Five Priorities for Biden's SEC Chair

As the Biden Administration’s transition team prepares its slate of political appointments, it must take special care to put at the helm of the Securities and Exchange Commission someone with impeccable credentials and a strong belief in the mission of the agency.

The SEC is responsible for the health and orderly workings of America’s financial markets, which are an engine of the nation's vitality and prosperity. With financial markets at all-time highs, risks are also higher.

The next SEC chair must think like a ship’s pilot far out at sea. When blue skies and flat oceans are replaced by 40-foot waves, the chair will want to steer around the storms by using the agency’s traditional tools: Maintaining the highest standards of transparency in financial instruments, going after those who abuse investor trust, and writing and enforcing rules to prevent misdeeds and increase efficiency in capital markets.

But a good SEC chair doesn't leave a legacy by just managing from one crisis to another. A bold and lasting regulatory agenda demands a focus on long-term goals that can be remembered and appreciated for years after their term is complete.

The next SEC chair faces several core priorities:

  1. Elevate the investing public as the agency’s priority. For too long, the SEC and the functions it oversees have been seen as captive to the interests of audit firms, financial market leaders, public companies and other entities. But all those interests have their own dedicated representatives in Washington; the investing public does not, save for the SEC. That’s why the agency's chair must ultimately represent the interests of public investors in every SEC action and discussion. Certain rules by the current Commission majority require further review and rescission — for example, a rule permitting private placement of opaque investments with financially unsophisticated investors. Another rule proposed allowing non-registered “finders” to collect transaction-based compensation when they steer investors into private offerings. Bottom-line: If a proposal doesn’t improve the information given to ordinary investors, reduce fees and friction for public investing activity, and reduce obfuscation and the risk of scams, then it should be dropped or rescinded as soon as possible.
  2. Treat day trading like vaping. Today, a new generation of day traders are tempted by stock-trading apps into rapid-fire trading in a casino-like atmosphere. But investing is serious business with serious risks. The next SEC chair should stand athwart this trend and oppose it. First, the SEC should take an active role in investigating the ways in which stock-trading apps stimulate trading activity through the psychological tricks and nudges that have energized other social media and e-commerce platforms. Second, the next SEC chair should inveigh against casual, game-like investor platforms the same way recent Food and Drug Administration directors inveighed against vaping.
  3. Bring Chinese companies into compliance with our audit quality standards. It's always good for the SEC chair to look for issues with broad and bipartisan support. One such issue is a Trump Administration-supported law that would kick Chinese and other companies off U.S. exchanges if their external audits are not subject to review by the Public Company Accounting Oversight Board, which the SEC oversees. This isn’t the first time the SEC has had to face down companies from an important nation — the agency did the same with German companies in the 1990s. And there is more on this theme: The next SEC chair should enforce prior SEC penalties without condition. An enforcement action against China-based Luckin Coffee over egregious accounting fraud allegations is being held up because, incredibly, it is subject to the approval of the Chinese Communist Party. This cannot stand and the next SEC chair would be wise to pursue it to the hilt. If investors are willing to place their funds at risk in Chinese-regulated markets, that’s their choice; the SEC should not bless any U.S.-listed company of any nationality if it operates beyond the reach of U.S. law and regulation.
  4. Increase auditor independence and review. I was an early and outspoken advocate for stronger rules on auditor independence when I was SEC chair; as it happens, my warnings about the risks to financial markets were proven eerily correct during the Enron debacle. And yet, here we are, and the post-Enron standards for auditor independence (which included the creation of the Public Company Accounting Oversight Board) are being watered down. The next SEC chair must resist this slow-drip destruction of the regulatory wall protecting the audit process. The first such effort would rescind a recent rule that would allow audit firms to determine for themselves whether their independence was compromised. Such self-policing got us Enron, WorldCom and the dot-com collapse two decades ago. The next SEC chair may need to call out the veterans of that crisis to remind Congress and others why such self-policing doesn’t work. I’ll happily testify.
  5. Promote truth in advertising rules on ESG funds. Investing in funds that consider environmental, social and governance issues is a perfectly defensible form of investor-driven activism. But investors can’t always be sure whether their socially responsible mutual funds aren’t taking positions in companies with questionable policies and practices. This is an area where the SEC chair can exert, through the bully pulpit, greater power than can be done through the regulatory process. If mutual funds want to call themselves socially or environmentally responsible, they should hold themselves to the highest possible standard of transparency. With a solid shove from SEC leadership, fund companies will find every reason in the world to make socially-driven investing as easy and reliable to do as opening an IRA.

These priorities form the basis of a vigorous and coherent approach to financial market regulation. They're also complementary to President-elect Joe Biden's public pronouncements on these issues. And most of all, they're in keeping with the best traditions of the agency I was proud to lead for eight years.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Arthur Levitt Jr. is a former chairman of the U.S. Securities and Exchange Commission and a director of Bloomberg LP.

©2021 Bloomberg L.P.

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