Effective Regulatory Oversight and Investor Protection Requires Better Information

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

It is said that, “knowledge is power.” Knowledge, however, requires information. And there is no doubt we live in an age of information. The advent of the Internet and the breathtaking technological advances we have witnessed over the last few decades have given us access to more information than at any time in history. The available data seems to be limitless—and all available at the touch of a fingertip.

Yet, when I joined the Commission, it quickly became apparent that the SEC did not have the breadth and quality of information necessary to do its job effectively. As our country experienced the worst financial crisis since the Great Depression, and, as things began to unravel, I sought data and information to analyze the impact of what was occurring—only to find that much of the information available to the Commission was missing, stale, or incomplete.

For example, just weeks into my tenure, a large money market fund “broke the buck,” and it quickly became clear that the information received by the Commission on money market fund holdings was too stale to be of regulatory use. I recall asking the then-Director of the Division of Investment Management whether other money market funds were at risk, only to be told something to the effect that, “we’re not sure and we’re calling around to get information.” Needless to say, it is not the answer you want to hear or say. Instead, you want more definitive answers; answers based on reliable information that will enable you to make critical decisions. Simply stated, the SEC did not have timely, reliable information to allow it to determine whether other funds were also susceptible to a liquidity crisis. Clearly, data deficiency has serious ramifications.

As a result, from my early days as a Commissioner, I have been a strong advocate for the collection of high-quality data at the SEC. For example, during the drafting of what led to the 2010 money market reforms, I championed a rule requiring money market funds to provide monthly disclosures of their investment portfolios, which would provide the Commission with more current information to allow timelier monitoring of money market fund holdings Surprisingly, even with a clear need for this data, there were skeptics who doubted the benefits of collecting such data.

Ultimately, the Commission adopted this rule in 2010, and today the SEC staff and the staff at other regulatory agencies rely heavily on the data to monitor money market funds activities. In fact, there is no equivalent transparency for similarly situated products. Indeed, a former Director of the Division of Investment Management noted that the Commission “benefitted greatly from the monthly data that Form N-MFP [provided] about money market fund holdings.” The staff’s ongoing analysis of the new money market fund data, and its review of the gross yield of funds as a marker of risk, has proved useful to monitoring for fraud and other discrepancies. For example, in 2013, the review of Form N-MFP resulted in an enforcement action when the staff noted that a money market fund’s performance was consistently different from the rest of the market. In addition, during the Eurozone crisis in 2011, the new data allowed the Commission staff to determine that money market funds were not—as had been widely speculated—overexposed to Irish banks and other European securities during the crisis. The staff is able to use “real time” data on money market funds’ portfolio holdings to great effect, and the staff’s review of the monthly information often raises questions that prompt the staff to reach out to advisers for answers.

The money market fund experience demonstrated that effective oversight of our capital markets requires that the SEC be well informed through better data collection and analysis.

Similarly, early in my tenure, I started to advocate for improved data about the trading markets. As a result, I heard about a nascent project to try to create a Consolidated Audit Trail (“CAT”) to develop, implement, and maintain a consolidated tracking system for all quotation and trading activity in exchange listed securities. I searched out the staff with knowledge about this project and learned about the potential benefits of the information that could be derived from such a project. It became very clear to me that CAT could improve Commission oversight by allowing the SEC staff to monitor the markets more effectively, identify and address potential risks before they metastasize into larger problems, and analyze historical data more efficiently. Moreover, I learned that CAT could also be a game-changer with respect to combatting financial fraud, which is more difficult to identify today because of market fragmentation and automated trading.

In light of these clear benefits, I fought hard to make sure that the CAT project was added to the Commission’s formal regulatory agenda, and I continue to press for its prompt implementation. It is clear that the data to be provided by CAT will also enhance the Commission’s regulatory efficiency.

In addition to the money market fund disclosure rule and CAT, I have fought for and supported many other data gathering rules at the SEC spanning the entire regulatory horizon, including rules affecting derivatives activities (including credit default swaps), municipal advisors, credit rating agencies, hedge funds, and many others. I have also been a public voice as to the benefits of high quality, interactive data that can allow the Commission, investors, academics, and the public to better analyze corporate information and market information.

I give you that history so that it should come as no surprise that I am pleased that the two proposed rules that the Commission considers today will significantly enhance the available data, and its use:

  • First, the Commission is proposing new rules, forms, and amendments, to update and enhance the disclosure and reporting framework for registered investment companies (“RICs”), such as mutual funds and exchange-traded funds; and
  • Second, the Commission is proposing rules and form amendments that seek to improve the quality of information that investment advisers retain and report to the Commission.

These rules will result in more useable, complete, and high-quality information that will have a significant impact across the regulatory landscape. In particular, the additional information, much of it in a structured and searchable format, should have a positive impact on the way investors can obtain information about their investment advisers and their RIC investments. The information will also improve the way market participants and interested parties collect, aggregate, and analyze data and trends, as well as enhance the quality and depth of available information. Lastly, of course, the information will help enhance the Commission’s risk monitoring, examination, enforcement, and other oversight functions.

