The Journal The Authority on Global Business in Japan

Coinciding with Japan’s G20 Presidency, the American Chamber of Commerce in Japan (ACCJ) Financial Services Forum welcomed Hester Peirce, commissioner of the US Securities and Exchange Commission (SEC), to share recent SEC initiatives and her insights on the global regulatory framework on August 7 at Tokyo American Club.

Peirce has made waves with her calls for reform at the SEC. In 2018, she dissented from the commission’s disapproval of an application for a bitcoin-related exchange-traded fund, saying that, in her judgment, “it would send a strong signal that innovation is unwelcome in our markets.” This proactive stance towards cryptocurrency has earned her the moniker Crypto Mom in online circles.

Peirce spoke about the power of innovation in society, and the role of the SEC.

“One of the reasons I wanted to become a commissioner was because I believe in the transformative power of the capital markets,” she said. “Capital markets bring people together in joint endeavors to improve society.”

A native of Ohio, Peirce used her hometown of Cleveland as an example of how the SEC’s work relates to innovation. “Ohio’s story is not one of government plans or grants, but one of bright minds inspiring each other and financing each other.”

Quoting American economic historian Naomi Lamoreaux, Peirce related how networks in Cleveland formed around innovative companies and became engines for local economic development. This, in turn, encouraged the geographic concentration of technological creativity and venture capital.

It is Peirce’s hope that the same kinds of innovation networks will emerge throughout the world. “I daydream about having these spring up organically all over the country—and the world—to unleash the talents of the next generation of entrepreneurs and invigorate the communities in which they are located,” she said.

“Our capital markets are a shared resource, so efforts we undertake in the United States to reform the regulatory structure should be informed by wisdom from Japan and all across the globe. Our efforts, if successful, will generate benefits far beyond our borders. We Ohioans, inspired by our state’s heart-like shape, refer to it as ‘the heart of it all.’”

“As a government official, I spend a lot of time thinking about what the government can do toward this end,” said Peirce, who believes it’s not the government’s place to decide where or how innovation takes place. Instead, the government should “lay the groundwork within which healthy capital formation happens spontaneously, as people think, produce, and interact with one another.” As she sees it, neither innovators nor investors need the government to guide them or generate ideas. The government’s only role should be to establish clear, consistent rules.

In fact, Peirce believes that government can actually deter innovation and the process of capital allocation. “It runs the risk of ruining the whole effort,” she said. Innovators and entrepreneurs are rewarded by society for their deeds. They instinctively react to the needs of society. But government reacts regardless of what society actually needs or wants.

“Government allocates capital to politically expedient projects—or to projects that make the allocating bureaucrats happy—rather than those that would make society happier and better off,” she said.

Many rules and regulations have been made over the long history of the SEC, which was founded in 1934. Some are considered more outdated and unnecessary than others. Tying into reality television star Marie Kondo, Peirce compared the government’s accumulation of archaic regulation to hoarders.

“Just as a person who has lived in a house for decades collects lots of stuff—and has trouble throwing out the pieces that have served their purpose well but are now just in the way—a regulatory agency that has been around for decades collects lots of rules and, rather comfortable with the dusty volumes lying around, resists throwing out the ones that no longer serve a valid purpose,” she said.

“The rules that objective observers see as unnecessary and standing in the way of progress, the regulators see as worth preserving because they once had value and might come in handy again.”

Peirce isn’t the only one at the SEC trying to do away with obtrusive regulation. “Chairman Jay Clayton has made it a hallmark of his tenure to look at the SEC’s rule book with an objective and practical eye. He recognizes that we cannot afford to nostalgically hang on to the rules of the past with the inter­pretive dust that has accumulated on them.”

This does not mean a complete overhaul is needed. “Sometimes, we take a look at a rule, find that it is functioning perfectly well, and, therefore, leave it untouched,” she explained. “Replacing old rules that are working well with modern substitutes would be foolish.”

Still, she recognizes that the rules should be reviewed inde­pendently to determine if they need to be tweaked, updated, or removed altogether.

New rules may also be necessary, and recent SEC initiatives have included some. Regulation of public companies, in particular, is a part of their jurisdiction that Peirce said is “crying out for reform.” “We have seen the trend of companies waiting longer to go public and have been asking ourselves what we can do to encourage companies to go public earlier, and to remain public,” Peirce said. “We want to ensure that retail investors can participate in the growth of these companies.”

She cited Sarbanes-Oxley, the 2002 law designed to protect investors from fraudulent financial reporting, as a particularly painful constraint on small companies, because it requires an auditor to attest to the effectiveness of the internal controls. “It requires companies to spend scarce investor funds on an assurance that many investors simply do not want at that stage of the company’s life,” she said. “Accordingly, we recently proposed to eliminate this for certain pre-revenue companies.” Additionally, the SEC has begun efforts to cut unnecessary costs while ensuring that investors still get the information they need. Among the many modernization measures being considered are:

  • Streamlining the disclosure requirements for financial statements relating to acquisitions and dispositions
  • Expanding the pool of companies that can use Regulation A (an exemption from registration for public offerings) to raise funds
  • Allowing all issuers to test the waters by communicating with potential investors

She also listed numerous other revisions, saying, “Some of these changes may sound small, as I rattle them off in a list, and I would have liked some of them to go further. Many commenters, however, have welcomed these changes and the spirit in which they come.”
Before ending with a question and answer session, Peirce reinforced her position on innovation, reform, and coope­ration through her home state’s motto: The heart of it all. “If our capital markets function as they should, there will be many hearts of innovation beating all across the world in a combined effort to nurture our global economy, with the ultimate goal of improving the well-being—and unleashing the talents—of people everywhere.

During the Q&A, Peirce was asked about the January 2018 Markets in Financial Instruments Directive (MiFID II), something very much on the minds of investors. A legislative framework within EU financial markets, the regulation has burdened US businesses with cross-border compliance issues. Peirce said the SEC could consider extending the grace period, but finding a permanent solution is “not that easy.”

Aaron Baggett is a staff writer at Custom Media for The ACCJ Journal.

Photos: Embassy of the United States, Tokyo
We cannot afford to nostalgically hang on to the rules of the past with the interpretive dust that has accumulated on them.