The Securities and Exchange Commission should focus on enabling retail investor access to innovation rather than limiting products through merit-based judgments, according to Commissioner Hester Peirce. In a discussion with Todd Rosenbluth, head of research at TMX VettaFi, during the Exchange conference in Las Vegas, Peirce shared insight from her term at the SEC and examined the agency’s role moving forward.
Topics included the recent approval of ETF share classes for mutual funds, expanding retail access to private markets, the SEC’s approach to crypto products, and her vision for the agency as her term winds down.
Investor protection includes ensuring people have access to products that serve them best, according to Peirce. She also added that the approval of ETF share classes for mutual funds took longer than it should have. The process was painful and required working through operational challenges beyond regulatory approval. The previous administration did not allocate resources to the issue, which contributed to delays.
The conversation shifted to another access question: private markets. Public markets have shrunk relative to private market growth, raising questions about whether the SEC is doing retail investors a disservice by making private market access difficult, according to Peirce.
Enabling exposure through ETFs makes sense because retail investors would access private investments through professional managers in diversified products, according to Peirce. Fund sponsors must determine whether private holdings sit within illiquid asset limits.
Crypto and Emerging Products
Turning to cryptocurrency, Peirce argued that the SEC should treat these products like any other investment vehicle rather than taking positions unique to crypto that create different standards. The SEC now has generic listing standards in place, creating movement in the space. The agency will work with sponsors interested in products outside those standards.
Leverage products face different constraints. Derivatives rules cap exposure at 200%, and Peirce emphasized the SEC is not a merit regulator that should determine appropriate risk profiles for investors.
However, financial professionals bear responsibility. Advisors putting clients into leveraged products without understanding them merit strong regulatory responses, according to Peirce, because the products have particular uses and should be deployed appropriately.
Tokenization emerged as another area drawing interest after the SEC announced a fresh approach to crypto policy earlier this year. Interest has focused on tokenizing traditional securities including equities and fixed income, according to Peirce.
On-chain assets offer potential for collateral use and operational convenience, while issuers can code back-office processes into smart contracts for fixed income. Peirce expects to see more tokenization of money market funds and ETFs.
A More Open SEC
Looking at her tenure, Peirce called for the SEC to become more open-minded and willing to work with people to get new products to market faster. Her term ended in June, though she continues serving.
ETFs represent one of the biggest innovations in the SEC’s area, but the path to ETF rulemaking took far too long, according to Peirce. She hopes the agency becomes more willing to work with issuers on innovation while maintaining investor protection.
The agency also plans closer coordination with the Commodity Futures Trading Commission. Peirce said product innovation becomes difficult when issuers cannot determine which regulator oversees their product, so the two agencies are committed to answering jurisdictional questions early to prevent issuers from getting passed between regulators.
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