Sec Office Investor Advocate Report on Objectives Fy2016

8/20/2019 Sec Office Investor Advocate Report on Objectives Fy2016

1/52

REPORT ON OBJECTIVES FISCALYEAR2016

Ofce of theInvestor

Advocate

U . S . S E C U R I T I E S A N D E X CH A N G E C O M M I S S I O N


2/52

The Office of the Investor Advocate was

established pursuant to Section 915 of the

Dodd-Frank Wall Street Reform and

Consumer Protection Act of 2010, as

codified under Section 4(g) of the Securities

Exchange Act of 1934, 15 U.S.C. § 78d(g).


3/52

OFFICE OF THE INVESTOR ADVOCATE

REPORT ON OBJECTIVES

F I S C A L Y E A R 2 0 1 6

TheOfficeoftheInvestorAdvocate(sometimesreferredtohereinasthe“Office”or“we”or

“our”)wasestablishedpursuanttoSection915oftheDoddFrankWallStreetReformand

ConsumerProtectionActof2010(the“DoddFrankAct”),ascodifiedunderSection4(g)of

theSecuritiesExchangeActof1934(the“ExchangeAct”),15U.S.C.§78d(g).ExchangeAct

Section4(g)(2)(A)(ii)providesthattheInvestorAdvocatebeappointedbytheChairoftheU.S.

SecuritiesandExchangeCommission(the“Commission”orthe“SEC”)inconsultationwiththe

otherCommissionersandthattheInvestorAdvocatereportdirectlytotheChair. 1 OnFebruary

24,2014,SECChairMaryJoWhiteappointedRickA.FlemingastheCommission’sfirst

InvestorAdvocate.

ExchangeActSection4(g)(6)requirestheInvestorAdvocatetofiletworeportsperyearwith

theCommitteeonBanking,Housing,andUrbanAffairsoftheSenateandtheCommitteeon

FinancialServicesoftheHouseofRepresentatives. 2 AReportonObjectivesisduenotlaterthan

June30ofeachyear,anditspurposeistosetforththeobjectivesoftheInvestorAdvocatefor

thefollowingfiscalyear.3TheinstantreportistheInvestorAdvocate’ssecondannualReporton

Objectives.ItcontainsasummaryoftheInvestorAdvocate’sprimaryobjectivesforFiscalYear

2016,beginningOctober1,2015.

AReportonActivitiesisduenolaterthanDecember31ofeachyear,anditdescribesthe

activitiesoftheInvestorAdvocateduringtheimmediatelyprecedingfiscalyear. 4 Amongother

things,thereportmustincludeinformationonstepstheInvestorAdvocatehastakentoimprove

theresponsivenessoftheCommissionandselfregulatoryorganizations(“SROs”)toinvestor

concerns,asummaryofthemostseriousproblemsencounteredbyinvestorsduringthereporting

period,identificationofCommissionorSROactionthatwastakentoaddressthoseproblems,

andrecommendationsforadministrativeandlegislativeactionstoresolveproblemsencoun-

teredbyinvestors.5 ThenextReportonActivitieswillbefiledbyDecember31,2015,andwill

describetheactivitiesoftheOfficeoftheInvestorAdvocateduringFiscalYear2015,coveringthe

periodfromOctober1,2014throughSeptember30,2015.

Disclaimer: Pursuant to Section 4(g)(6)(B)(iii) of the Exchange Act, 15 U.S.C. § 78d(g)(6)(B)(iii), this Report

is provided directly to Congress without any prior review or comment from the Commission, any Commis-

sioner, any other officer or employee of the Commission, or the Office of Management and Budget. Accord-

ingly, the Report expresses solely the views of the Investor Advocate. It does not necessarily reflect the

views of the Commission, the Commissioners, or staff of the Commission, and the Commission disclaims

responsibility for the Report and all analyses, findings, and conclusions contained herein.

R E P O R T O N O B J E C T I V E S : F I S C A L Y E A R 2 0 1 6 | i


4/52


5/52

CONTENTS

MESSAGEFROMTHEINVESTORADVOCATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

OBJECTIVESOFTHEINVESTORADVOCATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

AssistingRetailInvestors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

IdentifyingAreasinWhichInvestorsWouldBenefitfromRegulatoryChanges . . . . . . . 3

IdentifyingProblemswithFinancialServiceProvidersandInvestmentProducts . . . . . . 4

AnalyzingthePotentialImpactonInvestorsofProposedRulesandRegulations . . . . . .4

ProposingAppropriateChangestotheCommissionandtoCongress . . . . . . . . . . . . 4

SupportingtheInvestorAdvisoryCommittee . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

POLICYAGENDAFORFISCALYEAR2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

EquityMarketStructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 MunicipalMarketReform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

FiduciaryDuty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Millennials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

RetirementReadiness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

ShareholderRightsandCorporateGovernance . . . . . . . . . . . . . . . . . . . . . . . . . 20

FinancialReportingandAuditing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

OMBUDSMAN’SREPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

AppointmentofSECOmbudsmanandFoundationalActivities . . . . . . . . . . . . . .25

AssistingRetailInvestorsandOtherInterestedPersons . . . . . . . . . . . . . . . . . . . . 26

StandardsofPractice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

InquiryManagementSystem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

InquiryStatistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

RecommendationsandOutlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

SUMMARYOFIACRECOMMENDATIONSANDSECRESPONSES. . . . . . . . . . . . . . . . 29

ShorteningtheTradeSettlementCycleinU.S.FinancialMarkets . . . . . . . . . . . . . . .30

ImpartialityintheDisclosureofPreliminaryVotingResults . . . . . . . . . . . . . . . . . .30

TheAccreditedInvestorDefinition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Crowdfunding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

DecimalizationandTickSizes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

LegislationtoFundInvestmentAdviserExaminations . . . . . . . . . . . . . . . . . . . . . 32

BrokerDealerFiduciaryDuty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

UniversalProxyBallots. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

DataTagging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

TargetDateMutualFunds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

GeneralSolicitationandAdvertising. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

ENDNOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

R E P O R T O N O B J E C T I V E S : F I S C A L Y E A R 2 0 1 6 | iii


6/52

In short, our job is to help ensure that the needs of

investors are considered as decisions are being made

within the Commission, at SROs, and in Congress.


7/52

MESSAGE FROM THEINVESTOR ADVOCATE

TheOfficeoftheInvestorAdvocatewas

createdattheSecuritiesandExchange

CommissiononFebruary24,2014.The

threecorefunctionsoftheOfficeincludethe

workofanOmbudsman,thesupportoftheSEC’s

InvestorAdvisoryCommittee,andthepursuitof

policiesthatarebeneficialforinvestors.Asasmallteam,weexpendgreatefforttoprovidevaluable

serviceinallthreeareas,andwewillcontinueto

enhancethoseservicesinFiscalYear2016.

TheCommission’sfirstOmbudsman,TraceyL.

McNeil,beganherdutiesonSeptember22,2014.

Inherinitialmonthsinthisnewrole,Ms.McNeil

hasbegunhelpinginvestorsresolveproblems

theyhavewiththeCommissionorselfregulatory

organizations.Muchofhertimehasalsobeen

spentdevelopingsystemsandlayingthenecessarygroundworktoreceive,process,andtrackinquiries

frominvestors.Oncethosesystemsareopera-

tional,Ms.McNeilwillengageinoutreachtoraise

publicawarenessofthisnewserviceforinvestors.

InJune2015,anattorneywashiredtoassist

theOmbudsmaninestablishingproceduresand

processinginquiries.

TheInvestorAdvocateisastatutorymemberofthe

InvestorAdvisoryCommittee(the“Committee”or

“IAC”),andIparticipateintheworkanddelibera-tionsoftheCommittee.MyOfficealsoprovides

thenecessarystaffsupporttotheCommittee.

Thisinvolvesmanytasks,includingthedrafting

ofmeetingminutes,processingtheappointments

ofnewmembers,assistingwithtravelarrange-

mentsandreimbursements,schedulingandsetting

upmeetingrooms,publishingmeetingnotices

andagendas,andhelpingtoarrangebriefingsby

Commissionstaff.

Wewillcontinuetodevotesignificantresourcesto

supporttheworkoftheIACinFiscalYear2016.Inaddition,Iwillpersonallyworktoraiseawareness

ofIACrecommendationsamongCommission

staffandtheCommis-

sioners.Eachofthe

IAC’srecommendations

todateissummarized

inthisReport,andthe

Commissionisrequired

byExchangeAct

Section39torespond

“promptly”toeachrecommendation.In

FiscalYear2016,Iwill

endeavortoimprovethe

timelinessofCommission

responsestoIACrecommendations.

InadditiontotheworkoftheOmbudsmanand

oursupportoftheIAC,asubstantialportionof

ourenergiesaredevotedtothepolicymaking

process.Inshort,ourjobistohelpensurethatthe

needsofinvestorsareconsideredasdecisionsarebeingmadewithintheCommission,atSROs,and

inCongress.

InFiscalYear2016,theOfficewillbeginreviewing

everysignificantrulemakingthattheCommission

R E P O R T O N O B J E C T I V E S : F I S C A L Y E A R 2 0 1 6 | 1


8/52

andSROspropose.Wewillexaminetheimpacts

oninvestorsand,whenneeded,advocatefor

changesthatwillbenefitinvestors.However,

giventhebroadscopeofpolicyissuesimpacting

investors,aswellasthelimitedresourcesofour

office,wewillagainfocusmoreintentlyona

manageablenumberofissuesinwhichwecan

developexpertiseandprovideastrongervoicefor

investors.

Inthecurrentfiscalyear,weareprimarilyfocused

onthesixcorepolicyareasthatweresetforthin

theReportonObjectivesfiledinJune2014.We

arecompletingourworkinthreeofthoseareas

(investorflight,elderfraud,andcybersecurity),

andtheremainingthreeareasinvolvemultiyear

projectsthatwillremainonouragendaforFiscalYear2016.Accordingly,wewillcontinueourfocus

onequitymarketstructure,municipalmarket

reforms,andwaystoimprovetheeffectivenessof

disclosure.

Withtheadditionofanotherattorneytothepolicy

sideoftheOfficeinJune2015,wewillbeableto

expandouragendasomewhatinFiscalYear2016.

Thus,asdescribedmorefullyinthisReport,we

willbegintofocusonsomeadditionalchallenging

topics:afiduciarydutyforbrokerdealers,theinvestingandbehavioralcharacteristicsofthe

Millennialgeneration,thereadinessofAmericans

forretirement,shareholderrightsandcorporate

governance,andfinancialreportingandauditing.

Ofcourse,otherissuesareimportant,too,butI

believewecanbemosteffectiveinadvocatingfor

investorsifweconcentrateourfiniteresources

onalimitednumberofissues.Bymaintaininga

disciplinedfocus,wewillbeabletodevelopthe

requisitelevelofexpertisethatwillenableusto

providemeaningfulinputtopolicymakersand

successfullyadvancepoliciesthatbenefitinvestors.

