SEC Investor Advisory Committee Meeting on DOL Fiduciary and Elder Financial Abuse
Securities and Exchange Commission
“Meeting of the Investor Advisory Committee”
Thursday, July 16, 2015
Key Topics & Takeaways
- Comprehensive Searchable Advisor Database: J. Robert Brown, Jr. recommended that the SEC: (1) develop a database that allows people to search for anyone who has been disciplined by the SEC; (2) improve comparability of data issued with respect to brokers and advisors; and (3) take the lead when negotiating with other agencies in trying to create the database. He stated that investors should be able to have a report similar to “Carfax” that would include a complete background of a seller prior to purchasing a financial product.
- DOL Fiduciary: Tim Hauser said that the DOL identified “demonstrable injuries” that flow from the current compensation structure, but that they are committed to “fix the problem.” Referring to the proposed rule, Hauser stated that “there will be changes, no doubt about it.” Jerry Lombard noted that the current approach of the DOL is not the “right” approach, as it would be “confusing, burdensome,” and would increase costs and eliminate advice for investors.
- Disclosures: Susan Nash noted that pressure has been put on the Commission to change how risk disclosures are currently presented in a narrative. She offered the creation of risk metrics as a possible solution, while recognizing that this still may be hard for the average retail investor to understand. She explained that it was her hope that the inclusion of this information would make analysis easier for financial advisors and the media, whom would then pass down their findings to average investors.
Speakers
- Members of the SEC Investor Advisory Committee
- Kara Stein, Commissioner, Securities and Exchange Commission
- Judy Mares, Deputy Assistant Secretary, Employee Benefits Security Administration, U.S. Department of Labor
- Timothy Hauser, Deputy Assistant Secretary, Employee Benefits Security Administration, U.S. Department of Labor
- Jerome Lombard Jr., President, Janney Private Client Group, Janney Montgomery Scott LLC
- Marilyn Mohrman-Gillis, Managing Director, Public Policy and Communications, Certified Financial Planner Board of Standards, Inc.
- Patrick McGurn, Special Counsel at Institutional Shareholder Services (ISS)
- Michael Garland, Assistant Comptroller for Corporate Governance and Responsible Investment, New York City Office of the Comptroller
- Jonathan Ingram, Deputy Chief Counsel, Division of Corporate Finance of the SEC
- Lori Schock, Director, Office of Investor Education and Advocacy, SEC
- Susan Nash, Associate Director and Deputy for Disclosure Policy, Division of Investment Management, SEC
- Mercer Bullard, President and Founder, Fund Democracy, Inc.
Addressing Elder Financial Abuse
J. Robert Brown, Jr. of the Investor as Owners Subcommittee spoke of the “one stop shop” background check database they recommend for “anyone selling a financial product,” explaining that it will ensure “people who should not be in the business are not in the business.” He stated that the Office of Federal Insurance is creating a national association of registered agents and brokers that will have a board of directors and will work in all states. Brown continued that the organization will create a database “explicitly designed for enforcement,” and will track all actions brought against insurance agents. He stressed that while regulators can use the database, it “should be open to investors.”
Brown had three recommendations for the Securities and Exchange Commission (SEC): (1) develop a database that allows people to search for anyone who has been disciplined by the SEC; (2) improve comparability of data issued with respect to brokers and advisors; and (3) take the lead when negotiating with other agencies in trying to create the database. He stated that investors should be able to have a report similar to “Carfax” that would include a complete background of a seller prior to purchasing a financial product.
Rick Fleming, Investor Advocate, stated that improvements are being made to the Investment Adviser Public Disclosure (IAPD) database to make it mobile friendly, easier to find within a search engine, and to improve the functionality of the search function. Brown replied that the IAPD name “needs to go,” and be replaced with something “more illustrative,” as people do not realize it is a search engine for the background of advisors.
Barbara Roper stated that she “strongly supports” the recommendation to have the background check database, but wondered if the reports provide the right information in an easy way for investors to understand, and if there are ways to better ensure investors see the reports.
The recommendation of the background check database by the Investors as Owner Subcommittee was approved by the Investor Advocacy Committee with unanimous support.
