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From Securities Regulation Daily, October 19, 2015

Investor Advocate, in a first, asks SEC to disapprove NYSE rule proposal

By Jacquelyn Lumb

The SEC’s Office of the Investor Advocate has let the self-regulatory agencies know that the days of expecting little attention to their routine rule proposals are over. Rick Fleming, the head of the office, announced his first formal recommendation to the SEC to disapprove a proposed rule change by the New York Stock Exchange that would exempt certain early stage companies from having to obtain shareholder approval before selling additional shares to insiders and other related parties. Fleming said his action marks the beginning of his office’s plan to bring greater attention to SRO rule proposals. It will oppose those that may be detrimental to investors or support those that will benefit investors, he advised.

The NYSE filed the proposal with the SEC on April 16, 2015. The SEC did not receive any comments on the proposal, but on June 18, it designated a longer period to act, until August 4. The SEC noted that although the proposal would require that the transactions be approved by the audit committee or a comparable committee made up of independent directors, such approval may not serve as an effective substitute for the approval of shareholders whose interests would be affected by the potential dilutive impact.

The NSYE said the proposal would benefit shareholders of early stage companies because it would allow the companies to raise additional capital quickly and inexpensively, but the SEC said that benefit must be weighed against the potentially detrimental impact of a dilutive transaction on which shareholders would no longer have the right to vote.

The Office of the Investor Advocate was created to examine the impact of SRO rule proposals on investors. In his statement, Fleming noted that the task is challenging given the hundreds of proposed rule changes that are filed each year with the Commission. Although the staff carefully scrutinizes all of the proposals, Fleming said that investors may not be aware of them or may have difficulties monitoring all of them.

The SEC publishes the SROs’ proposed rules for public comment, but Fleming said few individual investors submit comments in response. Given the general lack of awareness about these proposals, Fleming’s office stands as the investor’s advocate.

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