Washington, D.C.
May 8, 2014
Thank you, Gianna for that kind introduction.
Before I begin my remarks, I need to remind you that the views I am expressing today are my own and do not necessarily reflect those of the Commission, my fellow Commissioners, or the staff of the Commission.
I am pleased to join you this morning as part of your spring conference. I am particularly fond of the title of your conference, Building Momentum. While it’s a simple enough concept, in reality, it’s actually quite challenging. And it requires overcoming obstacles, not the least of which can be inertia. Overcoming inertia to build momentum, to effectuate change, is a tough thing to do.
I want to start by reassuring you that we haven’t lost momentum on fulfilling our Dodd-Frank and JOBS Act obligations.
Despite significant resistance in lobbying efforts and legal challenges, the Commission is pushing forward. There’s a long way to go, but we can and should finish these important Congressional directives. But, I’m not here to update you on those efforts, which would take me hours.
I’m here today to share with you some of the other things that we’re working on and ask for your best thoughts and guidance.
The Commission, like you, is very focused on making sure investors are well and accurately informed. The Commission, like you, is very focused on making sure that investors are empowered to effectuate their plans and goals. And the Commission, like you, understands that neither of those two things will mean much unless the markets as a whole operate fairly and efficiently.
We need to work in partnership to improve our disclosure regime; empower shareholders to make smart choices; and improve the fairness and transparency of our increasingly complex markets — so that everyone is on a level playing field and investor confidence and trust are protected.
In each of these areas, you play a critical role. In order to do your job and make those investments, you must make decisions about how and where to deploy investors’ precious capital.
But your success is not just measured by returns. Your work helps determine whether our economy will grow, and will adapt to new technologies and other changes.
If you are well-informed, then you will help drive our economy for decades by funding the best businesses in their most promising endeavors.
Full and fair disclosure is woven into the fabric of our securities markets. The federal securities laws are built upon the premise that an informed investor is the key to robust and efficient nature of our markets.
Your job of investing and protecting the retirement assets of millions of American workers and retirees simply cannot be done without good information. And the Commission needs to make sure that you have it.
Over the eight decades since our federal securities laws were first adopted, the Commission has repeatedly modified disclosure requirements to meet the evolving needs of both investors and issuers. But, with rapid shifts in technology, the rise of increasingly large and complex businesses, and a growing understanding of our connection to each other and the planet, investors’ needs and expectations have changed.
The Commission’s requirements need to change too.
Chair White has rightfully included “disclosure effectiveness” as one of the Commission’s priorities, and I think there is real momentum for this project.
But we must be cautious. In an era with hundreds of pages per filing for some large issuers, many have argued that we simply need to cut back. Certainly removing redundancies and outdated disclosures may be part of this exercise, but that should not be the central focus. Our focus needs to be on better disclosure.
And I know we can do it because we have done it before. In 1967, the Commission launched a study into the “efficacy” of disclosure requirements. In announcing the study, then-SEC Chairman Manny Cohen importantly noted that “[b]etter disclosure is not at all synonymous with less disclosure.”[1] I couldn’t agree more.
The Commission’s 1967study[2] laid the foundation for our current integrated disclosure regime by merging the previously separate obligations into an integrated structure to the benefit of both issuers and investors.
The logical place to start this project is by focusing on investors — the people with the capital. Disclosures are for the benefit of investors. Are current disclosures fulfilling investors’ needs? Are they fulfilling your needs?
The answers to such questions will often depend on whom you ask.
For example, is there a way to ensure that issuers’ disclosures are accessible to ordinary Americans, while also providing information that is important to sophisticated institutional investors? I believe there is.
The disclosure review project presents an opportunity to step back to first principles and examine the benefits of the information that is communicated through disclosure.
Is it meaningful? Is it timely? Is it complete? Is it useful? If not, what would be? And does it keep pace with changing technological needs and abilities?
