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From Securities Regulation Daily, November 7, 2013

Commissioner Gallagher recommends new “venture exchanges” for small and emerging companies

By Lene Powell, J.D.

Commissioner Daniel M. Gallagher said the SEC should undertake comprehensive review of the equity markets, especially with a goal of promoting capital formation for small and emerging growth companies. In particular, the SEC should look at allowing a new type of exchange specifically for small companies. The commissioner spoke at the Futures Industry Association (FIA) Expo on Wednesday.

Comprehensive review of equity markets. Gallagher said there is a need for a “fundamental, holistic review” of equity market structures, and that he was pleasantly surprised by unanimity on this subject among those with whom he has discussed it. He was “particularly pleased” that SEC Chair Mary Jo White echoed the call recently.

A comprehensive review is necessary because the Commission cannot tolerate the perception that the equity markets are unfair to investors, said Gallagher. The review should take a “no sacred cows” approach and it should incorporate regulatory review. This is consistent with President Obama’s executive order directing federal executive agencies, including independent agencies like the SEC and CFTC, to conduct a systemic review of their regulations.

Capital formation. The commissioner questioned whether the current regulatory structure supports capital formation. There has been a decline in the number of IPOs in recent years, especially for small companies. According to one study, up to 22 million jobs through 2009 might have been lost due to the “broken” IPO market, Gallagher said.

The SEC has created barriers to entry for small and emerging growth companies, said Gallagher, and the JOBS Act was designed to facilitate job creation and IPOs.

Venture exchanges. According to Gallagher, the SEC Advisory Committee on Small and Emerging Companies has made the very important recommendation to create a distinct marketplace for the securities of small and emerging growth companies. The commissioner calls such a marketplace “venture exchanges.” This idea is not new; in fact, Canada and England have their own versions of these markets for small companies, said Gallagher.

The venture exchanges could offer a pilot program for wider tick sizes. Under decimalization, the narrowing of spreads means market-makers are not paying as much attention to small, illiquid securities. Widening the spreads would encourage them to make markets in these securities.

In addition, disclosure requirements could be reviewed for these exchanges. The premise of any disclosure regime is not to disclose all information or eliminate all risk; it is to disclose material information. The SEC could set aside the current one-size-fits-all approach and tailor disclosure requirements to the specific needs of the small company marketplace. Disclosure would be reduced to more basic, clearly material information. Regulation SK disclosure could possibly be reduced, as well as some periodic reporting, for example, the quarterly Form 10-Q.

Other possibilities include limiting the liability of management and boards for choosing tick sizes, and removing the prohibition against direct payment by issuers to market-makers, said Gallagher.

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