Remarks by Commissioner Kara Stein
Commissioner Kara Stein stated that the proposal by the Investor as Owners Subcommittee was “very thoughtful.” She continued that looking at mutual fund fees and how investors might best understand the fees “is critically important.” Stein explained that SEC Chair Mary Jo White asked her staff to bring a universal proxy ballot rulemaking recommendation to the Commission and stated that she is “very pleased” to be moving forward with universal proxy ballots.
Discussion of the DOL Fiduciary Rule Proposal
Judy Mares,Deputy Assistant Secretary, Employee Benefits Security Administration
Judy Mares stated that individuals now have to plan and execute their retirement savings “path,” and therefore the “time to act was critical…to provide more consumer protections.” She explained that the DOL’s Regulatory Impact Analysis found evidence of harm to investors, stating that conflicts of interest cost investors $17 billion annually.
Timothy Hauser,Deputy Assistant Secretary, Employee Benefits Security Administration
Tim Hauser stated that the “central component of the regulatory regime is the definition of fiduciary.” He continued that the DOL’s approach is to outlaw conflicts of interest unless they are exempted and said the goal is to improve the marketplace. Hauser said that the DOL identified “demonstrable injuries” that flow from the current compensation structure, but that they are committed to “fix the problem.” Referring to the proposed rule, Hauser stated that “there will be changes, no doubt about it.” He stressed that the most important exemption the proposal offers is the best interest contract (BIC) exemption, calling it “the heart of the proposal.”
Jerome Lombard,Jr., President, Janney Private Client Group, Janney Montgomery Scott LLC
Jerry Lombard stressed that investors deserve that their interests to be placed first, and that Janney has been supportive since the Securities Industry and Financial Markets Association (SIFMA) provided a roadmap for a broker dealer fiduciary standard in 2009. He noted that the current approach of the DOL is not the “right” approach, as it would be “confusing, burdensome,” and would increase costs and eliminate advice for investors. Lombard stressed that the BIC exemption would impose new legal liabilities and would require revising the advisor compensation model, noting concern that municipal bonds and foreign bonds are among the impermissible assets. He noted the “irony” in requiring future projections of returns for clients while the Financial Industry Regulatory Authority (FINRA) does not allow projections. Lombard stated that if the proposed rule goes into effect, Janney will have to terminate many account relationships due to the size of the accounts, and said he “cannot fathom how this is in their best interest.” He concluded that while he is in favor of a single fiduciary standard for all account types, the DOL proposal should not be the approach taken, and that the BIC is “unworkable as written today.”
Marilyn Mohrman-Gillis, Managing Director, Public Policy and Communications, Certified Financial Planner Board of Standards, Inc.
Marilyn Mohrman-Gillis stated her support of the DOL’s proposed rulemaking, calling it the “perfect storm for consumers and investors.” She noted that today’s marketplace is “very difficult for investors to navigate” with “increasingly complex” financial products. She explained that consumers are unable to distinguish between fiduciary advisors and non-fiduciary advisors, which is why the rule is “so important.” She noted that her company put in place a similar practice in 2007 and has since seen a growth of 30 percent in certified financial planners. She explained that the BIC exemption is workable, as it is business model “neutral” and provides “flexibility.” Mohrman-Gillis concluded that the reform is “long overdue” and that she will help the DOL make the rule work across business models.
Committee Questions
Joseph Carcello asked Lombard how a different proposed solution could address the problem of conflicted interests while still providing the industry with a viable business model. Lombard noted that expense management is a critical part of the framework and that any solution should cover all accounts and client needs, but said he is unsure of the “roadmap to get there.”
J. Robert Brown, Jr. said that there seems to be agreement that a suitability standard is not adequate, noting that FINRA rewrote their suitability requirement and highlighted the “best interest standard” that SIFMA proposed. Brown said believes there are better approaches than to “invent something brand new” and said he appreciates the disruption that this could cause. He asked Lombard about alternative ways to approach the problem.
Lombard noted that the broker dealer model is unique and said Congress recognized the need to preserve the business model when it drafted Section 913 of the Dodd-Frank Act. He added that firms would benefit from increased trust and confidence and expressed support for a standard that could accommodate the benefits of the brokerage model.
