Securities and Exchange Commission Investor Advisory Committee
Minutes of April 10, 2014 Meeting
The Investor Advisory Committee (IAC) met on April 10, 2014 from 10:00 a.m. to approximately 3:15 p.m. in the multipurpose room of the Securities and Exchange Commission’s headquarters in Washington, D.C. The meeting was open to the public and transmitted live by webcast.
The following persons attended the meeting:
Commissioners of the Securities and Exchange CommissionChair Mary Jo White (morning session only)
Commissioner Luis Aguilar (morning session only)
Commissioner Daniel Gallagher (morning session only)
Commissioner Kara Stein (morning session only)
Commissioner Michael Piwowar (morning session only)
Advisory Committee MembersKurt Schacht, Chairman
Craig Goettsch, Vice Chairman
J. Robert Brown, Jr., Secretary
Jean Setzfand, Assistant Secretary
Adam M. Kanzer (phone, morning session only)
Staff of the Securities and Exchange Commission
Mr. Goettsch opened the meeting by expressing deep sorrow over the death of the IAC’s former chairman, Joseph A. Dear, and asked for suggestions on how to honor his service to the Committee. Mr. Goettsch welcomed Chair White and Commissioners Gallagher, Stein, Piwowar and Aguilar. Separately, Mr. Goettsch thanked the Commission for its April 3 announcement seeking comments on a recommendation by the Investor Advisory Committee regarding disclosure by target date mutual funds.
Chair White welcomed the Committee and also expressed her condolences over the passing of Mr. Dear. She welcomed Rick Fleming as the first SEC Investor Advocate and newest member of the IAC. Chair White then turned to recommendations made by the IAC, beginning with target date mutual funds. She noted that the Commission has reopened the comment period on target date mutual funds and was specifically seeking comment on the IAC’s recommendation. Chair White also reported that Commission staff was developing a recommendation to implement a pilot program to allow certain companies to use wider tick sizes. In addition, she said that the staff was working to address other IAC recommendations, including universal proxy ballots, data tagging, and making broker-dealers subject to a fiduciary duty when providing investment advice to retail investors. Commissioners Gallagher, Stein, Piwowar and Aguilar also welcomed the Committee and made brief comments.
Mr. Goettsch asked whether the IAC members had questions or comments. Damon Silvers asked about the Commission’s view on high frequency trading. Chair White said that market structure issues were a high priority for the Commission.
REMARKS BY THE INVESTOR ADVOCATE
Mr. Fleming described his plans for the newly established Office of the Investor Advocate, his background and his motivation to represent the interests of investors. He emphasized the legitimate role that government serves in ensuring the fair treatment of all participants, including individual investors, in the securities markets.
JANUARY 31, 2014, MEETING MINUTES APPROVAL
The Committee amended the minutes to reflect that three members had dissented from the recommendation on decimalization and tick size. The Committee approved the amended minutes without objection.
ELECTION OF INVESTOR ADVISORY COMMITTEE CHAIRMAN
The Committee unanimously elected Kurt Schacht as the new Chairman. He pledged to do his best to support an investor-focused Committee voice that was organized, reasoned and impactful on the regulatory and policy process. Doing so, he said, would improve investor confidence and the integrity of securities markets.
DISCUSSION OF BYLAWS AND ADMINISTRATIVE MATTERS
Mr. Goettsch noted that the current vacancy has prompted the officers to review the bylaws. The bylaws provide that a person appointed to fill a vacancy shall serve the remainder of the term. Mr. Goettsch stated that the officers have found a potentially different reading in the statute, and he asked Bryant Morris of the General Counsel's Office to elaborate. Mr. Morris explained that the statute calls for each member to serve for a term of four years, and this was potentially in conflict with the bylaw provision (which calls for members who are appointed to serve out the remainder of a term, which would be less than four years).
