The Securities and Exchange Commission is often referred to as “Wall Street’s regulator,” and when people think about the SEC, their minds can often turn to the movies where lawyers in trench coats show up to bust somebody for bad behavior.
Yes, the SEC does play a critical enforcement role as the regulator of America’s securities markets, but that’s far from its entire mission. Another important role the SEC plays is to develop regulations that apply to all of America’s public companies, the vast majority of which employ and serve people on Main Street, not Wall Street.
American entrepreneurs have always dreamed about turning their ideas into businesses and then taking those businesses public. For much of its history, the SEC administered a reasonable regulatory framework that allowed public companies and their investors to thrive, while providing for the transparency and investor protections that have become a hallmark of our capital markets.
Regrettably, more and more businesses in America are choosing not to go public to the detriment of economic growth, job creation and the ability of Main Street households to build wealth. The United States is home to roughly half the number of public companies as existed two decades ago, and there is little doubt that the long-term trend remains negative.
While there is not one single reason for this decline, what is clear is that SEC rules and mandates have steadily grown over the years, to the point where too many businesses are saying “no thanks” to a public company model that was once the dream of every entrepreneur. For example, the average annual report of a company now runs longer than Shakespeare’s “Hamlet,” and SEC rules have made it easier for issue activists to target companies over pet political or social issues.
Newly minted SEC Chairman Jay Clayton addressed this problem last week, indicating that the public company crisis is a Main Street problem that must be addressed. As he noted, a healthy public capital market brings with it capital formation and competition. Without those two elements of a strong economy, Main Street investors have limited chances to participate in the system that helped build America into the economic opportunity machine it’s known to be.
The Chamber has for the last several years put forth a number of ideas that would make the public company model more attractive. For instance, in 2014 we released a detailed list of prescriptive recommendations for how to improve the SEC’s disclosure regime, and earlier this year we released a report to emphasize the importance of the materiality standard for corporate disclosure.
And just this past week, the Chamber issued a set of recommendations to reform the broken shareholder proposal system under Rule 14a-8 of the Securities and Exchange Act.
The fundamental purpose of that system is to allow investors to put forward constructive ideas for how to improve a company’s long term performance, but unfortunately, the longstanding guardrails that have existed under the rules have steadily weakened. As a result, the shareholder proposal system has unnecessarily devolved into a mechanism too often abused by a minority of investors to advance political or socially motivated agendas that impose significant costs on the rest of a company’s shareholders, while distracting businesses’ leadership from its core mission. That’s bad for public companies, and it’s bad for the Main Street investors who bear the costs of these outdated rules.
If we want to get out of this 1 percent to 2 percent economic growth rut and create more opportunities for Main Street, modernizing SEC rules so that more businesses want to go public would be a great place to start.
When we all do our jobs well, the intersection of Wall Street and Main Street is a busy thoroughfare that leads to more public companies, more options for every-day investors and more economic growth for America. It’s time we get around to fixing some of the potholes in our way.
Brian O’Shea is senior director of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.
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