December 21, 2019
I think there need to be several reforms made to the exemptive application process:
1. If an application may adversely impact investors in a fund, those fund shareholders should be given a meaningful opportunity to raise concerns. Notice in the Federal Register or an obscure corner of SEC.gov is not adequate notice. You should require the fund to put a brief summary on the funds website with a means for the investor to convey its views to the SEC about the matter.
2. Clarify that all investors in a fund have standing to challenge an application. Today, you must own more than 5% of the fund to challenge an application. As a practical matter, no investor can challenge the actions of a large fund. It seems curious as to why even have a notice period if there is no one who has standing to challenge an application.
3. It is too expensive to challenge an application under the current system. The cost for an investor to hire a competent attorney and travel to Washington is prohibitively expensive. Investors should be able to fill out a brief form explaining their concerns and then the SEC Investor Advocate or Ombudsman should review the matter and challenge the application on behalf of affected investors.
I am a college professor located in the Southwest. There have been 2 applications I would have liked to challenge over the years. Here is a summary of my experiences:
The College Retirement Equity Fund moved to a multi-class structure, which in essence increased my annual fees by 20BPs per year and would cost me tens of thousands over my life time. I asked my friend and lawyer about this and he told me that there is likely nobody in the entire state competent in the issues raised in the application to challenge the application. (I also did not know about the change until after the SEC approved the application.) Also, it would likely cost over $100,000 to challenge the application. In my view, I bought a contract and agreed to pay X and now they are charging me X+0.20% in contravention of SEC rules. However, I had no meaningful recourse.
I owned a variable annuity that touted investments in world-class asset managers. The insurance company decided to substitute 3 of my investments for index funds of their choosing (and that bare the insurance companys name). This is a classic bait and switch and yet, again after speaking to my attorney, I really had no means to challenge this. If a broker did this, the SEC and FINRA would have had them barred from the industry. In my view (and by analogy), imagine you buy a Tesla and a year later the dealer sneaks into your house, swaps your Tesla for a Nissan and leaves $2,000 on the drivers seat. The argument they make is they are both electric cars, they both work and you were given $2,000. Also, if you do not like the Nissan, you can sell the Nissan and buy whatever else you want. Also, this is allowed because of small print on page 120 of some long document. Why did they do this? Because it was in the dealers financial interest to do so. I think we would all rightly be offended by this. Like in this scenario, I had no meaningful recourse.
The SEC needs to rethink how it approaches applications. It should give more appropriate consideration to matters that affect investors (particularly those that already own the investment). It should be more skeptical of any relief that may change the deal on investors.
The SEC should not be expediting the review of any application that changes the deal on investors. Such applications should only be granted sparingly after appropriate and due consideration.
I also think any communications between the applicant and the SEC should be public at the time any application is noticed. There should not be any ex parte or backroom deals. The dialogue should be public.
Thank you.