Views on improving the integrity of global capital markets
01 February 2021

The Biden SEC – Time to Restore an Investor Protection Vibe

With a new Administration comes fresh leadership at the Securities and Exchange Commission (SEC), the most important securities regulator on the world stage.  We have a simple request, get us back on track for investor protection.

While present SEC leadership has focused more on loosening market regulations and protecting the commercial interests of public companies, it has missed once-in-a-generation opportunities to address mis-selling of financial products and bolster shareholder rights.  This SEC shift has resulted in nearly four years of rolling back investor protections and disengaging from some of the most important securities market debates in decades, concerning corporate disclosures and investment management practice.  Below are the areas both ripe for accomplishment and primed to create high improvement in  market integrity, fairness and safety.

Fixing Regulation Best Interests. The mis-selling of financial products, especially by brokers using the honorable moniker of “financial advisor,” and saying they are working in the customer’s best interests was addressed by the SEC over a year ago when they enacted “Regulation Best Interest,” (Reg BI). Reg BI regulates brokers and other financial advice givers to hold them to what was called a higher standard of customer care. A key part of this new advice rule is that brokers and investment advisers give their clients a Form CRS (Client Relationship Summary). The CRS was supposed to present plain-language communication about what investors should expect from their “best-interests” investment professional. The Form is complicated legal speak and a simple clarity upgrade would do wonders for retail investors understanding the difference between a sales agent and a true fiduciary.  Form CRS should simply and clearly address basic mis-selling issues like these:

  • When you use the title, “adviser,” does that mean you work for me or are you a salesperson, acting for your firm?   Can you do both?
  • When you sell me mutual funds or IPOs and other securities in an ongoing offering who do you represent?  How will that affect your duties of acting in my best interests?
  • When you sell financial products to your retail brokerage account holders, can you sell more expensive financial funds or products even though there are products of similar quality or performance available at lower cost ? 
  • Are you limited to your firm’s products?
  • Do you recommend investment funds that pay you extra to feature their products? Can you assure me you are still acting in my best interests?

Fixing Proxy Advice and Voting. A sore subject for many institutional investors dedicated to doing a proficient job with proxy voting on behalf of their underlying investors is the SEC’s action to block independence of proxy voting advice. Of note is making the proxy adviser responsible to deliver the issuer’s objections and blocking any voting until they do so.  It has become a complicated mess that is now wrapped up in litigation.  In the view of investors which use the advisory services, it marks an intrusive attack on shareholder rights and the corporate  governance process.   Corporate trade associations tried everything including fake comment letters from investors to make the case this was about investor protection and enhancing the mix of information available to shareholders.  Rather this has everything to do with a voracious and decades long attack by certain issuers and their lobbyists to rig proxy voting outcomes. If the pending litigation does not invalidate the current rule, we encourage the new SEC to take prompt rulemaking steps to refine, revise or even abandon the rule unless it can be shown there is need to honestly support fixing significant errors in proxy advice or a lack of truthfulness in proxy research. No credible evidence of this was ever confirmed during the rulemaking process.

Engaging on Sensible Sustainability Steps.  Finally,  few issues have risen to the fore in global markets like the matters around ESG and sustainability.  Two aspects of this – sustainability reporting by public companies and whether regulated investment managers integrate ESG factors into investment analysis have dominated the regulatory scene in other developed markets. Not so in the U.S.  The SEC must play catch up but use a measured approach to regulatory mandates in either of these areas. 

First, we must not swing from the recent politics of blocking ESG considerations by asset managers to the politics of requiring it.  Professional investors should be allowed to follow their clients’ directives and their professional judgement in determining what is material to the investment decision making process, including material ESG factors. 

Similarly, sustainability reporting by public companies must not be left entirely to the discretion of the management which has left our markets with little clarity, consistency or comparability. Worse yet, too many issuers simply dismiss such disclosures as being immaterial or relegate same to yearly boilerplate.   The SEC should begin actions to frame in more specific terms a template for what should be routinely addressed by a public company in a required sustainability disclosure.  Importantly, this should  include the SEC reengaging with global counterparts like the IFRS in the ongoing  process to improve the quality of sustainability reporting.

In the coming months dozens of stakeholders and other commentators will have their own “To Do” lists for the SEC.  To be sure, there are many topics the SEC could choose to be the focus of new regulatory leadership.  In our view, the ones we feature here will have the most impact on investor protection and renewing the SEC’s standing as a leader in global market regulation. 

Editor’s note: A version of this article appeared on Nasdaq.com.


Photo credit @ Getty Images / Michele Ursi

About the Author(s)
Kurt Schacht, JD, CFA

Kurt Schacht, JD, CFA, is managing director of the Standards and Financial Market Integrity division at CFA Institute, where he oversees all advocacy efforts and the development, maintenance, and promotion of the highest ethical standards of practice for the global investment management industry.

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