Mr. Goettsch indicated that the officers and subcommittee chairs, serving as an executive committee, would continue to confer with Commission staff to explore a solution that would ensure continuity of the work of the Committee. This includes the concepts of members continuing to serve until a successor is appointed and the creation of staggered terms. Mr. Goettsch said that the officers hope to present a recommendation to the full Committee by its next meeting.
CONSIDERATION OF JOINT RECOMMENDATIONS OF THE INVESTOR AS PURCHASER AND THE INVESTOR EDUCATION SUBCOMMITTEES REGARDING CROWDFUNDING REGULATIONS
Ms. Roper and Mr. Ganser presented the joint recommendations (italicized below) from the Investor as Purchaser and the Investor Education Subcommittees regarding crowdfunding regulations and invited comments and questions.
The Committee recommends that the Commission adopt regulations implementing crowdfunding that are both consistent with the statute and commensurate with the risks inherent in allowing early stage start-up companies to sell securities based on limited information to unsophisticated, low net worth investors. To achieve that goal, the Commission will need to strengthen its proposed rules in several key areas. The Committee believes the following changes are needed to better ensure that investors understand the risks of crowdfunding and avoid unaffordable financial losses.
The Commission should, as an initial matter, adopt tighter restrictions on the amounts that investors can invest in crowdfunding. Specifically, the Committee recommends that the Commission initially use a “lesser of” approach to setting investment limits (as explained below), with the exception that investment limits for accredited investors be calculated using the “greater of” methodology. If experience suggests that crowdfunding is a success for investors, the Commission can consider whether to expand the amount that individual investors can place at risk by adopting a “greater of” methodology.
The Commission should strengthen the mechanisms for the enforcement of the investment limits in order to better prevent errors and evasion. To reduce errors in calculating investment limits, the Committee recommends that intermediaries be required to create a tool that investors would use to assemble the underlying data on which investment limits are calculated and to perform the calculations electronically. The Committee also recommends that the Commission view the provision allowing reliance on investor representations to enforce compliance with investment limits across platforms to be a temporary one. The Commission should monitor the effectiveness of this approach in order to determine whether it should be continued or whether a more stringent enforcement mechanism is needed.
The Commission should clarify and strengthen the obligations of crowdfunding intermediaries to ensure compliance by issuers with the crowdfunding title and relevant regulations. The Commission should clarify the requirements for background checks. It should also clearly affirm the right of portals to “curate” offerings, including the right to reject offerings based on a variety of factors, without automatically triggering regulation as a broker-dealer. In revising the compliance obligations of intermediaries, the Commission should consider adopting a tiered approach – based on such factors as the size of the offering, permitted investment amounts, and participation by individuals with a record of securities law violations – in order to minimize regulatory costs where the risks are smallest and maximize protections where risks are greatest.
The Commission should take further steps to ensure that educational materials clearly convey the required information and are reviewed and, to the degree possible, understood by investors.
The Commission should withdraw its proposed definition of electronic delivery, which fails to ensure that investors actually receive the required disclosures and educational materials, and continue to rely instead on the strong and effective policy for electronic delivery adopted by the Commission in the mid-1990s.
The Commission should require crowdfunding offerings to be integrated with offerings in reliance on a separate exemption where needed and appropriate to prevent evasion of regulatory requirements.
After discussion, the Committee agreed to change the word “Findings” to “Preliminary Observations” at the beginning of the document and the Supporting Rationale to Recommendation 3. In addition, the Committee approved the following amendments (changes underlined).
The Commission should clarify and strengthen the obligations of crowdfunding intermediaries to ensure compliance by issuers with the crowdfunding title and relevant regulations. The Commission should clarify the requirements for background checks. It should also clearly affirm the right of portals to “curate” offerings, including the right to reject offerings based on whatever factors the portal deems appropriate (including the issues of liquidity and dilution referred to in our Preliminary Observations), without automatically triggering regulation as a broker-dealer. In revising the compliance obligations of intermediaries, the Commission should consider adopting a tiered approach – based on such factors as the size of the offering, permitted investment amounts, and participation by individuals with a record of securities law violations – in order to minimize regulatory costs where the risks are smallest and maximize protections where risks are greatest.
