SEC’s Hester Peirce urges simpler rules, cautions on overregulating tokenized securities

SEC Commissioner Hester Peirce spoke to the US SEC’s Investor Advisory Committee on Thursday and called for clearer, simpler disclosure standards and warned regulators against micromanaging crypto markets. She cautioned that overly explicit regulations can inadvertently disrupt capital flows in financial markets.

Drawing on the work of Adam Smith, a Scottish economist and philosopher, Peirce said regulators should be careful not to overly interfere in market outcomes.

Smith’s view, she said, was that allowing people to fulfill their ambitions in accordance with morality and socially acceptable norms makes for better personal and social well-being.

Pierce says they are still working on an innovation exemption

The SEC, Peirce says, mandates that companies invest significant time and effort in producing disclosures that sometimes add more complexity than clarity for investors. Thus, she recommended the commission reexamine and simplify the existing disclosure rules.

In her speech, she also hailed the committee’s move to address concerns about proxy voting for funds. She called the matter overdue, saying that funds often cannot gather a quorum under the Investment Company Act of 1940, which typically requires more than half the fund’s voting securities to approve certain changes. 

Retail investors, who constitute a large portion of shareholders, are far less likely to vote than institutions, Peirce noted. She said she hoped to hear about possible reforms from investors and stressed that proxy voting authority belongs to the fund, not individual investors, and must be exercised in the fund’s best interest if delegated to advisers.

She also called attention to the ongoing debate over tokenized securities and the potential for blockchain technology to play a larger role in financial infrastructure. The commission’s staff is still mulling the “innovation exemption,” which could allow small-scale trials involving tokenized securities.

Moreover, she questioned whether additional regulatory requirements are warranted for tokenized securities, noting that blockchain can be used to settle payments much faster and, in certain cases, operate without traditional intermediaries.

The SEC has taken a cautious approach in handling tokenized securities

Earlier, SEC Chair Paul Atkins had asserted that the innovation exemption would effectively create a temporary regulatory pathway that allows crypto firms to introduce new products without being fully bound by existing securities rules while regulators refine a more suitable framework. 

More recently, he added that the exemption would “facilitate limited trading of certain tokenized securities on novel platforms with an eye toward developing a long-term regulatory framework.”

He further pushed that individuals should have the option to interact with decentralized applications themselves or rely on intermediaries for custody and trading services.

Lately, more crypto companies have been venturing into tokenized equities alongside traditional financial institutions like Nasdaq and Depository Trust & Clearing Corporation. With regulatory approval from the US Securities and Exchange Commission, these platforms will offer blockchain-enabled trading of traditional equities, placing them in direct rivalry with brokerage firms.

Kraken is still one of the companies waiting for the agency’s green light. Nonetheless, even without access to US markets, the company reported in February that its tokenized xStocks have surpassed $25 billion in total transaction volume since their launch.

Chair Atkin may be moving quickly on crypto regulations overall, but when it comes to on-chain securities trading and issuance in the US, the approach has been more cautious.

Peirce had even previously offered a tempered view on the innovation exemption, speaking to those who both support and question the initiative.

“Both groups are likely to realize that the innovation exemption is not as monumental as either faction anticipated,” she said. “It would be an important step toward facilitating the integration of tokenized securities into our existing financial system, but it would not change the entire financial system overnight.”

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