Why Is Trump’s SEC Chairman Looking to Bring Back an Obama-era Financial Rule?
When the Securities and Exchange Commission (SEC) was created in 1934, it was largely tasked with policing disclosure of investment risk. At the same time, the SEC historically has let investors manage their own risk appetite and decide the merits of securities themselves, though that hasn’t always been the case with state securities regulators. In the 1980s, Massachusetts barred its residents from investing in the initial public offering (IPO) of Apple and declared the stock “too risky” because of its high price-earnings ratio. As we know today, the Apple IPO turned out to be one of the greatest in investment history and, fortunately, in 1996 Congress passed a law to preempt state securities restrictions.
However, recent proposals give the impression that SEC Chairman Jay Clayton wants to take us back to the 1980s and impose nanny state, merit-based securities regulation. He proposed a set of regulations last fall that would bar many middle class investors from buying mutual funds and exchange-traded funds (ETFs)—financial products that have been on the market for nearly three decades.
CEI Senior Fellow John Berlau and Research Associate Gibson Kirsch recently explored this topic in an op-ed for the Wall Street Journal, noting that “derivatives in these funds present some risks, but the risks are fully disclosed to investors under existing SEC rules, and the SEC can always take action to improve such disclosure without restricting investor choice.”
This latest piece comes on the heels of another op-ed from Berlau in February posted in The Washington Times, in which he noted, “Mr. Clayton alarmed many by putting forward this proposed regulation despite the concerns of his fellow Republicans,” and “if Mr. Clayton votes to finalize the rule along with Democrats on the SEC, who have praised the regulation as it’s currently proposed, it would go into effect.”
Clayton has gone forward with these rules despite objections from the two other Trump-appointed Republican SEC commissioners, Hester Peirce and Elad Roisman. Peirce and Roisman have gone on the record to say that under these rules “investors would incur higher costs and greater risks for the same market exposure” and that the rules are an “overly-paternalistic approach to investor protection. Beyond that, one of the rules was originally floated in 2015, leaving one to question why the SEC is looking to bring back a bygone Obama-era financial rule.
Berlau also notes that these rules would effectively prevent investors from buying funds they can now purchase on stock exchanges and from investing apps like Robinhood for zero-dollar commissions. The rules would require broker-dealers and investment advisors to determine if their clients understand the risks of buying and selling these funds, so a firm would need to obtain sensitive information from the client such as annual income, net worth, and investment experience. The commissions and fees for trading these funds would increase and the costs would be passed on to the customer, forcing many away from these affordable, high-risk but high-yield investments.
In addition to crippling the mutual fund and ETF industries, the regulation would also “set a terrible precedent in subjecting investment vehicles already listed on American stock exchanges to new arbitrary rules for middle-class investors to purchase them.”
Instead of creating new red tape, Chairman Clayton should abandon these proposals and give all Americans the freedom to have a bite at the next Apple.