This process should be driven by investors and the markets. If investors think a particular set of disclosures is relevant and important, then we, as a Commission, should seek to understand why. Such disclosures may relate to executive compensation and its relationship to performance, corporate governance, or sustainability efforts. Irrespective of whether I, or others at the Commission, may agree with you, we should listen.
That said, let me share some ideas that may be ripe for improvement.
Many of us continue to think about the lessons learned from the financial crisis. I am concerned that investors may not have sufficient information about some issuers’ reliance on short-term funding for their long-term obligations. Companies’ funding-liability mismatches played a key role in the crisis, and we need to make sure that we do what we can to prevent that from happening again. One way to do that is to enhance disclosures about issuers’ funding arrangements. With additional transparency, shareholders can help rein in companies that become too reliant on short-term funding. Investment company disclosures regarding securities lending activities are also something that we should explore. Shouldn’t a fund disclose both the percentage of its assets out on loan, and how it splits revenue from securities lending with its sponsor?
Improving these disclosures could help investors make smarter choices. We also need to make disclosures more accessible and useable. In an era where nearly all data is electronic, it baffles me that such a huge portion of public disclosures are presented in a format that isn’t structured and easily accessible for analytics. We should be making sure that as many disclosures as practicable are required to be submitted in useful, structured formats that investors, the public, and the Commission can use.
In the same vein, I believe we should require disclosures to be timelier. News and business move faster than ever before. Does it still make sense for investors to wait for quarterly or annual statements that are delivered weeks or months later?
Improving disclosures is an important and herculean task. We need your help. You are the ones poring over company disclosures, and you know best where they are meeting your needs and where they are not.
With full, fair, and accessible information, hopefully, comes smart and strategic action by investors. Information is great, but you must be able to act on it. Unfortunately, I fear there are currently too many obstacles to appropriate and effective shareholder action. We must examine the shareholder voting franchise and ensure that basic principles of corporate democracy are supported and, where needed, repaired.
One of the most basic rights of an owner of a company is to fire an employee. Shareholders should have that right. But, over time, that right has become very difficult to exercise. How, for example, can shareholders be expected to vote out bad directors if they are restricted in their choices at election time?
It is time for the Commission to consider permitting, if not mandating, universal proxy ballots. As many of you know, in 1992, the Commission sought to address obstacles in director elections, but only partially solved the problem. The partial solution has led to an overly complex approach that has stratified shareholders into two classes: those that attend the shareholder meeting and have full freedom of choice, and those that do not. We should not be in the business of disenfranchising shareholders.
Shareholders have both a right and a responsibility to cast their votes, and we should be doing all we can to facilitate that. I very much appreciated the thoughtful petition for rulemaking that CII sent to the Commission on this issue, and I would like to see the Commission continue the discussion.
I also think it may be time to take a hard look at our process for evaluating issuer no-action requests to exclude shareholder proposals. Commission staff works long and hard on these requests each proxy season, and I commend them for their efforts.
But the work is difficult in part because the guidelines for review of these requests are not as clear as they should be, and this adds uncertainty and costs for issuers and shareholders alike. Both issuers and shareholders are entitled to more clarity and consistency as to which proposals are appropriate under our rules and which are not.
For example, in this last season, the New York State Common Retirement Fund tried hard to follow guidance and carefully drafted proposals to be included in the proxy materials of two large banks related to the very important policy issue of incentive compensation for personnel in a position to take large risks. The proposals were ultimately excluded, however, resulting in a significant expenditure of time and resources on both sides. That’s not a good outcome for anyone. I’m just not sure that the process is working well, and I’d like to step back and re-examine it in its entirety. So, please - help us think of ways to improve this process. Help me, help you.
Finally, as I said before, no amount of disclosure or voting will make much impact unless our markets are structured fairly and efficiently. For years, we have been discussing the rise of technology in securities trading. Now, a new book is acting as powerful force — much like the May 6, 2010 Flash Crash — driving many to re-examine how our markets operate.
