Securities and Exchange Commission Investor Advisory Committee

Minutes of July 10, 2014 Meeting[1]

The Investor Advisory Committee (IAC) met on July 10, 2014 in the multipurpose room of the Securities and Exchange Commission’s headquarters in Washington, D.C.  The meeting, which convened at 10 a.m., was open to the public and transmitted live by webcast.

The following persons attended the meeting:

Commissioners of the Securities and Exchange Commission
Chair Mary Jo White (morning session only)
Commissioner Luis Aguilar (morning session only)
Commissioner Daniel Gallagher (morning session only)
Commissioner Kara Stein (morning session only)

Advisory Committee Members[2]

Staff of the Securities and Exchange Commission

• Stephen Luparello, Director, Division of Trading & Markets 
• Jim Burns, Deputy Director, Division of Trading & Markets 
• David Shillman, Associate Director, Office of Market Supervision, Division of Trading & Markets 
• D. Bryant Morris, Assistant General Counsel, Legal Policy Group, Office of General Counsel 
• Marc Sharma, Senior Special Counsel, Office of the Investor Advocate 

OPENING

Mr. Schacht opened the meeting by noting that it marked the Committee’s second anniversary and thus the mid-point of most members’ terms.  Mr. Schacht welcomed Mr. Carcello, the Committee’s newest member, as well as Chair White and the SEC Commissioners in attendance.

Chair White congratulated Mr. Schacht on his election as Committee chair.  She also welcomed Mr. Carcello, as did other Commissioners in subsequent remarks.  Chair White noted that the Office of the Investor Advocate, led by Rick Fleming, had issued its first report to Congress.  The report included a recommendation for additional funding to enable the SEC to enhance its examination program of investment advisors.  The Chair noted that this also had been the subject of a recommendation by the IAC.  The Chair proceeded to give brief updates on the status of the Committee’s other outstanding recommendations, including the crowdfunding provisions of the JOBS Act, data tagging, target date funds, and a tick size pilot. 

Commissioner Stein said she was pleased that the Investor Advocate’s annual report provided information related to the committee’s recommendations. 

Commissioner Aguilar, speaking remotely, applauded the Committee for its focus on elderly financial abuse.  He remarked that the focus on financial exploitation provides the SEC a critical and unique opportunity to contribute to the federal government's response to elder financial abuse.  He elaborated on what the SEC has done so far, and what it can do going forward.

Commissioner Gallagher said it was time for the Commission to redouble its efforts to deal with elderly financial abuse.  He also said that he was pleased that the Investor Advocate’s annual report placed a priority on municipal market reform. 

Mr. Silvers asked the Chair how she and the Commission were responding to requests from the issuer community for regulatory change in the corporate governance area.  He expressed concerns over what he saw as demands motivated by a desire for investors to have less information and less ability to act in the corporate governance system. 

Chair White replied that she was seeking to give more meaningful information that investors would find more understandable, usable, and helpful. 

APRIL 10, 2014, MEETING MINUTES APPROVAL

The Committee approved the minutes of its previous meeting on April 10, 2014, without objection.

Administrative Session (Discussion of By-Laws)

Following discussion, the Committee amended Bylaw D for vacancies without objection.  The amendment seeks to conform the language of Bylaw D to the statute establishing the IAC.

The previous bylaw stated:

D.        Vacancies.  Vacancies among the members, whether caused by the resignation, death, removal, expiration of a term, or otherwise, will be filled in the manner that the exited member was appointed.  Any person selected to replace a member, other than at the expiration of a term, will serve only for the unexpired portion of the term, and must be re-appointed to continue serving.

The amended bylaw states:

D.        Vacancies.  Vacancies among the members, whether caused by the resignation, death, removal, expiration of a term, or otherwise, will be filled in the manner that the exited member was appointed. Any person selected to replace a member will serve for a term of four years.

Discussion of the Definition of Accredited Investor

Barbara Roper summarized the current accredited investor definition and ideas that the Investor as Purchase Subcommittee has been considering to revise it.  She said that the definition was meant to restrict the sale of certain non-registered securities to persons who could fend for themselves.  To fend for oneself, she continued, an investor needs three types of capabilities: access to information, the sophistication to assess the risks and merits of the investment, and the financial capability to bear the risks.  Ms. Roper said that the current definition provides a test of income or net worth, which she called a poor proxy for the first two types of capabilities (access to information and sophistication to analyze it).

Ms. Roper invited fellow IAC members to discuss the definition, and a wide-ranging discussion ensued.  Ms. Roper said that the subcommittee would continue to work on the issue.

