As a practicing securities lawyer for more than thirty years, I have in the past advised boards of directors, including mutual fund boards, and I am well acquainted with the important work that you do. I also understand the essential role that independent directors play in ensuring good corporate governance. As fiduciaries, you play a critical role in setting the appropriate tone at the top and overseeing the funds’ business. Thus, I commend the Mutual Fund Directors Forum’s efforts in providing a platform for independent mutual fund directors to share ideas and best practices. Improving fund governance is vital to investor protection and maintaining the integrity of our financial markets.
Posts Tagged ‘Luis Aguilar’
I am honored to be here today [February 21, 2014]. This is the sixth time that I have spoken at “SEC Speaks” as a Commissioner. Much has changed since my first “SEC Speaks” in February 2009. At that time, we were in the midst of the worst financial crisis since the Great Depression. Among other things, Lehman Brothers had recently filed for Chapter 11 bankruptcy, The Reserve Primary Money Market Fund had “broken the buck,” and the U.S. Government had just bailed out insurance giant AIG. In addition, the Bernard Madoff Ponzi scheme had come to light just a few months earlier, further shaking investor confidence in the capital markets.
These and other events made it clear that the SEC had much to do to become a more effective regulator and to enhance its protection of investors. It was also clear that the agency itself had to undergo significant change. As a result, in my 2009 remarks at “SEC Speaks,” I highlighted a number of steps that Congress and the SEC should take to close regulatory loopholes. These regulatory gaps included a lack of appropriate regulation in the areas of over-the-counter derivatives, hedge funds, and municipal securities—areas that Congress subsequently addressed in the Dodd-Frank Act.
Rule 17g-5(c)(1) (the “Rule”) of the Securities Exchange Act of 1934 addresses nationally recognized statistical rating organization (“NRSRO”) conflict of interest concerns by prohibiting an NRSRO from issuing a credit rating where the person soliciting the rating was the source of 10% or more of the total net revenue of the NRSRO during the most recently ended fiscal year.  As noted by the Commission, this prohibition is necessary because such a person “will be in a position to exercise substantial influence on the NRSRO” and, as a result, “it will be difficult for the NRSRO to remain impartial, given the impact on the NRSRO’s income if the person withdrew its business.”  The Commission also recognized that the intent of the prohibition “is not to prohibit a business practice that is a normal part of an NRSRO’s activities,” and that the Commission may evaluate whether exemptive relief would be appropriate. 
Today [Dec. 18, 2013], the Commission proposes rules to implement Title IV of the JOBS Act. As mandated by that Act, the proposed rule would allow companies to issue a class of securities that are exempted from the registration and prospectus requirements of the Securities Act, provided that certain conditions are met. This is the third major rulemaking undertaken by the Commission to comply with the JOBS Act since its adoption last year.
Enhancements to Investor Protection under Regulation A-plus
The proposed rules being considered today enhance an existing exemptive regime known as Regulation A. Under the current provisions of Regulation A, companies can raise up to $5 million per year without registration, provided that they file an offering statement with the Commission containing certain required information and furnish an offering circular to purchasers, among other conditions.
Public company shareholders have a vital role to play in corporate governance. To that end, they are given important rights under federal and state law. Chief among these are the right to vote for the election of directors and on other significant matters and to make their views known to the company’s management and directors. Most corporate shareholders exercise their voting rights by proxy, which makes federal regulation of the proxy process a critical focal point for investor protection purposes.
To support the exercise of their voting rights, many institutional investors and investment advisers hire proxy advisory firms to provide analysis and voting recommendations on matters appearing on the proxy.
These firms often also provide other services to their institutional clients—such as:
The recent financial crisis and subsequent events  show the dangers that can result when banks trade for their own accounts while disregarding their customers’ interests. During the financial crisis, U.S. taxpayers were forced to cover losses sustained by major financial institutions that resulted from speculative proprietary trading activities.  While several factors combined to cause the financial crisis, proprietary trading by major financial institutions was a key contributor to that crisis.  In particular, proprietary trading by deposit-taking institutions exposed a bank’s capital—and FDIC-insured deposits—to unacceptable risks and saddled taxpayers with massive losses. 
