By Simon Johnson
The Senate is due to vote today on the so-called “JOBS” bill – a piece of legislation, originating in the House, which aims to reduce disclosure and other securities law protections for investors (see my review yesterday; a link to HR3606 is here).
Supporters of the law claim that it will greatly increase the number of companies going public – and that this will boost economic growth and job creation. Opponents argue that by weakening investor protection, the risks of investing in start-up companies will increase – there will be more frauds and scams – and this will increase the cost of capital for honest entrepreneurs.
Members of the CFA Institute have an interest in getting this right – this is the “global association of investment professionals” and they make their living by figuring out what is a good investment and what is likely to become a losing proposition. These people also have a lot of expertise on the key issue – which is better for business, weakening investor protections or keeping them in place? Which way are these experts voting?
Overwhelmingly, members of the CFA Institute are against the “JOBs” bill as it currently stands.
According to a survey released yesterday, and available through MarketWatch, 33 percent of CFA members in the U.S. think that the Senate should “not pass this bill,” while 27 percent think the Senate should pass a bill with more investor protections. (The member survey was conducted online from March 13-16, with 491 U.S. members participating.)
In terms of the effects that the legislation would have on investor protection, the view is overwhelmingly skeptical: 63 percent say “the proposed bill would create additional gaps in investor protection and transparency,” and only 3 percent say the bill would improve investor protection (the rest think it will have no effect).
The essential nuts and bolts question is: What effect, if any, would the bill have on an investor’s ability to make informed investment decisions? The majority, 59 percent, of those surveyed think, “The bill would decrease an investor’s ability to make informed investment decisions,” while only 9 percent think it will enable investors to make more informed decisions.
In rather more colorful language, the Motley Fool – a strong advocate for investors – takes an equally negative view of the “JOBS” bill. Investors in companies with less than $1 billion in revenue (i.e., most companies in the United States today) “would look forward to”:
“The legalization of Wall Street pump-and-dump behavior that was banned after the Enron and WorldCom frauds.
Less clarity in executive compensation and golden parachute disclosure.
Weaker auditing standards.”
Markets with weak investor protection and little effective disclosure are subject to a great deal of volatility. They also do not typically do well over time – there might be a boom for a while, but fraud and excess generally prevail, resulting in a big collapse. Well-connected people, including many stock brokers, can do well – this was the experience in the US stock market frenzy of the 1920s. But ordinary investors do not thrive in this environment – and ultimately everyone suffers, as in the 1930s.
In terms of the practical alternatives at this point, I agree with the position taken by Ilan Moscovitz in the Motley Fool article:
“Although the House has already passed the worst elements of the bill, the Senate is considering the Reed-Landrieu-Levin amendment, which would help clean up most of these problems.
Among other things, the Reed-Landrieu-Levin amendment would make sure investors still get clear executive pay disclosures, reduce the number of companies that get exempted from accounting rules, and help ensure that crowd-funding companies give true information to investors.
They’re voting on it tomorrow [i.e., Tuesday/today].
What do you think? You can let your senators know here.”