Q&A: Hester Peirce Weighs COVID-19’s Impact on SEC Agenda

With her recent Senate renomination, Hester Peirce will serve as an SEC Commissioner for a another five years until 2025. As the ramifications of COVID-19 continue to affect the country, Peirce and the rest of the SEC face a constantly shifting array of priorities. In an interview with WealthManagement.com, Peirce detailed the SEC’s response to the pandemic’s impact on the country, as well as her interest in cryptocurrencies, ESG investing and the SEC’s recent changes to the accredited investor definition.

WealthManagement.com: What are your greatest priorities or areas of focus for the coming year, through 2021?

Hester Peirce: Right now the agenda obviously is driven by the chairman; he has a very busy agenda. That’s a lot of what I’m thinking about, the rules we have ongoing. We just last week issued the accredited investor rule, as an example. Some of what is going on is and what’s on my mind is driven by COVID-19, by the related effects in the marketplace and related effects in the economy. I think if you’d asked me at the beginning of 2020 what I’d be thinking about now, some of that is quite different because of what we’ve seen from COVID-19.

On the positive side, the markets have really functioned quite well during times of high volume and volatility. We also have been reminded of the need to update and modernize our rules. With everyone doing work from home, for example, it’s really reminded us that pulling out paper-based requirements on rules should be a priority, so if something like this were to happen again, it’d be a more seamless transition. The market functioned quite well, but we need to think whether there are any changes we need to make to the emergency-type rules that kick in when markets move a lot, like the circuit breaker rules. Do we need to look at changes to those rules; though I think they worked well, are there tweaks we can make there? 

Are there things we can do in our fixed income markets, to modernize them, so if something like this happens again, or for normal everyday trading, that the markets are a little more streamlined and modern, and function in a bit more of an automated fashion than we do now?

Coming out of the crisis, we need to think about ways to get capital to businesses who are starting and restarting. That ties into something that has been a priority of mine, which is how we can open up different options for companies at different points in their life cycle to get the capital they need. I think we have some work to do there. I think there are some exemptions available, but do we need to look at how well they’re working, and whether they could be more user-friendly, and live up to their potential better than they have so far. I’m thinking of things like crowdfunding.

Do we need to add any new exemptions? I’ve suggested in the past a micro offering exemption. I suggested a couple of weeks ago that maybe we should have an exemption that lets everyone invest, but requires a certain minimum set of points of information that would be provided. We have some work to do to make sure capital is flowing to people who need it. That has to be not just people on the coasts but also people in the middle of the country or communities that traditionally have not gotten as much capital.

WM: In your statement on the accredited investor definition changes, you expressed concern that the definition may still be too exclusive. What are some ways in which you hope the definition could go further—are there other ways you’d want the definition to expand or be more malleable? 

HP: I have a very broad perspective in the sense that I would eliminate it altogether if I was in charge. That stems from my view that liberty interests are important; we often forget them, but people have a right to spend their money as they wish. People know their circumstances better than we know their circumstances. So, we should allow them to take that information about how much money they make and how much they expect to make next year, and what their most pressing needs are; we let people make those decisions in most areas of life. Why are securities different?

That said, what we did in the accredited investor rulemaking was a positive step forward. People with high wealth and high income can still be counted as accredited investors but that’s not the only way we’re going to measure that. We’re going to look to education and look to experience. It opened the door to let people come in with different ideas about what that might look like. I think that’s really positive.

At the end of the day, I doubt most regular retail investors will be seeking out private investments on their own, because it does take quite a bit of work, but I think a subset of people is interested and willing to spend the time to do the work. I don’t think we should stand in the way of that. I think the idea that someone might say ‘I’m personally not that interested in spending time investigating investment opportunities, but I’m willing to pay someone to do that for me, that person shouldn’t have to limit the scope of potential investments for me to ones that are found in the public markets.’ I can see an argument for that as well, because it goes back to the fundamentals of liberty interests.

WM: Instead of the definition being those who can, should there instead be a definition where there’s a group of people who can’t?

HP: I don’t know that I would do that either, because that puts us into a very paternalistic role I’m not particularly comfortable with. I do think it’s important for people who are investing in these markets to know and to be told that they have to ask a lot of questions; if it’s not in our public market, then the onus is much more on them to get the information they need. So they need to be asking lots of questions. 

They need to be told, too, that “you could lose your money. There’s no guarantee you’ll make money here.” I think it’s important for us as a regulator to encourage people to think carefully about how they invest their money and to be aware of the potential risk.

WM: One concern from critics stems from what they perceive to be a lack of disclosure and transparency for private market offerings in contrast with their public market counterparts. Do you give weight to this concern? How do you strike that balance?