Wewillalsoachieveagreaterimpactforinvestors

ifweareabletoengageinthepolicymaking

processattheCommissionearlyon,whileconcepts

arestilldeveloping,insteadofbeingplacedinthe

positionofcritiquingfullyformulatedproposals.I

ampleasedtoreportthat,withthesupportofSEC

ChairMaryJoWhite,ourviewsarebeginningto

beconsideredearlierinrulemakingsthatfallwithin

ourpolicyagenda.Welookforwardtoprovidinga

strong,reasonedvoiceforinvestorsasfuturerules

aredeveloped.

Inclosing,Iwanttoacknowledgethesupport

oftheCommissionersandmycolleaguesonthe

Commissionstaff.TheyareprovidingmyOffice

withthetoolsandaccessweneedtobesuccessful

overthelongterm,withanappropriatelevelof

independenceasenvisionedbyCongresswhenit

createdtheOffice.

IampleasedtosubmitthisReportonObjectives

forFiscalYear2016onbehalfoftheOfficeofthe

InvestorAdvocate,andIwouldbehappytoansweranyquestionsfromMembersofCongress.

Sincerely,

RickA.Fleming

InvestorAdvocate

2 | O F F I C E O F T H E I N V E S T O R A D V O C A T E


9/52

OBJECTIVES OF THEINVESTOR ADVOCATE

AssetforthinExchangeActSection4(g)

(4),15U.S.C.§78d(g)(4),theInvestor

Advocateisrequiredtoperformthe

followingfunctions:

(A) assistretailinvestorsinresolvingsignificant

problemssuchinvestorsmayhavewiththe

CommissionorwithSROs;

(B) identifyareasinwhichinvestorswouldben-

efitfromchangesintheregulationsofthe

CommissionortherulesofSROs;

(C) identifyproblemsthatinvestorshavewith

financialserviceprovidersandinvestment

products;

(D) analyzethepotentialimpactoninvestors

ofproposedregulationsoftheCommission

andrulesofSROs;and

(E) totheextentpracticable,proposetothe

Commissionchangesintheregulationsor

ordersoftheCommissionandtoCongress

anylegislative,administrative,orpersonnel

changesthatmaybeappropriatetomitigate

problemsidentifiedandtopromotethe

interestsofinvestors.

ASSISTING RETAIL INVESTORS

ExchangeActSection4(g)(4)(A)directstheInvestor

Advocatetoassistretailinvestorsinresolving

significantproblemssuchinvestorsmayhave

withtheCommissionorwithSROs. 6Tohelp

accomplishthatobjective,theInvestorAdvocate

hasappointedanOmbudsmanto,amongother

things,actasaliaisonbetweentheCommission

andanyretailinvestorinresolvingproblemsthat

retailinvestorsmayhavewiththeCommissionor

withSROs.7 TheOmbudsmanisalsorequired

to“submitasemiannualreporttotheInvestor

AdvocatethatdescribestheactivitiesandevaluatestheeffectivenessoftheOmbudsmanduringthe

precedingyear”(the“Ombudsman’sReport”).8 As

requiredbystatute,theOmbudsman’sReportis

includedwithinthisReportonObjectives. 9

IDENTIFYING AREAS IN WHICH

INVESTORS WOULD BENEFIT FROM

REGULATORY CHANGES

ExchangeActSection4(g)(4)(B)requiresthe

InvestorAdvocatetoidentifyareasinwhich

investorswouldbenefitfromchangesinthe

regulationsoftheCommissionortherulesof

SROs.10 Thisisabroadmandatethatauthorizes

theInvestorAdvocatetoexaminetheentire

regulatoryscheme,includingexistingrulesand

regulations,toidentifythoseareasthatcouldbe

improvedforthebenefitofinvestors.Forexample,

theInvestorAdvocatemaylookattherulesand

regulationsgoverningexistingequitymarket

structuretodeterminewhetheranychangeswould

benefitinvestors.Similarly,theInvestorAdvocate

mayreviewcurrentmunicipalmarketpracticesto

evaluatewhetheranyregulatorychangesmight

benefitinvestors.Theseandsimilarotherconcerns

arediscussedingreaterdetailbelowinthesection

entitledPolicy Agenda for Fiscal Year 2016.



10/52

IDENTIFYING PROBLEMS WITH

FINANCIAL SERVICE PROVIDERS AND

INVESTMENT PRODUCTS

PROPOSING APPROPRIATE CHANGES

TO THE COMMISSION AND TO

CONGRESS

ExchangeActSection4(g)(4)(C)requiresthe ExchangeActSection4(g)(4)(E)providesthat,

InvestorAdvocatetoidentifyproblemsthat totheextentpracticable,theInvestorAdvocateinvestorshavewithfinancialserviceproviders mayproposetotheCommissionchangesinthe

andinvestmentproducts.11 TheInvestor regulationsorordersoftheCommissionand

Advocatecontinuestomonitorinvestorinquiries toCongressanylegislative,administrative,or

andcomplaints,SECandSROstaffreports, personnelchangesthatmaybeappropriateto

enforcementactions,andotherdatatodetermine mitigateproblemsidentifiedandtopromotethe

whichfinancialserviceprovidersandinvestment interestsofinvestors.13Aswestudytheissuesin

productsmaybeproblematic.Asrequiredby ourPolicyAgendaforFiscalYear2016,assetforth

ExchangeActSection4(g)(6),theseproblemswill below,wewilllikelymakerecommendationstothe

bedescribedintheReportsonActivitiestobefiled CommissionandCongressforchangesthatwill

inDecemberofeachyear. mitigateproblemsencounteredbyinvestors.

ANALYZING THE POTENTIAL IMPACT

ON INVESTORS OF PROPOSED RULES

AND REGULATIONS

SUPPORTING THE INVESTOR

ADVISORY COMMITTEE

ExchangeActSection39,asamendedbySection

ExchangeActSection4(g)(4)(D)directsthe 911oftheDoddFrankAct,establishestheInvestor

InvestorAdvocatetoanalyzethepotentialimpact AdvisoryCommittee.14 Asdiscussedingreater

oninvestorsofproposedregulationsofthe detailbelowinthesectionentitledSummary of

CommissionandproposedrulesofSROs. 12 As IAC Recommendations and SEC Responses,the

amatterofroutine,theOfficenowreviewsall purposeoftheCommitteeistoadviseandconsult

significantrulemakingsoftheCommissionand withtheCommissiononregulatorypriorities,

SROs.Italsocommunicateswithinvestorsand issuesimpactinginvestors,initiativestoprotect

theirrepresentativestodeterminethepotential investors,andrelatedmatters.Bystatute,theimpactoninvestorsofproposedrules. InvestorAdvocateisamemberoftheIAC.15 In

addition,theOfficecontinuestoprovidestaffand

operationalsupporttotheIAC.



11/52

POLICY AGENDA FORFISCAL YEAR 2016

ThestatutorymandatefortheOfficeof

theInvestorAdvocateisbroad,butour

resourcesarelimited.Becausewewillbe

unabletoexamineeverypossibleissueindepthin

FiscalYear2016,itwillbenecessarytonarrowour

focustoamanageablenumberofissuessothatwecanadvisepolicymakerseffectivelyandachievethe

greatestimpactforinvestors.

Afterdiscussionswithnumerousknowledgeable

individuals,bothinsideandoutsidetheCommission,

andafterdueconsideration,theInvestorAdvocate

hasdeterminedthattheOfficewillfocusonthe

followingissuesduringFiscalYear2016:

§ EquityMarketStructure

§ MunicipalMarketReform

§ FiduciaryDuty

§ DisclosureEffectiveness

§ Millennials

§ RetirementReadiness

§ ShareholderRightsandCorporateGovernance

§ FinancialReportingandAuditing

Someoftheitemslistedabovemayappear

familiarbecausetheywereonthepolicyagenda

forthepreviousfiscalyear.Theyremainonthe

agendaforFiscalYear2016becausetheywarrant

continuedconsiderationinlightoftheirmagnitude.

Undoubtedly,otherissueswillarisethatrequire

theattentionoftheOffice,buttheaforementioned

issueswillremainonourpolicyagenda.

EQUITY MARKET STRUCTURE

Asnotedinlastyear’sReportonObjectives,

thesecondarymarketforU.S.listedequities

hasbecomedispersedandcomplex,partlyas

aresultofthedecadeslongtransitionfroma

marketstructuredominatedbymanualtrading

toamarketstructurecharacterizedprimarilyby

automatedtrading.16 Theevolutionoftechnologies

forgenerating,routing,andexecutingordershas

enhancedthespeed,capacity,andsophisticationof

thetradingfunctionsthatareavailabletomarket

participants.17Additionally,tradingvolumehas

becomedispersedamongmanytradingcentersthat

competefororderflowinthesamestocks,and

tradingcentersareofferingawiderangeofservices

designedtoattractdifferenttypesofmarketpartici-

pantswithvaryingtradingneeds.18

Regulatoryactionshavealsocontributedto

changesinequitymarketstructure—forexample,

RegulationNMS(adoptedin2005), 19 Regulation

ATS(adoptedin1998),20 theOrderHandling

Rules(adoptedin1996),21 andcertainenforcement

actions.Inparticular,theequitymarkethasevolved

significantlysincetheadoptionofRegulationNMS,

whichwasintendedtomodernizeandstrengthen

theregulatorystructureoftheU.S.equity

markets.22 RegulationNMSwasalsointendedto

“protectinvestors,promotefaircompetition,and

enhancemarketefficiency.”23 TheCommissionis

evaluatingtheseregulationsaspartofitscompre-

hensivereviewofequitymarketstructure,and


http:///reader/full/trading.16http:///reader/full/trading.16http:///reader/full/participants.17http:///reader/full/participants.17http:///reader/full/needs.18http:///reader/full/needs.18http:///reader/full/markets.22http:///reader/full/markets.22http:///reader/full/trading.16http:///reader/full/participants.17http:///reader/full/needs.18http:///reader/full/markets.22


12/52

severalSROshavealsojoinedthepublicdiscussion

regardingreformsthatmightbenefitinvestorsand

othermarketparticipants.