Supporting Rationale to Recommendation 4
Instead of allowing intermediaries to rely on the representations of investors that they have reviewed the material, the Commission should consider requiring or encouraging the material to be presented in the form of participatory education such as an interactive questionnaire that investors are required to complete successfully before being allowed to invest through the intermediary’s portal.
Fifth Bullet of Findings
Recognizing these and other risks associated with crowdfunding, Congress included a number of provisions in the crowdfunding title of the JOBS Act designed to address those risks. These include first and foremost provisions to limit the amount individuals can invest through crowdfunding,
The committee unanimously approved the recommendations as amended.
LUNCH BREAK [NON-PUBLIC SUBCOMMITTEE SESSIONS]
The public meeting resumed after lunch and the non-public subcommittee sessions
COMMITTEE OFFICERS’ MEETINGS WITH CHAIR WHITE, COMMISSIONER AGUILAR, COMMISSIONER GALLAGHER, AND THE SENATE BANKING COMMITTEE
Ms. Setzfand briefed the Committee on meetings that a delegation of Committee Officers had held the previous day with Chair White, Commissioner Piwowar, Commissioner Stein, and the Investor Advocate. The delegation consisted of the Vice Chairman, Secretary, Assistant Secretary, Chairs of the Investor as Purchaser, Investor Education, and Market Structure Subcommittees, and a representative of the Investor as Owner Subcommittee.
The participants discussed the role of the IAC in SEC rulemaking, the status of pending IAC recommendations, the role of the Office of the Investor Advocate and other issues.
INVESTOR AS OWNER SUBCOMMITTEE REPORT
Ms. Yerger reported that the Investor as Owner Subcommittee received two briefings: one from representatives of Broadridge Financial Solutions, Inc., who discussed the mechanics of proxy distribution and tabulation; and the other from Shelley Parratt of the Division of Corporation Finance on its review of disclosure documents. The subcommittee intends to prepare a recommendation addressing proxy distribution impartiality.
MARKET STRUCTURE SUBCOMMITTEE REPORT
Mr. Wallman reported that the Market Structure Subcommittee met with Daniel Gray of the Division of Trading and Markets. Mr. Wallman said that the subcommittee is examining market structure issues, which he grouped into four buckets:
INVESTOR AS PURCHASER SUBCOMMITTEE REPORT
Ms. Roper reported that the Investor as Purchaser Subcommittee is examining issues involving fixed income securities as well as the definitions of “Accredited Investor” and “Qualified Purchaser.” As a long-term project, she indicated that the subcommittee would look at the entire disclosure system for retail investors, including fee and risk disclosures and delivery mechanisms.
INVESTOR EDUCATION SUBCOMMITTEE REPORT
Mr. Ganser reported that the Investor Education Subcommittee is working jointly with the Investor as Purchaser Subcommittee.
SEC OFFICE OF INVESTOR EDUCATION AND ADVOCACY
Mr. Goettsch thanked Director Lori Schock and Chief Counsel Owen Donley of the SEC Office of Investor Education and Advocacy for their support to the IAC since its inception. Mr. Goettsch noted that the Office of the Investor Advocate will assume those responsibilities. He invited Ms. Schock and Mr. Donley to say a few words to the committee.
Mr. Goettsch closed the meeting.
 A webcast of the meeting is available at http://www.sec.gov/video/webcast-archive-player.shtml?document_id=iac041014.
 For purposes of these minutes, descriptions of discussions have been grouped and listed seriatim, even though the discussions of different items overlapped on occasion.
 The Jan. 31, 2014, meeting minutes are available at www.sec.gov/news/otherwebcasts/2014/iac013114.shtml.
 The Recommendations Regarding Crowdfunding Regulations are available at http://www.sec.gov/spotlight/investor-advisory-committee-2012/crowdfunding-recommendation.pdf