Treasury Aims to Promote Capital Markets by Reducing Restrictions

While the proposals intend to make it less onerous for public companies, market participants have concern about the impact of reduced disclosures for investors.

The Treasury Department has issued a report proposing how to streamline US capital markets regulations in accordance with principles that President Donald Trump outlined earlier this year. The aim is to further the capital markets and economic growth, while maintaining investor protections.

According to Treasury Secretary Steven Mnuchin, “The US has experienced slow economic growth for far too long. We examined the capital markets system to identify regulations that are standing in the way of economic growth and capital formation. By streamlining the regulatory system, we can make the US capital markets a true source of economic growth that will harness American ingenuity and allow small businesses to grow.”

One area the report identifies as a concern is that the number of publicly traded US companies has been nearly halved in the last 20 years. Thus, the government sees a need to make for less onerous disclosure requirements for public companies, and to base disclosures on company size.

According to the Council of Institutional Investors (CII), however, the drop off in the number of US public companies has not impacted the ability of public companies to raise capital. In a letter commenting on the Treasury’s proposals, the Washington-based trade group sees the decline as more related to a growth in the private markets, and a rise in mergers and acquisition activity. CII also says “The quality of disclosure at public companies is critical to our members.” And Mary Talbutt, lead portfolio manager, fixed income, with the Stanley-Laman Group, Berwyn, Penn., noted that she doesn’t support fewer disclosures for companies going public. However, she sees a need to make it less costly to be public, considering that “with so many years of increased regulations, it’s incredibly expensive to be a public company in the US.”

The Treasury also proposes to revisit the definition of an accredited investor so as to open up private markets to more investors. Along these lines, the amount of money that could be raised through a crowdfunding offering would rise to $5 million, from $1 million. Kenneth Winans, president and CIO, Winans Investments, Novato, Calif., is not in favor of this move. According to Winans, “Accredited investors are not necessarily more knowledgeable than unaccredited investors. Just because you have the net worth, doesn’t mean you educate yourself on it properly.” Talbutt also doesn’t see this as a positive move, considering that accredited investors don’t always make good investment decisions.

However, she is in favor of a move to get more public input into the rulemaking process, so as to make it more transparent. According to Talbutt, “Public input is always of value. Regulators and lawmakers are not always aware of situations that go on behind the scenes.” Winans, while in favor, too, pointed out, “The only concern I have is if it slows down making effective changes, and we’re now mostly bogged down in a series of tweets and Facebook input, nothing would ever get done.”  

Another Treasury proposal is to look into the opportunities to harmonize SEC and CFTC regulations so as to reweigh today’s derivatives regulations. 

While CII expects that there are some efficiencies to be gained through an alignment between SEC and CFTC, it would only support such a step if this combined entity has as “a primary mission the protection of investors” and it also has the means and the independence to effectively fulfill this goal. The organization is also of the view, “Given the role that repurchase agreements and certain securitized products played in the 2008 financial crisis, we support requiring robust disclosures for those instruments.”

However, the Treasury is looking to move more towards fewer disclosures for certain asset-backed securitizations, by streamlining certain aspects of Dodd-Frank regulations. This move would also soften risk retention requirements for securitizations, as well as disclosures on CEO pay. According to the Treasury, “By imposing excessive capital, liquidity, disclosure, and risk-retention requirements on securitizers, recent financial regulation has created significant disincentives to securitization.”

While Talbutt believes that investors “deserve full disclosure,” she also notes “Regulations have taken things a little too far. It puts an unnecessary stress on financial institutions and we are losing smaller banks.” And on the issue of CEO pay disclosure, she notes, “CEO pay should always be transparent with a greater focus on compensation based on performance.”

And Winans expects, “At the end of the day, I believe what we get will be a logical change to Dodd-Frank. Even before Trump became president, there was already talk that maybe this was too tight.”

Also in the cards is ensuring appropriate oversight for central clearinghouses and other “financial market utilities,” and addressing “systemic risk management issues left unresolved by post-crisis regulation.”  Gary Soura, a portfolio manager with the Stanley-Laman Group, is skeptical that there will be any “meaningful impact” as a result. He notes, “The big banks are a lot bigger and even more complicated today than pre-2008. They all have massive derivatives books and all have massive counter party exposure to each other still.”

Plans to advance US interests and make for a “level playing field in the international financial regulatory structure” are also on the table. According to CII, “The overriding goal and focus of our international capital market initiatives should be to raise, rather than lower, the quality of the standards in the US and internationally consistent with serving the needs of investors and the broader financial system.”

As to what the impact of the Treasury’s proposals might be for investors, according to Stanley-Laman Group’s Soura, “With improved transparency 

and standardized reporting, we could see shifts away from or toward specific issuers, sectors, or international investing. Hopefully, we would see improved liquidity, market stability, less overlap from regulators, greater transparency—all considerations when determining the appropriate investments for institutions.”

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