Hester Peirce pushes for personal liberty as an SEC voice of dissent

Securities and Exchange Commission member Hester Peirce will soon have a new experience on the five-person panel. During her first three years, she was part of the Republican majority. Following the likely Senate confirmation of Gary Gensler as chair, Democrats will have a 3-2 edge.

Peirce, a former senior counsel for an SEC commissioner and a former attorney in the Division of Investment Management, is poised to be a colorful voice of dissent who champions personal liberty over extensive regulation. Her speeches and statements at SEC open meetings often are peppered with rhetorical flourishes, such as relating regulatory action to a proverb about a nail and a horseshoe.

The Senate confirmed Peirce, age 50, last year for a full term that lasts until 2025. She is familiar with the chamber, having formerly served as Republican senior counsel on the Senate Banking Committee.

Peirce recently talked to InvestmentNews senior reporter Mark Schoeff Jr.

IN: How do you envision your role on the commission now that you’re about to be in the minority?

Hester Peirce: I think my job as the commissioner doesn’t change. We all bring to the job — each of the five commissioners — different experiences, different backgrounds, different interests. That makes for a really nice working relationship. 

If Chairman Gensler is confirmed, I’m looking forward to working with him. He is someone who brings a deep knowledge of the markets to the job. We’ve known each other for quite a long time. We also have in common a shared interest in cryptocurrency, so I’m looking forward to having someone in the role of chairman who really has a deep understanding and interest in that space as well. 

I’m sure there’ll be areas that we disagree about, but I’m looking forward to finding common ground.

IN: In the recent Republican-majority commission, there were many split votes, for instance, on Regulation Best Interest and on exemptions for private security offerings. Do you expect the trend to continue?

HP: I think it’s important for people to remember, and sometimes it’s easy to forget, that the bulk of what the commission does, we’re doing with uniformity. Everyone is voting the same way. We take lots of votes on enforcement actions and on regulatory things. We are almost always in unison when we take those votes. Difficult to make predictions about where there are going to be differences, but I’m sure there will be some. That’s also the nature of some of the issues we’re dealing with these days.

IN: Some have said the SEC has become too political. Do you share that view?

HP: There is pressure from a lot of people outside of the agency, because we built this really wonderful system of disclosure by issuers, that then informs investors as they make their long-term financial decisions about where to put their money ... And people say, ‘Well, let me think about how … to use it for some other kinds of objectives, other than objectives related to investments and capital formation.’ That’s where the problems arise. But I think to the extent that we can really keep focused, we can have a really productive upcoming set of years … under Chairman Gensler.

IN: How does your emphasis on personal liberty inform your approach to rulemaking and enforcement?

HP: I’m looking forward to convincing my fellow commissioners that personal liberty is something we need to be taking into account every time we make a regulatory decision. So, there’s a tension there, right? We have this job of protecting investors. But we’re not the parent of the investor, we’re a regulator. We let people spend money as they choose, if they earn it. And so I think we should be careful on the financial side not to overstep our bounds and tell people, ‘Well, this is how you should invest, or must invest.’

IN: For three years, you’ve had two other SEC members joining you in that view — Elad Roisman, your fellow Republican commissioner, and former Chairman Jay Clayton. Under a Democratic majority, where do you find the third vote?

HP: I think everyone as an American has an appreciation for the value of personal freedom and liberty, and the importance of allowing people to make decisions. So perhaps I have to remind people in particular circumstances of the importance of that value, but I remain optimistic that we can come together, and together as a whole commission place a value on that really important fundamental American principle.

IN: How effective has Regulation Best Interest been?

HP: Well, I think it’s a bit early to draw that final analysis of how effective it’s been. From all early reports that I’ve heard, firms have taken their new obligations very seriously. They had to do a lot of training and rethinking all of the ways that they do things in order to make sure that things lined up with what Reg BI required, and if it didn’t, to make any necessary adjustments.

IN: Should the SEC revisit Reg BI to define what best interest means and to define what it means to mitigate a conflict?

HP: I think we always have to be open to revisiting and revising rules if that’s necessary, but we also have to bear in mind that ... this was a June implementation date, and so we haven’t even been up and running with it for that long. My advice to any incoming chair who might be thinking about priorities would be to say, let’s see how this works out. I certainly wouldn’t put it at the top of the agenda.

IN: How should the SEC respond to the GameStop trading frenzy?

HP: We’ll look to see whether there are any securities law violations. And perhaps there’ll be enforcement actions down the road, perhaps not. And then the second piece of it that we’re looking at is the regulatory front, and we’re getting all kinds of [suggestions] on what we should be doing. We all know that too small a percentage of Americans are engaged in our markets, both as investors and as users of capital from the market. So, let’s let technology work for us in expanding the reach of the capital markets. I caution there that we don’t take steps to curtail that.

