Tuesday, at the CNBC Financial Advisor Summit, SEC Chair Jay Clayton was interviewed by CNBC’s Bob Pisani, touching on a variety of issues, including SPACs, proposed changes to Form 13F, ESG ratings and investing, emerging market listings and other topics of interest. No breaking news, but some insight into the SEC’s thinking on these subjects.
SPACs. Very loosely, SPACs are companies with no real operations formed to raise capital in an IPO that would be used to acquire an operating company after the IPO, essentially acting as vehicles for the acquired operating companies to go public through the acquisition transactions. With regard to SPACs and the need to monitor this innovative new “product” for going public, Clayton noted that, while he liked the concept of more competition in the distribution of stock, it was important that investors understand that SPACs are a different animal than an IPO, especially with regard to price discovery, diligence and motivations:
“I think what investors need to understand and what the professionals who are involved need to help them understand, is that it’s not the same as an IPO. The motivations of the SPAC sponsors, the motivations of the company that they’re purchasing and the de-SPACing transaction are different from the motivations of your traditional owners and management teams in an IPO. Not saying that’s right or wrong, but they’re different; investors should understand that. Also, there’s something that happens in the IPO process that doesn’t happen as much in the de-SPACing process, and that is institutional investors on your traditional road show kick the tires on the company. That doesn’t happen to the same extent in the de-SPACing transaction.”
Form 13F reports. Generally, institutional asset managers are required to make quarterly filings to reports their holdings if they exercise investment discretion over accounts aggregating $100 million. The SEC has recently proposed increasing the reporting threshold from $100 million, which has been the threshold for 40 years, to $3.5 billion, a change that was expected to capture about 90% of prior filings. To put it mildly, the proposal has been widely panned. Pisani asked whether the SEC planned to go forward with the proposal? Clayton’s response: “Yeah, Bob. We learned a lot.” Acknowledging that the proposal elicited substantial criticism, Clayton nevertheless seemed a bit nonplussed that the objections did not relate to the basic purpose of the form, but rather to other reasons that were “interesting” and “good,” but perhaps not what he expected. For example, one objection was that commenters wanted “to see what strategies…fund managers were using, what are the professionals doing in their strategies.” Clayton noted that the form was not designed for that purpose: it was “45 days late, it includes only long holdings, not all long holdings. So, to the extent you’re using these to follow, as some people might call it the ‘smart money,’ understand that that’s a very imperfect way to look at that. It’s not what the form was designed for, but it’s—I will say this, it is very interesting to me how many people seem to use it for that purpose.”
Pisani observed that reporters also use the form and regularly complain about the timing. He wondered why the SEC doesn’t “change it from 45 days to 15 days and make it shorter and make it more useful to people?” To that, Clayton responded that the question has long been debated as to whether shortening the filing deadline would allow others to take “unfair advantage” of proprietary strategies: “So how long of a delay do you have before that kind of trading information is no longer proprietary information or should no longer be protected as proprietary information? Good question.”
In addition, in their comment letters, companies said that these forms were “the only way we have to effectively identify who our shareholders are,” which Clayton viewed as “a problem. If we’re using 45-day trailing filings of a select group of people to help companies figure out who their shareholders are in the day of electronic communication, that’s something we’ve got to address. And I will throw these terms out there: OBO/NOBO, it’s how we interact through the brokerage system with ultimate beneficial owners. But we need to look at that.” Sounds like this might be a topic to be addressed in connection with potential changes to the proxy process?
So will the SEC move forward with the proposal, Pisani reiterated? Clayton responded that “where we are, Bob, is we need to examine this, and we need to examine all those issues.” What is right threshold? Why are people using the form for unintended purposes? Pisani interpreted that as a “definite maybe.”
ESG investing. Pisani remarked that there have been “massive inflows this year” into ESG investing, but that there has also been pushback from some groups “that view this as pushing a social agenda; that climate change, boardroom practices, clean energy are really social agendas and is it sort of an appropriate thing for financial advisors to be pushing or asset managers.” First, Clayton questioned whether ESG scores are really too subjective to convey valuable investment information and whether, to the extent that scores are used for marketing to investors, investors really understand “what that means from a return perspective and investment philosophy perspective?” On the question of values versus value, Clayton asked whether the decision was really about capital allocation:
“It is terrific if somebody says, ‘Look, I think that our economy is going to go through a transition. I want to be in front of that transition, and I want to know how to do it.’ That’s a fundamentally, you know, valid way to invest, absolutely. But if somebody is sitting there saying, ‘I want to drive the transition of our economy using SEC rules,’ that’s a different story. And trying to, you know, handle the difference between those two and convey investment decision information to people as effectively as practical, that’s our job.”
Where a problem can arise in touting ESG, he said, is when an investment is marketed as, for example, “environmentally friendly or something else, and there’s no rigor behind whether it actually does that.” The marketing and the substance need to “line up.”
Emerging market listings. For over a decade, the PCAOB has been unable to fulfill its SOX mandate to inspect audit firms in “Non-Cooperating Jurisdictions,” or “NCJs,” including China, and there have been various legislative and regulatory efforts to address that issue, including potential de-listing. Asked the status of these efforts, Clayton responded that dialogue with regulatory counterparts in China is continuing; however, the issue regarding PCAOB inspections has been around a long time. Clayton viewed that as “a problem, because this is a fundamental part of our investor protection. And what we’re working on is whether we’re going to continue to allow companies that do not allow PCAOB inspections to list their securities in the U.S. It’s a recommendation from the President’s Working Group, and the staff here at the SEC is moving forward on proposals that would implement that, that would go out for public notice and comment.”
Retail investors. After acknowledging the benefits of broader participation of retail investors in the markets, Pisani asked whether, with regard to investments that may be very dicey, the SEC should do more than just require disclosure: “I know you’re very big on disclosure, warning people. But I’m wondering if, in certain circumstances, the SEC might not be able to do a little bit more than just warn people and write something in big crayon on the form saying, ‘This is a risky investment.’…But I’m wondering if there are situations where the SEC could just jump in and say—clearly define what is suitable, what is not suitable, without getting into the nanny state where you’re telling people what to invest in?” Clayton agreed that more long-term investing by the public is “terrific,” but added that “there are a number of products that just aren’t appropriate for most retail investors, and we’re doing a lot more to make it clear what those types of products are…. We don’t want our long-term retail investors being exposed to those without a great deal of dialogue with the financial professional.” Different products are right for different people and, with new Reg Best Interest, among other things, “we’re making it clear that financial professionals need to think about those types of things and only recommend those products in those idiosyncratic circumstances where they’re appropriate.”
Cybersecurity. Finally, on his own initiative, Clayton raised the issue of cybersecurity, cautioning the audience to make sure that their systems are protected. Incidents will happen, he said, but what’s important is “how we deal with them. But keeping the confidence in the system is crucial. Part of keeping that confidence is maintaining good cyber hygiene and what I would say is being able to react quickly in the event of an issue.”