Main Street and Premium Listings
Mr. and Ms. 401(k).
Yesterday Jay Clayton gave his first big public speech as Chairman of the Securities and Exchange Commission, in which he laid out his goal to serve "the long-term interests of the Main Street investor":
Or, as I say when I walk the halls of the agency, how does what we propose to do affect the long-term interests of Mr. and Ms. 401(k)? Are these investors benefitting from our efforts? Do they have appropriate investment opportunities? Are they well informed? Speaking more granularly: what can the Commission do to cultivate markets where Mr. and Ms. 401(k) are able to invest in a better future?
One perhaps odd emphasis there is "do they have appropriate investment opportunities?" One thing that the SEC traditionally does is protect investors from inappropriate opportunities: Mr. and Ms. 401(k) seem to love frauds, and the SEC tries to protect them from people who want to defraud them. Another thing that the SEC traditionally concerns itself with is whether companies have appropriate financing opportunities: Companies need money, and part of the SEC's mission is to "facilitate capital formation," and it can't be so vigilant about protecting investors that companies can't raise money.
But Clayton is saying something slightly different: He wants to make sure that investors have enough opportunities to make good investments. His implication is that investors are reasonably well protected from fraud under the current rules, and that companies can raise plenty of money -- but that a lot of that money is raised in private markets where Mr. and Ms. 401(k) can't invest, but would like to:
I have been vocal about my desire to enhance the ability of every American to participate in investment opportunities, including through the public markets. I also want American businesses to be able to raise the money they need to grow and create jobs. As I mentioned earlier, evidence shows that a large number of companies, including many of our country’s most innovative businesses, are opting to remain privately held. Just yesterday I met with a broad group of businesses at different stages of capital raising and heard firsthand about the regulatory requirements and other considerations that factor into their decision to stay private or go public. One message was loud and clear: private markets operate well in many sectors and, in these areas, they offer a very attractive alternative to the public markets. I believe we need to increase the attractiveness of our public capital markets without adversely affecting the availability of capital from our private markets.
From the traditional SEC perspective, the current state of affairs is fine: Capital formation is well served by the private markets, and investor protection is well served by the stricter standards of the public markets. But from Clayton's perspective, that state of affairs is troubling, because Mr. and Ms. 401(k) can't participate in that capital formation: "Many of our country's most innovative businesses" are raising money privately, so the 401(k)s don't benefit from their growth.
Obviously one tradeoff here is that many of our country's most hopeless businesses also raise money privately; lowering the disclosure standards for public companies -- as Clayton hints he'd like to do, especially in areas of disclosure that go "beyond the core concept of materiality to shareholders" -- would give the 401(k)s more good investment opportunities but also more bad ones. But, as we have previously discussed, there is another potential tradeoff: It's not clear that the only advantage private markets have over public markets is freedom from SEC disclosure rules. Private markets also offer companies more flexibility on governance and structure, more opacity on stock price, more control over ownership, more protection from short-sellers and activists. If you want to flush all the unicorns out of the Enchanted Forest and into 401(k) accounts, you might need to do more than reduce the length of Form 10-K filings: You might need to make more fundamental changes to how public companies interact with their shareholders.
FCA and Saudi Aramco.
Speaking of which, the UK's Financial Conduct Authority has proposed a "new premium listing category for sovereign-controlled entities." The UK has a category of public company called a "premium listing," in which companies need to comply with certain financial, disclosure, ownership and governance standards. Having a "premium listing" is good. (It is "premium.") Some companies -- oh, let's not be coy, one company, Saudi Arabian Oil Co. -- would like to have a premium listing, but would prefer not to comply with the governance or ownership standards. Getting the Saudi Aramco listing would be a nice coup for London, and so the FCA has proposed a new listing type that is sort of "premium, but for Saudi Aramco." Companies in this category would have to meet the other premium listing requirements, but could be controlled by their sovereign shareholder and would not be subject to related-party-transaction limitations in their dealings with the sovereign.
The rationale for the new category is pretty much literally "well, but it's Saudi Aramco":
“Sovereign owners are different from private sector individuals or companies – both in their motivations and in their nature. Investors have long recognised this and capital markets are well adapted to assess the treatment of other investors by sovereign countries.”
The rationale for having a distinct category for these companies is to create a new listing option for companies of a distinct type which may wish to access UK markets and choose the higher standard represented by our premium listing regime rather than standard listing.
That last sentence is not strictly true. It's a new listing option for companies of a distinct type which may wish to access UK markets and choose not to meet the higher standard represented by the premium listing regime, but who would like to be called "premium" anyway.
