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Remarks Before the Consumer Federation of America’s 27th Annual Financial Services Conference

Commissioner Kara M. Stein

Washington, D.C.

Dec. 4, 2014

Thank you, Barbara [Roper],[1] for that kind introduction. 

[As written] I am absolutely delighted to be here with all of you today.  What an honor it is to be among such passionate advocates for consumers.  Through your leadership and advocacy, American consumers have a strong, robust voice that helps ensure a balanced debate on issues that are important to them.  And through Consumer Federation of America’s work on the America Saves campaign, consumers have access to tools that will help them save money, reduce debt, and build wealth.  Your work is vitally important to consumers, and particularly to consumers as investors.  And investors are what we are all about at the SEC and the focus of everything we do.  

Before I get much further, I must remind you that the views I express today are my own, and do not necessarily reflect the views of my fellow Commissioners or the staff of the Securities and Exchange Commission.  

As we near the close of 2014, the year in which the Commission celebrated its 80th birthday, it is a perfect time to reflect on our history, and our proud tradition of investor protection -- a tradition that was recently reinforced through numerous provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  And a perfect time to look toward our future, and consider how that tradition can be carried forward into the 21st century, to make  government work even better for investors, and to leverage the resources of the private sector in that endeavor.   

The inception of the SEC 80 years ago has been described as “an accident,” essentially the product of a political compromise.[2]  As some of you may know, the original agency to administer the Securities Act of 1933 (the “Securities Act”), and proposed to administer the Securities Exchange Act of 1934 (the “Exchange Act”), was the Federal Trade Commission (FTC).  But opponents of the Exchange Act feared the power of the FTC, an agency controlled largely by New Deal reformers like James Landis, and they believed a new agency might prove to be less effective.[3]

The SEC, however, immediately set out to prove them wrong.  Indeed, shortly thereafter, the idea of the Commission as the “Investors’ Advocate” was born.  At his first press conference in 1937, SEC Chairman William O. Douglas coined a phrase that would come to define the SEC and, I believe, continues to reflect the central mission of the Commission: 

“We are and we should be, and I think we will continue to be, what I might call ‘the investors’ advocate.’

We have got brokers’ advocates; we have got exchange advocates; we have got investment banker advocates, and we are the investors’ advocate. That isn’t foisting my own economic and social theories and ideas in the picture. You find that within the framework of the three statutes that we presently administer. That is the one fundamental, underlying philosophy of those three statutes—protection of the investor.”[4]

Douglas and the other members of that early Commission understood which constituency didn’t have much of a voice.  They knew then what remains unshakably true today – investor protection provides the critical foundation for all the other goals and priorities of securities regulation, including fair, orderly and efficient markets, and capital formation.  Promoting efficiency and capital formation are important objectives that, in 1996, Congress directed the Commission to consider when drafting rules.[5]  But neither of those goals can be achieved without a thoughtful and determined vigilance over investor protection.  Douglas and the early Commission got it right, and that has served both American investors and American businesses well for over 80 years.

I was pleased to participate in the work of Congress on the Dodd-Frank Act, when Congress updated and renewed our investor protection mission and toolkit.  Dodd-Frank gave us innovations like an Office of the Investor Advocate to be a central point for channeling the voice and feedback of investors; an Investor Advisory Committee that brings to the Commission a robust set of diverse views and perspectives; and a whistleblower program that is proving to be a smart and responsible way to promote a transparent, law-abiding marketplace.[6]

I’m very pleased so far with the work of all three new entities.  Our new advocate, Rick Fleming, has been doing the hard work of listening to a wide range of voices on a wide array of topics, and actively bringing those voices into critical aspects of the SEC’s work.  His office is a great resource for every investor. Their website is incredible, providing accessible answers to questions that can really help ordinary investors find their way around our securities markets a little bit more easily and safely.[7]

The Investor Advisory Committee has been hard at work laying out innovative and creative new approaches to tough, often contentious issues.  Go to their website and read their reports and recommendations[8] – you’ll be amazed at how thoughtful they are, and how much consensus they can build among participants who represent incredibly divergent backgrounds and interests.  The proposal for a new approach to the definition of an “accredited investor” is only one example of the creative thinking they have been doing.  Check out their work, and let us know what you think. 

