Overcoming ‘policy differences’ takes work early in rulemaking process: SEC's Peirce

Everyone seems to have an opinion about the size and pace of SEC Chairman Gary Gensler’s rulemaking agenda. But SEC commissioner Hester Peirce has first-hand experience to compare Gensler’s approach to that of his predecessor, Jay Clayton.

Peirce was initially nominated for one of the Securities and Exchange Commission’s five seats by President Donald Trump in 2018, when Clayton was chairman. Clayton served through 2020, the year Peirce was renominated for her seat, which she will hold until 2025.

Prior to becoming a commissioner, she served as a senior counsel on the Senate Banking Committee, a counsel for a former SEC commissioner and an SEC staff attorney. Republican Peirce, who was in the majority on 3-2 votes taken during the Clayton era, now finds herself in the minority on 3-2 votes in the Gensler era.

Peirce talked about the SEC’s priorities and individual rulemakings during the keynote session at the CFA Society of Washington’s annual dinner March 8. She was interviewed by InvestmentNews senior reporter Mark Schoeff Jr. The Q&A has been edited for length and clarity.

InvestmentNews: What is your take on the SEC agenda, which includes 52 rulemaking proposals?

Hester Peirce: The agenda is enormous. That’s a lot of rules, especially when many of them are multi-hundred pages long, and it covers a wide range of issues. Chairman Gensler works very hard and he expects everyone else to. I can assure you, everyone at the SEC is working extremely hard. I’ve been around the SEC a long time. I would say it’s one of the most ambitious agendas.

IN: You served under Chair Gensler and Chair Clayton. How would you compare them?

HP: I would say the difference between the Clayton commission and the Gensler commission is that under Chair Gensler, we’re really trying to dramatically change the regulatory approach over huge swaths of the market. There was a lot more incremental change, I would say, under Chair Clayton.

IN: You and your fellow Republican Commissioner Mark Uyeda are often the “2” in 3-2 votes. Are split votes good, bad or indifferent for rulemaking?

HP: I love the commission structure. There are five of us. We all come with very different experiences, very different interests. The mix of views is helpful. It really is better if we can come to a point where we all agree on a rulemaking. It certainly is my preference for us to be 5-0 voting in favor of a rule. There are pretty big policy differences. I think it can be done. It requires work early in the process. As we’re talking about moving from proposal to adoption, the commenters have highlighted issues that are important to them. We’re looking at those comment letters. It would make sense for us to talk about that and try to come to a place where we can all support things.

IN: What is the likely fate of the mandate for Scope 3 emissions reporting by public companies?

HP: This is the most controversial piece. The idea that a company would have to disclose the emissions … of not only of its suppliers but its customers. That’s quite a big ask. It’s quite difficult. There’s a lot of pressure to rip that part of the rule out. But there’s a lot of pressure to keep it in. So, I think, Chair Gensler has a difficult decision. I don’t know how that gets resolved. There are other pieces of that rule that I think are quite problematic as well. Solving the Scope 3 issue is not going to be enough.

IN: Another ESG proposal focuses on disclosures by registered investment advisors. To what extent is that a fiduciary obligation already for RIAs?

HP: I think that a lot of what we’re trying to do in the advisor space is already covered by the fiduciary duty. If you’re telling people that you’re managing their money and you say you’re using some sort of ESG strategy, it’s incumbent upon you to say what it is you’re doing – what is the strategy – and then to adhere to that strategy. And, if you don’t do it, then you face, among other potential consequences, and SEC enforcement action. So, trying to develop a rule that is specific to ESG is actually really difficult.

IN: Will the ESG disclosure proposal lead to other kinds of fiduciary disclosures for RIAs?

HP: That’s a good question. That’s the kind of question I like to focus on. One of the fears that I have is that we start writing rules every time a new topic comes up. I think the fiduciary concept is an important concept. It allows us to trust the judgment – that’s not saying trust without verifying – but trust the judgment that advisors use. If they’re doing something that’s counter to their clients’ interests, then we can bring enforcement actions.

IN: Why did you vote against releasing for public comment a proposal to reform mutual fund liquidity practices?

