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Remarks to the SEC Investor Advisory Committee

Nov. 7, 2019

I would like to thank the Committee members and the panelists for engaging on the topics on today’s agenda. I am disappointed not to participate in the meeting today. The topics on your agenda today—(1)Whether Investors Use Environmental, Social, and Governance (ESG) Data in Investment/Capital Allocation Decisions, and (2)our Concept Release on Harmonization of Securities Offering Exemptions—are of great interest to me.

As a coincidence, yesterday, I had a very constructive meeting with Valdis Dombrovskis, Executive Vice President of the European Commission, and today, I am attending a Financial Stability Board meeting. Each meeting has a significant focus on the first topic on today’s agenda.

For various reasons, including that the Commission is actively engaged on the agenda topics, I would like to share some of my view on those matters. In addition, I have identified some other potential areas of focus for this Committee that I believe would contribute to the Commission’s work.[1]

Whether Investors Use Environmental, Social, and Governance (ESG) Data in Investment/Capital Allocation Decisions

Thank you very much for bringing this topic forward.

As I have mentioned to many of you, key points of interest for me in virtually all matters of disclosure regulation include (1) what data do companies use to make decisions and (2) what data do investors use to make investment decisions. I recognize these are just a few of the factors that would inform an evaluation of existing or proposed disclosure. I also recognize that even these two questions can lead to complex answers, including because (1) not all companies in the same sector use the same or comparable data in their decision making and (2) investor analysis also varies widely. In the areas of “E” and “S” and “G,” in particular, the approach to investment analysis appears to vary widely, in some cases incorporating objectives other than investment performance over a particular time frame or frames. I hope you will explore those variances, and what they may mean for effective and efficient disclosure regulation, in today’s meeting.

To be sure, these and other complexities are not a reason for inaction. However, as my former FSB colleague, Governor Mark Carney, has eloquently recognized, to foster the production of “decision-useful” information these complexities must be recognized.[2] On the issue of what is “decision-useful,” I again note the Commission’s longstanding approach to disclosure.[3] Substitute the word “material”—that is, disclosure that a reasonable investor needs to make informed investment and voting decisions based on each company’s particular facts and circumstances—for “decision-useful.” This framework—which has, in turn, driven a broad combination of (1) principles-based disclosure requirements and (2) specific, often industry-specific, requirements, in each case shaped by ongoing interaction among regulators, investors and registrants—has served investors and our capital markets well for the better part of a century.[4]

Turning to our panelists, those who use disclosure to make investment decisions, I am very interested in how and to what extent you use “E,” “S” and “G” data. Does your use of this data reflect a change in investment approach, or is it an enhancement to your traditional approach? Is the use of such data designed to improve investment performance over a particular term, to screen certain activities, companies or industries to address a particular objective or policy, or a combination of these goals? And how do the underlying clients view and understand the asset manager’s use of such data?

Answering these questions will assist us in our efforts to foster the production of “decision-useful” (aka “material”) information.

Concept Release on Harmonization of Securities Offering Exemptions

The second topic, a discussion of the concept release on harmonization of securities offering exemptions, is important for investors and issuers alike. I believe it is our obligation to explore whether we can reduce cost and complexity, and increase opportunity for our Main Street investors in this important market, including through professionally managed funds, where Main Street investors are able to invest in the private market on terms similar to those available to institutional investors. Importantly, we must ensure appropriate investor protections for our long-term Main Street investors. Below, I suggest that the Committee take up this topic for further consideration.

Suggested Topics and Areas of Focus for the Investor Advisory Committee

The Investor Advisory Committee was established by the Dodd-Frank Act to advise the Commission on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace. Since the Committee was established, it has held over 30 meetings, and issued recommendations to the Commission on over 20 topics ranging from proxy matters, to retail investment advice, to the impact of international regulations on investment research, and many others. I appreciate the time and effort the Committee members have devoted in supporting the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

As the Committee moves forward in fulfilling its statutory purpose, I would like to suggest some topics and areas of focus for the Committee that I believe would be most helpful for the Commission in the coming months and years.