And the Office of the Whistleblower has been making clear just how valuable that program can be.  In Fiscal Year 2014, the office received 3,620 whistleblower tips, an increase of more than 20 percent over the two previous years.[9]  These tips are helping the Commission root out misconduct that would otherwise be very difficult to detect.[10]  And the Office recently helped the Commission bring an anti-retaliation case against a firm that punished a trader for reporting his firm’s violations to the SEC.  The firm was engaged in prohibited principal transactions – the kinds of blatant conflicts of interest that can seriously harm investors.[11]    

This is powerful progress, and I’ve been pleased to see these new investor protection entities get up and running successfully.  But it’s not just one or two offices at the SEC where investor protection lives.  Personally, I take to heart the idea that the SEC as a whole is the Investors’ Advocate.  As William Douglas said in 1938,“we are first and last the investors’ advocate.”[12]

Of course, it’s no longer 1938; it’s 2014 – almost 2015 – and we have to stay up to date. We have to evolve with the markets.  In that vein, I want to discuss with you today three areas where we should be focusing our investor protection energies and staying ahead of the curve by deploying the full range of new and creative tools available to us:  (1) we should optimize and enhance the disclosures that form the heart of our efforts to empower investors; (2) we should continue and do more to align the interests of investors, companies, and other market participants; and (3) we should hold those who don’t follow the rules accountable. 

Effective Consumer Choice as the Heart of Free Markets

I think few would argue that the heart of the free market – and the reason we in the United States place value on markets – is that we believe in the freedom of the individual to choose his or her own destiny.  And the economic bonus is that not only do we place a value on this freedom of choice, but we also believe that, overall, individual choice leads to the best economic result.    And maybe that’s one of the reasons that the federal securities laws have long made disclosure the foundation of investor protection – not the only tool available, but certainly one of the most important.   

But, disclosures are only a valuable tool to the extent that they can provide the investor with the information needed to make informed decisions about the future.  And it’s complicated.  We know from experience that there are many different types of investors, with different levels of knowledge, desires for information and analytical skills.  While disclosure must be supplemented by financial education, we must be attuned to the incredibly disparate levels of investor capacity in the marketplace.  And while we have at times varied the types of disclosures, summarizing or simplifying certain documents, we still generally take a “one-size-fits-all” approach to disclosure as investor protection.  I think we can and should think about whether we can do better.        

If you haven’t heard about it yet, the Commission’s Division of Corporation Finance is spearheading a very important project examining the effectiveness of disclosures.  This project presents an opportunity to holistically rethink the disclosure that we offer to investors.  With so many technological tools at an investor’s fingertips, we can provide both timely and relevant information that empowers investors of all different types to make thoughtful, informed decisions.  We should be smart about requiring disclosures that are genuinely meaningful and useful for different types of investors – which leads me to the importance of investor testing.  

Investors are the consumers of disclosure – period – and we must ensure that the primary tool investors have available to protect themselves actually empowers them to do so.  In the days of William O. Douglas, investor testing didn’t exist, at least to the extent and with the sophistication that it does today.  Nor has the Commission in the years since incorporated investor testing into its work in an extensive and consistent way.  However, we know that the private sector is using it to understand its consumers, frequently in a highly-refined manner.  The Commission should seek to better understand its consumers as well. 

The work of our sister agency, the Consumer Financial Protection Bureau (the CFPB), should be instructional in this regard.  The CFPB revamped the mortgage disclosure form, by drawing on consumer testing and experts in design to find a new way to communicate complex mortgage terms to prospective homeowners.  There are a number of opportunities to take a similar approach at the SEC.  We would benefit from testing that lets us understand how the ordinary investor in Peoria, Illinois or Portland, Oregon, absorbs corporate disclosures.  And does this change depending on the age of the investor?  Do Millenials absorb information differently than Boomers?  We should formulate a plan to incorporate thorough investor testing into as many of our projects as possible. 

