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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Remarks at InvestEd Investor Education Conference


Lori J. Schock

Director, Office of Investor Education and Advocacy
U.S. Securities and Exchange Commission

San Diego, California
May 15, 2011

I. Introduction and Overview of Dodd-Frank

I would like to begin by thanking InvestEd for inviting me to speak with you today. As I begin, I must remind you that my remarks expressed here are my own views, and not necessarily those of the Commission or its staff.1

I’d like to begin my talk today with a brief overview of the financial reform bill that Congress passed last year, followed by discussion of the recent work that the Commission is doing in connection with that legislation. I’ll leave a few minutes for questions at the end, if there are any.

As you may know, the Dodd-frank Wall Street Reform and Consumer Protection Act, also known as the “Dodd-Frank Act,” was signed into law by President Obama last July. This enormous law has 16 sections, and requires regulators to issue more than 20 studies and more than 100 rules. These requirements are split among banking regulators, the SEC and the Commodity Futures Trading Commission, with a large majority of the work falling on the SEC. Accordingly, we have and will continue to be very busy complying with the requirements of the new law.

Providing an overview of all the provisions of the new law could take us sometime. Instead, I plan to focus on some of the studies and rules that the SEC is required to complete under the law which will have a significant impact on individual investors.

II. Dodd-Frank Studies and Rulemakings

The Dodd-Frank Act requires the SEC’s staff to complete a number of studies and rulemakings regarding issues that are important to individual investors.

Financial Literacy Study

One of the studies currently being worked on by the Commission involves an assessment of financial literacy among retail investors and subgroups of retail investors. In this study, we will examine and identify:

  • The existing level of financial literacy among retail investors;
  • Methods to improve the timing, content, and format of disclosures to investors with respect to financial intermediaries, investment products, and investment services;
  • Methods to increase the transparency of expenses and conflicts of interest in transactions involving investment services and products; and
  • The most effective existing private and public efforts to educate investors.

As part of this financial literacy study, the SEC currently is conducting investor testing to examine the effectiveness of SEC-mandated disclosure documents, specifically, the Form 10-K annual report and the mutual fund shareholder report, in communicating useful information to individual investors. This testing is designed to gather feedback from investors in order to determine how these disclosure materials could more effectively communicate information to individual investors.

We plan to deliver the results of this study in a final report to Congress by July 2012.

BD and IA Registration Information Access Study

Another Dodd-Frank Act study, which we recently completed, examines investor access to information about investment professionals. Currently, investors who want to investigate their broker or advisor online have to use two separate databases. For brokers and brokerage firms, the information is available through BrokerCheck, which is owned and operated by FINRA, the Financial Industry Regulatory Authority, the self-regulatory organization for broker-dealers. For investment advisers and advisory firms, the information is available online through the Investment Adviser Public Disclosure system, or IAPD, which FINRA operates on behalf of the Commission. Most brokers, advisers and firms are either in one system or the other, but not both. At present, there is no crossover or link between the two systems, so investors have to know where to start — with BrokerCheck for brokers and brokerage firms, or with IAPD for advisers and advisory firms.

This study analyzes the advantages and disadvantages of centralizing access to the information in these two databases. Additionally, the study also examines and identifies ways to make these databases more accessible and useful for investors. Based on our staff’s analysis of these two databases, the primary recommendations of the study include:

  • Unifying FINRA’s BrokerCheck and the SEC’s Investment Adviser Public Disclosure (“IAPD”) database search results;
  • Adding a ZIP code search function to BrokerCheck and IAPD; and
  • Adding educational content to BrokerCheck and IAPD.

In addition, the study recommends that our staff and FINRA continue to analyze the feasibility and advisability of expanding BrokerCheck to include information currently available in the Central Registration Depository (the securities industry online registration and licensing database developed by FINRA in consultation with the states), as well as the method and format of publishing that registration information.