Barbara Roper said that Section 913 instructed SEC to develop a uniform standard that would be as strong as what is already in place today, adding that the planning community has “embraced” the standard. She expressed support for the DOL proposal and said “most investors” do not know if they are working with a broker or a registered investment advisor.
Jean Setzfand applauded the DOL proposal and asked if they had any advice or guidance for the SEC moving forward with its own standard. Hauser said he did not have any recommendation, but noted that SEC staff provided technical help with the DOL proposal and added it is not for him to tell the SEC what it should be doing.
Fleming clarified that a standard of care under Section 913 is to be “no less stringent,” needs to allow for sales-based compensation, cannot impose a continuing duty of care, and cannot limit the sale of proprietary products. He said it is “hard to reconcile” the carve-outs in the DOL proposal with a traditional fiduciary duty and asked DOL how it deals with those issues.
Hauser noted the statutory framework of the Employee Retirement Income Security Act (ERISA) and its jurisdiction over retirement accounts and tax preferred saving vehicles. He said the DOL is “not trying to disrupt existing business models, including commission structures,” noting that the proposal does not require an ongoing obligation to monitor beyond a party’s expectations or what is contractually agreed to. He added that there is no prohibition on differential compensation but said the fee structures should not incentivize people to act in ways that are contrary to the client’s best interest.
Darcy Bradbury expressed concern about the product limitations included in the BIC exemption. Mares conceded that the DOL “did not include the universe” of assets, but said they did include 96 percent of assets that are held in IRAs, while excluding “non-public,” “uncommon,” and “complicated” securities. Mohrman-Gillis added that the DOL “drew a line in favor of investor protection.”
Damon Silvers said investors need to understand what they are paying for when they receive advice. He noted that “workable rules” are necessary for participants that want to stay in the brokerage model, but said it is important to know what a “genuine concern” from the industry is in this regard. Mares agreed that consumers need to understand what they are paying and said it is not the DOL’s intent to decrease access to good advice.
Roy Katzovicz said that from a regulatory perspective, the BIC exemption is an “interesting tool” because it seems to create authority where there is none, and said the regulator would have the ability to decide whether the contract qualifies the service provider for the exemption and whether they have breached the contract, in addition to the counterparty to the contract having the ability to sue. He noted that “although a rule may be written with little ink,” there can still be a large degree of confusion and cost. Katzovicz asked what enforcement authority is available and what role private law enforcers play.
Hauser noted that enforcement is an important component of the BIC exemption, but said DOL is “not trying to help out plaintiff’s attorneys.” He said the DOL tried to “strike balance” by permitting individual arbitration and only limiting it in the class action context.
Roper concluded the discussion expressing support for both the DOL and SEC moving forward with fiduciary standards.
Shareholder Rights Update Panel
Patrick McGurn, Special Counsel at Institutional Shareholder Services (ISS)
Patrick McGurn spoke on behalf of individual shareholders and said that more than 50 percent of resolutions that company boards were asked to consider related to environmental and social concerns. He highlighted three key points derived from two different proposals on the topic: (1) the results were driven by shareholders; (2) differentiation in voting based on specific terms occurred; and (3) shareholders were not confused by alternative appearances on ballots. Other key takeaways included: stiffening of resolve in some board rooms at the corporate level; uncontested board room elections at an all time high (96.3 percent); and that investors are now becoming very selective in providing negative votes. McGurn further expressed support for “say on pay” to provide a tighter link between pay and performance which he said would lead to more disclosures and more accountability.
Michael Garland,Assistant Comptroller for Corporate Governance and Responsible Investment, New York City Office of the Comptroller
Michael Garland noted that investors overwhelmingly support proxy access and said the landscape on proxy access has shifted greatly since February. Garland argued that voting results this season have demonstrated investor demand for viable access to proxies, which he said provides the SEC an opportune time to re-address the issue. Garland cited that shareholders were not confused by the presence of multiple proposals on the same topic and expressed concern that many companies universally adopted proxy access without offering different proposals. He said that limits on the ability of shareholders to aggregate shares are not in spirit of their proposal and further emphasized concern that there were no protections to insure that loaned shares can be counted towards ownership.
