Sure, like everyone (eventually) I’m getting up there in age, having had another “anniversary” of my 26th birthday not long ago. But one doesn’t have to be that old to remember the disaster at the end of the tech and telecom bubble in 2000 when millions lost boatloads of money on hot stocks that sell-side analysts hyped publicly and disparaged privately. Yet that appears to be the road a willfully blind Congress seems bound and determined to take us down again with the Jumpstart Our Business Startups (JOBS) Act.
At the peak of the bubble, the Nasdaq Composite reached 5,132.52 on 10 March 2000. A dozen years later, and the Index remains 41 percent below that inflated level.
The pillaged landscape the dot.com bubble left was one that few of us here at CFA Institute at the time will forget. Members were angry because their reputations were being dragged through the mud, not because of their own actions but because of the actions of a cadre of unprincipled, over-paid analysts on Wall Street. Their modified version of the old pump-and-dump scheme sullied the first impression of investment analysts for years to come.
Members were angry at AIMR, too, as we were known then, and rightly so. They were angry because the organization wasn’t seen regularly enough, publicly enough, or vigorously enough defending the integrity of its members.
No wonder members express caution when it comes to the JOBS Act. In a recent survey of U.S. members, nearly 60 percent of respondents said the bill would create gaps in investor protections and transparency, and make it harder to make informed investment decisions.
So, here we are a decade later and this time CFA Institute is arguing to prevent a return to the system that created so much turmoil in the past. But many of the same people who gave us stifling rules like Basel III and the Consumer Financial Protection Board are now coming for capital markets investors. They’re easy marks for politicians — dispersed and unorganized, not congregated into any one representative’s or senator’s jurisdiction. If they lose money, it won’t be much.
Sudden Mad Dash to Pass JOBS Act
I wrote about this legislation back in December. At the time, I noted that the bills moving through Congress were unlikely to have any immediate effect on jumpstarting the economy. Rather, it was likely to lead to adverse selection — companies with good business plans waiting for evidence of economic improvement to raise capital, while those on the edge desperately seeking it.
At the time of that last post, Congress had two speeds: leisurely and slow. Sure, the House consolidated about five bills into one, H.R. 3606, now known as the JOBS Act, and passed it last Friday. There was nothing unusual about that, as the House had been generating lots of legislation since 2010. The Senate, on the other hand, had acted like The Hotel California since the 2010 elections — House bills regularly checked in, but they never left.
All that changed last week, however, as the politicians in Washington D.C. came out of their slumber with small investors in their sights. Everyone, regardless of party affiliation, from the freshest of freshmen Congressmen up to the President, seemed to conclude at the same time that they needed to be doing something, anything, so that they could claim to be busy helping the economy grow. The idea of tinkering with financial markets regulation to help the economy grow is putting the cart before the horse — fundamental cuts to deficits and the national debt would have a much bigger effect on that score. But these kinds of things make for good stump speeches and television ads. They also help thwart the attacks they will undoubtedly receive from challengers come November.
“A Passing Bullet Train”
Our contacts in Washington D.C. have told us that trying to stop this legislation would be like yelling at a passing bullet train. It won’t stop, and those on board won’t hear much of what we have to say.
Nevertheless, we have sent letters to senators who have publicly expressed concern about the Act’s potential effects on investors. We pointed out that we’ve been down this road before and that we are concerned about the eventual outcome. Recognizing the political realities, however, we suggested two changes to the bill that we felt would do the most good for investors. First, we asked that they remove provisions that would permit sell-side analysts to publish research on companies in the midst of an IPO. We also asked that they place a visible warning on the SEC filings and financial updates of these companies noting that they are not subject to normal financial reporting rules and investor protections.
It ain’t perfect, and we’re not sure that it will stop this bill from passage. But it does put our views about the potential dangers of the Act into the public domain, while attempting to give investors a fighting chance so that we won’t have to go through this again in another 10 years.