InMay2015,theCommission’srecentlyformed

EquityMarketStructureAdvisoryCommittee(the

“EMSAC”)metforthefirsttimetodiscussand

debatethestructureandoperationsoftheU.S.

equitiesmarket.Underitscharter,theEMSAC

willprovideadviceandrecommendationstothe

Commissionspecificallyrelatedtoequitymarket

structureissues.24TheEMSACiscurrentlyconsid-

eringtheimplicationsofRule611ofRegulation

NMS,alsoknownasthe“OrderProtectionRule”

orthe“TradeThroughRule,”25andhaspublicly

indicatedaninterestinevaluatingthecomplex

interactionbetweenRule611andotherpartsofRegulationNMS,includingorderexecutionand

routinginformationunderRules605and606,

accessfeesunderRule610,andonecentminimum

pricingunderRule612.26

SeveralSROshavealsopubliclyproposedreforms

toRegulationNMSthatcouldpotentiallyprovide

benefitstoinvestors.InDecember2014,Inter-

continentalExchange,Inc.,asparentcompany

ofthreeexchanges,proposeda‘grandbargain’

toreducethemaximumexchangeaccessfeesunderRule610from30centsto5centsper100

sharesinreturnfora“tradeat”rulethatwould

givemoreprecedencetoexchangesdisplayingthe

bestordersunderRule611.27 InJanuary2015,

BATSGlobalMarkets,Inc.(“BATS”),asparent

companyoffourexchanges,filedaPetitionfor

Rulemaking(“Petition”)withtheCommissionto

amendRegulationNMSinwaysitbelieveswould

enhancethequalityoftheU.S.equitymarketsto

thebenefitoflongterminvestors.28 InitsPetition,

BATSproposedtoreduceaccessfees,enhancetransparencybyrequiringbrokerstobetterdisclose

theirexecutionquality,andreducefragmentation

bydenyingsmalltradingcenterscertainadvantages

currentlyaffordedbyRegulationNMS.Related

tothepublicdiscourseonaccessfees,inFebruary

2015,theNasdaqStockMarketLLC(“Nasdaq”)

implementedanexperimentalpricingschedule

toloweraccessfeesfor14securitiestradingon

itsmarket.29 Nasdaqbeganprovidingstatistical

reportsontheeffectsoftheexperimentinMarch

2015andhascommittedtocontinuemakingsuch

datapubliclyavailable.30

AsnotedinBATS’sPetition,enhancements

toRegulationATSarealsounderdiscussion.

Currently,around35%ofmarketvolumeinNYSE

andNasdaqlistedstocksisexecutedindarkalter-

nativetradingsystemsandbrokerdealerplatforms,

ratherthanonlitvenues.31 Thesevenuesarenot

requiredtodisclosetheirrulesofoperationto

theircustomersorthepublic,andtheytypically

onlyprovidelimitedinformationabouthowthey

operate.

32

Greaterinformationabouttheoperationofthesevenuescouldallowsophisticatedinvestors

tobettercomparethetradingvenuesanddetermine

whichvenuesandorderroutingproductsmeet

theirtradingneeds.

Othermarketparticipants,includingasset

managers,havealsovoicedopinionsandsugges-

tionsforhowtheybelievethemarketcouldbe

adjustedtobetterserveinvestors.Forexample,in

testimonybeforetheSenateBankingCommittee,

theGlobalHeadofTradingforInvescoLtd.,KevinCronin,calledforfairerdisseminationofmarket

datatoallmarketparticipants,theeliminationof

makertakerpricing,andotherreforms.33

InMay2015,theCommissionapproveda

proposalbythenationalsecuritiesexchanges

andtheFinancialIndustryRegulatoryAuthority

(“FINRA”)foratwoyearpilotprogramthat

wouldwidentheminimumquotingandtrading

increments—or“ticksizes”—forstocksofsome

smallercompanies.34

TheCommissionintendstousethepilot,whichisscheduledtobeginonMay

6,2016,toassesswhetherwiderticksizesenhance

themarketqualityofthesestocksforthebenefit

ofissuersandinvestors.Datageneratedduringthe

pilotwillbereleasedpubliclyonanaggregated

basis,andtheexchangesandFINRAwillsubmit


http:///reader/full/issues.24http:///reader/full/investors.28http:///reader/full/market.29http:///reader/full/available.30http:///reader/full/venues.31http:///reader/full/venues.31http:///reader/full/operate.32http:///reader/full/operate.32http:///reader/full/reforms.33http:///reader/full/reforms.33http:///reader/full/companies.34http:///reader/full/companies.34http:///reader/full/issues.24http:///reader/full/investors.28http:///reader/full/market.29http:///reader/full/available.30http:///reader/full/venues.31http:///reader/full/operate.32http:///reader/full/reforms.33http:///reader/full/companies.34


13/52

theirinitialassessmentonthepilot’simpactlater

thatyear.

InFiscalYear2016,wewillmonitorpublic

comments,reviewdata,andotherwiseassessthe

variousongoinginitiativesinvolvingequitymarket

structure.Forexample,wewillreviewrecommen-

dationsgeneratedbytheEMSAC,andwewilllook

forwaystoensurethattheEMSACappropriately

considerstheviewsandneedsofindividualand

institutionalinvestorsduringitswork.Wewillalso

evaluatehowindividualandinstitutionalinvestors

maybeaffectedbyvariousregulatoryproposals,

includingthePetitionforRulemakingcurrently

beforetheCommission.Finally,wewillmonitor

publiccommentaryontheapprovedticksizepilot

programandpreparetoreviewthedataproducedinthefollowingfiscalyear.

Inadditiontomonitoringongoinginitiatives,

wewillundertakeourownanalysisofpotential

marketstructurereforms.Wewillconsider

numerousquestions,includingthefollowing:

§ Whatarethenegativeimpactsoninvestorsfrom

thecurrentequitymarketstructure?

§ Comparedtothestatus quo,howmightthe

variousproposalsbetterserveinvestors?§ Howcouldweimproveliquidityandprice

discovery?

§ Cancurrentmarketcomplexitybesignificantly

addressedthroughmorefulsomedisclosureof

ATSoperations,tradingvenuerouting,and

thequalityofexecutionservices,oraremore

prescriptivemeasuresneeded?

§ Coulda“tradeat”ruleserveinvestorsby

furtherencouragingthedisplayoflimitorders

onexchanges,orarethevaryingneedsof

investorsbetterservedwithsomeleveloffragmentation,includingamongdarkpools?

§ Dointermediaries’existingconflictsofinterest

harminvestors,andhowcouldweaddressthat

concern?

§ Couldloweringexchangeaccessfeesandrebates

improvemarketqualityforinvestors?

LikeothersattheCommission,theOfficeofthe

InvestorAdvocateissensitivetothefactthat

marketstructureissuesarecomplexandrequire

abroadunderstandingofstatutoryrequirements,

economicprinciples,andpracticaltradingconsider-

ations.35WearealsomindfuloftheCommission’s

threepartmissiontoprotectinvestors,maintain

fair,orderly,andefficientmarkets,andfacilitate

capitalformation.However,whilewerecognize

thatcompetinginterestsmustbebalancedfor

marketstoworkefficiently,inthecomingyearwe

willcontinuetofocusononeoverridingconcernas

weexamineequitymarketstructureissues:whether

theequitymarkettodayisfairforinvestorslarge

andsmall.Thisisanindispensablefoundationfor

vibrantmarketsandrobustcapitalformation.

MUNICIPAL MARKET REFORM

AccordingtoFederalReserveBoardestimates,

thevalueofoutstandingmunicipalbondstotaled

approximately$3.65trillionattheendofthe

fourthquarterof2014.36 Roughly42percentof

municipalsecuritieswerehelddirectlybyindividual

investorsasofDecember31,2014,andanother28

percentwereownedindirectlybyretailinvestors

throughmutualfunds,moneymarketfunds,or

closedendfundsandexchangetraded funds.37

Municipalsecuritiescanbeanimportantpartofinvestors’retirementplansandavaluablesourceof

fundsforlocalprojectsthataffectinvestors’quality

oflifeintheircommunities.

OnJuly31,2012,theCommissionissueda

ReportontheMunicipalSecuritiesMarket(the

“MunicipalMarketReport”),whichincluded

severalrecommendationstobeconsideredfor

improvementofthemunicipalsecuritiesmarket.38

Inpart,theMunicipalMarketReportdiscussed

andmaderecommendationsrelatingtopricetransparency,transactioncosts,anddealerpricing

obligationstocustomers.39

AccordingtotheMunicipalMarketReport,the

relativeilliquidityandlackofpricetransparencyin

municipalsecuritieshasinhibitedtheefficiencyof


http:///reader/full/ations.35http:///reader/full/ations.35http:///reader/full/funds.37http:///reader/full/funds.37http:///reader/full/market.38http:///reader/full/market.38http:///reader/full/customers.39http:///reader/full/customers.39http:///reader/full/ations.35http:///reader/full/funds.37http:///reader/full/market.38http:///reader/full/customers.39


14/52

themunicipalsecuritiesmarket.40 Whilemunicipal

bonddealersgenerallyhaveaccesstoavarietyof

sourcesofmunicipalsecuritiespricinginformation,

retailinvestorshaveaccesstorelativelylittlepricing

information.41 Althoughsomemunicipalsecurities

pricinginformationisavailableonpubliclyacces-

siblewebsites,retailinvestorsmaynotbeawareof

thewebsitesormaynotbeabletoeffectivelyuse

thembecausetheylackthenecessaryexpertise.42

TheMunicipalMarketReportconcludedthat

“thewideravailabilityofmorerobustpricing

informationshouldfacilitatetheabilityofmarket

professionalsandtheircustomerstodeterminethe

bestpriceforasecurityandwheretoobtainit.”

TheMunicipalMarketReportmadeavarietyof

recommendationstoimprovepricetransparency,fairpricing,andbestexecutionobligations.43

TheOfficeoftheInvestorAdvocatesupportsthe

adoptionofthesetypesofreformsandcontinuesto

exploreandencouragedevelopmentsintheseareas.

Forexample,theMunicipalMarketReport

recommendedthattheMunicipalSecurities

RulemakingBoard(“MSRB”)“considerarule

thatwouldrequiremunicipalbonddealerstoseek

‘bestexecution’ofcustomerordersformunicipal

securities.”44

OnAugust6,2013,theMSRBissuedaconceptreleaseseekingcommentsonthis

recommendation,45andtheMSRBsubsequently

proposedabestexecutionrule. 46 OnDecember

5,2014,theSECissuedanorderapprovingthe

proposedamendments,andtherulechangesareset

tobecomeeffectiveonDecember7,2015. 47

Onceeffective,theMSRB’sbestexecutionrule

willrequiremunicipalsecuritiesdealerstouse

“reasonablediligence”inseekingtoobtainfor

theirretailcustomersthemostfavorabletermsreasonablyavailableunderprevailingmarket

conditions.48

TheMunicipalMarketReportalsorecommended

thattheMSRBdisclosemarkupormarkdown

informationtocustomers.49 MSRBrulesalready

requiremunicipalbonddealersactingasagents

todiscloseonthetransactionconfirmationthe

amountofanyremunerationreceivedfromthe

customer.50However,thereisnocomparable

requirementifthemunicipalsecuritiesdealer

isactingasaprincipal(bysellingsecuritiesout

ofitsowninventory).51 TheMunicipalMarket

Reportconcludedthatbecausemunicipalbond

dealersexecutealmostallcustomertransactionsin

aprincipalcapacity,customersreceiveverylittle

confirmationdisclosureoftheirdealer’scompen-

sation.52 Thus,theMunicipalMarketReport

recommendedtheMSRB“considerrequiring

municipalbonddealerstodisclosetocustomers,on

confirmationsforrisklessprincipaltransactions,the

amountofanymarkupormarkdown.”

