Millions of working people keep their hard-earned money in low-cost index funds to secure a dignified retirement and meet other financial goals. In choosing index funds, these everyday investors assume financial industry intermediaries, regulators, and lawmakers are working to keep this investment strategy a safe and conservative one.
But the infrastructure that has historically given index fund investors this sense of security is eroding. Index providers, exchanges, and asset managers are all changing their policies and practices in ways that weaken investor protection to the benefit of executives, directors, and other corporate insiders, just in time for several Silicon Valley companies hitting the market.
Meanwhile, the SEC is turning away from its investor protection mission to protect corporate insiders, and states are weakening investor protection tools to convince corporate management to pick them as their state of incorporation.
SpaceX provides a clear example. Elon Musk’s company went public in June at a sky-high valuation divorced from the company’s fundamentals. Mega AI companies Anthropic and OpenAI are also expected to go public soon.
Traditionally, the major indices have required companies’ stock to trade publicly for a length of time to establish their financial stability before adding them to an index. But nearly all the major index providers have recently changed their rules to fast track SpaceX and other large, recently public companies. (Notably, the S&P held the line after pressure from House Financial Services Committee Ranking Member Maxine Waters, the AFL-CIO, and my organization – Americans for Financial Reform.)
The fast-tracking by the Russell 3000, the Nasdaq 100, and other major indices sets the stage for deep-pocketed early investors to cash out while leaving retirement savers holding the bag in the likely event the company’s share price comes down to better reflect the company’s actual viability.
To make matters worse, most SpaceX investors will have little redress in the event they are harmed by wrongdoing on the part of the company, Musk, or other insiders. SpaceX is trying to ban class actions and force lawsuits into Texas Business Court or arbitration (both notoriously insider-friendly fora).
SpaceX was able to include a forced arbitration provision in its IPO deal after the SEC made an about-face, effectively allowing companies to block a powerful tool to combat corporate fraud and misconduct.
SpaceX is also taking advantage of Texas corporate law provisions that make it exceedingly difficult to bring claims under state law to hold corporate insiders accountable for wrongdoing.
In the meantime, regular shareholders are being denied the opportunity to provide meaningful input. Musk retains 85 percent voting power in a multi-class share structure where holders of one class of shares have 10 times the voting rights of shares available to the public.
One of the more disturbing implications of this structure: only Musk can fire himself.
Meanwhile, as massive AI companies are seeking to go public, the SEC has proposed rules that would permit SpaceX and other large companies to make significantly fewer disclosures compared to what large public companies are currently required to make.
To protect working families’ retirement funds, Congress and financial regulators need to step in. Index providers play a prominent role in millions of working peoples’ retirement security, but they are largely unregulated. This needs to change. Relatedly, asset managers of index funds need to be further regulated so they do not effectively outsource their responsibilities to largely unregulated index providers or use their voting power to rubber-stamp management decisions.
We also need to curb the power of corporate insiders, who call the shots on where a company is incorporated and on which exchanges they’re listed, by setting a federal floor that protects long-term investors and workers.
Congress should also set more stringent requirements for the SEC so it doesn’t lose sight of its mission to protect investors, including by mandating robust disclosures, disallowing forced arbitration, having a more public, thorough process for reviewing the paperwork companies need to file before they can go public, and eliminating or sharply curtailing the SEC’s authority to exempt regulated entities from requirements.
JPMorgan Chase CEO Jamie Dimon recently warned that today’s bullish stock market feels like 2007, when the country was on the brink of a financial crash. When that crash hit, working people wound up bearing the brunt of the crisis while Wall Street banks and their corporate clients got bailed out.
Should we face another financial crisis or drastic market correction, Congress must not bail out corporate insiders or other powerful financial players that benefited from inflating the bubble and instead focus on protecting regular investors, families, and communities.
