IN-DEPTH: Q&A with SEC Commissioner Hester Peirce

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As the U.S. Securities and Exchange Commission (SEC) recalibrates its approach to regulation and enforcement, it is also confronting a rapidly changing market. Below, SEC Commissioner Hester Peirce discusses some of the commission’s key priorities.

I think the main priorities are refocusing the commission on its mission. The chairman has put a lot of emphasis on trying to think about what has made the number of IPOs decline and trying to turn that around. A big focus is replacing a regulation-by-enforcement approach with an approach that looks to set rules and then enforce them. That's relevant in the crypto area, of course. The chairman has a pretty busy agenda covering a lot of areas. Another big focus is market structure with the proposal to eliminate the trade-through rule, and I think we've made a lot of progress. A lot of rules are coming out. All the divisions are firing on all cylinders.

What impact has the SEC's reduced role in shareholder proposal review had on companies, investors and the wider activism space this year?

It certainly has freed up some of our time. As Chairman Atkins has said, the world didn't end when the SEC's role in 14a-8 changed. There are still proposals, companies are still making decisions about what to do and whether to admit them or not. I think the world goes on.

What principle should guide any future changes to Rule 14a-8?

Of course, my views are my own views as a commissioner, not necessarily those of the SEC or my fellow commissioners. One principle is consistency with our statutory authority. We should make any changes with that as our guiding point. Another guiding point is thinking about how our rule interacts with state law. We're not a corporate governance regulator; that's the state’s job. Those are some of the things that I would say should guide us, and drawing from our experience to shape what we do going forward and looking at how things have changed in the interim and how it's been used in the interim.

What role should proxy advisors play in terms of shareholder voting and what transparency standards should be applied?

I don't think it’s my job to decide what they should be doing. I think some people will do, and do find their services valuable, and that's fine. I think the concern that I have is that a lot of what the SEC has done has forced people in the marketplace to feel that they're compelled to vote. Because of the volume of votes, they sometimes feel they have to turn to third parties for that. I think we should be sending the message that it's really up to a fiduciary to make the determination of whether voting makes sense. If the fiduciary is going to rely on a third party to assist in voting, the fiduciary should have confidence in the work that that third party is doing. That means asking some questions about how the recommendations are being made, conflicts, and so forth.

Under a proposed rule change, the executive compensation disclosure regime would be significantly transformed for many public companies. What drove that push to make a change?

We have heard from a lot of different people that the executive compensation disclosures, as they have developed over time in response to our rules, are not helpful to investors as they try to understand what is motivating a company in its compensation decisions. How is it thinking about compensation? How is it thinking about rewarding executives and encouraging them to do things that are good for the company? We need to get back to a world in which a company can tell its story about compensation. The hope is that if we do that, investors will be getting information to understand what is material. They'll be getting better information upon which to make decisions. That's certainly the goal.

We, as with other rulemakings, will seek and have already sought, public input on how to craft any changes. That should help to avoid unintended consequences.

What does the planning process look like when setting out to propose such reforms?

The roundtable was very helpful because not only did we hold the roundtable, but we got public input as well in addition to the roundtable discussion itself. That will be taken into account as we think about what a change would look like and then based on that feedback as well as the experience of the commission in reviewing disclosures over the years, that will then feed into the changes that we propose and then get comment on.

What are the SEC's main priorities going forward in relation to crypto?

We've seen a lot of interest in activity in tokenization of traditional stocks. That is something that we're spending a lot of time on: thinking about what it looks like for tokenized stocks to trade alongside non-tokenized stocks. There have already been market participants that have been experimenting with that. If people want exemptions or no-action letters to facilitate those kinds of experiments, we'll work with them on that. We're also working on issues that are really important but can pose difficult questions around custody of these assets by investment advisors and broker dealers.

We recently put out a release on crypto assets to give people a framework for fundraising with tokens. We're still working with Congress as they work on their legislation.

It’s not all going to be about money. Stablecoins are certainly one form of crypto and they've already got their own legislation. Other crypto assets may be sold as part of an investment contract, which is within our jurisdiction.

How will the SEC look to protect shareholder rights if securities move on to blockchain networks?

The rights can differ depending on what model it is. If you take a traditional stock and you natively issue it as a token, then it comes with all of the same benefits that would come from any other share of something. You can also use an entitlement model where you're basically getting all of the same rights as you would if you held that in either paper certificate form or in the more common uncertificated form that stocks are now held. The first step is to make sure that investors understand which of these models they're actually getting and what rights go with that. Then people can decide. They may want exposure only to how the value of the stock is changing. They may want all the voting rights. They may want rights to dividends or they may want to own the share or just own it in a tokenized form. The different models are all fine as long as people understand which one of them they're getting and they're able to opt into the one that comes with the rights that they want. That's something that we are really trying to encourage.

How has AI impacted the SEC's approach when it comes to market integrity and investor protection?

As everyone else is discovering, AI really offers powerful tools that we can use in the work that we do. That's fantastic, whether it's helping us review comment letters or helping our examiners as they look at the landscape of firms or helping our enforcement program to identify wrongdoing. I think it will make us more efficient and more effective as a regulator. I'm excited about that.

On the other hand, AI has also become a tool that people can use to engage in fraud. It requires us to up our game so that we can catch those people. That's an area where we have to be vigilant. We also have to encourage investors to be vigilant.

How should companies go about disclosing material AI-related opportunities and risks without making disclosure boilerplate?

Companies have obligations. The goal of our disclosure rules is for investors to get a picture of the company through the eyes of management. If management is thinking about AI risks, if they're material risks, those are ones they have to already disclose under our existing rules. Similarly with opportunities. If companies are using disclosure to tell their story, if AI is a big part of that, that's something that has to come through.

I think it would be a real mistake for us to try to put in prescriptive rules about how companies should disclose with respect to AI, because as we've seen even in the past few years, the possibilities of AI are very different than what we expected - certainly than what I expected - and they're developing very fast, so if we were trying to try to write a rule that captured how companies are using AI, I think we would end up depriving investors of information that they would get through a more principles-based approach, which is the approach we already have.