We also need to recognize the differences between, and the needs of, different types of investors.  This means looking beyond the annual and quarterly reports, and considering how and when other information is presented.  For example, since most ordinary investors access our markets through mutual funds, we should consider ways to improve fund disclosures.  The adoption of a summary prospectus was a great achievement.[13]  It fundamentally changed the form of mutual fund disclosures, and how they are delivered.   But the rule is now over five years old, and we should be thinking of ways to make it more useful to investors by asking them how it can be improved.    Investor testing would, I expect, reveal helpful information in this regard.     

I also would like to consider ways to provide different “layers” of disclosure to different types of investors.  Some investors may want and be able to utilize a great deal of detailed data.  For them, we might want to consider completely reshaping the type and form of data made available to the investors.  In an era of both large corporations and large computing power, many investors may find that they can better understand a large corporation by having enhanced or structured data.[14]  Are we doing everything we can to provide the disclosures and data that these investors can use and benefit from?  At the same time, “mom and pop” ordinary investors may be better served by a clearer summary that identifies only the most important information.  But which information is that?  These are the kind of questions that we can explore through investor testing.  And both types of disclosures can and should be made available to the investing public.         

We also need to do a better job leveraging technology to empower investors, regardless of the content of the disclosures themselves.  For example, going forward, we should continue to require that information be provided to the SEC in a structured format, something I have been pushing for in every rule that requires the submission of data.  But more must be done here.  For example, we should move quickly to add what we call “in-line XBRL” to annual reports, which is essentially embedding the data tags within the filed document itself instead of having two separate filings.  This would reduce errors, and eliminate the burden on filers who must file in two formats. 

In short, I believe we need to be developing a 21st century disclosure regime that uses all of the tools and expertise that have developed in the 80 years since the Commission first required public disclosures to sell securities.  There is a lot new out there today, and I hope we can take advantage of it. And of course, I hope you will weigh in with your expertise, views, and experience on what would be meaningful disclosure for you.  [We have a website devoted to gathering public comments on this topic, which you can find by searching for the phrase “disclosure effectiveness.”]

Aligning Private Incentives

No doubt, disclosure remains the heart of our investor protection regime.  But we also know from experience that sometimes it isn’t enough – or to put it another way, that it works better under some conditions than others.  What are the conditions under which it works best?  Basically, where we have done everything we can to align those interests that should naturally be aligned.  When interests are aligned, there are fewer incentives to play games, and better results for ordinary investors, who can make straight-forward, smart decisions.   

So how do we align interests better? We at the Commission, in partnership often with the states and the self-regulatory organizations, have been working to align interests for years.  On the corporate side, we have the basics of the proxy process (which could stand some improvement), we have provisions for board committees, and we have auditor independence rules  –– just to name a few. 

Dodd-Frank also added important new mandates related to executive compensation.  We should get them done. 

On the market participant side, we have professional standards and rules to ensure that investment advisers’ and broker-dealers’ interests are appropriately aligned – or at least, not misaligned – with the investors they serve.  These alignments may be in their sales duties, or they may be in their trading execution duties.  In the registered funds area, we have limitations on leverage, affiliated transactions and portfolio liquidity – all of which help maintain the alignment of interests between the fund sponsors and investors.  Dodd-Frank also added prohibitions against conflicts of interests in the underwriting and placement of asset-backed securities.[15]  That is just to name a few.

Are our rules in all of these areas perfect? No.  Is there a lot to be done and improved?  Absolutely.  For example, the Commission is in the midst of considering how to better align the interests of broker-dealers with the investors they serve.  It’s an important area, and I’m looking forward to seeing progress made.     