This is fine! Obviously this is fine! These are just words! Of course Saudi Aramco is not going to stop being state-controlled just to list in the UK. Nothing in the real world changes if it lists in the UK as "not premium," or as "premium," or as "premium with an asterisk." In each case, investors get to choose whether to invest in Saudi Aramco, and can make that decision based on its financial condition and disclosures and their own views about its relationship with the sovereign. The games with words involved in these listing standards shouldn't matter much to anyone. Of course they do, because these days we all assume that investors cannot make their own decisions, that they are forced to buy whatever the market is selling, whatever is listed on a particular exchange or included in a particular index. But they are not really forced to do it. You could just decide to invest in Saudi Aramco, or not to, whether or not it is "premium."
I think we are up to the Seventh Law of Insider Trading. The first six are: (1) don't do it, (2) don't do it by buying short-dated out-of-the-money call options on undisclosed merger targets, (3) don't text or email about it, (4) don't do it in your mother's account, (5) don't do it by planting bombs at a company and shorting its stock, and (6) don't do it while employed at the Securities and Exchange Commission. I hereby declare the Seventh Law: (7) If you are going to insider trade, don't Google "how to insider trade without getting caught" before or after you trade. I have mixed feelings about this law -- which, like its six friends, is not legal advice! -- because how would you know about the Laws of Insider Trading without Googling them a little bit? I suppose daily Money Stuff readers will be well prepared, but non-subscribers might get tripped up. (More reason to subscribe!) Fei Yan allegedly missed this one:
Later that same day, Yan conducted a Google search for the search string “how sec detect unusual trade” and visited several web pages concerning the Commission’s detection and enforcement efforts with respect to insider trading.
On December 7, 2016, Yan conducted a Google search for the search string “insider trading with international account” and accessed articles discussing the Commission’s insider trading enforcement actions with international dimensions.
Those are paragraphs 46 and 47 of the SEC's complaint against Yan, an engineering research scientist who allegedly insider traded in undisclosed merger targets that he learned about through his wife's job at a law firm. In paragraphs 45 and 48, Yan is allegedly buying short-dated out-of-the-money call options on merger targets in his mother's account. So he really needed the help! Still, Googling about insider trading while you are doing it is a no-no.
The nature of property.
Here is a story about how United Airlines Inc. wants to sell you a ticket and then come back to you later and offer to buy it back from you and re-sell it to someone else at a higher price, making airline ticketing into a continuous two-sided market instead of, you know, a service that you buy and then use. It is called the "Flex-Schedule Program," and it is a little reminiscent of the "Harberger tax" paper we talked about a while back, in which two law professors argued that "Property Is Another Name for Monopoly" and that people should constantly be re-valuing and buying and selling all of their personal property. Only here it's just airline tickets. You buy your ticket, but then you are constantly pestered with its changing market value, and pressured to sell it if its price exceeds the consumer surplus you get from it. It is all maximally efficient and utterly awful! Soon it will be how everything works.
Also this is the best part of the article, about the startup guy who pitched this plan to United:
When Barodawala first brought his idea to United, he used a metaphor involving three egg cartons, each lined up along their short sides. He filled them with a mixture of red- and green-dyed eggs: bargain shoppers and deep-pocketed business travelers. “What would you say,” Barodawala asked, “if you could move some of these red eggs [to empty slots in a different carton], and just replace them with green eggs?”
The executives lit up at the idea. As the board spitballed over how much this could represent to their bottom line each year, exorbitant numbers were thrown around: eight figures? Nine?
Why did they need the eggs? These are airline executives! Can't you just say to them "we're going to move some bargain travelers to less-full planes and fill their seats with business travelers"? Have they never heard those terms? "I am going to use dyed eggs to represent the fact that you sell some of your seats for more money than other seats?" "We do? My God, why did no one use painted food to tell me this before?"
The nature of the firm.
While we're at it we could also turn employment into a continuous two-sided market instead of, you know, a long-term relationship that provides a stable income:
They created a platform, Foundry, in which the process of assembling and running a temporary organization could be automated, without so much as a phone call.
Each project began with a project leader and an organization chart. To fill each role, Foundry emailed a group of qualified workers on Upwork, a huge freelancer site, which generated pools of candidates. Once the workers were hired, something Foundry could do automatically, they were assigned tasks and communicated through Slack, the messaging software. The organization chart could be altered as needed, generating new roles and new workers.
Ah, the future, it's so great.