Investment Company Reporting Modernization

The first proposal we consider today involves significant and substantive changes to the rules and forms under the Investment Company Act of 1940. Many of these changes will enhance the Commission’s oversight functions and improve the disclosures received by investors. To this end, the proposed rules have the following important components:

  • First, the rules would require certain RICs to report information about their portfolio holdings to the Commission on a monthly basis on new Form N-PORT. Timely and frequent reporting of portfolio holdings will help the Commission carry out its regulatory responsibilities in many programmatic areas, including examinations, enforcement, fund monitoring, policymaking, and disclosure review.
  • Second, the rules would standardize disclosures on derivatives in investment company financial statements. These enhanced disclosures will provide investors with clear and consistent disclosures across many funds to help investors make more informed investment decisions.
  • Third, the rules would require RICs, other than face-amount certificate companies, to report certain census-type information to the Commission annually on new Form N-CEN. This information will enhance the Commission’s understanding of industry trends, inform policy, and aid the Commission’s examination staff.

In addition, the requirements to submit information in a structured data format will improve the retrieval, searchability, and analysis of relevant fund data by the SEC staff and the public alike. This will allow investors, regulators, and market participants to organize and analyze large amounts of data and information more efficiently. These are all positive features of the proposed rules.

The proposed release, however, is not all about data gathering. In particular, there is one feature that would permit RICs, after satisfying certain conditions, to transmit shareholder reports by making them accessible on an Internet website, rather than printing and mailing the reports to the shareholders. The release, however, makes it clear that this new feature raises a number of questions. For example, while this “access equals delivery” model would certainly result in cost savings, it could also result in unintended consequences, such as creating unnecessary hurdles that could discourage shareholders from reading the shareholder reports.

These concerns are borne from the Commission’s prior experience and the staff’s investor research. After the Commission’s adoption of the e-proxy rules, we have witnessed declining retail investor participation in the proxy voting process. The e-proxy rules required issuers to post their proxy materials on an Internet website, and then provide shareholders with notice that the proxy materials were available on their website. Under these rules, issuers have the option to continue to provide paper copies. Issuers that declined to use the paper option, and only use e-delivery, adopted the so-called “notice and access” model.

As I noted several years ago, retail investor voting, already at low numbers, plummeted at those companies using the notice and access model. Indeed, statistics demonstrated that the level of voting participation by investors at companies relying on the notice and access model decreased over 30% as to large investors, and over 60% as to smaller investors. Even more disconcerting are suggestions by some observers that the notice and access model may have led to fewer shareholders even actually reading the proxy materials.

In fact, the Commission staff’s empirical research in connection with today’s proposal shows that some investors continue to prefer to receive paper reports, and some demographic groups of investors are less likely to use the Internet. Significantly, there is also a risk that even those investors who prefer to use the Internet may be less likely to review reports that are delivered electronically, as compared to reports that are delivered in paper format.

Thus, based on our experience with the e-proxy rules, and the staff’s investor research, this is an area where the Commission should proceed with caution before adopting a similar notice and access model that adversely affects the benefits of shareholder reports.

To this end, I thank the staff for responding to my concerns and including a more fulsome discussion in the release of the issues raised by this aspect of the proposal. I also appreciate the staff’s efforts to add various safeguards, redundancies, and other features to make it clearer to investors what occurs if they do not respond to notices about the conversion to web access. I encourage commenters, particularly investors, to respond to questions in the release as to this aspect of the proposal. Their input will allow the Commission to make a more informed decision.

Proposed Amendments to Form ADV and Advisers Act Rules

Let me now turn to the second proposal on today’s agenda. Here, the Commission considers proposed amendments to Part I of Form ADV and to various rules under the Investment Advisers Act of 1940 (“Advisers Act”). In particular, the proposed amendments should improve the quality and depth of the data that investment advisers disclose and, thereby, enhance the Commission’s risk monitoring and oversight of investment advisers’ business activities. Moreover, the new information in Form ADV should help investors in making informed decisions in the selection and retention of advisers.

Let me highlight a few salient points in the release:

  • First, advisers would be required to enhance disclosures as to separately managed accounts. The information should improve the SEC staff’s ability to spot emerging trends or regulatory risks.
  • Second, today’s rules request more detailed and nuanced disclosure in Form ADV regarding the adviser and its business—such as requiring information on assets under management from non-U.S. clients, and additional information about an adviser’s affiliation with wrap fee programs.
  • Third, the rules would codify the Commission staff’s prior guidance that allows affiliated private fund advisers to file a single Form ADV. This streamlined registration process, known as “umbrella registration,” provides better and clearer data about groups of advisers that operate as a single business.
  • Finally, advisers would be required to retain additional materials relating to the performance or rate of return for accounts that they manage. This information should be useful to the Commission and the public in examining and evaluating performance claims by advisers.

These amendments to the Advisers Act and Form ADV should result in greater transparency of the practices and services provided by investment advisers. This will benefit both investors and the regulatory and examination programs of both the Commission and state securities regulators.


Ultimately, greater access to high-quality usable information fosters confidence in investment decisions and in regulatory actions and initiatives. Moreover, better data helps the Commission fulfill its mission of protecting investors, fostering capital formation, and ensuring fair, orderly, and efficient markets. For these reasons, I will support both sets of proposed rules.

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