Jonathan Ingram, Deputy Chief Counsel, Division of Corporate Finance of the SEC
Jonathan Ingram said exclusion should be allowed for any proposal. The Commission received 18 comment letters, some from members of the committee, and Ingram noted that several commenters have supported SEC Rule 14a-8(i)(9), while others said SEC should take a more broad, holistic approach. Ingram briefly explained that shareholders do not have as much interaction and involvement as they once did.
Committee Questions
When asked about taking the proper steps for disclosure, Garland said the process is not a substitute for SEC action. He noted that the proposed regulation would become workable if companies were permitted to distribute information and materials. On the pay ratio provision of Dodd-Frank, Garland said there are always companies acting in good faith but the provision is meant to support investors and proxy access.
A question was raised about the process regarding regulation S-X and S-K to which Ingram responded, “regulation S-X is further along than S-K” but was unable to provide a time table of completion.
Investment Management Panel Discussion – Disclosure of Fees and Risks in Fund Products
Roper opened the discussion by explaining how Section 917 of the Dodd-Frank Act instructs the SEC to examine how disclosures can be improved to help retail investors better understand them. According to Roper, the results of surveys conducted by the SEC to test how well investors understood disclosures, prove that investors lack the financial literacy to do understand them. She asked the panelists to consider timing, content, and format when discussing possible ways to improve disclosure.
Lori Schock, Director, Office of Investor Education and Advocacy, SEC
In her opening remarks, Lori Schock began to explain the study Roper referenced. She elaborated on the finding that retail investors using online platforms prefer to receive disclosures at a different time then was recommended by many of panelists present. Schock explained that retail investors who took the survey online wanted the disclosure before they made trades. However, she noted, some panelists submitted comment letters saying that they thought disclosures should be presented closer to the time that a trade is made.
Susan Nash,Associate Director and Deputy for Disclosure Policy, Division of Investment Management, SEC
Susan Nash spoke about prospectuses and explained how a recent change to the Commission’s policy now allows for only a summary of the prospectus to be mailed to investors, as long as the complete prospectus is available online. According to Nash, the Commission has made a continual effort to make the prospectuses easier to understand for investors, taking steps such as moving the fee table section of the document to the front.
Nash noted that pressure has been put on the Commission to change how risk disclosures are currently presented in a narrative. She offered the creation of risk metrics as a possible solution to this criticism, while recognizing that this still may be hard for the average retail investor to understand. She explained that it was her hope that the inclusion of this information would make analysis easier for financial advisors and the media, whom would then pass down their findings to average investors.
Mercer Bullard, Presidentand Founder, Fund Democracy, Inc.
Mercer Bullard opened by explaining that the only disclosures that really matter to investors are those regarding conflicts of interest. He said that people hire financial professionals to make investment decisions for them because they want to avoid having to analyze information themselves. Therefore, investors only want to know how the advice provided to them may be compromised. Bullard stated that the biggest failure of fee disclosure tables is that there is nothing to compare them to, making understanding distributions, for example, particularly difficult.
Committee Questions
In reply to a question posed by Jean Setzfand, Nash explained how she believed the SEC’s full focus is helping retail investors. She cited moving the fee table to the beginning of prospectuses as evidence of their intent. However, Nash described how this goal is difficult to achieve when having to accurately explain 12b-1 fees to retail investors, for example. In a later line of questioning by Darcy Bradbury, Nash explained that it is hard to make the fee disclosure tables simpler without regulating the way that compensation is made. According to Nash, the fee disclosure tables are complex because of the compensation structures which they represent.
Regarding the quality of advice investors receive, Roper stated, “for many people the last investment decision they ever make is deciding who they are going to rely on for financial decisions.” She said that in the context of a mutual fund, it is hard for investors to understand what fees they are paying and what their brokers are being paid. Bullard said it needs to be easier for people to compare mutual fund fees, thus exposing these fees to market forces.
Roper said a common criticism from brokers is that compensation disclosure requirements are “too complicated” to disclose in a more simplified manner. She argued that if brokers were required to disclose differently, it could simplify their compensation structures, which in turn would make the fee tables easier for retail investors to understand. In reply, Mercer pointed out that the prospectus does disclose the manner in which brokers are compensated.
At the end of the panel, Joseph Carcello stated that it is becoming more important for people to understand disclosures as participation in defined contribution plans increases.