53

In2014,theMSRBannouncedthatitwould

developaproposalregardingdisclosureofinfor-

mationbydealerstoretailcustomerstohelp

themindependentlyassessthepricestheywere

receiving.54 OnNovember17,2014,theMSRB

andFINRAreleasedcompanionproposalsto

requiredisclosureofpricingreferenceinformation

oncustomerconfirmationsfortransactionsinfixed

incomesecurities.55 Underbothproposals,dealers

inretailsizedfixedincometransactionswouldberequiredtodiscloseonacustomerconfirmation

thepriceofcertainsamedayprincipaltradesinthe

samesecurityandthedifferencebetweenthatprice

andthecustomer’sprice.56

WerecognizetheeffortsputforthbytheMSRB,

FINRA,andtheSECinaddressingthemunicipal

marketshortcomingshighlightedintheMunicipal

MarketReport,includingbestexecutionand

pricingreference.InFiscalYear2016,wewill

continuetoworkwithothersattheCommissionandtherelevantSROstoencourageadditional

reformsdesignedtobenefitinvestorsinthe

municipalsecuritiesmarkets.Inparticular,wewill

explorewaystoimprovepretradepricetrans-

parencyandtheaccountingpracticesofissuers.


http:///reader/full/market.40http:///reader/full/market.40http:///reader/full/information.41http:///reader/full/information.41http:///reader/full/expertise.42http:///reader/full/expertise.42http:///reader/full/obligations.43http:///reader/full/obligations.43http:///reader/full/conditions.48http:///reader/full/conditions.48http:///reader/full/customers.49http:///reader/full/customers.49http:///reader/full/inventory).51http:///reader/full/inventory).51http:///reader/full/sation.52http:///reader/full/sation.52http:///reader/full/receiving.54http:///reader/full/receiving.54http:///reader/full/securities.55http:///reader/full/securities.55http:///reader/full/price.56http:///reader/full/price.56http:///reader/full/market.40http:///reader/full/information.41http:///reader/full/expertise.42http:///reader/full/obligations.43http:///reader/full/conditions.48http:///reader/full/customers.49http:///reader/full/inventory).51http:///reader/full/sation.52http:///reader/full/receiving.54http:///reader/full/securities.55http:///reader/full/price.56


15/52

Totheextentthatlegislationisrequiredtoimprove

disclosuresandpracticesinthismarket,wewill

makerecommendationstoCongressasappropriate.

FIDUCIARY DUTY

Manyindividualinvestorsrelyonbrokerdealers

andinvestmentadvisersforinvestmentadviceto

helpthemmanagetheirinvestmentsandmeettheir

financialgoals.57Generally,theseinvestorsexpect

thattheinvestmentadvicetheyreceiveisprovided

intheirbestinterest.58 Someinvestorsmaynotbe

aware,however,thatbrokerdealersandinvestment

advisersaresubjecttodifferentstandards

underfederallawwhenprovidingadviceabout

securities.59 Indeed,manyinvestorsareconfused

aboutthedifferentstandardsofcarethatapply

toinvestmentadvisersandbrokerdealerswithrespecttotheinvestmentadvicetheyprovide.60

Thisapparentconfusionhasstokedconcernamong

regulatorsandlawmakersinrecentyears.61

Whiletheregulatoryregimesforinvestment

advisersandbrokerdealersarebothdesignedto

protectinvestors,theydosoindifferentways. 62

Generally,thisisbecausethelegalstandardsof

conductforbrokerdealersandinvestmentadvisers

developedoutofdifferingandcomplexhistories.63

Whilebothsetsofstandardsevolvedinlargepartfromthegeneralantifraudprovisionsofthe

respectivefederalsecuritieslaws,theywereapplied

differentlytothetwoindustries.64 Thestandardfor

brokerdealersisrootedinspecificCommissionand

FINRArulesthataresupplementedbyinterpretive

guidance.65 Incontrast,theinvestmentadviser

standardevolvedprimarilythroughCommission

andstaffinterpretivepronouncementsunderthe

antifraudprovisionsoftheInvestmentAdvisersAct

of1940(the“AdvisersAct”),andthroughcaselaw

andenforcementactions.66

UndertheAdvisersAct,aninvestmentadviserisa

fiduciarywhosedutyistoservethebestinterestsof

itsclients.67 Thefiduciarystandardappliestothe

totalityofaninvestmentadviser’srelationshipwith

itsclientsandprospectiveclients,anditimposes

uponaninvestmentadviserthe“affirmativeduty

of‘utmostgoodfaith,andfullandfairdisclosure

ofallmaterialfacts,’aswellasanaffirmative

obligationto‘employreasonablecaretoavoid

misleading’”itsclientsandprospectiveclients.68

Thefiduciarystandardencompassesthedutiesof

loyaltyandcare.69 Thedutyofloyaltyrequires

aninvestmentadvisertoservethebestinterests

ofitsclients,whichincludesanobligationnotto

subordinateaclient’sintereststoitsown.70 The

dutyofcarerequiresaninvestmentadviserto

“makeareasonableinvestigationtodeterminethat

itisnotbasingitsrecommendationsonmaterially

inaccurateormisleadinginformation.” 71 In

practicalterms,thefiduciarystandardrequiresan

adviserwithamaterialconflictofinteresttoeithereliminatethatconflictorfullydisclosetoitsclients

allmaterialfactsrelatingtotheconflict.72

Brokerdealersoperateunderadifferentregulatory

regimethaninvestmentadvisers.Forexample,

brokerdealersthatconductbusinesswiththe

publicgenerallymustbecomemembersof

FINRA.73Inaddition,undertheantifraudprovi-

sionsofthefederalsecuritieslawsandSROrules,includingSROrulesgoverning“justand

equitableprinciplesoftradeandhighstandardsof

commercialhonor,”brokerdealersarerequiredto

dealfairlywiththeircustomers.74Althoughbroker

dealersgenerallyarenotsubjecttoafiduciaryduty


http:///reader/full/goals.57http:///reader/full/goals.57http:///reader/full/interest.58http:///reader/full/interest.58http:///reader/full/securities.59http:///reader/full/securities.59http:///reader/full/provide.60http:///reader/full/provide.60http:///reader/full/years.61http:///reader/full/years.61http:///reader/full/histories.63http:///reader/full/histories.63http:///reader/full/industries.64http:///reader/full/industries.64http:///reader/full/guidance.65http:///reader/full/guidance.65http:///reader/full/actions.66http:///reader/full/actions.66http:///reader/full/clients.67http:///reader/full/clients.67http:///reader/full/clients.68http:///reader/full/clients.68http:///reader/full/conflict.72http:///reader/full/conflict.72http:///reader/full/FINRA.73http:///reader/full/FINRA.73http:///reader/full/customers.74http:///reader/full/customers.74http:///reader/full/goals.57http:///reader/full/interest.58http:///reader/full/securities.59http:///reader/full/provide.60http:///reader/full/years.61http:///reader/full/histories.63http:///reader/full/industries.64http:///reader/full/guidance.65http:///reader/full/actions.66http:///reader/full/clients.67http:///reader/full/clients.68http:///reader/full/conflict.72http:///reader/full/FINRA.73http:///reader/full/customers.74


16/52

underthefederalsecuritieslaws,courtsnonetheless

havefoundbrokerdealerstohaveafiduciaryduty

undercertaincircumstances.75Moreover,broker

dealersaresubjecttostatutory,Commission,and

SROrequirementsdesignedtopromotebusiness

conductthatprotectscustomersfromabusive

practices,includingpracticesthatmaybeunethical

butnotnecessarilyfraudulent.76 Thethreeways

thatthefederalsecuritieslawsandrules,aswell

asSROrules,addressbrokerdealerconflicts

arethroughexpressprohibition,mitigation,or

disclosure.77

Aspartoftheirdutyoffairdealing,brokerdealers

haveanobligationof“suitability,”whichgenerally

requiresabrokerdealertomakerecommenda-

tionsthatareconsistentwiththeinterestsofeachcustomer.78Inotherwords,brokerdealers

shouldrecommendonlythoseinvestmentsthatare

suitableforacustomerinlightofthecustomer’s

risktolerance,liquidityneeds,investmenthorizon,

andotherfactorsthatarespecifictotheindividual

customer.79Brokerdealersalsoarerequired,under

certaincircumstances,todisclosematerialconflicts

ofinteresttotheircustomers—insomecases,at

thetimethetransactioniscompleted80—andthe

federalsecuritieslawsandFINRArulesprohibit

brokerdealersfromparticipatingincertaintransac-tionsinvolvingparticularlyacutepotentialconflicts

ofinterest.81

The Section 913 Study

Section913oftheDoddFrankActrequiredthe

Commissiontoconductastudyanalyzingthe

obligationsofbrokers,dealers,andinvestment

advisers.82 Amongotherthings,Section913

directedtheCommissiontoevaluate:(1)theeffec-

tivenessofexistinglegalorregulatorystandards

ofcare(imposedbytheCommission,anationalsecuritiesassociation,andotherfederalorstate

authorities)forprovidingpersonalizedinvestment

adviceandrecommendationsaboutsecuritiesto

retailcustomers;and(2)whethertherearelegal

orregulatorygaps,shortcomings,oroverlapsin

legalorregulatorystandardsintheprotection

ofretailcustomersrelatingtothestandardsof

careforprovidingpersonalizedinvestmentadvice

aboutsecuritiestoretailcustomersthatshouldbe

addressedbyruleorstatute.83

OnJanuary21,2011,SECstaffissuedtherequired

StudyonInvestmentAdvisersandBrokerDealers

(the“Study”).84Itcontainedanumberofrecom-

mendationsdesignedtoincreaseinvestorprotection

andreduceinvestorconfusion.Inaddressingthe

standardofcarecriteriaenumeratedabove,the

Studyrecommended,amongotherthings,thatthe

Commissionpromulgaterulestoprovidethat:

[T]hestandardofconductforallbrokers,

dealers,andinvestmentadvisers,when

providingpersonalizedinvestmentadviceaboutsecuritiestoretailcustomers(and

suchothercustomersastheCommission

maybyruleprovide),shallbetoactin

thebestinterestofthecustomerwithout

regardtothefinancialorotherinterestof

thebroker,dealer,orinvestmentadviser

providingtheadvice.85

Inotherwords,theStudyrecommendedthat

theCommissionimplementauniformfiduciary

standardforbrokerdealersandinvestmentadvisers.TheStudyurgedtheCommission

toconsider“rulemakingsthatwouldapply

expresslyanduniformlytobothbrokerdealers

andinvestmentadvisers,whenprovidingperson-

alizedinvestmentadviceaboutsecuritiestoretail

customers,afiduciarystandardno less stringent

thancurrentlyappliedunder”certainprovisionsof

theAdvisersAct(emphasisadded).86

TheStudyacknowledged,however,thatSection913

preventstheCommissionfromapplyingafiduciarystandardinawaythatwouldunderminecertain

businesspracticesofbrokerdealers.Thus,anyrule

adoptedbytheCommissionmustaccommodate

thereceiptofcommissionbasedcompensation(or

otherstandardcompensation)andallowbroker

dealerstosellonlyproprietaryoralimitedrange


http:///reader/full/circumstances.75http:///reader/full/circumstances.75http:///reader/full/fraudulent.76http:///reader/full/fraudulent.76http:///reader/full/disclosure.77http:///reader/full/disclosure.77http:///reader/full/customer.78http:///reader/full/customer.78http:///reader/full/customer.79http:///reader/full/customer.79http:///reader/full/interest.81http:///reader/full/interest.81http:///reader/full/advisers.82http:///reader/full/advisers.82http:///reader/full/statute.83http:///reader/full/statute.83http:///reader/full/Study%E4%A9%AE84http:///reader/full/Study%E4%A9%AE84http:///reader/full/advice.85http:///reader/full/advice.85http:///reader/full/added).86http:///reader/full/added).86http:///reader/full/circumstances.75http:///reader/full/fraudulent.76http:///reader/full/disclosure.77http:///reader/full/customer.78http:///reader/full/customer.79http:///reader/full/interest.81http:///reader/full/advisers.82http:///reader/full/statute.83http:///reader/full/Study%E4%A9%AE84http:///reader/full/advice.85http:///reader/full/added).86


17/52

ofproducts.87 Inaddition,theCommissioncannot

imposeadutyofcareorloyaltythatcontinuesafter

thebrokerdealerhasstoppedprovidingperson-

alizedinvestmentadvicetoaretailcustomer.88

Mindfuloftheseconsiderations,theStudymade

severalrelatedfiduciarydutyrecommendations

thatwould“suggestapathtowardimplementinga

uniformfiduciarystandardforinvestmentadvisers

andbrokerdealerswhenprovidingpersonalized

investmentadviceaboutsecuritiestoretail

customers.”89 Theserecommendationsaddressed

thestandardofconduct,thedutyofloyalty,

principaltrading,thedutyofcare,personalized

investmentadviceaboutsecurities,andinvestor

educationwithrespecttoauniformfiduciary

standard.

90

TheStudyarguedthattheuniformfiduciary

standardandrelateddisclosurerequirementsmight

offerpotentialbenefits,including:heightened

investorprotection;heightenedinvestorawareness;

aflexiblestandardthatcouldaccommodate

differentexistingbusinessmodelsandfeestruc-

tures;preservationofinvestorchoice;nolikely

decreaseininvestors’accesstoexistingproducts

orservicesorserviceproviders;thatinvestment

advisersandbrokerdealerswouldcontinuetobesubjecttoalloftheirexistingdutiesunder

applicablelaw;andtherequirementthatinvestors

receiveinvestmentadvicethatisgivenintheirbest

interest,underauniformstandard,regardlessof

theregulatorylabel(brokerdealerorinvestment

adviser)oftheprofessionalprovidingthe

investmentadvice.91

SEC Request for Data

OnMarch1,2013,theCommissionissued

arequestfordataandotherinformation,inparticularquantitativedataandeconomicanalysis,

relatingtothebenefitsandcoststhatcouldresult

fromvariousalternativeapproachesregarding

thestandardsofconductandotherobligations

ofbrokerdealersandinvestmentadvisers.92 The

Commissionsoughtthisinformationtoinformits

considerationofalternativestandardsofconduct

forbrokerdealersandinvestmentadviserswhen

providingpersonalizedinvestmentadviceabout

securitiestoretailcustomers,aswellastoinform

itsconsiderationof“potentialharmonization”of

certainotheraspectsoftheregulationofbroker

dealersandinvestmentadvisers.93

Investor Advisory Committee

Recommendations

OnNovember22,2013,theInvestorAdvisory

Committeeadoptedasetofrecommendations

encouragingtheSECtoestablishafiduciaryduty

forbrokerdealerswhentheyprovidepersonalized

investmentadvicetoretailinvestors.94TheIAC’s

preferredapproachtoaccomplishingthisobjective

wouldinvolvenarrowingtheexclusionforbrokerdealerswithinthedefinitionof“investment

adviser”undertheAdvisersAct. 95 Ineffect,this

wouldrequireanyonewhoprovidespersonalized

investmentadvicetobecomeregisteredasan

investmentadviserandsatisfythefiduciarydutyof

anadviser.

Asanalternative,theIACrecommendedthe

adoptionofaruleunderSection913ofthe

DoddFrankActtorequirebrokerdealerstoact

inthebestinterestsoftheirretailcustomerswhenprovidingpersonalizedinvestmentadvice,with

sufficientflexibilitytopermitcertainsalerelated

conflictsofinterestthatarefullydisclosedand

appropriatelymanaged.96 Inaddition,theIAC

recommendedtheadoptionofauniform,plain

Englishdisclosuredocumenttobeprovidedto

customersandpotentialcustomersofbroker

dealersandinvestmentadvisers.97 Thedocument

woulddiscloseinformationaboutthenatureof

servicesoffered,feesandcompensation,conflictsof

interest,andthedisciplinaryrecordofthebrokerdealerorinvestmentadviser.98

DOL Fiduciary Rule Re-Proposal

OnApril14,2015,theU.S.DepartmentofLabor

(“DOL”)reproposedaregulationtodefineand

clarifywhowouldbeafiduciaryofanemployee


http:///reader/full/products.87http:///reader/full/products.87http:///reader/full/customer.88http:///reader/full/customer.88http:///reader/full/standard.90http:///reader/full/standard.90http:///reader/full/advisers.92http:///reader/full/advisers.92http:///reader/full/advisers.93http:///reader/full/advisers.93http:///reader/full/investors.94http:///reader/full/investors.94http:///reader/full/managed.96http:///reader/full/managed.96http:///reader/full/advisers.97http:///reader/full/advisers.97http:///reader/full/adviser.98http:///reader/full/adviser.98http:///reader/full/products.87http:///reader/full/customer.88http:///reader/full/standard.90http:///reader/full/advisers.92http:///reader/full/advisers.93http:///reader/full/investors.94http:///reader/full/managed.96http:///reader/full/advisers.97http:///reader/full/adviser.98


18/52

benefitplanundertheEmployeeRetirement

IncomeSecurityActof1974(“ERISA”)asa

resultofprovidinginvestmentadvicetotheplan

oritsparticipantsorbeneficiaries(the“2015

Proposal”).99 The2015Proposalwouldalso

applytothefiduciaryofaplanundertheInternal

RevenueCode,includinganindividualretirement

account(“IRA”).100

Ifadopted,the2015Proposalwouldaffect“a

widerarrayofadvicerelationshipsthantheexisting

ERISAand[InternalRevenue]Coderegula-

tions,whichwouldbereplaced.”101 Itwould

applythefiduciarystandardtoanypersonwho

providesinvestmentadviceorrecommendations

toanemployeebenefitplan,planfiduciary,plan

participantorbeneficiary,IRA,orIRAownerunderbothERISAandtheInternalRevenueCode.

Aconsequenceofthe2015Proposal,then,would

betoexpandthenumberandcategoriesofpersons

whowouldbeconsideredfiduciariesunderERISA

toencompassmanybrokerdealers,individual

investmentprofessionals,andpensionconsultants

notpreviouslysubjecttoERISA.

ExistingSection3(21)(A)ofERISAcurrently

providesthatapersonisafiduciarywithrespect

toanemployeebenefitplantotheextentthatsuchperson(i)exercisesanydiscretionaryauthorityor

discretionarycontrolwithrespecttomanagement

ofsuchplanorexercisesanyauthorityorcontrol

withrespecttomanagementordispositionofits

assets;(ii)rendersinvestmentadviceforafeeor

othercompensation,directorindirect,withrespect

toanymoneysorotherpropertyofsuchplan,or

hasanyauthorityorresponsibilitytodoso;or(iii)

hasanydiscretionaryauthorityordiscretionary

responsibilityintheadministrationofsuchplan. 102

However,aregulationthatDOLissuedin1975narrowedthescopeofthestatutorydefinitionof

fiduciaryinvestmentadvicebycreatingafivepart

testtobesatisfiedbeforeapersoncanbetreated

asrenderinginvestmentadviceforafee. 103 Under

thatregulation,advicefromapersonwhoisnot

afiduciaryunderanotherprovisionofthestatute

willconstitute“investmentadvice”ifthatperson

(1)rendersadviceastothevalueofsecuritiesor

otherproperty,ormakesrecommendationsasto

theadvisabilityofinvestingin,purchasingorselling

securitiesorotherproperty(2)onaregularbasis

(3)pursuanttoamutualagreement,arrangement

orunderstanding,withtheplanoraplanfiduciary,

(4)thattheadvicewillserveasaprimarybasisfor

investmentdecisionswithrespecttoplanassets,

and(5)thattheadvicewillbeindividualized,

basedontheparticularneedsoftheplanorIRA. 104

Tobeconsideredafiduciarywithrespecttoany

particularinstanceofinvestmentadviceunderthis

formulation,apersonmustsatisfyeveryelement

ofthefiveparttestwithrespecttotheparticular

advicerecipientorplanatissue.105

In2010,DOLproposedanewregulation

designedtoreplacethefiveparttestwitha

differentdefinitionofwhatwouldconstitute

fiduciaryinvestmentadviceforafee(the“2010

Proposal”).106 The2010Proposalalsospecified

carveoutsfortypesofconductthatwouldnot

resultinfiduciarystatus.107 The2010Proposal

generatednumerouscommentsandengendered

vigorousdebate.108 Afterconsideringthecomments

received,andgiventhesignificanceofthat

rulemaking,DOLdeterminedtospendadditionaltimereviewingtheproposalandtoissueanew

proposedregulationforcomment. 109

Therecentlyreproposedrule—the2015

Proposal—revisesthe2010Proposalbutretains

elementsofthatproposal’sframework.110 The

2015Proposalexpandsthedefinitionoffiduciary

investmentadvicebutalsospecifiesaseriesof

carveoutsforcommunicationsdeemednottobe

fiduciaryinnature.111 Underthe2015Proposal

definition,apersonrendersinvestmentadviceby(1)providinginvestmentrecommendations,

investmentmanagementrecommendations,

appraisalsofinvestments,orrecommendationsof

personstoprovideinvestmentadviceormanage

planassets,and(2)either(a)acknowledging

thefiduciarynatureoftheadvice,or(b)acting


http:///reader/full/Proposal%E4%A9%AE99http:///reader/full/Proposal%E4%A9%AE99http:///reader/full/Proposal%E4%A9%AE99