HP: The reason that I voted no on releasing the proposal is because it was too big of a change to try to undertake given everything else we’re also trying to change at the same time. I understand, in concept, you want to make sure that people exiting a fund aren’t leaving the remaining shareholders a bill for their early exit. It might be so complicated it might make funds more expensive and it might end up shifting everyone out of funds.

IN: What would you like to see the SEC do on capital formation?

HP: For me, the concern is making sure companies have funding through their life cycle. A big part of that life cycle is likely to be in the private markets. I’d love to see us put a micro-offering exemption in place that had very few strings attached to it so that people could raise $250,000 or $500,000. One of the interesting things about my job is I get to meet with a lot of people, including entrepreneurs, who are people with great ideas, but they have no experience in the capital markets at all. No matter where I go in the country, people think that we don’t have the rules right now and that we need to make adjustments so that there are easier ways for angel [investors] and others to pour [funds] into these new [ventures].

IN: You’re known as 'Crypto Mom.' Chair Gensler says most crypto assets are securities. What do you think?

HP: Some people have renamed me 'Crypto Evil Stepmom.' There may be instances in which those initial sales were securities offerings. I think it becomes more difficult when you look at the token itself. The token is sold initially; it subsequently gets sold through secondary market transactions. It’s not as clear to me that the token by itself without any promises from the issuer is actually a security. I’d like us to sit down and do some hard work on what this is legally. Then we can make suggestions to Congress if we think we need more authority.

IN: If you were chair, how would you regulate crypto?

HP: You can think about initial token offerings, trading platforms, crypto staking, crypto lending, NFTs, stable coins. On each of these, we would draft up a position paper and say, here are where we think the activities we see might interest with the securities laws. Put that out there. Let people digest it. Then set up roundtables that would include people from the crypto industry, people who want to participate in it, investor protection advocates and others. Have that conversation in public. That could be particularly useful if we did it with the [Commodity Futures Trading Commission]. I don’t think it’s just the SEC and CFTC that are in contention for regulating the crypto space. If we work together with the CFTC, it would help provide Congress with some of the homework they need to figure out how they want to allocate regulatory responsibility.

IN: How dangerous is crypto for a retail investor?

HP: As with anything else, I think people, before they buy things, they need to think about whether they should buy it. They need to think about why they’re buying it. They need to think about their other needs at the moment. Can they afford to lose the money they’re putting in? There’s a lot of information out there about a lot of crypto assets. They can go look at that. I urge people never to have a fear of missing out. But at the same time … we trust people to raise children. So I think we can trust them to make decisions on whether they want to buy a crypto token or not.

IN: What do you think of the advisor outsourcing proposal?

HP: We were talking earlier about doesn’t fiduciary duty already cover this? Do we really need something separate on ESG? When I looked at the outsourcing proposal, I had the same reaction. Do we really think that when advisors are relying on third parties that they’re just handing things over and saying OK, not my problem anymore? That’s totally inconsistent with the fiduciary duty. For us to set up a whole new regime around outsourcing, what I think that will really mean is that it will make it even more expensive for small advisors to operate, and they’re already feeling very stretched by all the compliance obligations that they’re facing. I’m not sure it will lead to better outcomes for investors. It’s kind of symbolic of something we’re doing more broadly. We’re trying to reach one step outside the jurisdiction Congress gave us. So, we’re trying to grab those third-party service providers. We’re trying to grab custodians with our custody rule. Again, good intentions. But Congress didn’t tell us that we could regulate customers.

Audience question: How do you define a client’s best interests? Is it fees only? Is it some combination of factors?

HP: I think the beauty of the fiduciary standard is that it’s a principles-based standard. It’s not a rules-based standard. It relies on the professional to serve her client in the client’s best interests. That means you look at a range of things. I really think it’s much more about a relationship. I think that’s the key part. Being in a relationship where your client knows what she’s paying you. She knows what she’s getting, and you’re providing that service with an eye toward what is going to set her on the best course. We can’t turn it into a rules-based, the SEC will tell you how you have to behave in every situation, because that will ultimately fail because we cannot foresee every situation.