This article will pick up where the previous one left off
and discuss the issues raised by three subcommittees of the Security and Exchange Commission (SEC)’s Investor Advisory Committee at its quarterly meeting held Jan. 18.
The Investor as Owner subcommittee discussed issues related to proxy access and executive compensation without referring to the inherent difficulty investors have in affecting policy given the control management normally exerts over the governance process. For example, some years ago there was a movement to establish the principle that a single individual should not hold both the job of president and chairman of a board, but while some companies have adopted this policy, the issue has evidently lost any sense of urgency.
A difficult problem posed by the Dodd-Frank Act is to figure out how to fulfill the mandate for corporations to disclose the ratio between the average compensation of top executives and that of rank-and-file employees. Committee member Damon Silvers, associate general counsel for the AFL-CIO, expressed astonishment that corporations have modern accounting and payroll systems, yet they claim they are unable to calculate the ratios Dodd-Frank requires.
SEC Chairman Elisse Walter sighed that while this will be difficult to resolve, “It is what it is.” She lamented that corporate governance doesn’t do enough for “the little guy” or the mythical Aunt Millie, and she decried the notion that the market may consist of two tiers — one for professionals and the other for small investors.
Walter also referred to the Consolidated Audit Trail (CAT) as a tool that could help “fill the gaps,” and she remarked that the CAT is “on its way.” (A cynic might interject that this effort has been under way and on its way since 1980, and the regulation adopted last fall will do little to enable the level of market surveillance the market needs in light of the rapid increase in the speed of trading and in the frequency of flash crashes in the market as a whole and in individual stocks.)
For the Investor as Purchaser subcommittee, the main project is a set of recommendations for the implementation of the Jumpstart Our Business Startups (JOBS) Act, which was enacted last spring and the subject of a pending rulemaking by the SEC. The subcommittee has approached this issue with some urgency by issuing a comment between the last quarterly meeting and this one, and the recommendations reflect some alarm concerning the direction the crowd funding and general solicitation provisions of the JOBS Act could take, especially the potential for a spike in securities fraud. At least 20 issues are at stake in this debate.
Another issue before the subcommittee is the regulation mandated under Dodd-Frank to establish a single standard of care for both brokers and investment advisers, given that many investors are not aware of the difference with whom they are dealing at a given time. The subcommittee chairman, Barbara Roper, director of investor protection at the Consumer Federation of America,
stated that a number of industry groups, many of which distrust each other, have been working on recommendations, but there are “seemingly endless political barriers” to resolving this matter.
A related issue discussed at considerable length was the nature and role of “target date” funds marketed as vehicles tied to an anticipated retirement date. Several participants observed that these funds have morphed from their stated design, and investors may not know what they are buying.
Market Structure subcommittee Chairman Steve Wallman, CEO of Foliofn, warned that a mistake in asset allocation by these funds can destroy the savings of a prospective retiree. Moreover, in the aftermath of the 2008 financial crisis, these funds have made no significant changes — they have learned nothing. Because these funds are one of the available default choices for employees under Employee Retirement Income Security Act (ERISA), jurisdiction lies with the Department of Labor. The Labor Department has developed evidence of failures on the part of fiduciaries, but the SEC has failed to respond to the findings.
The Market Structure subcommittee is communing with the SEC’s Division of Trading and Markets on market infrastructure and technology matters. An important issue is whether the settlement cycle, which has been shortened from five days to three, can be further shortened to a single day or even to real time. However, systemic and investor issues arise.
Finally, many interest groups are affected by decimalization, although the subcommittee has made no recommendations. The SEC has scheduled a roundtable for an entire day on Tuesday, Feb. 5.
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