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From Securities Regulation Daily, December 6, 2013

Aguilar says SEC’s agenda should be driven by its impact on investors

By Jacquelyn Lumb

Commissioner Luis Aguilar, speaking at the Consumer Federation of America’s annual conference, offered his view that the SEC’s agenda should be evaluated based on how it affects investors, and retail investors in particular. He talked about the importance of true capital formation, not just capital-raising, through effective regulation. Aguilar also called for a review of the trading markets and Regulation NMS to ensure that the current market structure serves individual investors and facilitates capital formation.

Capital formation versus capital raising. Aguilar said that today’s debate about capital formation often focuses on capital raising, which in his view is the wrong goal. Whatever makes it easier and cheaper for companies to raise money does not necessarily increase the rate of capital formation, he explained, it can even be detrimental.

Aguilar said that true capital formation is dependent on investors having the information they need to make informed decisions, along with strong and effective regulations that promote appropriate disclosures. He noted that a number of empirical studies have demonstrated the positive effect of securities regulation and mandatory disclosure.

Recent legislation, such as the JOBS Act, prioritize making capital raising easier and quicker, he said, while often overlooking what is needed for real capital formation. Aguilar cited the general solicitation provisions in Rule 506 of Regulation D in particular. The lifting of the ban on general solicitation was adopted without including the investor protections that many investors, academics and state regulators recommended, he said, even though the risks are well documented. Rule 506 offerings are the most frequent source of enforcement cases conducted by state securities regulators, according to NASAA’s 2013 enforcement report.

Need for investor protections. Aguilar said the availability of general solicitation allows fraudsters to cast a wider net. NASAA has predicted that scam artists will use general solicitation to promote their schemes. Aguilar shares the concerns that removing the prohibition on general solicitation without strengthening investor protections puts investors at risk. It has been almost five months since the SEC proposed the additional investor protection rules; Aguilar urged the agency to promptly adopt them. Not only will the rules provide important investor protections, they will also help the staff assess whether the JOBS Act provisions are having the desired effect on capital formation, he explained.

Shareholder rights. Aguilar also talked about shareholder rights, expressing his belief that the SEC should again take up the proxy access issue after the rule was vacated by a federal appellate court. At a minimum, he said the SEC should examine its rules to see if any present an obstacle to shareholder voting.

He noted that the SEC’s Investor Advisory Committee has recommended that the SEC explore the option of allowing shareholders to distribute universal ballots in proxy contests where the outside candidates would not control the board if elected. The universal ballot would allow shareholders to vote for the directors they wish to elect, regardless of whether the individual was nominated by management or by outside shareholders. Aguilar said it is a concept worth exploring.

Trading markets review. In Aguilar’s view the SEC should make it a priority to revisit the trading markets and Regulation NMS so see if individuals are being served and if capital formation is being facilitated in the most efficient way possible. The increased growth, complexity and speed of the trading markets, as well as some of the recent market glitches, have been cited as reasons why investors lack confidence in the capital markets. Aguilar said it is clearly time for the SEC to examine the markets to ensure that they are fair to individual investors.

He added that the SEC should immediately review Regulation NMS, adopted in 2005, the success of which has been a matter of great debate. Given the substantial changes in the markets in recent years, Aguilar said the SEC should assess whether the market structure facilitated by Regulation NMS adequately protects investors and efficiently facilitates capital formation. Aguilar believes that evidence is piling up every day that supports the urgent need for a review of the trading markets.

MainStory: TopStory SECNewsSpeeches JOBSAct Proxies NASAANews ExchangesMarketRegulation

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