In another area, the Commission has at times over the last couple of years delved into how we might improve the dialogue between companies and their shareholders to the benefit of both.  Can we open up communication – and hence build a better partnership –by permitting or requiring universal proxy ballots?[16]  Or perhaps try again on shareholder proxy access?[17]

Regardless of the issue, though, in implementing our statutory mandates and objectives we should be driven by the facts and the policy, and always on the lookout for new data.  Moreover, we should not let the fear of litigation prevent us from doing what, in our well-informed view, is right.  We should prudently analyze our approach to regulation, and ensure that it is sound and well-reasoned, which in turn will reduce the risk of losing a court challenge.  However, we should not choose a course designed to ensure that we never have to face a court challenge at all, or essentially reduce litigation risk to zero.  We must be more intrepid than that if we are to effectively serve our mission to protect investors. 


Finally, let me say a word about accountability.  Without it, our efforts will have little meaning.   A central tenet of investor protection is protecting investors from those we call “bad actors” - essentially repeat offenders.  History and experience have taught us that law-breakers pose a threat to our markets, and hurt those who actually play by the rules.

Congress has long recognized this important fact.  Indeed the very first automatic disqualification dates to 1940.[18]  More recently, Congress reaffirmed their importance when it enacted Section 926 of Dodd-Frank.  Section 926 required the SEC to adopt a so-called “bad actor” rule, which is a rule that disqualifies law-breakers from participating in certain types of private securities offerings.  Securities offerings generally must be registered with the SEC (referred to as “public offerings”) unless they meet specific exemptions that allow for a private offering.  Section 926 required the SEC to adopt a bad actor rule for private offerings made under an exemption from registration in Rule 506 of Regulation D.  Vast amounts of capital are raised pursuant to this exemption in Rule 506.[19]

Accordingly, pursuant to Section 926, we recently adopted a “bad actor” rule which automatically bars law-breakers from participating in 506 exempt offerings.[20]  The reasoning for the rule is instinctive and logical – it should reduce fraud in these offerings both by precluding known bad actors from raising money through this channel, and by deterring future fraudulent activity because of the potential for disqualification. [21]

The 506 bad actor rule is just one of many automatic bars or disqualifications.[22]  These automatic disqualifications strengthen accountability, and carry the potential for deterrence that no injunction or financial penalty can match.    

They are the law, they are powerful, and they matter.  The Commission can waive the disqualifications, but only if there is good cause.  That standard must be applied with the utmost care.  Otherwise, we risk nullifying the laws that Congress has passed, as well as our own well-considered rules.  And we can’t afford to ignore what may be one of our most effective methods of improving compliance with the securities laws. 

So what does this mean?  It means that when we decide whether to waive these bad actor provisions, we must do so carefully, and in a fair and transparent manner.  Our waiver policies should be clear and public.  Both companies and investors are entitled to know when a firm or individual may, for good cause, be allowed to avoid disqualification.  Each waiver request should receive an individualized, detailed, and careful analysis based on all of the relevant facts and the particular waiver policy. 

And finally, we should be flexible and nuanced in our approach to these waivers, so that we make the most of this powerful tool.  Traditionally the Commission has viewed waiver requests as a “yes or no” proposition.  This creates a strong impetus towards “yes” to avoid the sometimes unwarranted impact of a full denial of the waiver.  However, there is nothing in our rules that requires this binomial outcome, and it is far wiser and more judicious to use a more flexible approach.

That is why I was extremely pleased to support a recent Commission order granting a conditional and limited waiver from disqualification under Rule 506.[23]  The waiver was for a limited time, and only if certain conditions were met, creating essentially a probationary period for the firm with a right to reapply after a second showing of good cause.  And the conditions are important.  For example, the recent case included a review by an independent compliance consultant, and a document signed by the principal executive or principal legal officer when the consultant’s recommendations have been implemented.  These conditions will focus and empower management to change behavior throughout the corporate culture.  This approach represents a breakthrough in the Commission’s method of handling waivers, and I hope to see more of this and other thoughtful approaches in the future.   


