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Give the Finance Sector an Inch, and Let Fly the Mile

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IPO Transparency Takes a Hit

Breaking Point, by K.M. Ramich
Breaking Point, by K.M. Ramich

“The evil that men do lives after them, The good is oft interred with their bones…” Updated, Shakespeare’s Mark Anthony might have included mischief done while scrambling for campaign funds as the finance sector obliges those doing its bidding. That mischief stumbles on like a zombie. This tortured comparison came to mind after reading a Naked Capitalism post by former derivatives trader Jerry-Lynn Scofield, Doubling Down on Deregulation: SEC Extends JOBS Act Benefit in Elusive Quest to Goose IPO Market. The post notes a bellwether of the speed of deregulation under SEC Chairman Jay Clayton.

Clayton is currently seeking to expand a degree of confidentiality to all IPO’s that was previously available only to so-called emerging growth companies under the Jumpstart Our Business Startups (JOBS) Act that passed in 2012. The result of the SEC extending aspects of the Act to all companies appear to include putting off filing information in financial statements when seeking an initial public offering, and allowing confidentiality until a mere fifteen days before trading begins. According to a sub-linked memo from Sullivan & Cromwell – Clayton’s former law firm – the effort seems to imply very user-friendly treatment to requests for waivers of information in financial statements. To better parse it, read the sub-links in Scofield’s post, but among the writer’s concerns is reduced protection for investors.

Indeed, the bedrock of investor protection – and investor confidence – is transparency, particularly on matters where companies might be tempted to cook the books. Transparency appeared to be targeted by the JOBS Act, which loosened reporting and other requirements to facilitate small investor “crowd-funding” of IPO’s by “emerging growth companies”, characterized as small businesses. EGC’s were able to claim their status despite having annual revenue of up to a billion dollars, which would include the vast majority of companies that might go public.

Jay Clayton is another denizen of the revolving door. You can read a quick background piece on him by Matt Taibbi here.

State capture is a theme not unknown to readers of DownWithTyranny. Maintaining continuity from the last administration, the SEC remains Exhibit A. You can explore the theme more generally at this post, At The Intersection of Stiglitz and Art.

Trump in the Driver's Seat, Illustration by Nancy Ohanian
Trump in the Driver’s Seat, Illustration by Nancy Ohanian

For several years I wrote columns and cover pieces aimed at explaining Washington influence and dysfunction to a group of international lawyers. Here was what the JOBS Act looked like to me in March of 2012, in my column Legislating to create the next Enron. I quoted Carl Levin, then Chair of the Senate’s Permanent Subcommittee on Investigations – ‘The so-called “JOBS Act” will lower accounting standards and transparency in our markets, which I suspect may result in fewer IPOs, higher costs of capital for businesses, and fewer jobs.’

Motivations to grease easier IPO’s may connect with the considerable drop over the last two decades in the number of companies publicly trading stock in US markets, a drop I assume isn’t welcomed by Wall Street. The JOBS Act hasn’t appeared to turn that decline around. There are various reasons – mergers and the ability to raise venture capital – but in any case I doubt mucking up transparency on a broader scale is the answer.

Sean Spicer, The Swamp Deepens, by Nancy Ohanian
Sean Spicer, The Swamp Deepens, by Nancy Ohanian

The JOBS Act is one of those onerous pieces of legislation useful to scrutinize members of Congress by checking if they voted for it. When there’s finance sector money on the table, and the issues are too complex and archaic for most of the public to latch on to, what might politicians think they can get away with under cover of going along with the crowd? Legislation like the JOBS Act. When the (Democratic!) Senate voted in March of 2012, only 26 Senators voted against the Act. Not a Republican among them, but although they were in the majority not enough Democrats voted to stop it. In the House, only 23 members voted against it, against 390. Wisdom of crowds, like investors in Dutch Tulips in 1637. The Act also garnered the early blessing of Obama’s White House, no stranger to Wall Street largess.

This wasn’t because Washington wasn’t warned. Here’s a memo from Public Citizen, urging Congress to vote against the JOBS Act. I take comfort that Bernie Sanders did his best to oppose the bill. Although some amendments by Senator Jeff Merkley (D-Oregon) were accepted, making the bill less onerous than Wall Street pirates originally sought, Merkley still judged it too dangerous and ultimately voted against it.

Trump New Year 1984, by Nancy Ohanian
Trump New Year 1984, by Nancy Ohanian

With the JOBS Act, another Wall Street camel got its nose under the SEC tent. Now the SEC is making room on its bedroll.

If I can digress (still can!), It’s hard for me to damp down the feeling that regulatory power-grabs by the finance sector are evermore driven by a backstory of quiet desperation. Tangential to that feeling are several recent posts at the always interesting and concise WallStreetOnParade, written by Pam Martens and Russ Martens.

Give them a quick read. Though maybe not at night if you suffer insomnia, or dreams of night rider derivatives.

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