HP: I do think the people who are advocating a more stringent accredited investor definition have legitimate concerns about transparency and making sure investors are protected. I understand where they’re coming from, and I think that’s why it is important for us to be very clear with people that if you’re choosing the private markets, you don’t have the benefit of the SEC’s involvement in the disclosure to the degree you have in the public markets. You’ve got to ask for the information yourself; if you can’t get that information, that should be a red flag and should get you running away. 

I think those concerns are real, but we can better solve them by giving people the freedom to invest, making sure they’re clear about what kind of offering they’re investing in, and particularly if it’s a private offering, to be asking lots of questions.

WM: You dissented against the SEC’s decision against approving a bitcoin ETF in 2018, and that trend has continued, including in March, when you wrote in a dissent that “this line of disapprovals leads me to conclude that this commission is unwilling to approve the listing of any product that would provide access to the market for bitcoin and that no filing will meet the ever-shifting standards that this commission insists on applying to bitcoin-related products—and only to bitcoin-related products.” Do you feel that there’s a possibility that in the future the SEC may have a more positive eye towards approving that kind of ETF?

HP: I think eventually, the commission has to grapple with the fact that this is an asset that a lot of retail investors do want exposure to. The commission has been much more open to the idea of institutional access for bitcoin, and there are products that allow people to get access to it, but the products out there don’t allow the kind of access of a bitcoin exchange traded product. We’ve had numerous applications now, and that kind of access, which would be quite convenient for investors, is something we haven’t allowed.

When I looked at the way we reasoned through our disapproval in those instances, it appeared to me very different than the way we’ve handled similar products in the past, so that suggests we need to go back again and do a critical rethink of the way we analyze these products. 

The bitcoin and future markets are maturing, and given that, I think it will be easier for people who come in to make a case for the bitcoin exchange traded products that some of the concerns underlying those disapproval orders have been addressed. But I felt as if it were a bit of a moving target, and that’s why I wrote those couple of dissents. I was concerned we weren’t setting a clear standard, so it was hard for people to know what they had to do to be approved.

WM: Concerning ESG terminology, do you have more confidence in the industry’s ability to self-police or self-regulate and better define the usage of this terminology, and how it affects investment decisions? 

HP: I think I would say that a lot of people are using the phrase ESG or sustainable investing now, and I don’t know that it means the same thing to everyone who’s using the term. My main concern from the perspective of the regulator is to say that if you’re telling people that you’re investing their money according to some strategy, you should be explaining that strategy to them. If it’s an ESG strategy, fine, but any other kind of strategy, too. You need to tell people enough so they can figure out what it is you’re doing with their money. I think we need to leave it fairly open ended, because I don’t want to prescribe how people manage other people’s money, I just want them to make the disclosure accurate. 

I think some of the talk about ESG and sustainable investing—people try to argue on the one hand that they’re doing something totally different and new, and on the other hand they say what we’re doing will have no economic effect or will only make your investments more profitable. They may have an explanation for how that will work, but people need to be clear; are you able to achieve your ESG target and achieve the same returns if you weren’t working on using ESG to achieve higher returns? If so, explain how that works. So it’s a matter of getting people to explain what role these pieces of the analysis are playing, and what the ultimate economic effect is, and if investors are having to sacrifice returns in order to have that strategy used, then investors need to know that as well.

WM: In 2018 and 2019, as Reg BI developed, I know you were concerned about the term best interest, and how it would be used, arguing that many often used the term without being able to explain what it means. Did you feel the final rule addressed your concerns about that?

HP: As a topline matter, I think the final rule came out in a good place and has a standard that will help us to do our jobs better in terms of enforcement. It will be easier to bring in enforcement cases when we see abuse of practices. This Reg BI tool is a valuable tool to have in our arsenal. The term ‘best interest’ is not my favorite term, but that’s partly informed by the fact that people have used the term ‘fiduciary’ in a way that is not helpful for investors, because they’ve said ‘all they need to do is look to see if someone calls themselves a fiduciary, and if she does you can trust your money to her. I would say that’s not true, anymore than if someone says ‘I’m covered by the Reg BI standard,’ you’ve got to ask that person questions. 

Part of what I was enthusiastic about in the rulemaking was we do provide basic information to people which will encourage them to start a real conversation with a financial professional they’re thinking of working with, and I think it’s from the conversations that people can get the information they need to make an informed decision about what kind of service they need and ultimately to understand how much they’re paying for that, and how they’re paying for that and what the consequences are.

This interview has been edited for clarity and length.

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