By Ross Kerber

July 1 (Reuters) - The opinions expressed in this column are those of the author, a correspondent for Reuters.

June's record SpaceX IPO shattered more than fundraising records on Wall Street. The tight control kept by CEO Elon Musk and a rush by index providers to add the shares cut across corporate-governance norms and raised questions from pension funds and others.

A number of people including Oregon State Treasurer Elizabeth Steiner told me they would like some guidance from Wall Street's top regulator, the U.S. Securities and Exchange Commission, about how various market participants should handle the new company with the giant market valuation.

SEC Chairman Paul Atkins has declined to comment, but fellow Republican Commissioner Mark Uyeda agreed to take questions via email. One takeaway is his simple point that if you don't like the governance arrangements of a stock, don't buy it. Our full exchange is published herewith:

Q: Thanks for doing this interview. We’re corresponding just a bit after the SpaceX IPO, the largest in history and one with a structure giving major influence to its founder and CEO Elon Musk through mechanisms like dual-class shares and its reincorporation in Texas. Typically, SEC staff would have reviewed a would-be-IPO company’s S-1 registration document, so is it right to regard SpaceX’s tight governance structure as something that has the SEC’s blessing?

A: The SEC does not approve or bless any offerings or corporate governance arrangements. While the SEC frequently reviews filings, the SEC makes clear that the company is responsible for the accuracy and adequacy of the disclosure, notwithstanding any review, comments, action, or absence of action by its staff. The SEC does not regulate corporate governance arrangements nor does it engage in a merit-based evaluation of offerings. Rather, it is the adequacy of disclosure that is the primary consideration for the SEC to declare registration statements effective.

Q: What, if any, changes did staff (or commissioners) seek in reviewing the SpaceX S-1? Did you personally get involved? Please talk about what, if any, changes were sought, and the thinking behind them. As a fan of “capital formation,” what do you think should be the SEC’s priorities when reviewing potential IPOs?

A: The SEC has a very experienced staff that reviews offering documents, so there was no need for me to be personally involved in this filing. Generally, all correspondence between the SEC staff and the company regarding any reviewed registration statement is made public after the registration statement is declared effective, thereby providing transparency into the SEC review process. The SEC is currently considering whether the IPO process can be improved, both on a procedural and substantive disclosure basis.

Q: As you know, the SpaceX governance structure drew sharp criticism from major pension funds. Retirement leaders from New York and California said they had major concerns about what they called SpaceX’s “extreme” ownership and control features. What do you make of their critique? Do you think their concerns are overblown? Alternatively, maybe you agree with them but don’t think it’s the SEC’s place to have insisted on changes from SpaceX, since investors can avoid the stock or price it down accordingly.

A: One feature of the U.S. capital markets is the flexibility to design a company’s corporate governance structure in accordance with state law. SEC rules require a description of the features and limitations regarding the corporate stock being issued. If prospective investors have concerns with the governance arrangements, then their most powerful tool is to not purchase shares of the stock.

Q: Some of the pension leaders’ concerns were about related-party transactions, and it’s clear that Elon Musk’s companies have extensive commercial and financial ties. What, if any, reviews have the SEC done of these connections? Now that SpaceX is a public company, are related-party transactions between Musk companies an area of focus for the SEC? What should investors watch for?

A: While the SEC staff reviews registration statements, it is the company’s responsibility to provide disclosure of related-party transactions in accordance with the federal securities laws, including applicable disclosure and accounting rules. In connection with the SEC staff’s review, the staff may provide comments related to this or other areas as appropriate to promote material compliance with the federal securities laws. Additionally, failure to provide adequate disclosure of related-party transactions could be the basis for fraud charges against a company and the individuals responsible for such disclosure.

Q: Traditionally, critics of a company’s governance structure could just choose not to buy its shares. But index funds today are often the largest outside owners of S&P 500 companies, making many retirees etc automatic owners. Nasdaq and FTSE have faced criticism over their treatment allowing SpaceX early entry into their high-profile indexes, which will prompt new demand for SpaceX shares. Do you see potential problems in how the indexes behaved? Does the SEC have authority over how indexes make inclusion decisions? Should it? Do you see any conflicts of interest in how SpaceX was added to major indexes so quickly? Alternatively, maybe you think the indexes were only responding to the widespread interest in SpaceX shares from their clients?