19/52

pursuanttoanagreement,arrangement,orunder-

standingwiththeadvicerecipientthattheadvice

isindividualizedto,orspecificallydirectedto,the

recipientforconsiderationinmakinginvestment

ormanagementdecisionsregardingplanassets. 112

Wheneversuchadviceisprovidedforafeeorother

compensation,directorindirect,thepersongiving

theadviceisafiduciary.113

The2015Proposalalsoincludesseveralcarve

outsforpersonswhodonotrepresentthatthey

areactingasERISAfiduciaries.Forexample,a

fiduciarydutywouldnotbetriggeredbystatements

orrecommendationsmadetoa“largeplaninvestor

withfinancialexpertise”byacounterpartyacting

inanarmslengthtransaction,theprovisionofan

appraisal,fairnessopinion,orastatementofvaluetoanemployeestockownershipplanregarding

employersecurities,ortheprovisionofinfor-

mationandmaterialsthatconstitute“investment

education”or“retirementeducation.” 114

Moreimportantly,the2015Proposalintroduces

anewBestInterestContractExemption(the“BIC

Exemption”).115 TheproposedBICExemption

wouldconditionrelieffromERISA’sprohibited

transactionrulesontheexpresscontractual

agreementbyadviserstoemployersponsoredbenefitplansandIRAs(andtheadvisers’employing

firms)tobegovernedbyERISAfiduciary

standards.Thus,theproposedBICExemption

wouldprovideconditionalreliefforcommon

compensation(forexample,commissionsand

revenuesharing)thatanadviserandtheadviser’s

employingfirmmightreceiveinconnectionwith

investmentadvicetoretailretirementinvestors. 116

Toreceivesuchcompensation,theBICExemption

wouldrequiretheadviserandthefirmto:

[C]ontractuallyacknowledgefiduciary

status,committoadheretobasic

standardsofimpartialconduct,adopt

policiesandproceduresreasonably

designedtominimizetheharmfulimpact

ofconflictsofinterest,anddisclosebasic

informationontheirconflictsofinterest

andonthecostoftheiradvice. 117

Accordingtothe2015Proposal,theBIC

Exemptionispredicatedontheadviserandfirm’s

agreementtomeetfundamentalobligationsoffair

dealingandfiduciaryconduct; inotherwords,to

giveadvicethatisinthecustomer’sbestinterest,

avoidmisleadingstatements,receive“nomorethan

reasonable”compensation,andcomplywithappli-

cablefederalandstatelawsgoverningadvice. 118

The2015proposalstatesthatthis“principles-

basedapproachalignstheadviser’sinterestwith

thoseoftheplanparticipantorIRAowner,”while

“leavingtheadviserandemployingfirmwiththe

flexibilityanddiscretionnecessarytodetermine

howbesttosatisfythesebasicstandardsinlightoftheuniqueattributesoftheirbusiness.”119

Chair White’s Recent Statements

OnMarch17,2015,SECChairMaryJoWhite

calledfortheimplementationofauniform

fiduciarystandardforbrokerdealersand

investmentadvisersunderSection913ofDodd-

Frank.120 Inendorsingauniformfiduciary

standardforbrokerdealersandinvestment

advisers,ChairWhitestatedthatsucharulemaking

shouldbeaprinciplesbasedstandardrootedinthecurrentfiduciarystandardforinvestment

advisers.121

Atthesametime,ChairWhiteacknowledged

thattherewerecomplexitiesandchallengesthat

accompanysucharulemaking. 122Inparticular,

ChairWhiteidentifiedthreeissuessurrounding

sucharulemaking—howtodefinethestandard,

whatwouldberequiredunderthatstandard,and

howtoensurecomplianceandenforcementofthat

standard.123

U.S. Supreme Court Decision—

Tibble v. Edison Int’l

OnMay18,2015,theU.S.SupremeCourthanded

downaunanimousdecisioninTibble v. Edison

Int’l ,135S.Ct.1823(2015).AlthoughtheCourt’s



20/52

holdinginTibblestrictlyconcernedthetimeliness

ofacomplaint,theCourttooktheopportunity

inthecasetointerpretthenatureofthefiduciary

dutyunderERISA.Id. at1828.TheCourtfound,

amongotherthings,that“ERISA’sfiduciarydutyis

‘derivedfromthecommonlawoftrusts’”andthat,

undertrustlaw,“atrusteehasacontinuingdutyto

monitortrustinvestmentsandremoveimprudent

ones.”Id.at1828(quotingCent. States, Se. &

Sw. Areas Cent. Fund v. Cent. Transp., Inc.,472

U.S.559,570(1985)).AccordingtotheCourt,

this“continuingdutyexistsseparateandapart

fromthetrustee’sdutytoexerciseprudencein

selectinginvestmentsattheoutset.”Id .Therefore,

a“plaintiffmayallegethatafiduciarybreached

thedutyofprudencebyfailingtoproperlymonitor

investmentsandremoveimprudentones.”Id. at1829.

InTibble,thebeneficiariesofadefinedcontri-

butionretirementsavingsplan(the“Plan”)

broughtanERISAactionagainstthefiduciaries

ofthePlantorecoverdamagesforallegedlosses

sufferedbythePlanfromallegedbreachesof

respondents’fiduciaryduties.Id. at1824.Atissue,

amongotherthings,washowrespondents(the

allegedfiduciaries)couldhavebeenconsideredto

haveactedprudentlyinofferingsixhigherpricedretailclassmutualfundsasPlaninvestmentswhen

respondentscouldhaveofferedeffectivelythe

samesixmutualfundsatalowerpriceofferedto

institutionalinvestors.Id.

Infindingthatafiduciaryhasa“continuing

dutyofsomekindtomonitorinvestmentsand

removeimprudentones,”theCourtinTibble

drewfromtrustlaw. Id.at1828.Quotingthe

Restatement(Third)ofTrusts,theCourtobserved

thata“trustee’sdutiesapplynotonlyinmakinginvestmentsbutalsoinmonitoringandreviewing

investments,whichistobedoneinamannerthatis

reasonableandappropriatetotheparticularinvest-

ments,coursesofaction,andstrategiesinvolved.”

Id.(quotingRestatement(Third)ofTrusts,§90,

cmtb(2007)).

Objectives of the Investor Advocate with

Respect to Fiduciary Duty

InlightofChairWhite’sremarksandtherecent

activitybyDOL,theOfficeoftheInvestor

Advocatewillendeavortoprovideavoicefor

investorsasthisimportantissueisaddressedby

policymakers.FortheCommission,itwillbe

especiallychallengingtoreconcilewhatappearto

becontradictorymandatesunderSection913of

theDoddFrankAct—todevelopastandardfor

brokerdealersnolessstringentthantheexisting

standardforinvestmentadvisers,whileaccom-

modatingsalesbasedcompensationandthesale

ofproprietaryproductsorlimitedproductlines.

Section913alsoprohibitstheSECfromrequiring

abrokerdealertohaveacontinuingdutyofcareor

loyaltytothecustomerafterprovidingpersonalizedinvestmentadvice.Thislimitationcouldleadtoa

dutyforbrokerdealersthatislessrigorousthan

thecontinuingdutyappliedtoERISAadvisers

underTibble.

Inatleasttwosignificantways,anilladvisedSEC

rulecouldbeworsethannoruleatall.First,arule

coulddilutetheexistingstandardforinvestment

advisersinanattempttoadopta“harmonized”

standardforbrokerdealers.Second,eventhough

thiseffortisintendedtoreduceinvestorconfusionaboutthedifferingstandardsofcareforinvestment

advisersandbrokerdealers,apoorlydesignedrule

couldcreateevenworseconfusionbypurportingto

giveinvestorstheprotectionofa“fiduciaryduty”

thatis,infact,lessstringentthanthetraditional

fiduciarydutythatappliesinotherrelationships

oftrust.Wewillfighttoavoidtheseoutcomesand

toencouragerulemakingsthatareasstrongas

possibleforinvestors.

DISCLOSUREDisclosureisattheveryheartofoursystemof

securitiesregulationintheUnitedStates.The

Commissionisworkingonanumberofdisclosure

relatedinitiatives,asdescribedbelow.InFiscalYear

2016,theOfficeoftheInvestorAdvocatewillwork

alongsideothersattheCommissiontoimprove



21/52

disclosuretoinvestorsinawidevarietyofcontexts.

Indoingso,wewillseekinputfromusersofdata

andcommunicatetheirneedstopolicymakers.

Investment Company Reporting

Modernization

OnMay20,2015,theCommissionproposed

amendmentstoitsrulesandformstomodernize

thereportinganddisclosureofinformationby

registeredinvestmentcompanies(“funds”). 124 As

theprimaryregulatoroftheassetmanagement

industry,theCommissionreliesoninformation

includedinreportsfiledbyfundsandinvestment

advisersforanumberofpurposes,including

monitoringindustrytrends,informingpolicy

andrulemaking,identifyingrisks,andassisting

Commissionstaffinexaminationandenforcementefforts.125 Asassetsundermanagementand

complexityintheindustryhavegrownoverthe

years,sotoohasthevolumeandcomplexityof

informationthattheCommissionmustanalyzeto

carryoutitsregulatoryduties.126

Forexample,Commissionstaffestimatesthat

therewereapproximately16,619fundsregistered

withtheCommissionasofDecember2014. 127

Commissionstaffalsoestimatesthattherewere

approximately11,500investmentadvisersregisteredwiththeCommission,alongwith

another2,845advisersthatfilereportswiththe

Commissionasexemptreportingadvisers,asof

January2015.128Moreover,atyearend2014,fund

assetsexceeded$18trillion,havinggrownfrom

approximately$4.7trillionattheendof1997. 129

Meanwhile,thefundindustryhasdevelopednew

productstructuresandnewfundtypes,aswell

asincreaseditsuseofderivativesandotheralter-

nativestrategies.130 Althoughthesenewproducts

andstrategiescanoffergreateropportunitiesforinvestorstoachievetheirinvestmentgoals,theycan

alsoaddcomplexitytofunds’investmentstrategies,

amplifyinvestmentrisk,orexposeinvestorsto

otherrisks,suchascounterpartycreditrisk. 131

Inaddition,therehasbeenasignificantincreasein

theuseoftheInternetasatoolfordisseminating

information,andnewtechnologycanbeutilized

toreportandanalyzeinformation. 132 Inresponse

tothesedevelopments,theCommissiongenerally

hasallowedtheuseoftheInternetasaplatform

forprovidingrequireddisclosuretoinvestors. 133

TheCommissionhasalsostartedtousestructured

andinteractivedataformatstocollect,aggregate,

andanalyzedatareportedbyregistrantsand

otherfilers.134 Thesedataformatshaveenabled

theCommissionandotherdatausers,including

investorsandtheirintermediaries,tobettercollect

andanalyzereportedinformation. 135

Amidtheseindustrychangesandtechnological

advances,theCommissionrecognizedaneedto

improvethetypeandformatoftheinformationthat

fundsprovidetotheCommissionandtoinvestors.136

TheCommissionalsorecognizedtheneedto

improveitsmonitoringofthefundindustry.137

Accordingly,theCommissionhasproposedasetof

reportinganddisclosurereformsdesignedtotake

advantageofthebenefitsofadvancedtechnology

andtomodernizethefundreportingregime.138 The

proposedreformsseektoincreasethetransparency

offundportfoliosandinvestmentpracticestothe

Commissionandtoinvestorsbytakingadvantage

oftechnologicaladvances.139Wewillreviewthe

commentsfiledinresponsetotheCommission’s

proposaltomodernizeandenhancereportingby

investmentcompanies,andwewillencouragethe

Commissiontomoveforwardwiththeadoptionof

astrongfinalrule.