My bottom line is we’re looking at what happened, and we will, I’m sure, do an analysis of whether there are any regulatory actions to be taken, but that’s going to have to be a careful and deliberate analysis.

IN: Regulation of cryptocurrencies is one of your priorities. What would you like to see in that area?

HP: I think there are several areas where we need clarity. One is, I’ve set forth a framework for token distribution events that would allow people to do token distribution events under the cover of the safe harbor, which would require them to make certain disclosures to token purchasers, and would subject them to the anti-fraud parts of the securities laws, but ... other parts of the securities laws wouldn’t apply for three years.

Another area I think we need to provide clarity is for broker-dealers and investment advisers looking to engage with this asset class, either for themselves, or more likely for their customers and clients. We really do need to provide them a framework within which they can do that … consistent with the securities laws. 

And then a third area, and I get asked about this all the time, about when an exchange-traded product for Bitcoin will get approved. I think we’ve seen ... that Canada has an exchange-traded fund that’s up and running. But I think it’s a reminder to us that there’s a lot of demand in the marketplace — and not only that, but there are other ways that retail investors and institutional investors are getting access to this asset class, and so at some point you’ve got to ask the question whether we need to rethink the approach that we’ve taken with respect to these exchange-traded product applications.

IN: Climate change and ESG are going to be huge issues for a Democratic-majority SEC. What’s the appropriate role for the SEC?

HP: Well, I always go back to the touchstone of materiality. There are many climate-related and other ESG-related factors that could show up somewhere in the disclosures that they already have to make, and that’s already the case. So, I would argue that there’s not a need to do anything else specific with respect to any category of disclosures or risks that companies might face. 

The second area that’s gotten a lot of attention is advisers who are marketing funds as being ESG funds, or climate funds, or green funds, and the term greenwashing is a common term now. And so just making sure that when an adviser says, ‘We’re running an ESG fund,’ they spell that out and tell people what that means so that investors can figure out whether that’s the fund they want to invest in or not. 

And also to be clear, if they’re saying you can have these kind of non-investment objectives, and investment objectives, and not give anything up in terms of financial return, explain ... why you as an adviser have come to that conclusion.

IN: To what extent should ordinary investors be allowed into the private markets?

HP: People come to me all the time and they say, ‘Hester, why is it that in the United States you have to be rich to get rich?’ 

Even if we open the doors and said anyone can participate in the private markets, I would be cautioning people: Make sure you know what you’re buying, don’t ever rush into a decision, make sure that you ask a ton of questions. If you don’t get answers to those questions, you should turn the other way, run away. 

But I do think that people should be able to spend their money as they want, as long as it’s clear to people, yes, here you’re within this category of investments that doesn’t get the same kind of disclosure oversight [as] public company investments do. And so I do think that we need to expand the doors, open the doors wider.

IN: Trade associations representing the brokerage industry claim that the SEC’s crackdown on inadequate disclosure of 12b-1 fees and revenue sharing is regulation by enforcement. What do you think?

HP: Some of those people who are complaining about it raise really valid points. Here’s the tension for me. On the one hand, the approach that we take for advisers is a principles-based approach. The fiduciary duty belongs to them. We expect them to exercise judgment and to do it well for the benefit of their clients. But then we come in with these very specific enforcement actions. We’re flyspecking their disclosures, and we’re saying, ‘We looked at your disclosures and you didn’t use the magic words that we thought would be good.’

IN: But investor advocates — and a former SEC enforcement official — have said that recommending a fund with a 12b-1 fee when a less expensive one is available in the same class and not telling your client is a clear violation of fiduciary duty. How do you respond?

HP: I don’t think anyone disagrees with the fact that conflicts need to be laid out clearly and options for investors need to be laid out clearly. My only point is that we went in and when there was disclosure, we often said the disclosure wasn’t adequate because it didn’t meet exactly the template that we had in mind for disclosure. The bottom line that we all care about is making sure that the investor knows what it is that she’s getting, knows how much she’s paying for it and knows about other options if she wants something different.

IN: And to wrap up, a hypothetical question. If you were chair, what’s the one thing you would do?

HP: I think we need to remember that the SEC has a really important role to play in helping the country to recover from Covid. This is the problem of our moment that we can embrace and really play a very positive role in. We’ve seen devastation for small businesses. 

What I’m looking forward to is us just rolling our sleeves up and going out and talking to people who are trying to rebuild their businesses, or build new businesses, in this environment, to see what we can do to help. 

The SEC, its capital formation set of rules is quite complex, difficult to understand. What can we do to simplify things?

This interview has been edited for clarity and length.