Discussion of Elder Fraud with Ms. Greenlee

Dr. Brown introduced the next speaker, Kathy Greenlee, Assistant Secretary for Aging at the U.S. Department of Health and Human Services.  She spoke about the importance of the issue and her commitment to it.  Among other things, she highlighted the need to build core competencies among professionals to recognize signs of elder abuse.  She also mentioned the need for cross-disciplinary training and developing screening tools. Ms. Greenlee offered her availability to help the IAC to address the issue together. 

At the conclusion of Ms. Greenlee’s remarks, Commissioner Aguilar thanked her for appearing before the IAC and for her leadership on the issue of elder abuse.  He also drew attention to guidance issued jointly by the SEC and other federal regulators.[3]  The guidance clarifies that reporting suspected financial abuse of older adults to appropriate local, state, or federal agencies does not, in general, violate the privacy provisions of the Gramm-Leach-Bliley Act or its implementing regulations.  In addition, the document includes a list of potential signs of elder financial exploitation. 

Several IAC members expressed their willingness to work on the issue of elder financial abuse and proposed various approaches to address the challenges.

RECESS 

The Committee went into recess at 12:51 p.m. for a lunch break and non-public subcommittee meetings.

PUBLIC MEETING RESUMED

The public meeting resumed at 2:26 p.m.

Commission Staff Briefing on Market Structure and Proposed Market Structure Advisory Committee

The following three senior staff members of the Division of Trading and Markets briefed the IAC:

• Stephen Luparello, Director
• Jim Burns, Deputy Director 
• David Shillman, Associate Director, Office of Market  Supervision, Division of Trading & Markets 

The three briefed the Committee on short-term and intermediate-term initiatives involving equity and fixed income markets.  Several of the short-term initiatives are aimed at high-frequency trading firms and active proprietary traders.  These measures would include requiring registration, enhancing regulatory and SRO oversight, and, in certain situations, constraining the trading of such entities.  Other rulemaking would address ATSs and dark pools, including such issues as order routing, order types, and the discrepancy in the latency between consolidated market data feeds and proprietary market data feeds.

Mr. Burns described the role of the forthcoming Market Structure Advisory Committee. He said that the staff would look to that committee as a sounding board for ideas that are being developed within the Commission. 

Mr. Schacht asked which two or three priorities would benefit from additional input from the IAC.  Mr. Luparello cited payment for order flow and the extent that disclosure was a useful tool or whether there was a point of diminishing returns.  Mr. Shillman commented that the Commission could benefit from the investor perspective on how to fine-tune its efforts involving the fixed income market, which he noted was heavily retail-dominated.

Subcommittee Reports/Discussion

The chairs of the subcommittees reported on the non-public discussions each group had held preceding the afternoon session.

Barbara Roper, chairman of the Investor as Purchaser Subcommittee, reported that the group had discussed its strategy to move forward with a recommendation on the Accredited Investor definition.  She said this could involve looking to state regulators or other partners to get a clearer picture of the harm to investors who lack sophistication.  She added that the subcommittee would revise its recommendation based on the morning’s discussion.

Anne Sheehan, chairman of the Investor as Owner Subcommittee, reported that Mike Garland, Assistant Comptroller for the City of New York, had spoken to the group as part of its continuing discussion on the disclosure of preliminary voting results.  Ms. Sheehan said that the subcommittee would bring a recommendation to the full committee at its next meeting. 

In addition, the subcommittee heard from staff of the divisions of Corporation Finance and Investment Management on the recent guidance that the staff issued regarding proxy voting and proxy advisory firms.  Ms. Sheehan said that there had been some public misunderstandings about the guidance and the obligation to vote proxies.  She said that the guidance did not address the fiduciary obligation of developing proxy voting guidelines, because the staff felt such guidance was already available. 

Mr. Ganser, chairman of the Investor Education Subcommittee, said that the group had initiated efforts to work on a multi-agency investor awareness initiative.  He called that initiative separate from but highly complementary to issues raised by Ms. Greenlee.  He added that the subcommittee would follow up on an initiative to combat elder financial exploitation.  Finally, he said that the subcommittee would join with the Investor Purchaser Committee on the accredited investor definition. 

Mr. Wallman, chairman of the Market Structure Subcommittee, said that the group had discussed changing the settlement cycle from T+3 to T+2.   He said that the subcommittee expected to have a recommendation to present to the full committee at the October meeting.

Mr. Schacht, chair of the IAC, reported that the previous day the Executive Committee, continuing its tradition, had met individually with Chair White, Mr. Fleming, Mr. Luparello, and Keith Higgins, Director of Corporation Finance.

CLOSING

Mr. Holmes made a motion to adjourn and the motion carried without objection.  The meeting was adjourned at 3:29 p.m.