  • Self-directed individual retirement accounts (IRAs): Do retail investors in self-directed IRAs have sufficient protections, and is there anything further the Commission should do to help these investors?
  • Teachers and military service members: What else can and should the Commission do to protect America’s teachers and military service members when they invest in the securities market?[5]
  • Minority and non-English speaking communities: Are there any regulatory barriers or hurdles that may be discouraging access to investment services for minority and non-English speaking communities, or leading to higher prices or inferior financial product choices? What can the Commission do to address this topic from a regulatory or investor education point of view?
  • Retail access to investment opportunities: How can we help ensure that retail investors have access to the same attractive investment opportunities available to institutional investors in our private markets, while still providing appropriate investor protections? Are there changes in our regulation of funds that we should consider, including regulatory changes that would focus on the alignment of retail investor interests and expectations with the interests of fund managers?
  • Retail investor protections in an increasingly global world: What are the differences in protections afforded to retail investors in U.S. and non-U.S. jurisdictions, respectively, and do retail investors understand these differences?
    • Take one of our topics today—ESG. What assurances do retail investors have in the U.S. and outside the U.S. that a company that claims to meet certain ESG standards actually does so? I have serious concerns that retail investors do not appreciate the lack of protections in this regard when investing in companies outside the U.S., and I continue to be concerned that it is not adequately discussed.
    • On the topic of audit quality, I also have concerns that retail investors do not appreciate the regulatory challenges of investing in registrants whose auditor is based in certain jurisdictions.[6] Even in cases where the auditor signing the audit opinion is based in the United States, investors may not be focused on the fact that significant portions of the audit may have been done by affiliate firms in other jurisdictions. What more can we do to ensure that investors are cognizant of the current regulatory challenges?
  • LIBOR transition: The pending LIBOR transition presents risks that market participants, working with central banks and regulatory authorities, need to address. What can the Commission do to help market participants address these risks and avoid the substantial frictions, including frictions that will harm investors directly (including retail investors), through higher costs, and as a result of uncertainty more generally?
  • Index construction: Do retail investors and those who advise them understand how indices are constructed from (1) a technical perspective (e.g., weightings, adjustments and the like), (2) from a market exposure perspective (e.g., opportunities and risks the index incorporates), and (3) as a subset of those opportunities and risks, any key value judgments the index provider has made (e.g., to include or exclude certain types of companies)? What can we do to ensure that investors understand these topics? Should we encourage or require more disclosure?
  • Credit rating agencies: How much do retail investors rely on credit rating agencies and how much influence do they have in today’s marketplace. Are they appropriately disclosing, monitoring and managing their conflicts. Are investors actually harmed by the compensation models of credit rating agencies? Are there alternative payment models that would better align the interests of rating agencies with investors?

While there is no shortage of other issues that stakeholders are asking the Commission to address (some of which are outside of the purview of the SEC’s mission), I believe that engaging on the topics above and related topics will chart a productive course for the Committee. I encourage the Committee to use its time to focus on areas that can most effectively support the Commission’s work.


[1] My thoughts are my own and do not necessarily reflect the views of my fellow Commissioners or the SEC staff.

[2] See, e.g., Mark Carney, Governor of the Bank of England, TCFD: strengthening the foundations of sustainable finance (Oct. 8, 2019), available at: https://www.bankofengland.co.uk/-/media/boe/files/speech/2019/tcfd-strengthening-the-foundations-of-sustainable-finance-speech-by-mark-carney.pdf?la=en&hash=D28F6D67BC4B97DDCCDE91AF8111283A39950563.

[3] See Chairman Jay Clayton, Remarks to the SEC Investor Advisory Committee (Dec. 18, 2018), available at: https://www.sec.gov/news/public-statement/clayton-remarks-investor-advisory-committee-meeting-121318.

[4] I believe we should recognize that “E,” “S” and “G” are very different categories from a disclosure regulation perspective. For example, “G” is significantly rooted in and bounded by law, regulation and governance agreements, lending itself to a fair degree of precision. “G” also generally is more historical than forward-looking and is substantially under the control of the registrant. “E” has some similarities to “G”—for example, “E” disclosure is often based on law and regulation or at least the effects of law and regulation. However, “E” disclosure can be significantly forward-looking, including estimating or otherwise discussing the effects of current law and regulation as well as pending or potential regulation. We have long recognized there can be a substantial difference between historical information and forward-looking information. As I have previously discussed with this Committee, due to this complexity, I have concerns that imposing a uniform, mandatory disclosure framework for many areas “E,” “S” and “G” disclosures runs the risks of sacrificing what may be the more relevant, company-specific disclosure for the potential for greater comparability across companies. See id.

[5] In June, the Commission announced enforcement and investor education initiatives to protect teachers and military service members, and in October, the Commission announced several teacher investment outreach efforts in connection with the previously announced Teachers Initiative. See Press Release (June 3, 2019), available at: https://www.sec.gov/news/press-release/2019-85; Press Release (Oct. 15, 2019), available at: https://www.sec.gov/news/press-release/2019-215

[6] Last year, along with our then Chief Accountant Wes Bricker and PCAOB Chairman Duhnke, I issued a statement on the vital role of audit quality and the challenges and issues relating to information access, particularly for PCAOB-registered auditing firms in China and Hong Kong. Jay Clayton, Chairman, and Wesley Bricker, Chief Accountant, SEC, and William D. Duhnke III, Chairman, PCAOB, Statement on the Vital Role of Audit Quality and Regulatory Access to Audit and Other Information Internationally—Discussion of Current Information Access Challenges with Respect to U.S.-listed Companies with Significant Operations in China (December 7, 2018), available at https://www.sec.gov/news/public-statement/statement-vital-role-audit-quality-and-regulatory-access-audit-and-other.

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