Noting the agency’s “time of transition,” Michael Piwowar, the Securities and Exchange Commission’s acting chairman, said Friday that despite the challenges in dealing with a two-person commission, “work continues” with the securities regulator moving ahead with four new disclosure recommendations forthcoming on March 1.
Speaking at the Practising Law Institute’s annual SEC Speaks conference in Washington on Friday, Piwowar noted his hope that a new chairman would be confirmed quickly and that the two other vacancies on the commission would also be filled in short order.
Sullivan and Cromwell partner Jay Clayton was nominated by President Donald Trump to serve as the next SEC chairman. His nomination hearing is said to come in early March.
Piwowar zeroed in on the Dodd-Frank Act, which he argued “is rife with examples of burdens ultimately borne by the ‘forgotten investor’ through shareholder money and company resources being expended to provide nonmaterial disclosures — the conflict minerals, pay ratio and resource extraction provisions to name a few.”
The theme of his talk was “Remembering the forgotten investor.”
Piwowar also argued that there was a “glaring need” for the agency “to move beyond the artificial distinction between ‘accredited’ and ‘nonaccredited’ investors.” He questioned “the notion that nonaccredited investors are truly protected by regulations that prevent them from investing in high-risk, high-return securities available only to the Davos jet-set.”
Two “well-known concepts” from the field of financial economics, Piwowar continued, can be used “to show that, in maintaining an ‘accredited’ status in our regulatory structure, we may have forgotten — and in fact disadvantaged — a set of investors.”
The first, he maintained, “is the risk-return tradeoff. Because most investors are risk averse, riskier securities accordingly offer higher returns. Therefore, prohibiting nonaccredited investors from investing in high-risk securities amounts to a blanket prohibition on their earning the very highest expected returns.”
The second concept is modern portfolio theory. “By holding a diversified portfolio of assets, investors reap the benefits of diversification,” Piwowar said. That is, the risk of the portfolio as a whole is lower than the risk of any individual asset. The correlation of returns is the mathematical key. When adding high-risk, high-return securities to an existing portfolio, so long as the returns from the new securities are not in perfect positive correlation with the existing portfolio, investors may reap higher returns with little to no change in overall portfolio risk. In fact, if the correlations are low enough, the overall portfolio risk can even decrease.”
These two basic concepts of economics, he added, “demonstrate how even a well-intentioned policy of investor protection can do more harm than good, for instance, by exacerbating inequalities of wealth and opportunity.”
In adopting Regulation D in 1982, he said, the SEC divided “the world of private offering investors into two categories: those persons accorded the privileged status of accredited investor and those who are not.” Investors “lucky enough to earn $200,000 or more in annual income or with a net worth of more than $1 million have available to them myriad investment choices, both public or private.” By contrast, “les Misérables on the other side of the line are severely restricted in their investing options.”