For more information on this hearing, please click here.
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Securities and Exchange Commission
“Meeting of the Investor Advisory Committee”
Thursday, July 16, 2015
Key Topics & Takeaways
- Comprehensive Searchable Advisor Database: J. Robert Brown, Jr. recommended that the SEC: (1) develop a database that allows people to search for anyone who has been disciplined by the SEC; (2) improve comparability of data issued with respect to brokers and advisors; and (3) take the lead when negotiating with other agencies in trying to create the database. He stated that investors should be able to have a report similar to “Carfax” that would include a complete background of a seller prior to purchasing a financial product.
- DOL Fiduciary: Tim Hauser said that the DOL identified “demonstrable injuries” that flow from the current compensation structure, but that they are committed to “fix the problem.” Referring to the proposed rule, Hauser stated that “there will be changes, no doubt about it.” Jerry Lombard noted that the current approach of the DOL is not the “right” approach, as it would be “confusing, burdensome,” and would increase costs and eliminate advice for investors.
- Disclosures: Susan Nash noted that pressure has been put on the Commission to change how risk disclosures are currently presented in a narrative. She offered the creation of risk metrics as a possible solution, while recognizing that this still may be hard for the average retail investor to understand. She explained that it was her hope that the inclusion of this information would make analysis easier for financial advisors and the media, whom would then pass down their findings to average investors.
Speakers
- Members of the SEC Investor Advisory Committee
- Kara Stein, Commissioner, Securities and Exchange Commission
- Judy Mares, Deputy Assistant Secretary, Employee Benefits Security Administration, U.S. Department of Labor
- Timothy Hauser, Deputy Assistant Secretary, Employee Benefits Security Administration, U.S. Department of Labor
- Jerome Lombard Jr., President, Janney Private Client Group, Janney Montgomery Scott LLC
- Marilyn Mohrman-Gillis, Managing Director, Public Policy and Communications, Certified Financial Planner Board of Standards, Inc.
- Patrick McGurn, Special Counsel at Institutional Shareholder Services (ISS)
- Michael Garland, Assistant Comptroller for Corporate Governance and Responsible Investment, New York City Office of the Comptroller
- Jonathan Ingram, Deputy Chief Counsel, Division of Corporate Finance of the SEC
- Lori Schock, Director, Office of Investor Education and Advocacy, SEC
- Susan Nash, Associate Director and Deputy for Disclosure Policy, Division of Investment Management, SEC
- Mercer Bullard, President and Founder, Fund Democracy, Inc.
Addressing Elder Financial Abuse
J. Robert Brown, Jr. of the Investor as Owners Subcommittee spoke of the “one stop shop” background check database they recommend for “anyone selling a financial product,” explaining that it will ensure “people who should not be in the business are not in the business.” He stated that the Office of Federal Insurance is creating a national association of registered agents and brokers that will have a board of directors and will work in all states. Brown continued that the organization will create a database “explicitly designed for enforcement,” and will track all actions brought against insurance agents. He stressed that while regulators can use the database, it “should be open to investors.”
Brown had three recommendations for the Securities and Exchange Commission (SEC): (1) develop a database that allows people to search for anyone who has been disciplined by the SEC; (2) improve comparability of data issued with respect to brokers and advisors; and (3) take the lead when negotiating with other agencies in trying to create the database. He stated that investors should be able to have a report similar to “Carfax” that would include a complete background of a seller prior to purchasing a financial product.
Rick Fleming, Investor Advocate, stated that improvements are being made to the Investment Adviser Public Disclosure (IAPD) database to make it mobile friendly, easier to find within a search engine, and to improve the functionality of the search function. Brown replied that the IAPD name “needs to go,” and be replaced with something “more illustrative,” as people do not realize it is a search engine for the background of advisors.
Barbara Roper stated that she “strongly supports” the recommendation to have the background check database, but wondered if the reports provide the right information in an easy way for investors to understand, and if there are ways to better ensure investors see the reports.
The recommendation of the background check database by the Investors as Owner Subcommittee was approved by the Investor Advocacy Committee with unanimous support.