Ten years ago, if someone had told you that Royal Bank of Scotland Group was going to pay $5.5 billion to settle U.S. government charges that it misleadingly sold shoddy mortgage bonds to Fannie Mae and Freddie Mac, you'd probably have thought that was a big deal, right? But now that settlement comes toward the tail end of a long chain of similar multibillion-dollar settlements by big banks -- albeit "at the high end of other settlements" in dollar terms -- and it's pretty much a shrug. Also another RBS mortgage settlement -- this one with the Department of Justice -- is still in the works. The mortgage settlements may never end, but eventually we will stop paying attention.
Elsewhere: "Pimco sues Wells Fargo over crisis-era mortgage bonds."
How's Martin Shkreli doing?
Weird, real weird; the former chairman of his pharmaceutical company, Retrophin, testified in Shkreli's securities-fraud trial on Tuesday and Wednesday, and it was stuff like this:
Mr. Richardson, now 63, said he became a “personal mentor” to Mr. Shkreli, 34, advising him on his hygiene and dress. Soon, instead of spending nights in a sleeping bag at the office, Mr. Shkreli would stay in a hotel.
Marc Agnifilo, Mr. Shkreli’s lawyer, asked during cross-examination whether at times his client had skipped brushing his teeth and “couldn’t bring himself to leave his house.”
I wonder how many public company boards of directors have agenda items like "Ask Chief Executive Officer to consider brushing his teeth more often."
But never mind Shkreli; how is the Wu-Tang Clan doing? The guy who helped Wu-Tang sell Shkreli that million-dollar one-copy album has a book coming out. Here is an excerpt about how he learned of Shkreli's drug-pricing practices, and how he rationalized selling him the album:
Maybe this was the ultimate artistic statement. If we don’t support musicians as a society and all contribute to its sustainability, then it will end up in the hands of the most ruthless capitalists out there. There was a certain poetry to it.
Here's how RZA rationalized it:
RZA saw it differently again. If you put a product in a shop window and someone buys it, neither the shop nor the creator of the product is tied in any way to the morality of the buyer. And anyway, if Martin had been making some bad decisions and was mired in negativity, then the album would open a portal of positivity and hopefully make him change direction. Maybe the most troubled guy in the world needed the album more than anyone.
Maybe it would help inspire him to brush his teeth.
A boiler room.
Here are the SEC and Department of Justice cases against an alleged boiler room on Long Island. The charges are fairly standard: stock promoters working with insiders at microcap companies to pump up their stocks and then sell them at inflated prices to retirees with high-pressure sales tactics, that sort of thing. But the case is distinguished by involving stocks like Grilled Cheese Truck Inc., a company once promoted by retired General Wesley Clark (who is not involved in this case). Also the high-pressure sales tactics were pretty high-pressure:
During these calls, victims were allegedly harassed and threatened by sales personnel. When one victim complained about his losses, a sales representative allegedly said, “I am tired of hearing from you. Do you have any rope at home? If so tie a knot and hang yourself or get a gun and blow your head off.”
People are worried about unicorns.
People are worried about Uber Technologies Inc., and yet they still want to be its chief executive officer:
“This is a fantastic opportunity for someone who’s wired for problem solving and wants to make their mark by turning around the image of the company,” said Jason Hanold, managing partner at Hanold Associates, a boutique executive search firm. “Yes, they’re inheriting Uber’s entire toxic culture. But they’re also getting thousands of employees who are hungry to change it.”
It is also an interesting compensation puzzle: Uber's valuation is enormous and its net income is negative, so it might take a while for it to grow into its valuation, and a new CEO who gets options struck at its huge private valuation will have a lot of work to do to see any upside. Though really there's no reason for Uber to strike its new CEO's options at the $69 billion valuation of its last private financing: Since then, Uber has slumped in the secondary market, and it is not unheard-of for employee stock-option valuations to be below funding-round headline valuations. I guess if I were in talks to be the new Uber CEO, I'd be arguing for a pretty low starting valuation. Honestly if the new CEO takes Uber public at a $69 billion valuation, that will be a pretty big win, and he or she should be rewarded for it.
I am not in talks to be the new Uber CEO, but a lot of people apparently are, including Marissa Mayer (as I once guessed she would be). In other Uber news, it is merging its Russia business with local competitor Yandex NV, in its "second retreat from a major market" after abandoning China to Didi Chuxing last year.
People are worried about bond market liquidity.
Jay Clayton is worried about bond market liquidity! From the speech that we discussed above:
I have asked the staff to develop a plan for creating a Fixed Income Market Structure Advisory Committee. Like the EMSAC, this committee would be made up of a diverse group of outside experts, who will be asked to give advice to the Commission on the regulatory issues impacting fixed income markets.
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