Recently, Securities and Exchange Commission Commissioner Mark Uyeda recently expressed concern about the the Commission's belief system with respect to its proposed Regulation Best Execution:
This particular proposal uses the phrase “the Commission believes” 77 times. What does that phrase mean? If the phrase is employed as a reasoned conclusion of the Commission after a discussion of supportive evidence and relevant analysis, then I suppose that is fine. However, when the expression—“the Commission believes”—is employed as a substitute for evidence, like spackling used to fill a hole, then that is a problem. Indeed, “the Commission believes” seems to be used as another regulatory shortcut for situations when the Commission has no hard evidence or data, but nonetheless has a theoretical concern. (footnote omitted)
Commissioner Uyeda's criticism reminded me of a similar criticism that I leveled a year ago when the Commission proposed enhanced repurchase disclosures:
As I read the SEC's 102-page rule proposal, I was struck by the SEC's repeated use of "could". According to my count, the word appears 90 times in the proposing release.
"Could" is the past participle of "can". When used as a substitute for "can", "could" implies a greater degree of uncertainty. When we say that something "could happen" we mean that it might or might not happen. Essentially, it means that something is possible, not that it necessarily will occur. Thus, the proposing release's constant use of the word conveys a notable incertitude on the part of the SEC. For example, the SEC seems be far from convicted when it states "we believe investors could benefit from improving the quality, relevance, and timeliness of information related to issuer share repurchases" (emphasis added). If the SEC is not convinced that investors will benefit, why is it proposing to impose additional burdens on issuers and ultimately their owners?
The Commission's failure to support its regulatory proposals with evidence or data is also evident in its recent proposal to regulate outsourcing of services by investment advisers. In the proposing release, the Commission claims to have “observed an increase in such outsourcing and issues related to the outsourcing and advisers’ oversight”. The release elsewhere refers to “the increase in the use of service providers”. However, these claims are not creditable without data showing an increase in outsourcing. More specifically, the proposing release does not disclose over what period the Commission observed the observed increase or the magnitude of the increase. To make matters worse, the Commission undermines its claim by its own admissions in the release. For example, the Commission admits that it “has limited visibility into advisers’ outsourcing and thus the potential extent to which advisory clients face outsourcing-related risks” and that it “currently collects only limited information about an adviser’s use of certain service providers” (emphasis added). If the Commission has limited visibility as it claims, how was it able to observe an increase in outsourcing? The failure to provide creditable data undermines the very premise for the proposed rule changes and the Commission’s economic analysis.