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From Securities Regulation Daily, February 24, 2017

Acting SEC Chairman Piwowar urges focus on the ‘forgotten investor’

By Amy Leisinger, J.D.

As the SEC moves forward in its mission to protect investors, maintain fair and orderly markets, and facilitate capital formation, focus must remain on the "forgotten investor," Acting SEC Chairman Michael Piwowar told attendees of the annual SEC Speaks conference. According to the official, when the agency sees market failures and contemplates what can and should be done to address them, it is crucial to consider whom the Commission actually serves. With special-interest disclosure initiatives, the accredited/non-accredited investor dichotomy, and penalties imposed in enforcement proceedings, investors almost always bear the burden, Piwowar said.

"Forgotten investor." In 1918, Yale sociologist William Graham Sumner coined the phrase "forgotten man," defining it in terms of individuals seeking to protect another person who is suffering by imposing obligations on yet another individual. For Sumner, the latter person is the "forgotten man," the victim of reformers and speculators. According to Piwowar, this person is "dragooned into someone else’s quixotic crusade," often in a manner contrary to his or her own interests. Investors have suffered this fate in a number of contexts over the years, he said.

Disclosure. Without accurate and effective disclosure, investors may have only indistinct impressions of a company’s finances, operations, or holdings, the acting chairman explained, and the SEC plays an active role in empowering investors to make informed decisions. However, he noted, arguably immaterial, politically motivated disclosures unrelated to investor protection can result in costs to average investors wholly disconnected from the protected group. For example, the official explained, substantial resources have been expended in connection with the conflict minerals, pay ratio, and resource extraction provisions without direct benefits for investors. As such, Piwowar stated, the SEC staff will reconsider the 2014 guidance on the conflict minerals rule and evaluate comments on any "unexpected challenges" encountered in the implementation of the pay ratio rule. The staff will also review the recently vacated rule requiring resource extraction disclosures to determine how to comply with statutory obligations in alignment with the SEC’s mission, he said.

Accredited investors. Piwowar also suggested a need to move beyond the distinction between "accredited" and "non-accredited" investors and questioned whether non-accredited investors are actually protected by regulations that prevent them from investing in high-risk, high-return securities. "Distinguishing investors who can fend for themselves from those who cannot is a line-drawing exercise fraught with peril," the official opined, and regulators may have "forgotten," or at least disadvantaged, a substantial sect of investors. Prohibiting certain investors from investing in high-risk securities on the basis of income or net worth "amounts to a blanket prohibition on earning the highest returns," he said, and use of a diversified portfolio of assets including higher-risk investments can allow for stronger gains with little change in overall risk. This "well-intentioned policy" may be doing more harm than good, the acting chairman said.

Civil penalties. While agreeing that, in some cases, it is appropriate to punish corporate wrongdoers with civil penalties, Piwowar questioned who is actually penalized in these situations. It is easy to say that corporate misconduct should be penalized financially—where it hurts the most—but innocent investors are often the victims of the fraud and ultimately the ones who pay the penalty, he noted. Every case is different and should be treated as such based on particular facts and circumstances, the official stated.

Current SEC initiatives. In conclusion, Piwowar noted that the current transition is placing constraints on what the Commission can do in the short term. He stated that Commissioner Kara Stein and he are limited in how they can discuss the SEC’s work without creating a quorum. However, Piwowar noted that they will consider several issues at the upcoming March 1 open meeting. The items for consideration include: updates to Industry Guide 3 on disclosure by bank holding companies; exhibit hyperlinks requirements and submission of registration statements and reports to EDGAR in HTML format; changes to inline XBRL filing of tagged data; and proposed changes to Exchange Act Rule 15c2-12 to amend the list of events that trigger event notices to the Municipal Securities Rulemaking Board. The Commission will continue to advance the interests of the "forgotten investor," Piwowar concluded.

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