Good afternoon and thank you for inviting me to speak at the ICI’s Board of Governors’ Winter Meeting. It is a pleasure to engage in a dialogue with such a distinguished group of leaders in the investment management industry. As I am sure you are aware, and as is customary for us to say at the outset, these remarks express my own opinions and do not necessarily reflect those of the Commission, the other Commissioners, or members of the staff.
I am particularly pleased to be invited by the ICI. I’ve spent a good portion of my professional career working in the investment management and fund industries and am very familiar with the ICI’s effective representation of its members. The ICI has a long history of working with the SEC to shed light on the practical effects of SEC rules, and I think we are all the better for it.
I have been looking forward to having this conversation with you, and I hope that we will use this as an opportunity for information to flow back and forth between us. I am interested to hear your concerns and ideas at this time, when market turmoil is a day-to-day reality and transformational regulatory reforms are discussed at the dinner table, as well as in the board room. In times like these, we need all of our brightest minds engaged in the debate, and I look forward to our discussions — today and in the future.
However, before we engage in that conversation, I would like to say a few words about my background. My experiences are different from my fellow Commissioners and help to shape the perspectives and approaches I bring to the table.
My professional career, which will span 30 years this April, consists of work in the securities industry from many vantage points. During these 30 years, in addition to representing many corporate issuers, I spent a good deal of time working with, and for, investment companies, investment advisers, and broker-dealers.
My perspective as a regulator is enhanced by the fact that I have worked in government, private practice and in corporate America. I’ve been an SEC staff attorney, a law firm partner and a general counsel, and have spent time as a domestic and international business person. I have worked with the SEC and its regulation from just about every point of view, as well as similar regulations in foreign jurisdictions.
I started my professional career with the SEC as a staff attorney in its Atlanta Regional Office. There, I did everything that one could do as a young attorney — from full disclosure work to examining investment companies and investment advisers to some enforcement work. My time at the SEC provided the foundation for my securities law career, and I feel a great deal of respect and empathy for the men and women on the SEC staff who are committed to faithfully executing the securities laws.
From the SEC, I went into private practice and became a partner at several large law firms — practicing in securities and corporate law. I had a broad range of clients, from large and small corporations, both public and private, and a number of my clients were financial market participants — including money market and mutual funds, investment advisers, broker-dealers, commodity trading advisers and private equity and hedge funds. I had a stretch of time where I mostly did M&A work and feel very at home with corporate transactions.
While in private practice in the ‘80s, I began to serve as outside counsel to what was then a small investment advisory firm called INVESCO Capital Management. INVESCO was a long time client, and I was fortunate to have a front row seat in watching INVESCO grow from one office with a relatively small number of employees and assets under management to one of the world’s largest global asset managers with thousands of employees, offices throughout the world and hundreds of billions under management.
In the ‘90s, I had the opportunity to go and work in-house as INVESCO’s General Counsel. There I was fortunate to work on too many projects to name, ranging from developing compliance policies and procedures to managing acquisitions.
While at INVESCO, I had the opportunity to assess these same policies and procedures from the business side when I served on the North America Management Committee, which generally directed the business operations, and as the President of one of INVESCO’s broker-dealers. The time I spent in those roles helped me to better understand the concerns and pressures on business people and to strive to develop more effective methods to communicate regulations and compliance policies and procedures.
In the ‘90s I also became the Managing Director of INVESCO’s Latin American Division, during which time I established from the ground-up operations in Puerto Rico and Argentina, and led the work of a joint venture involved in the privatization of the Bolivian Social Security System. This experience was a terrific opportunity to manage the operational and compliance challenges of a growing international business.
The skills and knowledge gained during my professional career also rest on a foundation of values that began to develop in my childhood. These values are hard work, generosity, and self-reliance. I was born in Cuba and first came to the United States as a refugee when I was six years old. The generosity and opportunities of this country gave me the chance to become a person that now has the honor and privilege of serving as an SEC Commissioner.
This country taught me that hard-work can lead to success. I was able to work my way through college and law school by taking on a number of jobs — from putting up fences, to being a “stock boy” in a yarn store, and to working at the Miami airport loading baggage and cargo into the bellies of airplanes. From these experiences, I carry with me a profound respect for how people work hard for their money and the need to be vigilant in protecting their investments and retirement assets.
In the end, what does all this mean? I think my experiences have helped me to understand how regulators and industries need to work with one another.
I have been a practitioner in the securities industry for so long and in so many positions that it has attuned me to the practical effect of regulation and regulatory reform, particularly on investment management and fund groups.
Now, I know that your primary interest is to hear my particular policy views, rather than to hear about my background. Before we speak about specifics, I want to make it clear that there are a number of issues and possible policy changes that are midstream in the Commission’s rulemaking process, and I am continuing to gather information and develop policy positions as the proposals ripen.
I also want to make it clear that I have an open door policy because, in making decisions, it is important to see an issue from as many sides as possible in the time I have available. As issues arise in the future, I would encourage you to share your experiences and suggestions with me. I believe that more voices being heard in a debate will improve the quality of the decision-making process and ultimate policy outcome.
Currently, the regulatory landscape in the investment management industry is cluttered by a number of proposals that the Commission has not acted on for the past several years. These include topics as diverse as 12b-1 fees, ETFs, soft dollars, and Form ADV, just to name a few.
