Simons Says: The SEC Speaks 2016

Timothy M. Simons, CFA, CFP, CSCP, CIPM
Senior Managing Member
Focus 1 Associates LLC
February 24, 2016


At the beginning of each year, the Practising Law Institute, in cooperation with the Securities and Exchange Commission (“SEC”), presents The SEC Speaks program, giving the SEC an opportunity to make public its plans for the current year.  Recently, February 19, 2016, we had the opportunity to hear from Chair Mary Jo White and Commissioner Kara M. Stein.


“Beyond Disclosure at the SEC in 2016”

Chair White’s speech reviewed the SEC’s accomplishments for 2015, “Not only did we bring an unprecedented number of enforcement cases, secure an all-time high for orders directing the payment of penalties and disgorgement, and perform exams at a level not seen for the past five years, but we also continued to develop cutting‑edge cases and exams…Areas of focus included cybersecurity, market structure requirements, dark pools, microcap fraud, financial reporting failures, insider trading, disclosure deficiencies in municipal securities offerings, and protection of retail investors and retiree savings.”

The SEC continued to issue rules that are required under Dodd-Frank and will continue to do so in 2016.  Chair White spoke about initiatives for 2016, centered on the asset management industry, the structure of the equity markets, and disclosure.  Each of these initiatives was marked by Commission action in 2015, and will continue in 2016.


Asset management 

After adopting final rules for reforms to the money market fund industry, the SEC proposed enhanced reporting for investment advisers and mutual funds to improve the quality of information that the Commission and investors receive, report basic risk metrics, and require information about their use of derivatives, securities lending activities, and liquidity of their holdings.  The SEC also proposed reforms designed to promote stronger and more effective liquidity risk management across open-end funds and limit the adverse effects that liquidity risk can have on investors.  Also, the SEC approved a proposal requiring funds to monitor and manage derivatives-related risks and provide limits on their use.   Finalizing these rules, as well as advancing proposals for transition-planning and stress testing, are among 2016 priorities.


Equity market structure

The SEC proposed rules to improve supervision of today’s markets, broadening the oversight of active proprietary traders (including high-frequency traders), and a major update to the regulations for alternative trading systems.  These rules would require detailed disclosures about the operation of these platforms and create a new process for Commission oversight.  The SEC will continue to work on a rule for a uniform fiduciary duty for investment advisers and broker‑dealers, and try to develop a workable program for third-party reviews of the compliance of registered investment advisers.


Beyond Disclosure

Chair White stressed that although the SEC is a disclosure agency, it is not only a disclosure agency.  The SEC has authority to regulate the means of trading securities, including supervisory authority over stock exchanges and on trading practices, a series of requirements for registered funds, authorities that have, over time, been expanded by Congress.

“Looking ahead, a number of the Commission’s outstanding proposals and initiatives also reflect the careful consideration of tools beyond disclosure.  Aspects of our asset management proposals would impose minimum liquidity requirements and limits on derivatives in addition to greater and more standardized disclosures.

“Let me be clear that considering and using other policy tools to strengthen our regulatory regime does not reflect a retreat from our core disclosure powers.  Quite to the contrary, enhancing relevant disclosures continues to be a key aspect of all of our new rulemakings – and we are dedicating substantial resources to enhance the effectiveness of our existing disclosure requirements.  But more and more, the complexity of products, changes in market participant behavior, pervasive network technology, and systemic risks call for additional protections beyond those that can be achieved through disclosure alone.  We are therefore increasingly considering using measures beyond disclosure.”



“Regulators must safeguard the investment and capital raising process from unacceptable risks that can dilute, distort, or disable the fair playing field that is integral to robust free financial markets…From its founding, the SEC has been an independent agency with a proud, unbroken tradition of protecting the investing public based on hard work and hard data, carrying out our dynamic mission without fear or favor according to the rule of law.”

“What Lies Ahead? The SEC in 2016.”

Commissioner Stein indicated that two concepts are critical to the efficient and effective operation of our capital markets: transparency and accountability. Both are central to the efforts of the SEC in 2016.



One of the tools that the SEC uses for investor protection is disclosure, which provides transparency.  All investors are entitled to a steady flow of timely, accurate, relevant, and reliable information in order to make investment decisions.

Over the last decade, more and more people are investing in ETFs.  Some ETF sponsors saw growth rates of assets under management of 30 to 35 percent in 2015.  Scores of new and innovative ETFs entered the market.  In 2014, the U.S. ETF market had approximately $2 trillion in assets under management.  This accounts for almost 73% of the world’s $2.7 trillion in ETF assets.  Such growth is astounding and potentially good—as long as risks are identified; market participants and investors are informed; and appropriate safeguards are in place.

ETFs have grown in volume, type, and variety.  ETFs have expanded far beyond their equity index origins to include far more complex offerings.  Retail investors are being introduced to innovative ETFs that may offer attractive yield, but also feature more complex and other higher risk strategies.  While some new products are being hailed as exotic or innovative within the industry, others have been described as “toxic.”



The SEC must continue looking for opportunities to enhance accountability as well as investor protection, such as a Board’s accountability to its shareholders.  Good corporate citizens are those who are accountable, open, and have an effective group of stewards at the helm.   Accountability is enhanced each time shareholders exercise their right to vote for the stewards who can manage their companies best.

Last February, the SEC held a discussion about proxy voting mechanics and how they could amend the proxy rules to facilitate a more effective and robust shareholder voice.  The rules have created an anomalous situation between shareholders who physically attend a meeting and those who do not.  Shareholders in physical attendance can receive a universal ballot that allows them to pick and choose from all the candidates nominated for the board, regardless of whether the nominees were put forward by management or a shareholder.  In contrast, shareholders voting by proxy, who do not physically attend the meeting, generally are limited to choosing from among either the company’s nominees or the shareholder-proponent’s nominees.  This is due to the “bona fide nominee rule,” which allows only nominees who have consented to be named in the proxy statement to be included on the proxy card.  Commissioner Stein does not think we should be treating investors differently and limiting their voting rights based solely upon whether they are able to attend a meeting in person or vote by proxy.

Another initiative which will help promote efficiency and reduce risk in our markets is the shortening of the settlement cycle for securities transactions.  With input from, and the support of, both industry representatives and our Investor Advisory Committee, the SEC Commissioners have advocated moving settlement from T+3 to T+2.   Protracted settlement times are costly, increase risk, and are simply inefficient.  The SEC certainly should be able to make it a reality this year.  With the current state of technology, the settlement cycle could be even further shortened, but the SEC supports the industry’s consensus.


My Perspective

Perhaps I’ve become a little jaded, but it seems like everything we hear from the SEC, even when much of it sounds good in that it will make the market place a safer place to be (which may encourage more participants in the market place), purports a positive result for the adviser.  BUT, all of these market improvements require additional paperwork (maybe not actual paper, but still more work) from the adviser, and therefore, the CCO.  There will be more to review and more to maintain.  Can’t we find improvements that would result from less regulation?  I agree with Commissioner Stein that we need transparency and accountability, but doesn’t more transparency almost always mean more disclosure?  And doesn’t more disclosure mean more information that the investor has to go through, lessening the chance that the prospective investor will be better informed, but more convinced that he needs to depend on an “expert,” who may or may not have the investor’s best interest in mind? There must be a happy medium somewhere, but it doesn’t seem like any group is interested in finding it.


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