In a "fireside chat" at FINRA’s annual conference, FINRA president and CEO Robert Cook asked SEC Chairman Jay Clayton what the biggest surprises have been almost a year into his tenure as chairman. Clayton remarked that he has been surprised by the activities in the crypto-asset space, including cryptocurrencies and ICOs. Clayton also said that the amount of retail fraud he has seen surprises him. Given the advances in technology, one would think the ability to detect fraud would increase, but he noted that with advanced technology, the ability to perpetrate fraud also increases.
Regulation BI. Cook asked Clayton about the Commission’s recent proposal for a Regulation Best Interest (Reg BI) standard and related disclosures. Clayton said that in approaching the issue, the Commission examined the relationship a client has with a broker-dealer or with an investment advisor and asked what would a reasonable investor expect of that relationship. In the cases of both broker-dealers and investment advisers, a reasonable investor should expect that an investment professional cannot put his or her interests ahead of the investor’s interests, he said.
This is true even though the relationship model will be different between the transaction-based relationship of a broker-dealer compared to a portfolio and time-based relationship of an investment adviser, Clayton explained.
Cook inquired why the proposal does not use the word "fiduciary." Clayton replied that while both broker-dealer and investment adviser relationships involve a fiduciary principle, calling them both "fiduciary" would not make it clear that the relationship models are different. Using the same term, he explained, might lead an investor to believe that the relationship between an investor and a broker-dealer and between an investor and an investment adviser are the same.
SALI. Cook asked Clayton about one of the Commission’s latest investor protection initiatives, the SEC Action Lookup for Individuals (SALI) tool. Launched earlier this month, SALI allows investors to search whether a person trying to sell investments to them has a judgment or order against him in an SEC enforcement action. Clayton noted that a good deal of fraud perpetrated on investors is by those who are not registered investment advisers or broker-dealers, so they won’t appear on investor. gov or FINRA’s Broker Check search. With SALI, the Commission has provided investors with a database of individuals that did not exist before, Clayton said.
ICOs. Turning to initial coin offerings, Cook asked Clayton to highlight Commission developments with respect to ICOs. The U.S. has an incredible economy where people are able to use public offerings or private placements to raise capital while following the law, Clayton said. Regarding ICOs, people are not following the rules for either private placements or public offerings. They are able to take the most advantageous parts of a public offering, including broad dissemination and the promise of secondary trading, while providing none of the protections that would be provided even in a private placement, Clayton advised.
Cook asked Clayton how people with questions about ICOs should interact with the SEC. Clayton responded that the Division of Corporation Finance welcomes people to approach them about how they’d like to conduct their offering, whether they want to conduct a public offering, or if they need guidance on complying with private placement rules.
Retail investors and access to capital. Noting that FINRA has been taking a fresh look at its own operations and has recently issued a progress report on the changes it has made, Cook inquired about the Commission’s own outreach to industry groups and investors around the country and if there are any key takeaways from these conversations. Clayton said that a group that has a significant impact on his thinking is the Commission’s foreign regulatory colleagues. "The way our markets work is the way everybody wishes their markets work," Clayton stated. While we have the tendency to be self-critical, and we should be, the way we do it is the envy of the world, according to Clayton.
Giving up the democratization that results from broad participation in the capital markets is something that Clayton does not want to happen. He continues to worry that retail investors will not have access to as broad a slice of the U.S. capital markets as he would like them to have. To the extent that private capital has become so robust, it has shrunk some of the opportunities for retail investors. If this trend continues, the result is a much more select group that is participating in the market, which Clayton said he finds bothersome. Part of the solution can be broadening the number of public companies as well as providing channels for retail investors to have access to the private capital markets, Clayton recommended.
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