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May 23, 2019

Warning about excessive regulation for US companies wanting to list

Companies avoiding capital markets is ‘indictment of regulatory regime’, says think-tank wonk

A leading US think tank policy adviser has said US listed firms face too much regulation, resulting in companies not going public, and warned about adding to this regulatory burden.

James Copland, director of legal policy at the New York-based conservative think tank the Manhattan Institute for Policy Research, gave his views on the issue at a hearing on economic growth and efficient capital markets at the US House Committee on Financial Services.

He said: ‘It is important to note that the overall strength of market valuations obscures trends toward consolidation in our publicly traded capital markets. The number of publicly traded companies in the US today is roughly half that of two decades ago.

‘Although 2019 may shape up to be a banner year in IPO markets as several highly valued companies go public, there is no reason to believe the trend against public listing for non-giant companies is abating. The reasons for this shift are varied, and include the availability of large supplies of private capital. But the fact that so many enterprises would prefer to avoid public capital markets is an indictment of our current regulatory regime.’

Copland noted that among the changes that have ‘doubtless exacerbated’ the shift away from public listings in the last two decades are ‘onerous new reporting requirements under Sarbanes-Oxley, increasingly hyperactive shareholder activism – led by social investors, politically controlled public pensions and labor-union investment vehicles – oriented toward social and political goals, and increasing control over publicly traded companies by government regulators and prosecutors, including previously rare deferred prosecution agreements.

‘US publicly traded companies are subject to shareholder litigation that is severely cabined for their privately held peers and virtually unknown in foreign jurisdictions, notwithstanding Congressional reform efforts.’

Addressing the share buybacks tax plan proposed by Democratic Senator Tammy Baldwin, which wants to push companies to stop spending their cash on share buybacks through new SEC rules, Copland says the return of capital to shareholders – more than 70 percent of which are institutional investors that reallocate capital – is the most efficient way to shift societal resources to highest-value use.

‘Any laws or rules that would limit shareholder corporations from returning capital to investors – instead favoring retaining earnings – is simply foolhardy,’ he said. ‘Five of the six largest companies in the world today, by market capitalization, are American companies that simply did not exist 50 years ago. Of course, corporations that wish to distribute earnings to shareholders need not do so through share repurchases: they may do so through paying corporate dividends.’

Copland also criticized three bills before the House of Representatives, which could have ramifications on the capital markets: the Democrat representative Dean Phillips-backed Greater Accountability in Pay Act 2019, which addresses company pay ratios when there is an increase in senior management pay; the Democrat representative Cindy Axne-sponsored Outsourcing Accountability Act, which will require organizations to list foreign and domestic employees; and the Axne-sponsored Human Capital Management Disclosure Requirement, which will require the SEC to implement the 2017 rulemaking petition by the Human Capital Management Coalition, involving publishing diversity, skills and culture data in a company.

‘I believe each of the draft bills is seriously misguided and likely to retard, not promote, economic growth,’ Copland said. ‘We should not allow reasonable policy concerns about income inequality to intrude on our capital-market regulation, which has long been properly oriented around the SEC’s tripartite mission to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.’