Thanks to the meticulous work of Pythagoras, humans have known for two and half millennia that a line is the shortest distance between two points.1 Despite this knowledge and a general desire for efficiency, societies have often failed to incorporate this principle into systems. Take, for example, last century BC Rome, home of the milliarium aureum, a monument that people oft reference unknowingly when they say, “all roads lead to Rome.” When built, it was intended to mark the exact place in Rome to which all roads lead. This sounds practical in theory but belies the array of preexisting winding roads that lead to this destination. A clear destination has no bearing on the inefficiencies experienced to get there, making some paths inherently more efficient than others.2 For Rome, it would have taken an incredible feat of human ingenuity to optimize and replace the road network. While the network remained a labyrinth, it is easy to imagine an optimized version; one where roads lead directly and efficiently to the desired endpoint. Much like the Roman road network, federal securities regulation is an amalgamation of overlapping rules, winding regulations, and competing interests that can impair efficient comprehension and compliance.
Much like the Romans, Congress too had a clear end in mind with securities regulation: creating and maintaining confidence in U.S. capital markets. To help get there, Congress passed the Securities Act of 19333 (“Securities Act”) and the Exchange Act of 19344 (“Exchange Act,” or, collectively, “Acts”) While these laws outlined a detailed road map, it also created the Securities and Exchange Commission (“Commission”) At the tip of the iceberg, policing is one of the ways the Commission helps maintain confidence in markets. But, perhaps more importantly, the Commission was tasked with maintaining the roads laid out by Congress in the two acts and, when appropriate, building new ones. As both the technology underlying society and the capital markets evolved, the SEC had to likewise make changes.5
Neither Rome nor the current security regulation regime were built in a day; the SEC’s reactive nature has played a large part in the regime’s creation. Each time a nefarious wrongdoer, ambitious schmuck, or enterprising investor took advantage of a hole in the regulatory scheme, the Commission plugged that hole with a new rule (typically following some kind of notice or legal action).6 As technology created gray areas around rules, the Commission diligently created rules to indicate how to stay in line with regulations.7 This slow process of constant change was happening on top of the periodic tweaks Congress made.8 After nearly a century, this process has created a bit of a mess. Rather than the deliberate and gridiron plan that the city of Rome was famous for, we have country roads that were created at times of need and are somewhat disconnected from the overall goal of the network–efficient travel to the milliarium aureum.
To highlight this point, take public offerings, specifically the gun-jumping rules. The Securities Act functionally divides public offerings into three periods, each with specific restrictions.9 The SEC in turn divides issuers into categories based on various qualifications. These categories are not equal; for example, being in the Well-Known Seasoned Issuer (WKSI) group can provide perks that significantly ease the offering process compared to the Non-Reporting Issuer group.10 The process is eased even though all categories technically remain obligated to meet the same statutory requirements. This is because, while there are some overarching similarities, each category has a specific set of rules, requirements, and standards that allow it to meet statutory requirements. This is essentially the SEC attempting to simultaneously circumvent and agree with the Acts. The end result has issuers wading through rules and safe harbors.
Fortunately for issuers, at the time of its inception, the SEC was given considerable regulatory responsibility and commensurate authority to make good on it. Hinting at the scope of its mandate, the Commission states that its goal is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”11. With this broad purpose (and the means to achieve it), the SEC was given the ability to not just create, but to also erase. More accurately, the SEC was explicitly given “general exemptive authority.”12 The text, in its entirety, reads as follows:
The Commission, by rule or regulation, may conditionally or unconditionally exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of this title or of any rule or regulation issued under this title, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.13.
Short, simple, and to the point. This section does more than just give the SEC a scalpel for small, nuanced changes, but it also provides a trebuchet for large, sweeping changes. Further, it seems that this general exemptive authority can be used freely if done in the public’s interest and in relation to investor protection.14 It is rational that this authority was given to the Commission because the rigid exemptions of sections 3 and 4 were not weathering the test of time.15 Congress identified the “rapidly changing marketplace” as why this increased flexibility was necessary.16 As such, Congress added a similar provision to the Exchange Act.17 Referring to this mirror provision, Congress stated that it wanted to empower the SEC with “maximum flexibility to reduce or otherwise alter” requirements found throughout the statute.18
Despite this congressional green light to use exemptions to modernize security regulation, it seems that the Commission is hesitant to brandish this authority. As of 2011, the SEC had only used its general exemptive authority once.19 In pursuit of public interest and investor protection, the SEC should use its general exemption authority to do directly what it has been doing indirectly. Doing so would streamline the gun-jumping rules and make compliance more likely. Further, it could potentially lower or remove a barrier that is preventing smaller issuers from accessing the capital markets. If desired, the Commission could maintain the current regulatory status quo and simultaneously improve market accessibility.
While gun-jumping rules were mentioned here, the exemption authority is largely unfettered and applies to both Acts. Unlike Rome, the SEC can simply redraw the map to efficiently arrive at the milliarium aureum and instill confidence in capital markets. In sum, the Commission can make regulation more efficient and transparent in pursuit of its own stated goals, through a process that would not be resource demanding and could happen in increments. By chaining itself to certain parts of the Acts and disregarding others, the SEC is hindering the modernization and flexibility that Congress envisioned. People say, “when in Rome, do as the Romans do.” But we are not in Rome. It is time to do what they could not—redraw the map using general exemption authority.
The Editors, When is a Straight Line Not the Shortest Distance Between Two Points?, Sci. Am., Nov. 8, 2010, https://www.scientificamerican.com/article/football-science-hypotenuse/ ↩
Samuel B. Platner, Milliarium Aureum, in A Topographical Dictionary of Ancient Rome 342 (Thomas Ashby ed., 2002). ↩
15 U.S.C. §§ 77a-77z. ↩
15 U.S.C. §§ 78a-78ll. ↩
E.g., Securities Offering Reform, Securities Act Release, No. 8,591, 70 Fed. Reg. 44,721 (Published Aug. 3, 2005). ↩
E.g., Roberta S. Karmel, Creating Law At the Securities and Exchange Commission: The Lawyer as Prosecutor, 61 Law. & Contemp. Probs. 33 (Winter 1998). ↩
E.g., Securities Offering Reform, Securities Act Release, No. 8,591, 70 Fed. Reg. 44,721 (Published Aug. 3, 2005). ↩
See, e.g., Pub. L. No. 112-106, 126 Stat. 306 (2012). ↩
15 U.S.C. § 77e (1933). ↩
Sec. Exch. Comm’n., Revised Statement on Well-Known Seasoned Issuer Waivers (April 24, 2014), https://www.sec.gov/divisions/corpfin/guidance/wksi-waivers-interp-031214.htm#_ftn2. ↩
Sec. Exch. Comm’n., What We Do, https://www.sec.gov/Article/whatwedo.html. ↩
15 U.S.C. § 77z-3 (1996). ↩
Id. ↩
Id. ↩
S. Rep. No. 104-293, at 15 (1996). ↩
Thomas Lee Hazen, Federal Securities Law 60 (Kris Markarian ed., 2011). ↩
15 U.S.C. § 78mm(a)(1) (1996). ↩
H.R. Rep. No. 108-19, at 2 (2003). ↩
Hazen, supra note 17, n.158 ↩