Nasdaq Inc., the multinational company that owns the NASDAQ stock exchange, is calling for an overhaul and modernization of the U.S. markets that govern stock trades, securities and initial public offerings – a move supported by West Palm Beach attorney Laura Anthony so long as the proposed changes simplify the costs and complexities of trading and investments for companies that are already public or are considering going public.
Writing in the October 24 Securities Law Blog, Ms. Anthony, founding partner of Legal and Compliance, LLC, cites “deep problems” that surround the market’s ability to sustain job growth, support increased wealth for investors, and address a recent slowdown in the number of U.S. companies pursuing initial public offerings (IPO’s).
Ms. Anthony agrees with a majority of the recommendations in a recent NASDAQ paper, “The Promise of Market Reform: Reigniting America’s Economic Engine.” Proposals include changes to the proxy voting process, more flexible corporate disclosure requirements, a reformed tax structure and a crackdown on nuisance securities litigation.
But Ms. Anthony cautions against a NASDAQ-suggested move to a scaled-down or consolidated single exchange on the grounds that it could limit options for over-the-counter (OTC) sources of capital for small and emerging companies, or limit options for average investors.
Much is at stake, she writes, in a market that since 1970 has seen 92% of job creation come from publicly traded companies – a market in which “the vast majority of Americans are invested in public companies, either directly or indirectly through pension funds, mutual funds and other retirement accounts.” About 38% of trading is handled on OTC markets, the NASDAQ paper points out.
The NASDAQ position paper identifies three areas in need of reform: a restructured regulatory environment, a modernized market structure, and philosophical support for “long-termism.”
The U.S. public securities market has been slowing, according to NASDAQ, because of increased shareholder activism, more shareholder lawsuits, stricter disclosure obligations that arose out of the 2008-2009 financial crisis, complicated and costly proxy voting processes, and rising pressure to prioritize short-term returns over long-term growth. Among the NASDAQ suggestions for reigniting U.S. markets are:
· Updated proxy voting processes, including raising the stock ownership requirements for shareholder proposals to reduce the “nuisance value” and costs of such votes, and greater transparency and fairness from proxy advisory firms.
· Updated corporate disclosure requirements giving companies “the flexibility to provide full disclosure that is shareholder-friendly and less burdensome.” Ideas include streamlined report filing requirements, expanded classifications and definitions for “smaller” and “emerging growth companies,” and elimination of so-called “politically motivated” reporting requirements concerning executive pay ratio and conflict mineral disclosures.
· Comprehensive litigation reform to stem the growth of class-action lawsuits and nuisance lawsuits. Among the suggestions: sanctions against lawyers who bring frivolous lawsuits, disclosure around financing of third-party lawsuits, limits on plaintiffs’ legal fees and other measures.
· Comprehensive tax reform, including lower corporate taxes for U.S. companies and a system of tying taxes to an account’s overall value rather than to its higher dividends and capital gains – a move made in 2012 by Sweden, resulting in 16% of the Swedish population taking advantage of this new tax structure and a doubling of Swedish IPO’s.
· An updated, technology-savvy market structure, especially to reduce liquidity issues and volatility for smaller and emerging growth companies. According to NASDAQ, 90% of trading 15 years ago was conducted on a single market, while trading today is stretched across 12 markets and 50 trading venues. “NASDAQ believes concentrating disaggregated liquidity onto a single exchange, with limited exceptions, will allow investors to better source liquidity” – a stance that runs counter to Ms. Anthony’s support for a diverse OTC market as a valuable source of capital for smaller, emerging companies and smaller investors.
· Promotion of “long-termism,” a concept that will help companies combat increasing pressure to “realize short-term profits for shareholders to the detriment of sustainable, long-term growth.” Companies are advised to address concerns raised by activist investors while also exposing underlying conflicts of interest and motivations for their actions. NASDAQ also supports equalization of disclosure requirements around short and long positions, and continued support for dual class structures by public companies, entrepreneurs and innovators.