📈 SEC vs Wall Street + the Government Shutdown

In case you missed it, we’re moments away from yet another government shutdown after the GOP tanked House Speaker McCarthy’s bill.

But here’s the palace intrigue-level story you haven’t been hearing much about.

In the event the government is shut down, this will force both the SEC and FTC to operate with a skeleton crew for the foreseeable future.

Why should you care as an investor?

While we certainly don’t approve of all of SEC Chairman Gensler and FTC Chairwoman Kahn’s policy agendas…

The timing of this shutdown seems rather convenient given some of the anti-Wall Street policies currently in progress.

For example:

• The SEC’s new Private Fund rules have, to no one's surprise, resulted in a lawsuit from private equity industry groups
  

• The FTC is putting the screws to one of Private Equity’s trademark strategies, the rollup, citing competitive harm that comes from buying up and consolidating firms.
  

• The SEC continues to fine Wall Street firms and brokerage houses for WhatsApp communication violations – more than $2.7b in fines so far
  

• Related to the WhatsApp probe, The SEC is ALSO getting serious about record keeping violations, dishing out a total of $289m in fines across 10 firms, with Wells Fargo being the biggest payer at $125m of that total.
  

• The SEC sued market-maker Virtu for allegedly leaking customer information. Virtu is now taking it to court, instead of accepting a $25m settlement.

In 2022, the SEC obtained a record $6.4 billion in fines, beating the 2020 record by nearly 40%.

As you’d imagine, Wall Street isn’t too happy about this and is fighting back… and a government shutdown would provide a convenient way to stop the SEC in their tracks.

According to the Wall Street Journal:

And that’s what we’re talking about in today’s Weekend Edition.

-Equifund Publishing

The Conspiracy to Defund the SEC’s New Market Structure Proposal

Most investors probably have no clue what the SEC’s new market structure proposal is, why Wall Street firms don’t like it, and how these regulatory updates could get squashed as part of the 2024 appropriations bill.

Let’s start with the easy part – what is the new market structure proposal?

The story begins with the meme-stock trading frenzy – most notably, Gamestop and AMC – in early 2021.

While we won’t spend too much time rehashing the drama, the entire thing made people aware of the longstanding market integrity and investor protection issues in the public markets.

More specifically, the practice of payment for order flow.

On December 14, 2022, the SEC took a major step in addressing long-standing equity market structure issues, by proposing a set of reforms intended to improve the way securities trades are routed and executed. These four separate proposals include:

• Regulation Best Execution – This proposal would update and strengthen the required duties of broker-dealers to provide "best execution" to customer orders. It aims to account for advances in technology and market complexities when routing orders for execution.
  
  Rather than just chasing the best price, brokers would need to consider other factors like how big the trade is and how rapidly an order can be executed when routing trades. The goal is to make sure retail traders aren't getting short-changed versus the big institutional players
  

• Order Competition – This proposal would require certain orders of individual investors to be exposed to competition in fair and open auctions, before they could be executed internally by any trading center that restricts order-by-order competition.
  
  The rule would apply to “segmented orders,” which would be orders for stocks listed on U.S. securities exchanges (called “NMS” stocks)
  

• Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders – This proposal aims to amend certain rules under Regulation NMS, to adopt what’s called “variable minimum pricing increments” or “tick sizes,” for the quoting and trading of NMS stocks
  
  The goal is to improve transparency around payment for order flow and incentives in the retail brokerage business model, enhance trading opportunities for all investors, and to help ensure that orders placed in the national market system reflect the best prices available for all investors
  

• Disclosure of Order Execution Information – Brokers would need to provide more detailed disclosures to retail investors on how their orders were executed. This includes specifics on routing decisions, the use of wholesale market makers, and how pricing compares to the broader national market across exchanges

Sounds like pretty reasonable proposals right? Well, not if you’re one of the firms who now has to comply with these rulings.

That’s why it’s no surprise to hear that industry lobbying groups may be gunning for a way to de-fang these proposals.

Not surprisingly, government shutdowns – which, inevitably, are due to Congress being unable to pass a spending bill – provide special interest groups with the ideal opportunity to extract concessions.

According to We The Investors, a grassroots advocacy group for individual investors, the Members of the House Financial Services Committee have decided to listen to a small group of powerful firms, and are trying to stop the SEC from doing anything to fix our market structure.

The group’s most recent bulletin says the following is to be included in the Fiscal Year 2024 final appropriations bill:

While we’ve only just become familiar with the group, and can’t independently verify this claim…

If it’s true, and that language does make it into the appropriations bill, it would represent a major blow to what could be the most significant securities reform that would likely benefit retail investors in a large way.

We’ll be following this story as it develops.

Government Shutdown Threatens IPO Market Revival

Although not directly tied to the overall SEC vs Wall Street story arc, the government shutdown also has some negative consequences for Wall Street firms hoping to cash in on a revitalized IPO market.

In 2020-2021, we had a red hot IPO market that generated record breaking numbers of new listings – more than 1,500 across both years…

But ever since the Fed decided to raise rates and ruin the party, the IPO market has been ice cold.

But thanks to the high profile debuts from Arm Holdings, Instacart, and Klavio in Q3, the market showed signs of warming back up, giving confidence to companies waiting on the sidelines for improved market conditions.

However, the government shutdown could slam that window shut and put us back into IPO purgatory.

According to SEC Chairman Gensler earlier this week,

While IPOs are certainly a topic of much interest for our readers – especially if they are hoping one of their portfolio companies will go public…

But in the land of crowdfunding, this may have a significant impact on any upcoming Regulation A+ (Reg A+) fillings.

For those unaware, when a company decides they want to raise capital under Regulation Crowdfunding, all they have to do is file a Form C with the SEC and, often in a matter of days, the company is clear to accept investment commitments.

However, a Reg A+ offering goes through the SEC review and commenting process, and must be “qualified” before a company can accept investment commitments.

Already, this process could take anywhere between 2-6 months to navigate. Should the SEC be reduced to a skeleton crew, this could put the damper on any pending Reg A+ offerings.