At its most basic level, a market is an information hub. That information has historically been exchanged through personal interaction. Exchange floors and securities transactions were once dominated by humans. Today’s securities markets, however, are increasingly dominated by the interaction of machines.
Trader’s shouts and frantic gestures have been replaced by algorithms, flashes of light, and electronic signals delivered in mere fractions of a second. The infrastructure has rapidly changed with lightning fast computers exchanging signals. Trades can be executed far faster than the blink of the eye.
Yet, the vast majority of the rules that govern today’s markets focus on interactions between individuals. Our rules need to evolve to ensure that efficiency and fairness remain paramount.
At their core, markets work because participants trust them. Whether in a physical or virtual location, the participants gather to trade because they have confidence and trust in the system. Questions about whether a market is trustworthy go to the heart of a market’s survival. Is the market fair? Is it efficient? How does it facilitate capital formation? Are investors protected? Do you trust it?
I think we are building momentum to comprehensively review how our markets work, and take actions to enhance their transparency and fairness. In this regard, I think we should start with best execution. The concept is simple, and one that has long existed in our markets. However, meaningful measurements or quantifications are elusive.
What does best execution mean? Who is obligated by it? And how do they know if they have fulfilled their duty? Are you satisfied with how your trades are executed? How do you know?
Fiduciaries seeking to execute orders for their customers should know what happens to their orders, and they should understand how that impacts the pricing and timing of their executions. If you send an order to a broker’s smart order router, you should know how that router operates, and whether it is sending your order to a place that’s most likely to get it filled at the best price, or to the place that will cost the broker the least.
Put simply, we need to be examining order routing practices, and we need to be empowering you with information to examine them yourselves. Meaningful, useable data can help us answer many of these questions.
I commend the Commission staff for its hard work in starting to obtain quality market data. In October, the Division of Trading and Markets rolled out its Market Information Data Analytics System (MIDAS) and the Division of Economic Risk Analysis (DERA) continues to make tremendous strides in analyzing vast amounts of data to inform the Commission’s policy objectives.
But we need to keep pushing. You need to keep pushing. We need to improve the data we collect and we need to make more of our data public. Some of the data standards we have are woefully out of date.
For example, in November 2000, the Commission adopted new rules mandating the disclosure of order execution and routing practices.[3] There have been a lot of changes in the last 14 years. Fourteen years ago, no one had ever heard an iPhone, or used a BlackBerry for email. We need to revise those standards to make that data more useful in a computerized era.
But we also need far more data, which the Consolidated Audit Trail (or CAT) will provide. I will continue to push to ensure that this project remains on track to deliver timely access to order and execution data.
Another basic question we should be looking at is how our lit and dark markets interact.
In a few short years, we have moved away from a handful of lit exchanges to eighteen securities exchanges, dozens of dark pools, and hundreds of internalizers. Why do all of these trading venues exist? What purpose do they serve? And at what cost? As you look to execute large orders, does the proliferation of these venues help or hurt you? There are innumerable questions about our market structure. We need your help in answering them.
Market participants, trading venues, and all of our market regulators need to be working together to keep our markets the most fair, transparent, and efficient in the world.
We all have a tremendous amount of work to do.
We need partners like you to help us build and maintain momentum to pursue new and innovative ways to improve disclosure, empower shareholders, and ensure fair and efficient markets.
Thank you for your time today. And thank you for the hard work you do each day for millions of families.
[1] Remarks before the 19th annual conference of the Financial Analysts Federation, May 24, 1966.
[2] The Wheat Report, Disclosure to Investors - A Reappraisal of Federal Administrative Practices Under the 1933 and 1934 Acts.
[3] Disclosure of Order Execution and Routing Practices, Exchange Act Release No. 34-43590, commonly known as Rules 605 (Order Execution) and 606 (Order Routing).