Remarks by Commissioner Kara Stein
Commissioner Kara Stein stated that the proposal by the Investor as Owners Subcommittee was “very thoughtful.” She continued that looking at mutual fund fees and how investors might best understand the fees “is critically important.” Stein explained that SEC Chair Mary Jo White asked her staff to bring a universal proxy ballot rulemaking recommendation to the Commission and stated that she is “very pleased” to be moving forward with universal proxy ballots.
Discussion of the DOL Fiduciary Rule Proposal
Judy Mares,Deputy Assistant Secretary, Employee Benefits Security Administration
Judy Mares stated that individuals now have to plan and execute their retirement savings “path,” and therefore the “time to act was critical…to provide more consumer protections.” She explained that the DOL’s Regulatory Impact Analysis found evidence of harm to investors, stating that conflicts of interest cost investors $17 billion annually.
Timothy Hauser,Deputy Assistant Secretary, Employee Benefits Security Administration
Tim Hauser stated that the “central component of the regulatory regime is the definition of fiduciary.” He continued that the DOL’s approach is to outlaw conflicts of interest unless they are exempted and said the goal is to improve the marketplace. Hauser said that the DOL identified “demonstrable injuries” that flow from the current compensation structure, but that they are committed to “fix the problem.” Referring to the proposed rule, Hauser stated that “there will be changes, no doubt about it.” He stressed that the most important exemption the proposal offers is the best interest contract (BIC) exemption, calling it “the heart of the proposal.”
Jerome Lombard,Jr., President, Janney Private Client Group, Janney Montgomery Scott LLC
Jerry Lombard stressed that investors deserve that their interests to be placed first, and that Janney has been supportive since the Securities Industry and Financial Markets Association (SIFMA) provided a roadmap for a broker dealer fiduciary standard in 2009. He noted that the current approach of the DOL is not the “right” approach, as it would be “confusing, burdensome,” and would increase costs and eliminate advice for investors. Lombard stressed that the BIC exemption would impose new legal liabilities and would require revising the advisor compensation model, noting concern that municipal bonds and foreign bonds are among the impermissible assets. He noted the “irony” in requiring future projections of returns for clients while the Financial Industry Regulatory Authority (FINRA) does not allow projections. Lombard stated that if the proposed rule goes into effect, Janney will have to terminate many account relationships due to the size of the accounts, and said he “cannot fathom how this is in their best interest.” He concluded that while he is in favor of a single fiduciary standard for all account types, the DOL proposal should not be the approach taken, and that the BIC is “unworkable as written today.”
Marilyn Mohrman-Gillis, Managing Director, Public Policy and Communications, Certified Financial Planner Board of Standards, Inc.
Marilyn Mohrman-Gillis stated her support of the DOL’s proposed rulemaking, calling it the “perfect storm for consumers and investors.” She noted that today’s marketplace is “very difficult for investors to navigate” with “increasingly complex” financial products. She explained that consumers are unable to distinguish between fiduciary advisors and non-fiduciary advisors, which is why the rule is “so important.” She noted that her company put in place a similar practice in 2007 and has since seen a growth of 30 percent in certified financial planners. She explained that the BIC exemption is workable, as it is business model “neutral” and provides “flexibility.” Mohrman-Gillis concluded that the reform is “long overdue” and that she will help the DOL make the rule work across business models.
Committee Questions
Joseph Carcello asked Lombard how a different proposed solution could address the problem of conflicted interests while still providing the industry with a viable business model. Lombard noted that expense management is a critical part of the framework and that any solution should cover all accounts and client needs, but said he is unsure of the “roadmap to get there.”
J. Robert Brown, Jr. said that there seems to be agreement that a suitability standard is not adequate, noting that FINRA rewrote their suitability requirement and highlighted the “best interest standard” that SIFMA proposed. Brown said believes there are better approaches than to “invent something brand new” and said he appreciates the disruption that this could cause. He asked Lombard about alternative ways to approach the problem.
Lombard noted that the broker dealer model is unique and said Congress recognized the need to preserve the business model when it drafted Section 913 of the Dodd-Frank Act. He added that firms would benefit from increased trust and confidence and expressed support for a standard that could accommodate the benefits of the brokerage model.
