Sept. 24, 2019
Chair Waters, Ranking Member McHenry, and members of the Committee, thank you very much for the opportunity to join you today. It is my honor to be joining my colleagues to testify before you on our task at the Securities and Exchange Commission—protecting ordinary American investors.
Before I joined the SEC, my work in government, as a teacher, and as a researcher focused on the gaps in our securities laws that allow corporate insiders to spend shareholder money to advance their own interests rather than those of investors. Because this Committee is now considering legislation that would close some of those gaps, I want to identify three areas where doing so is especially crucial for investors.
First, our disclosure rules have not kept up with the pace of today’s markets. Specifically, SEC rules give public companies four days before they must notify the market about market-moving business developments on our Form 8-K. A study I released before joining the Commission provided evidence that corporate insiders often trade during the “gap” between key business events and when our rules require that event to be revealed to the public. I am grateful that this Committee has taken up bipartisan legislation that would close this gap—and give investors the level playing field they deserve.
Second, our rules give corporate insiders incentives to pursue stock buybacks that maximize executive pay but make no sense for ordinary investors. In a speech last year, I provided evidence that executives engage in significant sales of their company’s stock after announcing a buyback. I expanded upon that work in a letter to Senator Van Hollen this Spring, showing that when insiders sell into a buyback, their company performs worse in the weeks after the buyback. SEC rules should not incentivize buybacks that allow insiders to cash out but don’t make long-run sense for shareholders.
Finally, we should give investors transparency into how public companies spend their money on politics. A significant amount of corporate political spending is not disclosed under current law, since public companies can and do give investor money to intermediaries that do not disclose their donors. Indeed, a study I published in 2013 showed that just eight intermediaries spent more than $1.5 billion of shareholder money on politics over just a few years. Under the law we have right now, ordinary American investors have no way to know whether the companies they own were a source of that money.
That would not trouble me if executives’ interests in political spending were aligned with those of investors. But when it comes to politics, insiders’ interests can diverge from those of investors. Political spending has consequences beyond the company’s performance—like advancing insiders’ private political views—and executives’ decisions may be influenced by those preferences.
The standard securities-law solution to conflicts like this is disclosure. That’s why SEC rules mandate clear disclosure of executive compensation. That’s why our rules also require companies to give investors detailed information about transactions between corporate insiders and the company. And that’s why the case for requiring disclosure of corporate political spending is strong.
Before joining the Commission, I led a bipartisan group of scholars who petitioned the SEC to develop rules requiring disclosure of political spending. Since then, more than 1.2 million Americans have written to the Commission urging us to adopt those rules. And a bipartisan group of former SEC officials, including two former Chairmen, have called our proposal a “slam dunk.” But because Congress has used the appropriations process to block the Commission from developing rules in this area, too many investors remain in the dark about how public companies spend their money on politics.
I believe that a critical part of the SEC’s mission is to make sure that ordinary investors stand on a level playing field in today’s complex markets. Gaps in our securities laws that allow insiders to trade before key information comes to light; pursue stock buybacks that maximize executive pay but not long-run performance; and spend investor money on politics in secret undermine the trust that ordinary Americans have in our financial system. I am delighted that this Committee is considering how best to close those gaps. And, of course, on all of these matters I remain open to the views of my exceptional colleagues on the Commission—and feel privileged to be a part of their work.
Thank you again for the opportunity to appear before you today. I would be delighted to answer any questions you might have.