SEC Must Reprioritize Investor Protection to Foster Recovery


January 29, 2021

With U.S. stock indexes at historic peaks, it may seem counterintuitive to add investor protection to the Biden administration’s list of priorities as it plans an economic recovery strategy from the COVID-19 recession.

But as with virtually all areas of our economy, the pandemic has laid bare inequities in our financial markets and provided cover for continued — and sorely misguided — deregulation that will hamstring our economic recovery and continue to put capital markets at risk.

While those wealthy enough to let their stocks ride largely profited during the pandemic, many others were forced to raid their retirement savings to replace lost income. With pre-pandemic 401(k) balances already severely underfunded and barely half of U.S. households invested in the stock market at all, many Americans will be dependent on Social Security and other government programs once their working years end.

It is thus vital to our national economic interests that we ensure that our markets are safe, fair, welcoming and easier to understand for the many people who can benefit from long-term capital growth. That is why President Joe Biden must prioritize rewriting the harmful legacy the Trump administration’s SEC has had on ordinary Americans.

Instead of strengthening protections for Main Street investors, however, the U.S. Securities and Exchange Commission under Chairman Jay Clayton pursued policies that exempted numerous offering types and individuals from regulatory oversight and broke wide open risky and opaque private markets to retail customers. In 2018, the SEC estimated that approximately $2.9 trillion was raised through exempt offerings, surpassing the capital raised in the public markets.

Further, consumers, particularly the elderly and other retail investors who can ill afford to lose their retirement savings, were steered by the Clayton SEC’s policies toward opaque, complex and risky investment products by financial professionals whose duty to their customers remains unclear or confusing.

Meanwhile, investors who are cheated are often unable to seek justice in the courts, instead increasingly forced into lopsided arbitration proceedings where they have little chance at success.

Fortunately, the Biden administration can do much to put things back on track, including, but not limited to, creating rules that define accredited investors; overhauling or giving real teeth to Regulation Best Interest; and re-empowering investors. Biden’s pick for SEC chair, former Obama administration Commodity Futures Trading Commission Chairman Gary Gensler, portends a welcomed and renewed focus on investor protection.

In 2020, the SEC expanded its definition of “accredited investors” — people presumably wealthy and savvy enough to invest in unregistered securities traded in often risky, opaque private markets — to include investment professionals and other people with purported financial sophistication, regardless of their assets.

Compounding its mistake, in its revision the commission failed to update minimum wealth and income requirements, which have not changed in nearly 40 years. When these minimums were put in place in 1982, 1.6% of U.S. households earned or had enough or had enough to qualify — that number has soared to at least 13%, or 16 million households.

A new SEC should, at a minimum, update these wealth and income requirements to keep up with inflation to best protect investors.

Falling far short of aligning brokers and clients’ interests, Regulation Best Interest — which ostensibly was supposed to ensure that brokers put their clients’ interests first — instead left a confusing patchwork of loyalty standards for investment professionals, many of whom wear dual hats as both investment advisers and brokers.

Because “best interest” itself is not defined in the regulation, the new SEC should at a minimum issue regulatory guidance defining “best interest” to mean something largely akin to a fiduciary duty and use its examination and enforcement powers to ensure financial professionals put investors’ interests ahead of their own.

Finally, there are several opportunities for the Biden administration and the incoming SEC to re-empower investors. Under Clayton, the SEC made a number of changes that significantly constrained investors’ ability to influence the corporations they own.

It constrained proxy information access and increased the time and monetary thresholds necessary for bylaw proposals. At the same time, it did nothing to either require mandatory and uniform environmental, social and governance disclosures or constrain the corporate royalty often self-bestowed on company founders which allows them to control the companies they started even after they are long gone.

Investors can be re-empowered through the means of shareholder proposals and voting, which have played a major role in bringing about valuable changes in corporate governance practices, corporate reporting, and on environmental and social matters. Numerous studies have also demonstrated that shareholder proposals often generate positive long-term returns for companies and serve to protect both the markets and corporations from unnecessary risk.

The new SEC needs to ensure that investors can get needed information in a timely fashion so they can continue to make their voices heard.

While many additional steps will and should be taken by the incoming SEC chair, the primary focus of the new SEC chair should be to rededicate the agency to prioritizing investor protection so that investors — both new and old — feel confident in our financial markets. The steps outlined in this article are, first, big steps in the right direction.

Laura H. Posner is a partner at Cohen Milstein Sellers & Toll PLLC and a member of the firm’s Securities Litigation & Investor Protection and Ethics & Fiduciary Counseling practice groups. She previously served as chief of the New Jersey Bureau of Securities.

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