Buried inside the 212-page Financial Innovation and Technology for the 21st Century Act (FIT Act) is Section 504 — a single amendment to securities laws that could be a potent legislative check on the overzealous use of regulatory power by the Securities and Exchange Commission.
Estimates show that regulatory bloat is expensive, costing the median U.S. public firm 4.1 percent of its equity value. Aggressive regulatory enforcement also drives U.S.-based startups to friendlier jurisdictions.
What’s so significant about Section 504? While it’s not a complete reform — time would tell how effective it is — it just might provide a much-needed modernization of the regulatory agency’s 85-year-old mission.
Instead of another long-winded rule or multipronged provision with more nested definitions than a Wikipedia rabbit hole, Section 504 simply adds the word “innovation” to key sections of existing SEC regulations that govern how the commission conducts its business. Such a small change might have a monumental impact, requiring the SEC to consider whether its actions promote or harm innovation.
Greater oversight or even an SEC overhaul might be needed, but better prioritization of innovation is a good place to begin. It could moderate the SEC’s noted perceptions of hostility towards novel sectors of the economy and move the agency’s focus away from social issues outside its intended domain. The SEC has issued an unprecedented number of rulemakings in recent years, nearly double what has been proposed in prior administrations, and with aggressive timelines to boot.
According to the agency rule list for this spring, there are already 63 proposed rules on the SEC’s docket introduced within the past two years, many of which have already been finalized. Comparatively, 43 rules were finalized between 2017 and 2020, coinciding with the Trump presidency, and only 22 between the Obama years of 2013 and 2016. Furthermore, the average public comment period is now only 46 days, 20 percent shorter than in prior years.
To an onlooker, this regulatory hyperactivity could be perceived in a few different ways. One is that the SEC is doing its mandated job really, really well. A second is that it’s unlawfully expanding its reach and authority, to the point of harassing individuals and corporations. A third is that it’s using this authority to crush developing sectors of the U.S. economy through targeted enforcement actions.
Option one is not as far-fetched as even skeptics might think. The SEC’s stated three-pronged mission is to protect investors, maintain fair, orderly, and efficient markets and facilitate capital formation. It sees its ambitious slate of proposed rules as there for a reason and its role as a “cop on the beat.” And while facilitating capital formation may seem at odds with the other two prongs of its mission, in prior years the agency has amended several existing securities regulations to improve access to capital in private markets.
So, the problem is this: If the SEC is fulfilling its mission to the detriment of American businesses, the broader economy and the spirit of entrepreneurship, then perhaps the mission needs to evolve. Section 504 offers a taste of that.
Critics of the reform suggest that requiring the SEC to consider innovation before taking an agency action would eviscerate securities regulations and put the public at risk. However, there are regulatory bodies in the international realm, such as the Monetary Authority of Singapore and the United Kingdom’s Financial Conduct Authority (FCA), that successfully balance innovation and competition while regulating robustly.
The United Kingdom’s FCA has clear objectives to promote effective competition in the interest of consumers and to facilitate the international competitiveness and growth of the U.K. economy. Its focus on healthy market competition and economic growth has created a culture perceived as more carrot and less stick, and consequently may be one reason American businesses are setting up shop across the pond. Like the FCA, the Monetary Authority of Singapore’s mission is to promote sustainable, non-inflationary economic growth and a sound and progressive financial center.
That’s not to say Section 504 would be perfect. One question is whether it would successfully curtail the SEC’s ever-expanding authority and aggressive reputation. U.S. securities regulations already require the SEC to consider efficiency, competition and capital formation. Adding innovation to the list may not twist the SEC’s arm enough to take it any more seriously. Let’s face it: Efficiency is already on the list, and it hasn’t exactly been a top priority.
At a minimum, the FIT Act’s Section 504 should flag for Congress the SEC’s duty to consider its other congressionally mandated factors and provide evidence of nonobservance. Perhaps Congress will even go a step further one day and clarify the SEC’s mission to not only consider but also balance or prioritize the importance of innovation and economic growth as it regulates.
Agnes Gambill West is an affiliate senior research fellow with the Mercatus Center at George Mason University and an associate professor at Appalachian State University.