July 21, 2017
Dear Mr. Chair Clayton, the Commissioners Several, and Mr. Fields in his Secretarial capacity,
Thank you for the opportunity to submit written comment on the proposed amendment of Rule 146, at SEC File S7-06-17. The expansion of the number and kind of securities included in the Rule 146 / 18(b) framework is an important, evolving, timely issue.
This Commission correctly identifies, in its statement narrative, the primary substantive economic factors as to a rule change. It is important to view changes in exchange-related rules in the broader historical context of these rules. At the time of the '33 Act, most stock exchanges were still mutual companies and cooperative societies and the patchwork of state regulation regarding offerings of securities was substantially more heterogeneous than today's market environment.
In today's environment, there is convergence of state rules, a flight-to-quality phenomenon where people not exempt from state regulation do business in states with more judicial and regulatory certainty as to outcomes, and substantial sensitivity from those creating securitized instruments or traditional securities to the transaction costs imposed on those instruments (which affect general attractiveness, perceived and actual liquidity, and target market definition for those instruments).
As an economist, these are strong signals that continuity, certainty of outcome, and low transaction costs are desirable to the actors in the marketplace. The removal of state-by-state heterogeneity, including through 18(b) inclusion, is one way to decrease friction both at the offering stage and on the secondary market. That IEX securities would enjoy this freedom from the encumbrances of state-level registration requirements is unobjectionable in the short-term and likely beneficial to both securities issuers and consumers in the long-term (and, indirectly, beneficial to brokers in securities of this kind).
By allowing a broader variety of securities, in this case the IEX securities at issue, to be covered under 18(b) and hence exempt from state law registration requirements, the Commission continues down a desirable path where it acknowledges that while contractual relationships between counterparties are in some cases resolved under state law, the registration status of the security (and interests in the security, pecuniary or otherwise) falls outside the ambit of state law registration mechanisms, some of which are needlessly diverse and cumbersome.
I therefore offer my support for the inclusion of certain IEX securities in the 18(b) provisions of a modified Rule 146 and, as a direct result, the exemption of certain IEX securities from certain state registration requirements to which they are currently or otherwise subject.
Finally, these comments and opinions are mine alone, including any errors. My comments, opinions, and sentiments may not be consistent with the views of Northwestern University or the Pritzker School of Law at Northwestern University. I have, to my knowledge, no financial interest in the success or regulatory relationships of IEX itself or any of the securities implicated by the Commission's decision today.
Dr. Karl T. Muth
Lecturer in Economics and Public Policy, Northwestern University
Lecturer in Law, Pritzker School of Law, Northwestern University