The central question here, as it should be for every Commission process and program, is how does it promote investor protection?  From this central mission and premise, we can continue to expect enhanced market efficiency and capital formation. 

And investor protection is not some esoteric or academic concept.  Investor protection is about people – people working to save for their children’s college, start a business, or retire and spend time with their grandchildren.  They are our neighbors, our friends, our teachers, our shopkeepers.  That’s whose hard-earned money we are trying to protect.  And that is one of the reasons why I greatly admire the work of the Consumer Federation of America, because that too is your focus.  So let me conclude by saying that I deeply respect what you all do every day on behalf of consumers and investors, and I appreciate the opportunity to address you today.  Thank you. 


[1] Director of Investor Protection, Consumer Federation of America.

[2] Seligman, Joel, The Transformation of Wall Street – A History of the Securities and Exchange Commission and Modern Corporate Finance, Northeastern University Press, 1995, p. 97.

[3] Id.

[4]  Transcript of W. O. Douglas’ press conference, September 22, 1937, Douglas Papers, Box No. 630, Library of Congress.  See  See also Text of W.O. Douglas’s Statement at Press Conference, The New York Times, September 23, 1937, p. 45. 

[5] See National Securities Markets Improvement Act of 1996, Public Law 104-290, Section 106.

[6] See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, Sections 915, 911, and 922-924.

[7] See Website for Office of the Investor Advocate, available at

[8] See Website for Investor Advisory Committee, available at

[9] U.S. Securities and Exchange Commission, 2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program, p. 2, available at

[10] Id. at 1 (referring to a large whistleblower award arising from an enforcement action relating to fraud that would have been otherwise difficult to detect).

[11] Id. at 2.

[12]  Text of address delivered by W.  O. Douglas at a dinner of the Association of Stock Exchange Firms, The New York Times, May 21, 1938 (noting that “we are also [business owners’] advocate).   

[13] See Release No. IC-28584, Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies (Jan. 13, 2009).

[14] See generally Hu, Henry T.C., Disclosure Universes and Modes of Information:  Banks, Innovation, and Divergent Regulatory Quests, 31 Yale J. on Reg. 565 (2014).

[15] See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, Section 621.

[16] See, e.g., Recommendations of the Investor Advisory Committee Regarding SEC Rulemaking to Explore Universal Proxy Ballots, Adopted July 25, 2013, available at

[17] In fact, we have new data from the Chartered Financial Analyst (or CFA) Institute which indicates that  “proxy access has the potential to enhance board performance and raise overall US market capitalization by between $3.5 billion and $140.3 billion” with “little cost or disruption to companies and the markets as a whole.” See Proxy Access in the United States, Revisiting the Proposed SEC Rule, CFA Institute, August 2014, pp. 8-9, available at  

[18] See Investment Company Act of 1940, Section 9(a); 15 U.S.C. § 80a-9(a)(1940).

[19] See generally Ivanov, Vladimir and Baugess, Scott, Capital Raising in the U.S.: An Analysis of Unregistered Offerings Using the Regulation D Exemption, 2009-2012, An update of the February 2012 study, July 2013, available at

[20] See Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, Release. No. 33-9414, July 10, 2013.

[21] Id. at 104-105.

[22] See, e.g., Section 27A(b) of the Securities Act and Section 21E(b) of the Exchange Act (exclusions to the use of safe harbors for forward looking statements); Section 9 of the Investment Company Act of 1940 (ineligibility of certain affiliated persons and underwriters); Rule 405 of the Securities Act  (disqualification from eligibility for status as a “Well-Known Seasoned Issuer”); Rule 262 of the Securities Act (disqualification from eligibility for Regulation A exemption); Rule 507 of the Securities Act (disqualification from eligibility for exemption under Rules 504, 505 and 506 of Regulation D); Rule 602 of the Securities Act (disqualification from eligibility for Regulation E exemption); Rule 206(4)-3 of the Investment Advisers Act of 1940 (ineligibility to receive solicitation fees). 

[23] See Commission Order available at

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