The effect of Bitcoin on securities markets and enhanced measures related to retail investors were the focus at the October meeting of the Securities and Exchange Commission's (SEC) Investor Advisory Committee (Committee).
In addition to those agenda items, SEC Chairman Jay Clayton also remarked on various topics, including disclosure requirements of Regulation S-K, distributed ledger technology (DLT) and so-called pump-and-dump schemes.
Established under Section 911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Committee's mandate is to advise the SEC on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and initiatives to protect investor interests, and to promote investor confidence and the integrity of the securities marketplace. The Committee may also submit findings and recommendations for review and consideration by the SEC.
Clayton's Remarks
During his introductory comments, Clayton addressed several topics set to be explored in panel discussions later in the day, as well as some other issues. First, he highlighted the SEC's proposal the previous day to implement a mandate under the Fixing America's Surface Transportation (FAST) Act, which included measures to "modernize and simplify disclosure requirements for public companies, investment advisers, and investment companies" under Regulation S-K.
"These amendments are also intended to improve the readability and navigability of disclosure documents and discourage repetition and disclosure of immaterial information," Clayton said at the Committee meeting, before deviating from his prepared remarks on the subject.
"I want to emphasize something I said yesterday in our open meeting. And that is, we very much want to encourage companies to discuss their business from the perspective of the way they manage their business."
Clayton then turned to the topics on the agenda for the day's panels, the first of which was blockchain technology and its implications for securities markets. He stated that "financial technology and innovation are essential to robust competitive markets," with the SEC seeking to identify a balance between fostering innovative ways to raise capital and ensuring investors remain protected. Specifically, Clayton said the SEC wants to improve clarity regarding how federal securities laws apply to DLT or blockchain technology to raise capital. He said the SEC will continue to study the effects of DLT and keep investors informed of technological developments, highlighting a recently issued bulletin from the SEC's Office of Investor Education Advocacy warning investors regarding the risk of bad actors using new technology to engage in familiar frauds.
Clayton again deviated from his prepared remarks to specifically emphasize the potential for new technology to be used in so-called pump and dump schemes.
"If we don't get that right, we won't get the benefits of this technology," Clayton warned.
Distributed Ledger Technology Panel
The event's morning panel featured several expert speakers from industry, regulatory and academia. Each discussed various aspects of DLT, including the future of blockchain, initial coin offerings and the implications for the investors and regulators of securities markets. Although participants acknowledged the need for regulators to adapt to the new technology in order to continue protecting investors and financial markets, they shared a largely positive vision of its potential to offer investors and regulators alike additional information and control.
For example, Jeff Bandman, the principal of Bandman Advisors, a former fintech advisor at the Commodity Futures Trading Commission (CFTC) and director and architect of LabCFTC, described blockchain as a "collaborative technology" that will require broad adoption in order to succeed. He suggested this could lead to greater transparency and oversight, since "most blockchain initiatives are developed in the open to attract participants and, therefore, they are actually more visible to regulators compared to some other innovations and other technologies." He also discussed the potential for the SEC to develop what he called "real-time regulation" that would allow regulators to harness real-time data from distributed ledgers and enhance its ability to effectively regulate market activities — or, as he described it, "to see through the windshield instead of the rearview mirror."
Although the panel reached few definitive conclusions, the discussion highlighted the SEC's focus on blockchain and its associated effects on larger securities markets — a focus that appears likely to continue as regulators and market participants adapt to the disruption.
The Committee's next meeting is scheduled for Dec. 7, 2017. Topics on the agenda for that meeting include: recommendation of the Investor as Purchaser Subcommittee regarding electronic delivery of information to retail investors; a discussion regarding cybersecurity risk disclosures; a discussion regarding dual-class share structures; and a discussion of what works, what doesn't and best practices related to retail investor disclosure.
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