Rick A. Fleming, Investor Advocate
U.S. Securities and Exchange Commission
The SEC Speaks in 2017
Feb. 24, 2017
Good afternoon. Thank you, Dave (Grim), for your kind introduction. It is a pleasure to be speaking at my third SEC Speaks conference, which happens to fall on the three-year anniversary of my appointment as the Investor Advocate.
As I reflect back on those three years, I am particularly proud of the caliber of the team I have been able to build in the Office of the Investor Advocate. We are a small office, with only 11 FTEs, which means that every member of the team plays a critical role and carries a heavy load. And, as a start-up office, team members not only must be experts in their areas of responsibility, but they must also display an entrepreneurial spirit. They were not given a manual on how to perform their jobs, but were required to develop their own roles. I also recognize that these men and women took a career risk to join a new office without an established reputation—an office in which the leader could take positions that might leave staff members ostracized from colleagues in other offices and divisions. I will always be grateful for the people who have taken a leap of faith to join my office in the first three years, and I am so very proud of the work they are doing to bring greater attention to the needs of investors at the SEC and self-regulatory organizations (“SROs”).
Let me say at the outset that I believe staff members all around the Commission, not just in my Office, are truly dedicated to serving the needs of investors and the American public. They recognize that our economy and standard of living depend, in no small part, on vibrant markets where capital can flow efficiently and investors are empowered to make well-informed decisions.
Yet, despite our best intentions, I believe there are some flaws in our methods for determining what is in the best interest of investors. To see what I mean, let’s take a step back and look at the rulemaking process. Generally speaking, the process starts with a roomful of securities lawyers trying to figure out how to solve some thorny regulatory problem. Then, as the rules are crafted, we expect securities lawyers to make judgments while developing recommendations about what policy choices will best serve the needs of investors.
Now, there are a lot of securities lawyers in this room, and I am one myself, so please don’t be offended when I observe that securities lawyers—as smart and lovable as we may be—are not representative of the average investor. For one thing, we spent three years in law school being trained to process and communicate information in very specific ways. As a result, when we consider how to present disclosure to investors in the most meaningful way, for example, we need to recognize that our brains are not necessarily wired the same as the average person.
Now that I have gotten in hot water with the lawyers, let me move on to the economists. I don’t claim to be an economist, but I do have an undergraduate degree in economics so I feel a certain kinship with them, and I think the Commission has done a better job in recent years of including economists in the rulemaking process. Unfortunately, however, I believe the Commission’s economic analysis tends to focus more heavily on the cost side of the equation, which is often easier to quantify than the benefits due to the availability of data. And, regardless of whether that is true or not, I think it’s fair to speculate that economists are probably no more representative of the average investor than securities lawyers, so we all need to be cautious about projecting our own ideas about what’s in the best interests of investors.
Of course, the rulemaking process is designed to overcome the insular nature of rule-writing by requiring proposed rules to be published for comment. However, as I’ve observed before, it is a bit of a stretch to call this a request for “public” comment. With some exceptions, which typically involve hot-button issues in which an advocacy group engages its constituency, the public comment files for SEC rulemakings tend to generate far more comments from stakeholders other than investors.
The reasons for this are fairly obvious. Industry stakeholders will bear the costs of regulations, and that gives them a strong economic incentive to hire lawyers to monitor SEC rulemakings and to engage in advocacy efforts. On the other hand, the benefits of regulations are typically dispersed among millions of investors who individually have little incentive to read hundreds of pages of complex rule proposals and respond to scores of questions. We should continue to explore ways to increase the engagement of household investors in the comment process, and I welcome suggestions you may have, yet I fear it will always be challenging to get significant feedback from individual investors in the typical SEC rulemaking.
Despite this challenge, however, we can do better. Instead of just relying upon the public comment process and hoping for investor feedback, the Commission should take more proactive steps to understand the needs of investors. And with better information, the Commission can be more confident that its policy choices will not reflect a mistaken assessment of their true needs.
Specifically, I suggest three ways that the Commission should enhance its understanding of investors: through direct outreach to investors, increased use of investor research, and greater engagement with the Investor Advisory Committee. In fact, I not only offer these as suggestions for Commissioners and staff to carry out, but I commit to you that I will use the resources of my own Office to help the Commission achieve these goals.
