New SEC Chairman

This week, Jay Clayton gave his first public speech as the new SEC Chairman. It was… interesting. Most of his comments seem fairly benign, but I’d like to “read the tea leaves” a little.

“The SEC has a three-part mission: (1) to protect investors, (2) to maintain fair, orderly, and efficient markets, and (3) to facilitate capital formation. Each tenet of that mission is critical. If we stray from our mission or emphasize one of the canons without being mindful of the others, investors, companies (large and small), the U.S. capital markets, and ultimately the economy will suffer.”

This is on par with the commission’s goals in the past. Really, number one and number three more than anything else. Number two only really gets attention when something hits the fan and the markets are decidedly unorderly—but I’m not going to split hairs with this guy.

“How does the SEC assess whether we are being true to our three-part mission? The answer: the long-term interests of the Main Street investor. Or, as I say when I walk the halls of the agency, how does what we propose to do affect the long-term interests of Mr. and Ms. 401(k)? Are these investors benefitting from our efforts? Do they have appropriate investment opportunities? Are they well informed? Speaking more granularly: what can the Commission do to cultivate markets where Mr. and Ms. 401(k) are able to invest in a better future?”

Reading Between the Lines of Clayton’s Mission

This is where it gets interesting. Most of these comments seem supportive of that first goal: to protect investors. But the last line takes the whole paragraph in a different direction. There’s a spiritual difference between “protecting investors” and “cultivating markets.”

Protecting investors implies there are unscrupulous companies looking to defraud investors and the SEC is here to keep them at bay. “Cultivating markets” implies there are amazing investment opportunities that the average investor can’t access. I’d say both are true. But if that’s the case, there’s a hidden fourth objective here: not only should the SEC prevent bad companies from entering the markets, but it should also help good companies get in. That’s a tricky balance.

How do you make it easier to enter public markets while also restricting them? Either the SEC has been too tough and is unintentionally keeping great companies out, or it’s been just tough enough and still losing them. Either way, sounds like the SEC wants more companies to regulate.

“I believe in the regulatory architecture that has governed the securities markets since 1933. It is abundantly clear that wholesale changes to the Commission’s fundamental regulatory approach would not make sense.”

So, here’s what we know:

1. The SEC wants to protect the public,

2. The SEC wants to incentivize companies to go public,

3. The SEC is totally happy with its current rulebook.
   Hmmm…

A Conflicted Approach to Regulation

“Incremental regulatory changes may not seem individually significant, but, in the aggregate, they can dramatically affect the markets… [we’ve] slowly but significantly expanded the scope of required disclosures beyond the core concept of materiality…”

Okay, so small regulatory changes are good—but also maybe bad? He implies they’ve become too expansive, yet claims the benefits outweigh the costs. It’s a bit of a contradiction. Should we love tough regulations or hate them? I think we’re still supposed to like them… maybe.

“While there are many factors that drive the decision of whether to be a public company, increased disclosure and other burdens may render alternatives for raising capital, such as the private markets, increasingly attractive…”

Ah, there it is! By lumping “increased disclosure” in with “other burdens,” Clayton subtly shifts the tone: now we’re not supposed to like tough regulatory environments.

“As I mentioned earlier, evidence shows that a large number of companies, including many of our country’s most innovative businesses, are opting to remain privately held.”

And:

“One message was loud and clear: private markets operate well in many sectors, and, in these areas, they offer a very attractive alternative to the public markets… We need to increase the attractiveness of our public capital markets without adversely affecting the availability of capital from our private markets.”

This is the tightrope Clayton is trying to walk: how do you protect retail investors while offering them access to innovative companies that don’t want to go public because of disclosure requirements?

Lowering standards would give average investors more access to high-growth companies—but also more risk. Some companies aren’t hiding anything; they just don’t want to deal with quarterly shareholder expectations. And that’s not something the SEC can really fix.

The Rise of Private Markets and the Unicorn Dilemma

There’s something to be said for companies avoiding the public markets. Snap and Blue Apron, two of the year’s most hyped IPOs. Both have struggled under public scrutiny.

Snap went public at $17 and quickly dropped to $15.44. Blue Apron launched at a discounted $10 and fell to $7.37. These are great reminders of why Mr. and Ms. 401(k) might not need direct access to private market valuations.

So how do private companies get such high valuations in the first place? It’s mostly supply and demand. There aren’t many hot private companies to invest in, and there’s a mountain of private capital ready to go. Plus, their values aren’t reassessed daily like they are on public markets.

And this is fine—for billionaires. But when retail investors jump in and quickly lose money, we start asking why those valuations weren’t more transparent in the first place.

Traders, Tedium, and Tennis (or Tinder)

In other news, Bloomberg ran a surprisingly fun piece on how bored Wall Street traders are.

“One bond trader says he’s been slipping out early to watch his kids play sports. A fund manager says his office just staged a golf retreat. A trading supervisor at another bank confides he’s swiping through a lot of profiles on Tinder.”

Yes, quiet markets have driven bond traders to spend time with their families. How scandalous.

“After four straight quarters of rising income from trading, the biggest U.S. investment banks spent the past few months in a renewed slump… the smallest haul for a second quarter since 2012.”

Not shocking, but notable.

Then there’s this gem:

“One portfolio manager said he left work for a few hours in late June to play his recently delivered Nintendo — the NES Classic Edition…”

Also:

“The executives asked not to be identified discussing their activities.”

Honestly, if my job was so slow I had to revisit 1985 video games, I’d keep quiet too. It’s like when Netflix asks if I want to “Watch It Again”—because I’ve already watched everything worth watching.

And finally, a quote that captures the summer trading mood:

“‘Something always blows up over summer,’ he said… But even an escalation — or resolution — of tensions with North Korea, or a terrorist attack, would probably only spur ‘a very short and temporary impact.’”

Translation: “I hope something chaotic happens, so I don’t have to keep pretending I enjoy soccer practice.”

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