• Equity Market Structure
• Municipal Market Reform
• Fiduciary Duty
• Disclosure
• Millennials
• Retirement Readiness
• Shareholder Rights and Corporate Governance
• Financial Reporting and Auditing

Equity Market Structure

Why It’s Important

Are our equity markets fair for all investors, including Mom and Pop investors? That question has taken on new significance with the advent of high-speed trading, sophisticated computer technology, and the increasing dispersion and complexity of our markets.

The evolution of technologies for generating, routing, and executing orders has enhanced the speed, capacity, and sophistication of the trading functions that are available to market participants. Meanwhile, trading volume has become dispersed among many trading centers that compete for order flow in the same stocks. Public confidence in our markets has been shaken, however, by several highly publicized market disruptions, from the so-called Flash Crash of May 6, 2010, to the volatility and trading pauses on August 24, 2015. Against this background, various exchanges and other market participants have submitted reform proposals, and the Commission has been engaged in a comprehensive review of equity market structure.

What We’re Doing

We will continue to work with others at the Commission and the relevant self-regulatory organizations (SROs) to encourage reforms designed to benefit investors in the equity market. In particular, we will explore ways to improve liquidity and price discovery and to enhance the transparency of trading venues, order routing, and execution services. While recognizing the need to balance competing interests for markets to work efficiently, we will continue to focus on one overriding concern: that the equity market today is fair for investors, large and small.

For more details, see pages 5-7 of our Report on Objectives for FY 2016.

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Municipal Market Reform

Why It’s Important

Individual investors own a substantial slice of the pie in the $3.65 trillion municipal bond market. As of the end of 2014, individual investors held about 42 percent of municipal securities directly plus an additional 28 percent indirectly, through mutual funds, money market funds, or closed end funds and exchange-traded funds. Municipal securities can be an important part of investors’ retirement plans and a valuable source of funds for local projects that affect investors’ quality of life in their communities.

What We’re Doing

In Fiscal Year 2016, we will continue to work with others at the Commission, FINRA and the Municipal Securities Rulemaking Board (MSRB) to encourage reforms designed to benefit investors in the municipal securities markets. In January 2015, we issued comment letters both to FINRA and to MSRB on their proposals to enhance post-trade price transparency. In FY 2016, we will explore ways to improve pre-trade price transparency and the accounting practices of issuers.

For more, see pages 7-9 of our Report on Objectives for FY 2016.

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Fiduciary Duty

Why It’s Important

Many individual investors rely on broker-dealers and investment advisers for investment advice. Generally, these investors expect to receive investment advice that is in their own best interest. Some investors may not be aware, however, that broker-dealers and investment advisers are subject to different standards under federal law when providing advice about securities. Indeed, many investors are confused about the different standards of care that apply to investment advisers and broker-dealers with respect to the investment advice they provide. This apparent confusion has stoked concern among regulators and lawmakers in recent years.

On March 17, 2015, SEC Chair Mary Jo White called for the implementation of a uniform fiduciary standard for broker-dealers and investment advisers. On April 14, 2015, the U.S. Department of Labor (DOL) re-proposed a regulation that would apply a fiduciary standard to any person who provides investment advice or recommendations on retirement accounts, such as 401(k)s and IRAs.

What We’re Doing

As policymakers address this important issue, the Office of the Investor Advocate will endeavor to provide a voice for investors. We believe that an ill-advised SEC rule could be worse than no rule at all, in at least two significant ways. First, a rule could dilute the existing standard for investment advisers in an attempt to adopt a “harmonized” standard for broker-dealers. Second, contrary to the goal of reducing investor confusion, a poorly designed rule could create even worse confusion by purporting to give investors the protection of a “fiduciary duty” that is, in fact, less stringent than the traditional fiduciary duty that applies in other relationships of trust. We will fight to avoid these outcomes and to encourage rulemakings that are as strong as possible for investors.

For more, see pages 9-14 of our Report on Objectives for FY 2016.

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Disclosure

Why It’s Important

Disclosure is at the heart of our system of securities regulation in the United States. All material information should be provided fully, accurately and in a meaningful way, without unnecessary repetition and without burying important information within less important disclosures.

It is a challenge, however, to provide the right levels of information to a variety of investors who may have different needs and interests. Technology can help meet this challenge. By harnessing technology to modernize the form and delivery of disclosures, we can make them more effective for 21st century investors.

What We’re Doing

We believe that data should be layered for the individual investor and structured for the analyst. Layered disclosures convey the most important information up front, while allowing investors to dig deeper to suit their needs and interests. Structured data allows highly sophisticated users, including analysts and investment professionals, to use cutting-edge tools to search data dynamically, establish trends, and draw comparisons between different filers.

In 2015, the Investor Advocate publicized his views on these issues in two speeches: Effective Disclosure for the 21st Century Investor and The Benefits of Structured Data for Investors. We commend the Commission for its continuing actions to incorporate structured data requirements in its rulemakings, actions that we have detailed in the Data Tagging section of our Report on Objectives for FY 2016. As the Commission advances several initiatives to modernize disclosures, we will continue to encourage the use of technology to make information more accessible and useful for investors.

For more, see pages 14-17 of our Report on Objectives for FY 2016.

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Millennials

Why It’s Important

This generation is poised to become a force in the U.S. economy for decades to come. Millennials, along with the preceding Generation X, are expected to inherit an estimated $30 trillion in financial and non-financial assets from North American Baby Boomers, with the peak transfer of wealth expected between 2031 and 2045.