Variable Annuity Disclosure

Commissionstaffhavealsobeenconsidering

potentialreformstovariableannuitydisclosure. 140

Forexample,staffhavebeenconsideringwhethertorecommendthattheCommissionrequirekey

informationtobedisclosedtonewinvestorsin

astandardizedorder.141 Inaddition,staffhave

beenconsideringtheutilityoftailoringdisclosure

forexistinginvestorsmakingadditionalpurchase



22/52

payments.”142Weagreewithstaffthatthemutual

fundsummaryprospectuscouldserveasauseful

modelforprovidingvariableannuitydisclosure. 143

Westronglysupportstaff’seffortstoaddressthe

problemoflengthyandcomplexdisclosurefor

eachvariableannuityinamanner“thatwilltell

thefullstory—thekeyfactsthatinvestorsneed

toknowabouttherisksandcosts,aswellasthe

benefits,oftheirinvestment.”144

Disclosure Effectiveness

AsdescribedinlastJune’sReportonObjectives,

intheofferorsaleofsecurities,allmaterialfacts

mustbedisclosedtoinvestorssotheycanmake

fullyinformedinvestmentdecisions.Enforcing

thesedisclosurerequirementsisacriticalelement

ofinvestorprotection.Ideally,issuersandsellersofsecuritiesshouldprovideinformationtoinvestors

inamannerthatenhancesinvestors’abilityto

understandit.Fullandaccurateinformationshould

beprovidedinameaningfulway,withoutunnec-

essaryrepetitionandwithoutburyingimportant

informationwithinlessimportantdisclosures.

WerecognizeandcommendtheCommission

onthestepsithastakeninrecentyearstowards

makingdisclosuresmoreeffective.Forexample,in

2009,theCommissionbeganrequiringcompaniestoprovidefinancialstatementsusingeXtensible

BusinessReportingLanguage(XBRL). 145 XBRL

ispresentinovertwentyCommissionformsand,

throughrulemaking,theCommissioncontinuesto

expandtheuseofstructureddata. 146Further,the

Commissionrecentlybegancompilingandposting

structureddataforusebyinvestorsandacademics,

andtheCommissionisworkingtodevelop“Inline

XBRL”tointegrateXBRLtaggingdirectlyinto

HTMLformatteddocuments.147

InDecember2013,theCommissionissuedthe

ReportonReviewofDisclosureRequirements

inRegulationSK(the“SKReport”),areport

mandatedbyCongressundertheJumpstartOur

BusinessStartupsAct(the“JOBSAct”). 148 The

SKReportdescribestheevolutionofthedisclosure

requirementswithinRegulationSKandrecom-

mendsareevaluationofthosedisclosurerequire-

ments.TheSKReportrecommendspotential

issuesforfurtherstudyandidentifiesspecific

areasofRegulationSKthatmaybenefitfrom

furtherreview.

OnApril11,2014,theSEC’sDivisionofCorpo-

rationFinanceannouncedadisclosurereforminitiativethatbuildsupontheSKReport. 149 The

initiativewillbeginwithareviewofthebusiness

andfinancialdisclosuresthatarereflectedin

periodicorcurrentreports(Forms10K,10Q,and

8K).Commissionstaffwilldeterminewhetherthe

requirementsofRegulationsSKandSXcanbe

updatedtoreducethecostsandburdenstoissuers

whilecontinuingtoprovidematerialinformation

andeliminateduplicativedisclosures.Inthefuture,

Commissionstaffwillalsoconsiderwaystoupdate

andmodernizedisclosuresthatformthebasisformostproxydisclosure.

Becausethesedisclosurerulesaresoimportant

toinvestors,wewillcontinuetofocusourefforts

andresourcesondisclosureeffectivenessin

FiscalYear2016.Wewillnotonlycontinueto



23/52

assisttheDivisionofCorporationFinanceand

othersintheexplorationofpotentialchanges

tothecontentofdisclosure,butwewillalso

advocateforfurtherenhancementstothemeans

ofdisclosure.Webelievethemeansofdisclosure

isalmostasimportantasthecontent,andthat

disclosuresystemsneedtobemodernizedto

achievegreaterefficiency,accessibility,and

usefulness.Morespecifically,webelievethatdata

shouldbelayeredfortheindividualinvestorand

structuredfortheanalyst.150 Therefore,wewill

continuetoencourageCommissionstafftopursue

theutilizationoftechnologythatcanbeusedto

makeinformationmoreaccessibleandusefulfor

investors.Additionally,totheextentthatlegislation

isproposedorrequiredtoimprovedisclosures

andpractices,wemaymakerecommendationstoCongressasappropriate.

MILLENNIALS

Theprecisedefinitionof“Millennials,”alsoknown

as“GenerationY”or“EchoBoomers,”varies

fromonesourcetoanother—infact,thereisno

strongconsensusabouthowtodefineMillen-

nials.151Forexample,WilliamStraussandNeil

Howe,authorswhoarecreditedwithcoining

theterm“Millennial,”definedthegenerationas

consistingofthoseindividualsbornbetween1982and2004.152 TheCouncilofEconomicAdvisers,

ontheotherhand,definesMillennialsasthose

“bornbetween1980andthemid2000s.” 153 The

PewResearchCentergenerallydefinesMillennials

asthosebornbetween1981and1997, 154andthe

2012NationalFinancialCapabilityStudyusesthe

spanfrom1978to1994.155

Forourpurposes,aprecisedefinitionisnot

necessary.Usinganyofthesedefinitions,thefirst

oftheMillennialsareintheirthirties,andmanyofthemareatthebeginningoftheircareers. 156

ThisgenerationislikelytobeaforceintheU.S.

economyfordecadestocome.157 Ina2012study

byconsultingfirmAccenture,itisestimated

thatapproximately$30trillioninfinancialand

nonfinancialassetsissettotransferfromNorth

American“BabyBoomers”totheirheirs,namely,

“GenerationX”andMillennials,withthepeak

transferofwealthprojectedtooccurbetween2031

and2045.158

Millennialsdifferfrompreviousgenerations

andhavebeendefinedbythecharacteristicsof

thecountrytheygrewupin.159 Theyhaveseen

increasedracialdiversity,climbingcostsofhigher

education,anddefiningeventssuchastheterrorist

attacksofSeptember11,2001.160 Millennials

arethemosteducatedgeneration161andthey

havebeenshapedbytechnology,withmuchof

thetechnologicalinnovationcoincidingwith

theirchildhood.162 Theyhavehadunparalleled

accesstoinformationandcomputationalpowerbecausetheyhavecomeofageatatimewhenthe

“frontiersoftechnologyhaveappearedunlimited”

andthecostofcreatinganddistributingdigital

contentfelldrastically.163Thishasnotonlycreated

opportunityforentrepreneurshipandincreased

computerprocessingpower;ithaschangedtheway

Millennialsdomanythings.164 Millennialshave

becomeaccustomedtousingtechnologyinevery

aspectoflife.165 Theytakeadvantageofhightech

tools,socialnetworkingplatforms,websites,and

mobileapplicationstodomanythings,includingpickstocksandfindfinancialplanners. 166Impor-

tantly,Millennialshavealsowrestledwithfinancial

challengesstemmingfromtheGreatRecession

earlyonintheircareerpaths,andtheycontinueto

negotiateapostrecessioneconomy.167

Inthecomingfiscalyear,wewillexamineeconomic

issuesgermanetoMillennialsingreaterdepth.We

will,amongotherthings,evaluatetheirfinancial

literacy,themannerandextentinwhichthey

participateinfinancialmarkets,andthedifferencesbetweenMillennialsandprecedinggenerations.We

willalsoconsiderwhetherproposedchangestolaws,

policies,andregulationsareforwardlookingand

anticipatetheneedsofanewgenerationofinvestors.



24/52

RETIREMENT READINESS

AccordingtotheCensusBureau,theage65and-

olderdemographicintheUnitedStatesislikely

toincreasebymorethan50percent—toapproxi-

mately74million—between2015and2030. 168

Basedoncurrenttrends,thisagegroupwilllikelyrepresentmorethan20percentofthetotalU.S.

populationby2030.169 Thisdevelopmentpromises

tohaveasignificantandwiderangingimpactona

numberofpolicyareasintheyearsahead.

OneofthosepolicyareasisAmericans’levelof

retirementreadiness.Currently,thereisnoclear

consensusregardingwhetherornotAmericansare

adequatelypreparedforretirement.Variousstudies

andsurveysoffer“mixedevidence”aboutthe

adequacyofretirementsavings.170 Thesestudies

“rangewidelyintheirconclusionsaboutthedegreetowhichAmericansarelikelytomaintaintheirpre

retirementstandardoflivinginretirement,

largely because of different assumptions about

how much income this goal requires.”171

Forexample,arecentGallupsurveyfoundthat

“[m]ostU.S.investorsaregenerallyconfident

thattheyarefinanciallypreparedforretirement,

including88%ofretiredinvestorsand76%of

nonretiredinvestors.”172 Thesesurveyresultsare

echoedbysomecommentatorswhoquestionthenotionthatAmericansarenotsavingenoughfor

retirement.173 Theirfindingswouldtendtosupport

thecontentionthatAmericansatleastbelievethat

theyareadequatelypreparedforretirement. 174

Ontheotherhand,aFederalReservereporton

theeconomicwellbeingofU.S.householdsin

2014found,amongotherthings,that39percent

ofnonretirees“havegivenlittleornothought

tofinancialplanningforretirementand31

percenthavenoretirementsavingsorpension.” 175

Accordingtothereport,morethanonehalfofnonretireeswithselfdirectedretirementaccounts

areeither“notconfident”or“slightlyconfident”in

theirabilitytomaketherightinvestmentdecisions

wheninvestingthemoneyinsuchaccounts. 176

ArecentstudybytheU.S.GovernmentAccount-

abilityOffice(the“GAORetirementStudy”)found

that52percentofhouseholdsage55andolder

havenoretirementsavingsinadefinedcontri-

butionplanorindividualretirementaccount,and

nearly30percentofhouseholdsage55andolder

havenoretirementsavingsandnodefinedbenefit

(e.g.,pension)plan.177Moreover,accordingto

thestudy,SocialSecurityfurnishesmostofthe

retirementincomeforapproximatelyhalfofhouse-

holdsage65andolder.178 Itisfindingslikethese

thatpromptsometowarnofa“retirementcrisis”

andtocautionthat“millionsofAmericansmaybe

forcedtomuddlethroughtheirfinalyearspartially

dependentonothersforfinancialsupportandto

acceptastandardoflivingsignificantlybelowthat

whichtheyhadenvisioned.”