Barbara Roper said that Section 913 instructed SEC to develop a uniform standard that would be as strong as what is already in place today, adding that the planning community has “embraced” the standard. She expressed support for the DOL proposal and said “most investors” do not know if they are working with a broker or a registered investment advisor.
Jean Setzfand applauded the DOL proposal and asked if they had any advice or guidance for the SEC moving forward with its own standard. Hauser said he did not have any recommendation, but noted that SEC staff provided technical help with the DOL proposal and added it is not for him to tell the SEC what it should be doing.
Fleming clarified that a standard of care under Section 913 is to be “no less stringent,” needs to allow for sales-based compensation, cannot impose a continuing duty of care, and cannot limit the sale of proprietary products. He said it is “hard to reconcile” the carve-outs in the DOL proposal with a traditional fiduciary duty and asked DOL how it deals with those issues.
Hauser noted the statutory framework of the Employee Retirement Income Security Act (ERISA) and its jurisdiction over retirement accounts and tax preferred saving vehicles. He said the DOL is “not trying to disrupt existing business models, including commission structures,” noting that the proposal does not require an ongoing obligation to monitor beyond a party’s expectations or what is contractually agreed to. He added that there is no prohibition on differential compensation but said the fee structures should not incentivize people to act in ways that are contrary to the client’s best interest.
Darcy Bradbury expressed concern about the product limitations included in the BIC exemption. Mares conceded that the DOL “did not include the universe” of assets, but said they did include 96 percent of assets that are held in IRAs, while excluding “non-public,” “uncommon,” and “complicated” securities. Mohrman-Gillis added that the DOL “drew a line in favor of investor protection.”
Damon Silvers said investors need to understand what they are paying for when they receive advice. He noted that “workable rules” are necessary for participants that want to stay in the brokerage model, but said it is important to know what a “genuine concern” from the industry is in this regard. Mares agreed that consumers need to understand what they are paying and said it is not the DOL’s intent to decrease access to good advice.
Roy Katzovicz said that from a regulatory perspective, the BIC exemption is an “interesting tool” because it seems to create authority where there is none, and said the regulator would have the ability to decide whether the contract qualifies the service provider for the exemption and whether they have breached the contract, in addition to the counterparty to the contract having the ability to sue. He noted that “although a rule may be written with little ink,” there can still be a large degree of confusion and cost. Katzovicz asked what enforcement authority is available and what role private law enforcers play.
Hauser noted that enforcement is an important component of the BIC exemption, but said DOL is “not trying to help out plaintiff’s attorneys.” He said the DOL tried to “strike balance” by permitting individual arbitration and only limiting it in the class action context.
Roper concluded the discussion expressing support for both the DOL and SEC moving forward with fiduciary standards.
Shareholder Rights Update Panel
Patrick McGurn, Special Counsel at Institutional Shareholder Services (ISS)
Patrick McGurn spoke on behalf of individual shareholders and said that more than 50 percent of resolutions that company boards were asked to consider related to environmental and social concerns. He highlighted three key points derived from two different proposals on the topic: (1) the results were driven by shareholders; (2) differentiation in voting based on specific terms occurred; and (3) shareholders were not confused by alternative appearances on ballots. Other key takeaways included: stiffening of resolve in some board rooms at the corporate level; uncontested board room elections at an all time high (96.3 percent); and that investors are now becoming very selective in providing negative votes. McGurn further expressed support for “say on pay” to provide a tighter link between pay and performance which he said would lead to more disclosures and more accountability.
Michael Garland,Assistant Comptroller for Corporate Governance and Responsible Investment, New York City Office of the Comptroller
Michael Garland noted that investors overwhelmingly support proxy access and said the landscape on proxy access has shifted greatly since February. Garland argued that voting results this season have demonstrated investor demand for viable access to proxies, which he said provides the SEC an opportune time to re-address the issue. Garland cited that shareholders were not confused by the presence of multiple proposals on the same topic and expressed concern that many companies universally adopted proxy access without offering different proposals. He said that limits on the ability of shareholders to aggregate shares are not in spirit of their proposal and further emphasized concern that there were no protections to insure that loaned shares can be counted towards ownership.