A: A lot of investment capital is being driven by indexes. Even for non-index funds, their managers are often benchmarked against an index. In fact, SEC rules specifically require fund prospectus (documents) to compare the fund’s performance with an appropriate, broad-based securities market index. Thus, there is pressure to have holdings that correlate in part to that index. Currently, the SEC does not directly regulate the activities of index providers. Index fund prospectuses often disclose that the selection of securities in the underlying index is at the sole discretion of the index provider.

Q: SpaceX is joining other companies that have gone public with unequal voting structures, and could presage more such IPOs. Various experts have suggested new rules restricting how much voting power leaders can have over public companies beyond their economic ownership. For instance, Arizona State University law professor Gregory Shill has suggested making it easier to bring shareholder proposals at dual-class firms or barring dual-class companies from government contracts if they engage in political spending. What is your view of dual-class shares? What if any changes might you suggest for companies that use them?

A: The federal securities laws focus on appropriate disclosure and do not expressly permit nor prohibit the use of multiple class share structures. The SEC previously attempted to indirectly impose a one-share, one-vote rule through the listing requirements imposed by national securities exchanges. However, that effort was struck down by the judiciary, on the grounds that the SEC lacked statutory authority to do so. Nevertheless, there are meaningful SEC rules that can apply to holders of dual-class stock, such as the Schedule 13D disclosures by beneficial owners holding 5% or more as well as the short-swing profit rule for persons with more than 10% beneficial ownership.

Q: Looking over my questions above, I see the controversies over the SpaceX IPO reflect a broader battle between the rights of investors versus managers at large U.S. corporations. In this article a year ago it seemed the SEC was shifting power in the direction of managers, and since then the trend has accelerated such as with new restrictions on stewardship activities by top asset managers. Can you talk about why these changes are necessary? What similar changes are under discussion?

A: There was not a change in SEC policy on stewardship activities. “Passive” investors are required to hold securities without “the purpose of or with the effect of changing or influencing control of the issuer.” Longstanding SEC rules are clear that control means the power to direct or cause the direction of the management and policies of a company. The revised guidance merely re-states these rules, for which some asset managers may not have been complying with as a result of their stewardship activities.

Q: And looking ahead, an order by U.S. President Donald Trump in December told the SEC to consider "revising or rescinding all rules" related to shareholder proposals. What changes are under discussion? For instance, there has been talk of eliminating the proxy votes of index funds. What do you think of that idea?

A: President Trump issued his executive order on foreign-owned and politically-motivated proxy advisors. President Trump is correct in that these proxy advisors can wield enormous influence over corporate governance matters. Currently, proxy advisory firms are not regulated unless they voluntarily register with the SEC as investment advisers. Chairman Atkins has instructed the SEC staff to evaluate whether the original rationale for adopting the shareholder proposal rule still applies today. The significant increase in size of index funds has raised questions on how they exercise their voting power and influence.

Q: I appreciate the chance to hear your thoughts on these topics. One thing that’s new under Trump is that the SEC is operating with only three of its five seats filled, all by Republicans. Would you prefer President Trump to fill the two remaining seats soon, to fully air out issues? Or does the status quo allow for more decisive action?

A: In the 1990s during the Clinton Administration, there was a period when there were only two seats filled – both of them by Democrats. Nominations to fill vacancies on the Commission (are) the prerogative of the President. Regardless of the composition, I am confident that the SEC and its staff will carry out its mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

Q: What am I missing?

The capital markets are in a constant state of evolution. This iterative process, although it can be unpredictable at times, has led to the United States having consistently led the world in economic growth, jobs creation, and innovation. Regulation must similarly evolve — it has been a quarter century since Enron and more than 15 years since the Dodd-Frank Act. We cannot have regulations frozen in time, which is why the current regulatory modernization efforts are critical.

POSTSCRIPT: I sent along a follow-up question, and Uyeda responded:

Q: You write that “If prospective investors have concerns with the governance arrangements, then their most powerful tool is to not purchase shares of the stock.” But critics like some big pension funds say the fast-track addition of SpaceX to big indexes could make them unwilling buyers of the stock. What would you say to such critics?

A: Large pension funds have choices with respect to their investment decisions as part of their fiduciary duty to the plan. While index funds may have certain conveniences and low costs, there is a trade-off to outsourcing securities selection to a third party. There are alternatives, such as selecting a fund that follows a different index or is actively managed, or engaging in customized direct indexing that would provide more control over the portfolio.