Despite subsequent rallies, the sharp declines in the stock market in early August and the subsequent volatility highlight the damage the Biden-Harris administration’s policies are inflicting on U.S. markets, with serious consequences for the retirement savings of Americans who are not government employees with pensions. These destructive policies must be reversed as quickly as possible to protect the retirement savings of the average American.
Under the Biden-Harris administration, the Securities and Exchange Commission (SEC) has continued Obama-era policies that have steadily reduced the number of publicly traded companies in the U.S. and drastically limited the average American’s investment choices, including in their 401(k) ) investments. or IRA retirement accounts.
In 2021, with most of the Trump administration’s policies still in place, the US had 1,035 initial public offerings (IPO) of corporate stock, including many transactions combining public special purpose acquisition vehicles (SPACs) with private companies. Once the Biden-Harris SEC implemented its policies, U.S. IPOs fell to 181 in 2022 and 154 last year.
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The Biden-Harris SEC policy has actively discouraged companies from going public and has built on Obama-era policies to continue the long decline in the number of U.S. publicly traded companies since the 1990s.
In 2021, President Biden appointed new leaders to the SEC who suddenly argued that SPACs were investment companies that should be regulated like mutual funds, despite decades of approving SPACs as publicly traded companies. The threat of such regulation, made without a law or regulatory process allowing public comment, cooled the SPAC boom that had reversed the decline of public companies.
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The Obama-era Dodd-Frank law required publicly traded companies to make various disclosures on hot-button political topics, such as the ratio of CEO to employee compensation, the use of “conflict minerals” or participation in “extractive resources” industries. it is unpleasant and expensive to be a publicly traded company.
Requiring disclosure on issues generally unrelated to a company earning returns for its shareholders opens up a new source of revenue for the litigators who file lawsuits against publicly traded companies claiming they have improperly made such disclosure. These lawsuits are often settled to avoid litigation costs, which increase the costs of being a publicly traded company.
The market declines of August 5 and September 3 showed the devastating consequences of the decline in the number of public companies. Despite a declining number of publicly traded companies, down from about 4,000 to a high of nearly 8,000 in 1996, biweekly cuts to workers’ paychecks continue to flow into 401(k) and IRA accounts, which generally only occur in liquid securities such as can invest in government shares.
It’s no surprise that the top 10 stocks in the S&P 500 index represent nearly a third of the index’s market value. The consolidation of retirement savings into fewer and fewer stocks means that steep market falls like those of August 5 and September 3 are particularly worrying for older investors who are seeing their savings dwindle. An increase in the number of listed companies would allow pension investors to spread their risk by diversifying their investments across more companies.
Perhaps the most dramatic illustration of the problem is the Wilshire 5000, an index that tracks the performance of the entire U.S. stock market. Founded in 1974 with – as the name suggests – approximately 5,000 shares, that number has now fallen to under 3,500.
A recent one report in The Wall Street Journal attributed the decline to two decades of cheap money used to finance mergers between public companies. While mergers are contributing to the decline, the real culprit is the dwindling supply of new companies entering the market through IPOs.
Why are IPOs becoming an endangered species? In the US, being a publicly traded company is unattractive and expensive, so entrepreneurs hesitate to go public. Not content with the rapid decline in the number of publicly traded companies, the SEC continues to propose new disclosure requirements, including recent proposals to require disclosure of environmental, social, and governance issues.
The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board, which imposes increasing accounting requirements. A publicly traded company needs an expensive army of lawyers and accountants to comply with disclosure and accounting rules, and if the company does anything wrong in this regard, it is subject to strike action or hostile hearings in Congress.
In addition, the growth of private equity funds (fueled by investments from pension plans for state and local government employees) provides an easy path for promising private companies that want to remain private to sell their shares to such funds rather than pursue an initial public offering.
As with so many other issues, there are common sense policies to restore the vibrancy of America’s public equity markets. The SEC should remove regulatory uncertainty surrounding SPACs, and reform them if necessary, and reduce disclosure and accounting burdens on all public companies to reduce the high costs of being a publicly traded company.
These steps will encourage successful private companies to access the public markets for capital to build their businesses and give everyday Americans the opportunity to invest in those innovative companies.
Norm Champ is the former director of the Division of Investment Management at the U.S. Securities and Exchange Commission and author of “Going Public: My Adventures Inside the SEC and How to Avoid the Next Devastating Crisis” (McGraw-Hill 2017).
Source of original article: How the Biden-Harris Administration Threatens Your Retirement Savings