Jonathan Ingram, Deputy Chief Counsel, Division of Corporate Finance of the SEC
Jonathan Ingram said exclusion should be allowed for any proposal. The Commission received 18 comment letters, some from members of the committee, and Ingram noted that several commenters have supported SEC Rule 14a-8(i)(9), while others said SEC should take a more broad, holistic approach. Ingram briefly explained that shareholders do not have as much interaction and involvement as they once did.
Committee Questions
When asked about taking the proper steps for disclosure, Garland said the process is not a substitute for SEC action. He noted that the proposed regulation would become workable if companies were permitted to distribute information and materials. On the pay ratio provision of Dodd-Frank, Garland said there are always companies acting in good faith but the provision is meant to support investors and proxy access.
A question was raised about the process regarding regulation S-X and S-K to which Ingram responded, “regulation S-X is further along than S-K” but was unable to provide a time table of completion.
Investment Management Panel Discussion – Disclosure of Fees and Risks in Fund Products
Roper opened the discussion by explaining how Section 917 of the Dodd-Frank Act instructs the SEC to examine how disclosures can be improved to help retail investors better understand them. According to Roper, the results of surveys conducted by the SEC to test how well investors understood disclosures, prove that investors lack the financial literacy to do understand them. She asked the panelists to consider timing, content, and format when discussing possible ways to improve disclosure.
Lori Schock, Director, Office of Investor Education and Advocacy, SEC
In her opening remarks, Lori Schock began to explain the study Roper referenced. She elaborated on the finding that retail investors using online platforms prefer to receive disclosures at a different time then was recommended by many of panelists present. Schock explained that retail investors who took the survey online wanted the disclosure before they made trades. However, she noted, some panelists submitted comment letters saying that they thought disclosures should be presented closer to the time that a trade is made.
Susan Nash,Associate Director and Deputy for Disclosure Policy, Division of Investment Management, SEC
Susan Nash spoke about prospectuses and explained how a recent change to the Commission’s policy now allows for only a summary of the prospectus to be mailed to investors, as long as the complete prospectus is available online. According to Nash, the Commission has made a continual effort to make the prospectuses easier to understand for investors, taking steps such as moving the fee table section of the document to the front.
Nash noted that pressure has been put on the Commission to change how risk disclosures are currently presented in a narrative. She offered the creation of risk metrics as a possible solution to this criticism, while recognizing that this still may be hard for the average retail investor to understand. She explained that it was her hope that the inclusion of this information would make analysis easier for financial advisors and the media, whom would then pass down their findings to average investors.
Mercer Bullard, Presidentand Founder, Fund Democracy, Inc.
Mercer Bullard opened by explaining that the only disclosures that really matter to investors are those regarding conflicts of interest. He said that people hire financial professionals to make investment decisions for them because they want to avoid having to analyze information themselves. Therefore, investors only want to know how the advice provided to them may be compromised. Bullard stated that the biggest failure of fee disclosure tables is that there is nothing to compare them to, making understanding distributions, for example, particularly difficult.
Committee Questions
In reply to a question posed by Jean Setzfand, Nash explained how she believed the SEC’s full focus is helping retail investors. She cited moving the fee table to the beginning of prospectuses as evidence of their intent. However, Nash described how this goal is difficult to achieve when having to accurately explain 12b-1 fees to retail investors, for example. In a later line of questioning by Darcy Bradbury, Nash explained that it is hard to make the fee disclosure tables simpler without regulating the way that compensation is made. According to Nash, the fee disclosure tables are complex because of the compensation structures which they represent.
Regarding the quality of advice investors receive, Roper stated, “for many people the last investment decision they ever make is deciding who they are going to rely on for financial decisions.” She said that in the context of a mutual fund, it is hard for investors to understand what fees they are paying and what their brokers are being paid. Bullard said it needs to be easier for people to compare mutual fund fees, thus exposing these fees to market forces.
Roper said a common criticism from brokers is that compensation disclosure requirements are “too complicated” to disclose in a more simplified manner. She argued that if brokers were required to disclose differently, it could simplify their compensation structures, which in turn would make the fee tables easier for retail investors to understand. In reply, Mercer pointed out that the prospectus does disclose the manner in which brokers are compensated.
At the end of the panel, Joseph Carcello stated that it is becoming more important for people to understand disclosures as participation in defined contribution plans increases.
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