179

TheCenterforRetirementResearchatBoston

College(“BostonCollege”)assertsthat“about

halfofworkingagehouseholdsare‘atrisk’of

beingunabletomaintaintheirpreretirement

standardoflivinginretirement.”180 Thereasons

forthis,accordingtoBostonCollege,include:

(1)increasedlifeexpectancy;(2)decliningSocial

Securityreplacementrates;(3)theshiftinemployer

retirementplansfromdefinedbenefittodefined

contributionplans;(4)increasedoutofpockethealthcarecostsforretirees;and(5)thesubstantial

declineinrealinterestratessince1983. 181 Asa

result,“babyboomers—andthosewhofollow—

willneedmoreretirementincome,butwillreceive

lesssupportfromthetraditionalsourcesofSocial

Securityandemployerdefinedbenefitplans.” 182

Therefore,concludesBostonCollege,“retireesneed

amuchbiggernesteggthaninthepasttogenerate

agivenamountofincome.”183

Pivotaltotheretirementreadinessdebateistheprojectedpercentageofincomerequiredtobe

replacedduringretirement.Incomeinretirement

maycomefromseveraldifferentsources,including

SocialSecurity,pensionplanincome,retirement

plansavings(e.g.,401(k)sorIRAs),nonretirement



25/52

savingssuchashomeequity,andwages.184

Adequateretirementincomehasbeendefinedas

“anincomethatallowsretireestomaintaintheir

preretirementstandardofliving.”185

Yet,thereisnoconsensusonhowmuchincome

wouldbeadequatetomaintainaretiree’s

preretirementstandardofliving.186 Experts

generallyagreethatmanyretireesdonotneedto

replace100percentofworkingincometomaintain

theirstandardoflivingbecausemostretireeslikely

havereducedexpensesascomparedtowhenthey

wereworking.187 TheGAORetirementStudy

concludedthatidentifyingaspecifictargetforthe

replacementrate(i.e.,ahousehold’spostretirement

incomeasapercentageofpreretirement)would

requirenumerouscomplicatedassumptions.

188

Moreover,theGAORetirementStudyobserved,

differentstudiesusedifferentreplacementratesor

otherbenchmarkstomeasureretirementincome

adequacy.189

Forexample,theNationalInstituteonRetirement

Security(“NIRS”)positsthat,“[t]omaintainits

standardoflivinginretirement,thetypicalworking

Americanhouseholdneedstoreplaceroughly85

percentofpreretirementincome”oreighttimes

incomeatage67.190

Althoughan85percentincomereplacementrate“mayseemhigh,”NIRS

contendsthattherate“doesnotfullyaccountfor

medicalcostswhichcanescalaterapidlyduring

retirement.”191 Nonetheless,eventhosewho

supportNIRS’spositionconcedethatthe85

percentreplacementrategenerallyisregardedas

being“atthehighendofstandardreplacement

raterecommendations.”192 Bycomparison,

theGAORetirementStudycitesa2012Urban

Institutestudythatsetsa75percentreplacement

ratetarget,butmeasuresretirementincomeatage70.193 Ratchetingdownthereplacementrate

further,theSocialSecurityAdministrationstates

that“SocialSecurityreplacesabout40percentof

anaveragewageearner’sincomeafterretiring,and

mostfinancialadvisorssayretireeswillneed70

percentormoreofpreretirementearningstolive

comfortably.”194Yet,detractorsarguethateven

that70percentfigureismisleading.195 Boston

Collegedividesitsretirementadequacybenchmark

intotiers,estimatinga69percentreplacementrate

forthehighestthirdofincomeearners,72percent

forthemiddlethird,and79%forthelowest

tier.196Generally,thosewhoarguethatthereis

noretirementcrisistendnottoidentifyaspecific

retirementadequacybenchmark. 197

TotheextentthatAmericansarenotadequately

preparedforretirement,BostonCollegemakesthe

followingrecommendations:

§ Work longer. Delayingretirementcanincrease

anindividual’sSocialSecurityincomeby78

percentforeachyearofdelay,allowindividualstocontributetotheiremployersponsored

retirementplanforalongerperiod,and

decreasethelengthofretirementoverwhich

anindividualwouldneedtostretchretirement

funds.198

§ Save more. Retirementnesteggscouldbe

enhancedbymakingemployersponsored

retirementplansfullyautomatic(byenrolling

allworkersautomaticallyintosuchplans,

settingdefaultcontributionrates,andenrolling

themintoacceptabledefaultinvestmentoptionsliketargetdatefunds),andcoveringthose

employeeswhoarenotenrolledinanemployer

sponsoredretirementplan.199

§ Consider home equity.Extraretirementincome

couldbegeneratedthroughdownsizingorby

takingoutareversemortgage.200

Whetherornotthereisaretirementcrisis,the

challengeofincreasingsavingsisnotnew,andthe

conceptofmakingemployersponsoredretirement

plans“automatic”hasgainedtraction.Accordingtoonestudy,themedianamountthatmiddleclass

Americanshavesavedforretirementis$20,000,

andhalfofthoseaged5075havesavedlessthan

$25,000.201 ThissuggeststhatmanyAmericans

findsavingforretirementmoredifficultthan

expected.202Toaddressissueslikethese,aswell



26/52

asemployeeinertia,CongressenactedthePension

ProtectionActin2006(the“PPA”).203Very

generally,thePPAgives401(k)plansponsorsand

employersa“safeharbor”fromfiduciaryliabilityif

theyoffertoemployeesaretirementplanwiththe

following“automatic”features:

§ Automaticenrollmentofemployeesina401(k)

planthatwouldenrollemployeesatadefault

savingscontributionrate(e.g.,3percentof

salary),butwouldpermitemployeestooptout

affirmatively.204

§ Automaticenrollmentintodefaultinvestments,

knownasQualifiedDefaultInvestment

Alternatives,205someofwhichwould

automaticallyinvestemployeecontributionsin

“approved”investmentvehicles,suchastargetdatefunds.206

§ Automaticescalationtoincreaseemployee

contributionstotheir401(k)accounts

periodically.207

Giventhelackofconsensusregardingthesubject

ofretirementreadiness,webelievethatthisarea

ofinquirywouldbenefitfromfurtherobjective

study.IftheresearchdemonstratesthatAmericans

generallyarepreparedforretirement,thenno

furtheractionmayberequired.Butifthedataleadtotheoppositeconclusion—thatAmericansare,in

fact,unpreparedforretirement—wewillconsider

potentialpolicyapproachestoaddresstheproblem.

SHAREHOLDER RIGHTS AND

CORPORATE GOVERNANCE

Inthecomingyear,wewillconsiderissues

involvingshareholderrightsandcorporategover-

nance.Inparticular,wewillfocusupontherules

governingshareholderproposalsandtheproxy

votingprocess.

Asapartialownerofthecompany,ashareholder

hasarighttovoteoncertainissuesaffectingthe

managementofthecompany.208 Thisincludesthe

righttoparticipateintheelectionofpersonsto

serveonthecompany’sboardofdirectors.209 In

addition,ExchangeActRule14a8givescertain

shareholderstheabilitytosubmitaproposalfor

avoteoftheothershareholdersthat,ifapproved,

wouldrecommendorrequirethatthecompany

takeacertaincourseofaction.210

Shareholdervotesaretypicallyheldduringan

annualshareholdermeeting.211However,because

itmaybeinconvenientforshareholderstoattend

themeetinginperson,statelawgenerallyprovides

amechanismforshareholderstocastvotesby

proxy.212 Theoverwhelmingmajorityofvotes

typicallyarecastinthismanner,sotherules

governingtheproxyprocessareofgreatimpor-

tancetoinvestors.

Election of Directors

Inacontestedboardelection,aslateofcandidates

backedbythecompany’scurrentmanagement

ischallengedbya slateofcandidatesbackedby

oneormoreshareholderproponents. 213Share-

holdersvotinginpersonareabletochoosefrom

amongcandidatesonbothslates. 214 Shareholders

votingbyproxy,however,generallymustvotefor

candidateseitherononeslateortheother,withno

abilitytomixandmatchfromamongcandidates

onbothslates.215 Thisresultflowsfromwhatone

SECCommissionerKaraSteinhasdescribedas“thestrangeconfluenceoffederalandstatelaw.”216

Inpractice,proxies(includingbothmanagement

anddissidents’proxiesincontestedelections)

typicallystatethatanynewproxywillrevokeany

previouslygrantedproxy.Asaresult,ifashare-

holdersubmitsmorethanoneproxy,onlythe

lastproxyisgiveneffect.Thisprecludesashare-

holderfromvotingforcertainnomineesfromthe

managementproxycardandothernomineesfrom

thedissidentproxycard.Moreover,shareholdersgenerallyarenotpermittedtowriteinthenames

ofcandidatesonaballot.217 Thus,shareholders

votingbyproxymaychoosecandidatesfrom

bothslatesonlyifthenamesofnomineesfrom

theopposingslatesappearonone“universal”

proxyballot.218



27/52

Currently,federallawdoesnotprovideforsucha

universalballot.Underwhatiscalledthebonafide

nomineerule,aproxycardcanlistonlythenames

ofthosedirectornomineeswhohaveconsentedto

havingtheirnamesappearonthatparticularproxy

cardandwhohaveagreedtoserveifelected. 219 In

practice,candidatestypically,thoughnotalways,

withholdconsentfortheirnamestoappearonthe

competingproxycard.

Toaddressthisissue,someadvocateshavecalled

fortheCommissiontoengageinrulemakingto

facilitateuniversalproxiesinwhichallcandidates

wouldappearonasingleballot. 220 Thiswould

eliminateasignificantdifferencebetweenvoting

byproxyandvotinginpersonattheshareholder

meeting.

221

Inaddition,auniversalproxycouldenhanceshareholdervotingbygivingshareholders

theopportunitytoselectthosecandidatesthey

believearebestqualified,nomatteronwhich

sideofthecontestthosecandidatesmayhave

beenpositioned.222 Critics,meanwhile,assert

thatauniversalballotwouldfurtherempower

activistshareholders,increasethenumberofproxy

contests,exacerbate“shorttermism,”andresult

inanegativeimpactonboardroomfocusand

dynamics.223

Thisissuehasgainedincreasingattentioninthe

pasttwoyears.224 In2013,theInvestorAdvisory

CommitteerecommendedthattheCommission

explo

Documents

Sec Office Investor Advocate Report on Objectives Fy2016