Bates News,Bates Research - 10-25-18
SEC Finalizes Its Four-Year Strategic Plan
In June, Bates reported on an SEC Draft Strategic Plan for Fiscal Years 2018 - 2022. The development of the plan is required by federal statute as a means to assess “agency performance and improvement.” The issuance of the Draft Plan was immediately followed by the submission of testimony by SEC Chair Jay Clayton before the House Committee on Financial Services. At that hearing, Chair Clayton expounded on the short draft strategy, describing in greater detail the future agenda for the agency. Now, after the required comment period, the agency’s Final Strategic Plan has been released. Chair Clayton describes the 11-page plan as a “forward-looking framework” that focuses “on the most important goals and initiatives” for fulfilling the agency’s mission. Here’s a closer look.
The final strategic plan identifies three core goals: (i) to “focus on the long-term interests of Main Street investors”; (ii) to respond effectively to new risks from technological “developments and trends in evolving capital markets”; and (iii) to enhance the agency’s “analytical capabilities and human capital development.” These contrast with the much lengthier (60-page) 2014 - 2018 Strategic Plan which sought to “establish and maintain an effective regulatory environment”; to “foster and enforce compliance with the federal securities laws”; to “facilitate access” to useful investment information for investors; and to better manage “human, information and financial capital.”
Goal 1: Refocusing on the Long Term Interests of Retail Investors
The first strategic goal reflects an important reorientation toward the concerns of retail investors. The new plan references the changing marketplace for retail investors including, for example, the changing retirement landscape – the evolution away from 401k plans, and the lack of clarity among retail investors seeking professional advice (“Best Interest”). The plan also referenced the decline in the number of opportunities for Main Street investors to invest in public companies, particularly with respect to emerging and growth sectors, given the decline in the number of companies raising capital through the public securities markets.
As a result, the SEC prioritized a number of long-term efforts to support retail investors. Most notably, the SEC committed to “pursue enforcement and examination initiatives focused on identifying and addressing misconduct that impacts retail investors.” In this regard, the SEC acknowledged that the evolving market continues to provide opportunities for “securities manipulation, fraud, and abuse, while also giving new life to age-old scams like Ponzi schemes.” The SEC committed to expand its enforcement efforts, including, specifically, “in the area of securities custody and penny stock trading.”
The agency also committed to strengthening its focus on retail investors by (i) enhancing outreach, education, and consultation efforts, in order to better understand “the channels retail and institutional investors use to access capital markets and to more effectively tailor policy initiatives to them; (ii) modernizing disclosure (including improvements to the EDGAR system) so that retail investors, can access readable, useful, and timely information to make informed investment decision; and (iii) identifying ways to increase long-term, cost-effective investment options available to retail investors, including by expanding the number of SEC-registered companies.
Goal 2: Adapting to Technology Risk and a Changing Market
The Plan’s second strategic goal reflects an acknowledgement that “increased use of, and reliance on, technology has introduced new risks and, in some cases, amplified better known market risks.” A number of factors are said to be driving the need to better respond to technological risk, such as: (i) increased dependence on data security and transmission to the functioning of the securities markets; (ii) investors moving toward data analytics to inform their investments; (iii) market participants embracing new technologies to improve efficiency and security; and (iv) the vulnerabilities that result from interconnected and interdependent markets. The SEC Strategic Plan seeks to address the consequent “regulatory and oversight challenges” that cyber security and new entrants into the market, like initial coin offerings, pose.
To that end, the Plan prioritizes expanding market knowledge and oversight capabilities to identify, understand, analyze, and respond effectively to these new developments and risks; to fix outdated rules; to address “cyber and other system and infrastructure risks”; and to better prepare for market technological emergencies and crises.
Goal 3: Enhancing Analytical Capabilities
The Plan’s third strategic goal, a commitment to enhance the agency’s analytical capabilities, is a recognition that the changing technological demands of the marketplace requires greater expertise and leadership. To that end, the SEC outlined the following initiatives: (i) recruiting, retaining, and training staff with the right mix of skills and expertise; (ii) building out agency infrastructure to expand and leverage risk analytics and data management programs in order to set regulatory priorities; (iii) continue enhancing the “analytics of market and industry data to prevent, detect, and prosecute improper behavior,” and investing in data and tools to strengthen enforcement efforts; (iv) improving risk management controls to deal with threats to the security, integrity, and availability of the SEC’s systems and sensitive data; and (v) better collaboration and information sharing across the agency.
The new SEC Strategic Plan has not changed much from the draft released in June. Comments demonstrated institutional interests in sync with the SEC Plan. (See, e.g. MSRB’s interesting discussion on retail investor protections and recent enforcement rulemakings.) Some commenters wanted to address more specific concerns – the Financial Services Institute took the opportunity to reinforce their argument for a two-tier disclosure regime pursuant to any forthcoming Best Interest rule. And the U.S. Chamber of Commerce argued that the SEC concentrate on four items: Public Company Regulatory Reform; Modernizing Existing SEC Rules; Disclosure Reforms; and Standards of Conduct for Investment Professionals.
Because the SEC delivered a shorter, yet higher-level plan, it managed to steer clear of many controversial and thorny policy issues. But the document does provide takeaways that indicate important shifts in thinking away from the agency’s previous stated priorities. These include an intentional reorientation to focus on the retail investor; an open-minded approach to better address the many risks raised by innovation and new technology; and a recognition that the infrastructure and personnel of the agency must (and will) improve to adapt to technological change. Market participants would be well advised to stay on a compliance course in sync with these priorities.
Bates Research will continue to keep you apprised.