These proposals pre-date my tenure as a Commissioner and, more importantly, arose prior to the unprecedented events of the last seven months. In the weeks ahead, following the arrival of the SEC’s new chair, the Commission should assess which items to prioritize based on the ramifications of market turmoil and the more immediate needs.
The American economy and the domestic regulatory structure that oversees it are at an important crossroads. In fact, I recently gave a speech that focused on shifts in policies and practices that I would recommend in the SEC’s enforcement program and some recommendations for Congressional action in the broader securities law arena.
To advance the discussion, I will not reiterate all of the points that I made in that speech, but I would like to highlight a few. First, I will highlight some of the recommendations that require Congressional action to strengthen the structure of the SEC and close loopholes in regulation. Second, I will also discuss two important proposals that the SEC can take up on its own before we open up the discussion.
With respect to Congressional action, Congress must address the growing market of derivatives and amend the securities laws to provide that all products that can function as securities, or economically substitute for securities, be regulated as such. Currently, the SEC is prohibited from exerting jurisdiction over particular financial instruments that seem to fall squarely within the agency’s mission.
Related to this is the suggested reform of a merger of the SEC and CFTC. This merger can make sense, but only if done in the right way. An SEC-CFTC merger would answer the question of “who” regulates certain financial services, market participants, and products. However, it would not address “how” they are regulated, and this is the key question. The SEC and CFTC have different objectives and have not pursued the same models of oversight.
As I have said before, I support the SEC’s model, which focuses on investors and markets, and provides for strong and broad regulatory authority and vigorous enforcement, coupled with flexible exemptive power to permit dynamic regulation where needed. Our securities markets have been the world’s best in large part because of SEC regulation, which provides for fairness, efficiency and transparency, and robust enforcement of that regulation
which, in turn, supports investor confidence, low market transaction costs, and efficient public capital raising.
I also believe that dedicated, independent financing, such as that enjoyed by the Federal Reserve, is important to enabling the SEC to do its job. Although the SEC is an independent federal agency, the agency is not self-funded. Instead, the SEC’s budget is recommended by the President and annually appropriated and apportioned. This has led to weaknesses in the agency’s ability to perform its mission. By having independent budget authority like the banking regulators, the SEC would have greater control over its own budget and funding levels, allowing the agency to take steps to address its growing workload in an increasingly complicated marketplace, while also recruiting and maintaining quality staff.
Moreover, I urge Congress to close the glaring loopholes in securities regulation by unequivocally stating that the SEC has jurisdiction and the ability to regulate hedge funds advisers and derivatives and provide for municipal securities disclosure.
In addition to those recommendations to Congress, two of my proposals for SEC action are:
To have the SEC staff undertake a study of the growth of institutional ownership and the consequences for regulation and the capital markets. One of the most significant changes in our financial markets since the ‘30s and ‘40s have been the decrease in the relative percentage of securities owned directly by retail investors and the substantial increase in direct holdings by institutions. Estimates indicate that in the ‘50s individuals directly owned more than 90% of public companies, and today that number is closer to 30%.
These trends in retail ownership and market participation raise very important questions for financial regulation.
What are the consequences? For example, how have these changes affected shareholder voting? Has the increased number of institutional investors made it possible for issuers and underwriters to pay less attention to retail investors when raising capital? Do retail investors get the same opportunities in offerings when underwriters make allocations of shares?
What are the causes of these trends? Some SEC regulations certainly have contributed to them, such as regulations providing exemptions for institutional buyers and accredited investors, but are there other causes?
Has the implementation of tax laws regarding retirement savings encouraged investing through institutions at the expense of direct investment?
What should be the SEC’s response? Should our rules take into account whether they may create incentives for retail investors to invest through institutions rather than directly? Is that good or bad? Do we need to change the manner and content of our required disclosures?
These are difficult questions touching on many areas of the Commission’s regulatory responsibilities, and the way we proceed will have profound effects on retail and institutional investors, funds, advisers, operating companies, and others.
Historically, when the Commission has been faced with issues as manifold and far reaching as these, it has directed the staff to study the problem in a thoughtful and coordinated way. For example, the 1992 Study by the Division of Investment Management entitled “Protecting Investors: A Half Century of Investment Company Regulation;” commonly known as the “red book,” is such a study. I believe the growth in relative institutional ownership is a topic that calls out for this sort of careful analysis.
A complementary proposal is the formation of a federal advisory committee to make recommendations for improving retail investor participation in Commission business and for improving the usefulness to retail investors of Commission rules. As we seek to improve our regulatory process and adopt better rules, I think it is important to provide retail investors with an active voice in our policymaking, since much of what we do often affects retail investors who do not routinely have contact with members of the Commission or its staff, too often do not submit comment letters, may not be well-versed in the securities or administrative laws, and may not effectively be represented by industry groups. Establishing a federal advisory committee under the Federal Advisory Committee Act (or FACA) consisting mostly of retail investors to provide advice and guidance on our rules and on our ways of interacting with these investors could be very useful. I believe direct retail investor input would be helpful toward restoring the confidence of retail investors in the SEC — they can again know that we work for them and are their advocate. Such a committee also could play a key role in our efforts to address issues of importance to retail investors and provide a useful forum for their views to be more effectively incorporated into the Commission’s work.
I look forward to our discussing the issues facing your industry — whether today or in the future.
Thank you for the opportunity of being here today, and now let us have more of a conversation.