My first recommendation—direct outreach to investors—is probably the most obvious, but it is also difficult to prioritize. Commissioners and staff are busy people with no shortage of visitors to our offices who want to discuss the regulatory environment. But, with the exception of a few consumer advocacy groups and some very large institutional investors, it seems there are few investors who come our way to talk regulatory policy. Now, I hope this doesn’t sound like a revolutionary idea, but the best way to find out how real investors think and act is to reach out to them and have a conversation.
If, for example, I want to know what information investors really use to make investment and proxy voting decisions, I have found it extremely beneficial to go out and meet with a variety of investors—individuals, portfolio managers, buy-side analysts, and others—and have a free-flowing discussion about that issue. A member of my team, Stephen Deane, coordinates my efforts to engage with a wide range of investors about issues like this, and he is always happy to serve as a conduit between investors and others at the SEC or SROs.
My second suggestion is that the Commission should commit itself to more scientific research regarding investors. I believe in evidence-based policy, but in my opinion, calls for evidence-based or data-driven policy are often focused too much on one side of the cost-benefit equation—namely, the costs or burdens to registrants. I believe we should similarly employ a more evidence-based approach to evaluate the potential benefits to investors from proposed rule changes, and to help the Commission make sure that it is choosing the best option amongst competing policy choices.
I am pleased to report that, with the support of the Commission, my Office is already taking steps to do this type of research. Under the direction of Dr. Brian Scholl, the Principal Economic Advisor in our Office, and with the assistance of the SEC’s Office of Acquisitions, we have fashioned a much more nimble process for utilizing surveys, focus group tests, and other tools to assess the needs of investors and the efficacy of competing policy options. We have dubbed this initiative “POSITIER,” for Policy Oriented Stakeholder and Investor Testing for Innovative and Effective Regulation, and Dr. Scholl will unveil more details about the program at the upcoming Investor Advisory Committee meeting on March 9.
As an example of the type of research we have in mind, the Commission’s Investor Advisory Committee has recommended that the Commission consider ways to enhance the disclosure of fees borne by mutual fund investors. Instead of speculating about the best ways to convey this information to investors, we can design controlled tests that will tell us, first of all, whether investors lack awareness of these fees and, if so, which disclosure methods are most effective.
In fact, we are beginning to study this very issue, and I am happy to invite you all to an event that we will be holding at the Commission two weeks from today. As we begin to design research projects like this, we first want to review the existing data and engage with leading researchers in order to leverage the existing knowledge base to the fullest and optimize the use of our limited resources. We expect that in-person research reviews—what we will call “Evidence Summits”—will become routine, but our kick-off Evidence Summit on March 10 will be a public event and will include broader topics than usual. In particular, at this event we will discuss how disclosure impacts decision-making and how to make disclosure effective for a wide variety of users, before turning to the more specific question of how to improve mutual fund disclosures.
Suffice it to say, I believe this type of research has the potential to transform the way the SEC approaches rulemaking and, in turn, to enhance the overall effectiveness of regulation. We still have a long way to go to make investor research a routine part of our rulemaking process, but I am gratified by the support we have received so far in this initiative.
My final recommendation, in addition to investor outreach and investor research, is that the Commission should increase its engagement with the Investor Advisory Committee. Its members are a diverse group of experienced and knowledgeable investors who bring different perspectives, and the very purpose of the Committee is to provide advice to the Commission. Importantly, it can use its public meetings to air important and controversial issues and increase public discourse.
Of course, it’s important to let the Committee members guide their own agenda. However, if the Commission staff is considering an issue and wonders what investors may think about it, there is no harm in asking the Committee for its views. I believe the Committee would welcome the opportunity to engage in a more collaborative dialogue on issues that are under active consideration, and it seems sensible for the Commission to more freely seek advice from this and other advisory committees. And, as the Office that provides staff support to the Investor Advisory Committee, my team would be honored to facilitate such collaboration.
In closing, as I reflect on my three years as Investor Advocate, it occurs to me that these recommendations are among the most important I have made. I frequently make more formal written recommendations on discrete policy issues, but these are things that could impact the very culture of the SEC by heightening our overall awareness of investor concerns. In an atmosphere where investor protection is a central part of our core mission but investors so seldom speak out, it seems that active engagement with investors is an important prerequisite to achieving our mission. I urge the Commission and staff to take more proactive steps to understand the needs of investors, including—and especially—those investors who have little awareness of what you do for them every day.
 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or other Commission staff.