Say-on-Pay and Golden Parachute Votes

The Dodd-Frank Act requires the SEC to establish new rules regarding shareholder approval of executive compensation and “golden parachute” compensation. On January 25, 2011, the SEC adopted new rules that require public companies subject to the Commission’s proxy rules to provide their shareholders with separate advisory votes on:

  • The compensation of the most highly compensated executives, generally known as “Say-on-Pay” votes;
  • The frequency of Say-on-Pay votes – every one, two or three years; and
  • The compensation arrangements and understandings with those executive officers in connection with an acquisition or merger, known as “golden parachute” arrangements.

In addition to the advisory vote on “golden parachute” arrangements, the new rules require companies to disclose, in narrative and tabular form, any agreements with executive officers regarding compensation related to the acquisition or merger.

All public companies subject to the proxy rules, except smaller ones, must hold Say-on-Pay and frequency votes at shareholder meetings starting on January 21, 2011. Smaller public companies – those companies with a $75 million public float or less – are not required to hold these votes until January 21, 2013. All companies subject to the proxy rules are required to comply with the “golden parachute” vote and disclosure requirements for any proxy statement submitted on or after April 25, 2011.

III. Whistleblower Program

In addition to new rules and regulations, the Dodd-Frank Act creates a powerful new tool to assist the SEC in the investigation and prosecution of violations of the federal securities laws. The Dodd-Frank Act authorizes the SEC to establish a new whistleblower program. This whistleblower program allows the SEC to pay awards to individuals who provide the Commission with high-quality tips that lead to successful SEC enforcement actions and certain related actions. This provision of the Dodd-Frank Act substantially expands the Commission’s authority to compensate individuals who provide the SEC with information about violations of federal securities law. Prior to the Dodd-Frank Act, the Commission’s bounty program was limited to insider trading cases, and the amount of the award was capped at 10 percent of the penalties collected in the action.

Under this new whistleblower program, the SEC will pay awards to individuals who voluntarily provide the Commission with original information that leads to a successful SEC enforcement action which results in monetary sanctions exceeding $1 million. The amount the SEC may award individuals ranges from 10 to 30 percent of the total monetary sanctions collected in the Commission’s enforcement action or any related action such as in a criminal case. The SEC determines the specific amount awarded on a case-by-case basis, taking into consideration factors such as the importance of the information and the degree of assistance provided.

The Commission has proposed rules detailing the procedures potential whistleblowers would need to follow to qualify for award. A whistleblower may be eligible to receive an award for original information provided to the Commission on or after July 22, 2010, so long as the whistleblower complies with all such rules once effective. Pending the adoption of final rules, the Commission’s Enforcement staff has been reviewing and tracking whistleblower complaints submitted to the Commission.

Lastly, in order to better protect potential whistleblowers, the Dodd-Frank Act expressly prohibits retaliation by employers against whistleblowers and provides them with a private cause of action in the event that they are discharged or discriminated against by their employers.

IV. The Investor Advocate and Investor Advisory Committee

The Dodd-Frank Act also established an Office of the Investor Advocate within the Commission. The Investor Advocate will report directly to the SEC Chairman and be responsible for:

  • Assisting retail investors in resolving significant problems they may have with the Commission or SROs;
  • Identifying areas in which investors would benefit from changes in Commission regulations or SRO rules;
  • Analyzing the potential impact on investors of proposed Commission regulations and SRO rules; and
  • Identifying problems that investors have with financial services providers.

This office will also have an “Ombudsman” appointed by the Investor Advocate who will act as a liaison between the Commission and investors. Additionally, the Dodd-Frank Act mandates the creation of a new “Investor Advisory Committee” composed of the Investor Advocate, state regulators, and representatives of a broad cross-section of the investing public. This committee will meet at least twice a year to advise and consult with the Commission on investor protection issues and related regulatory matters. The Commission plans to establish both the Office of Investor Advocate and the Investor Advisory Committee sometime in the near future.

V. Conclusion

I hope I’ve given you a little insight into what the SEC has been doing and will be doing in the months ahead. And now I’d be happy to take your questions.

1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or the author’s colleagues upon the staff of the Commission.


Modified: 05/18/2011