Millennials may have distinctive investing behaviors and needs. Having grown accustomed to using technology in every aspect of their lives, these digital natives are likely to access investment information differently from earlier generations. Furthermore, the early career paths of many Millennials have been shaped by a unique set of financial challenges, including unprecedented levels of college debt and the impact and continuing aftermath of the Great Recession.

What We’re Doing

In coming years, our system of securities regulations should keep pace with the needs of this generation. Toward this end, we will examine economic issues germane to Millennials in greater depth. Among other things, we will evaluate their financial literacy, the manner and extent in which they participate in financial markets, and the differences between Millennials and preceding generations. We will also consider whether proposed changes to laws, policies, and regulations are forward-looking and anticipate the needs of a new generation of investors.

For more, see page 17 of our Report on Objectives for FY 2016.

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Retirement Readiness

Why It’s Important

Based on current trends, more than 20 percent of the U.S. population is expected to be 65 years or older by 2030. Will they be financially prepared for their retirement? Or will a retirement crisis await them? These questions become more acute in the face of demographic and other trends, including increased life expectancy, rising health care costs, and the shift from defined benefit to defined contribution pension plans. There is no clear consensus on the level of America’s retirement readiness, with studies and surveys offering mixed evidence, but the stakes are high. Americans may be at risk of being unable to maintain the standard of living they had enjoyed before retirement, and of eventually outliving their savings.

What We’re Doing

We believe that this area of inquiry would benefit from further objective study. If the research demonstrates that Americans generally are prepared for retirement, then no further action may be required. But if the data lead to the opposite conclusion—that Americans are, in fact, unprepared for retirement—we will consider potential policy approaches to address the problem.

For more, see pages 18-20 of our Report on Objectives for FY 2016.

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Shareholder Rights and Corporate Governance

Why It’s Important

Shareholders invest their money to become owners of public corporations, but they do not run the company. This gives rise to a classic principal-agent dilemma: how do the owners ensure that the company is being managed in their interests? An elaborate system of corporate governance has arisen to protect the owners and align their interests with those of company management. The board of directors, for instance, oversees the professional managers who run the company on a day-to-day basis. And one of the key rights of shareholders is to vote to elect the directors. Another right is for qualified shareholders to submit proposals (subject to a limited list of exceptions) that will appear on company ballots to be voted on by shareholders.

Various corporate governance issues often arise in connection with each year’s proxy season, the concentrated time in the spring when most corporations hold their annual meetings. Last year, for example, a controversy arose over the efforts of one corporation to omit a shareholder proposal on the grounds that it directly conflicted with a management proposal. This led to a Commission staff review of the “directly conflicts” exemption found in Rule 14a-8(i)(9) and to the issuance on October 22, 2015, of Staff Legal Bulletin No. 14H.

A second subject of public debate, likely to continue into 2016, involves the use of universal ballots, which would enable shareholders to choose candidates from competing slates in contested elections of directors, rather than having to cast a strict up-or-down vote for the entire management proxy card or the entire competing dissident’s card. The SEC Investment Advisory Committee has recommended that the Commission explore ways to facilitate the use of universal ballots. The Commission held a roundtable on the topic in February 2015, and further rulemaking is possible in 2016.

In addition, national securities exchanges file hundreds of proposed rule changes with the Commission each year, and some of them have important implications for shareholder rights. For example, the exchanges may restrict the types of matters that are subject to shareholder approval.

What We’re Doing

We closely followed the issues involved in the debate over Rule 14a-8(i)(9) and applaud the issuance of Staff Legal Bulletin No. 14H for upholding the rights of shareholders.

On Oct. 16, 2015, our office issued its first official recommendation to the Commission. We recommended disapproval of a proposed rule change of the New York Stock Exchange that would exempt certain early stage companies from having to obtain shareholder approval before selling additional shares to insiders and other related parties. Consistent with our statutory mandate, our Office intends to shine a brighter light on rule changes by the exchanges, either to oppose proposals that may be detrimental to investors or, conversely, to support the efforts of exchanges to amend their rules in ways that benefit investors.

We will also follow any potential rulemaking on universal ballots. On this and any other corporate governance topics that arise, we will advocate to protect the rights of shareholders.

For more, see pages 20-22 of our Report on Objectives for FY 2016.

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Financial Reporting and Auditing

Why It’s Important

High-quality financial reporting is critically important to investors. Understanding a company’s true financial condition and results is indispensable in making investment and voting decisions. Indeed, our overall system of financial disclosures and controls constitutes a significant reason why investors are willing to place their trust and confidence in the U.S. financial markets.

Several gatekeepers play important roles in upholding the integrity of financial reports. The audit committee of the company’s board of directors has a key responsibility in overseeing the company’s financial reporting and its outside audit. The independent audit itself helps to establish the credibility of financial reporting and, thus, to foster investor confidence and facilitate capital formation.

The SEC is responsible for establishing and enforcing accounting and auditing policies. The Commission’s Office of the Chief Accountant works closely with the Financial Accounting Standards Board (FASB), which establishes U.S. financial accounting and reporting standards, and the Public Company Accounting Oversight Board (PCAOB), which oversees the audits of public companies as well as broker-dealers.

What We’re Doing

It is important for the Office of the Investor Advocate to track policy issues involving accounting and auditing and to give a voice to the needs of investors in the policymaking process. For example, we will be monitoring ways to enhance the disclosures in audit committee reports. On July 1, 2015, the Commission issued Concept Release No. 33-9862, Possible Revisions to Audit Committee Disclosure, which focuses on the audit committee’s disclosures related to its oversight of the independent auditor. Other topics of our focus will include FASB’s proposals on the definition of materiality as well as any further efforts at convergence of U.S. Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards (IFRS).

For more, see pages 22-23 of our Report on Objectives for FY 2016.

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