Today [Oct. 23, 2013], the Commission is proposing new rules to implement Title III of the JOBS Act, which exempts qualifying crowdfunding transactions from the registration and prospectus delivery requirements of the Securities Act. The new Regulation Crowdfunding is expected to be used primarily by small companies. As is well known, although personal savings is the largest source of capital for most start-ups, external financing is very important to many small and medium-sized businesses. Unfortunately, as is also well known, many small businesses have difficulty finding external capital. It is worth noting that the need for outside investment is even greater among minority entrepreneurs, who tend to have lower personal wealth than their non-minority counterparts.
Supporters of crowdfunding believe that it may offer a potential solution to the small business funding problem. Observers point to the success of existing crowdfunding services around the world, which raised almost $2.7 billion in 2012, an increase of more than 80% from the prior year.
Today [September 18, 2013], the Commission takes an important step to comply with the Dodd-Frank Act’s requirements for better disclosure and accountability regarding executive compensation decisions at public companies. 
As required by Section 953(b) of the Dodd-Frank Act, the Commission is proposing a rule to provide for disclosure of CEO-to-worker pay multiples. Reports show that these pay multiples have risen steadily over the years. For example, an April 2013 study by Bloomberg finds that large public company CEOs were paid an average of 204 times the compensation of rank-and-file workers in their industries. By comparison, it is estimated that the average CEO was paid about 20 times the typical worker’s pay in the 1950s, with that multiple rising to 42-to-1 in 1980, and to 120-to-1 in 2000. 
Given this backdrop, it is not surprising that investors are asking if such a high level of CEO-pay multiples is in the interest of corporations and their shareholders.  As owners of public companies, shareholders have the right to know whether CEO pay multiples reflect CEO performance. Shareholders have the right to know how their company’s internal pay comparisons may impact employee morale, productivity, hiring, labor relations, succession planning, growth, and incentives for risk-taking. 
The facts surrounding Bernie Madoff’s unprecedented fraud are well-known. Through a Ponzi scheme, he stole untold billions over decades. What is not as well-appreciated is that during the vast majority of this time, he operated solely as a registered broker-dealer. This led to the inevitable conclusion that the regulatory framework for broker-dealer custody required urgent strengthening.
The U.S. Securities and Exchange Commission (“Commission” or “SEC”) has finally adopted amendments to strengthen the framework governing broker-dealer custody practices to prevent another Madoff. The adoption of these amendments comes more than four and a half years after Madoff’s scheme came to light in December, 2008, and more than two years after they were proposed. As a Commissioner, I have often been asked about steps the Commission has taken to prevent another Madoff, and it has concerned me that these issues have not been addressed.
Today [July 10, 2013], among other things, the Commission considers amendments to Rule 506 of Regulation D, to remove the prohibition against general solicitation and advertising, if sales are made only to accredited investors. I do not support this action because both the process followed in proposing the amendments and the actual amendments being considered today come at the expense of investors and place investors at greater risk. I am particularly disappointed because this flies in the face of the Commission’s mission and did not have to be the case.
The Commission has both the Authority and the Obligation to Protect Investors in Implementing JOBS Act Section 201
Last year, Congress passed the Jumpstart Our Business Startups Act (“JOBS Act”). Section 201(a) of the JOBS Act requires the Commission to revise Rule 506 to remove the prohibition against general solicitation and general advertising, provided that all the purchasers in the offering are accredited investors.
It is without doubt the responsibility of the Commission to implement Section 201 of the JOBS Act. It is equally without doubt that this responsibility cannot be separated from the Commission’s duty to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Congress established the Commission as the independent agency with the expertise and authority to administer the federal securities laws. By statute, the Commission has the power to make, amend, and rescind the rules and regulations needed from time to time to carry out the provisions of such laws.