton pointed out that investors continue to invest overseas, where their protection through private rights of action is often weaker: “In this regard, I offer one data point that is worthy of illumination for various investor protection reasons—U.S. investors have, directly or indirectly, invested roughly $6.4 trillion in equity securities in jurisdictions that have substantially different, and in most cases less demonstrably significant private rights of action for shareholders. I expect this trend—a greater proportion of U.S. investment being made outside the SEC registration system—to continue.” Nevertheless, Clayton clarified that he had “not formed a definitive view on whether or not mandatory arbitration for shareholder disputes is appropriate in any particular circumstance. I believe any decision would be facts and circumstances dependent.”
Clayton then addressed a topic that was on the committee’s agenda for that day: “With respect to dual class structures, I commend the Committee for examining this issue and look forward to your recommendations. I understand that those recommendations focus on potential disclosure deficiencies and investor confusion. Of course, we should be striving to address any material gaps in governance disclosure and address investor confusion. Disclosure regarding the operation of dual class voting structures is a question that should be discussed.” However, it may make sense to address the issue in a broader context: he “would like to see more analysis of this topic that considers other related issues of significance, including concerns about short-termism and concerns about the attractiveness of U.S. public capital markets compared to foreign public markets and global private markets.“ But, as noted above, this topic was not on his priority list.
The Committee also decided to address at a later time, following the development of a specific proposal by the relevant subcommittee, a recommendation by Commissioner Jackson that the exchanges require companies to include sunset provisions in dual-class structures. In a speech in Berkeley, Jackson addressed the question of “whether dual-class structures, once adopted, should last forever.” While, Jackson acknowledged that, “at least for a defined period of time early in a company’s life, dual-class can be beneficial,” that may not be the case for the long term, he believed; his studies showed preliminarily that, “at some point that structure is no longer beneficial.” However, Jackson took issue with the approach of simply excluding companies with dual-class structures from major indices as too “blunt” a tool. That is because Main Street investors often invest through index funds and should not be forced to “lose out on the chance to be a part of the growth of our most innovative companies.” Instead, he advocated that the exchanges amend their listing requirements to impose sunset provisions on dual-class shares as the price of admission to the exchange.