Remarks to the SEC Investor Advisory Committee

Thank you, Anne (Sheehan), and good morning everyone. I want to extent a special welcome to their first Investor Advisory Committee meeting to Commissioner Robert Jackson and Commissioner Hester Peirce. Hester previously served on, and contributed substantially to, this Committee. Rob and Hester have brought great intellect, energy, and commitment to the Commission. I also express my gratitude to Jennifer Marietta-Westberg and Heidi Stam, who graciously agreed to dedicate their time as new Committee members. You are joining a valuable group that shares a common and important goal—promoting the long-term interests of America’s Main Street investors. We look forward to your contributions.

Turning to the agenda for today, I applaud the Committee for choosing the topics that you will engage on during this meeting. Rooting out fraud and other harms that affect our retail investor community—whether (1) directly through sales practices that prey on our most vulnerable investors or (2) indirectly through hidden fees or other improprieties—is and should remain a focus of the Commission.

Retail investors should know that our colleagues, Melissa and Lori, who are on the first panel, and their many colleagues at the Commission keep two questions at the forefront of their minds when doing their jobs: How much money have we saved retail investors from losing? And, how much money have we returned to retail investors? It is better to save investors from harm in the first place, but we must focus on both. Also, we should never lose sight of the fact that the lion’s share of the approximately $30.5 trillion invested in U.S. equity markets and $39.3 trillion invested in U.S. fixed income markets belongs, directly or indirectly, to retail investors at the end of the day.

Today’s agenda also includes a discussion of a governance topic that has garnered significant attention recently—dual-class share structures. Another governance topic—whether U.S. companies seeking to enter our public markets should be able to avail themselves of arbitration to resolve shareholder disputes—has also been the subject of recent debate. In particular, commentators have urged the Commission to take action (or refrain from acting) on these issues. And many commentators have advocated for particular outcomes.

I have spoken publicly on both topics, and I believe it is appropriate to repeat my comments today.

Before going into detail, I emphasize that my thoughts are my own and do not necessarily reflect the views of my fellow Commissioners or the SEC staff. Generally speaking, my view is that the Commission should allocate its limited rulemaking and other related resources to a portfolio of matters that (1) present currently pressing and significant issues for investors and our markets, (2) are central to our mission, (3) are ripe for consideration, and/or (4) are addressable through a reasonable share of Commission and staff time. To me, such matters currently include, among others, (1) standards of conduct for investment professionals, (2) an examination of equity and fixed income market structure, (3) the regulation of investment products, including ETFs, (4) the impact of distributed ledger technology (including cryptocurrencies and ICOs), (5) FinTech developments, (6) the elimination of burdensome regulations that do not enhance investor protection or market integrity with an eye toward facilitating capital formation, and, of course, (7) Congressionally-mandated rulemaking, as well as inevitable issues that we have not yet identified but will emerge as pressing.

I strongly believe that Main Street investors as a group—and those who focus on the performance of our markets and economy more broadly—would generally agree with this prioritization. This prioritization is a question that I ask myself, my fellow Commissioners, and the staff on a regular basis. These matters are reflected in the Regulatory Flexibility Act agenda. [1]

Now I will speak more specifically about both issues, including why they are not on my list of near-term priorities. I also will describe some considerations that may not be readily apparent, but nevertheless should be part of any future analysis.

With regard to U.S. domestic companies that seek to move through the initial public offering process with mandatory arbitration provisions for shareholder disputes, as I testified in the Senate, I am not anxious for this issue to come before the agency. [2]

This is a complex issue that invokes divergent and deeply held perspectives and could inevitably exhaust a disproportionate share of the Commission’s resources. I believe there are other matters to which we should devote our attention at this time, and as I noted previously, they are reflected in the Regulatory Flexibility Act agenda. This does not mean that the topic is not worthwhile to discuss, and I encourage those with strong views to support their position with robust analysis. In this regard, I offer one data point that is worthy of illumination for various investor protection reasons—U.S. investors have, directly or indirectly, invested roughly $6.4 trillion in equity securities in jurisdictions that have substantially different, and in most cases less demonstrably significant private rights of action for shareholders. [3] I expect this trend—a greater proportion of U.S. investment being made outside the SEC registration system—to continue. Also, to be clear, I have not formed a definitive view on whether or not mandatory arbitration for shareholder disputes is appropriate in any particular circumstance. I believe any decision would be facts and circumstances dependent.

Moreover, we should recognize that other authorities and market participants have previously taken or may take relevant action in this area, including states, [4] index providers, proxy advisors, institutional investors, and stock exchanges. It is clearly a multi-faceted and complex issue.

With respect to dual class structures, I commend the Committee for examining this issue and look forward to your recommendations. I understand that those recommendations focus on potential disclosure deficiencies and investor confusion. Of course, we should be striving to address any material gaps in governance disclosure and address investor confusion. Disclosure regarding the operation of dual class voting structures is a question that should be discussed. More broadly, I would like to see more analysis of this topic that considers other related issues of significance, including concerns about short-termism and concerns about the attractiveness of U.S. public capital markets compared to foreign public markets and global private markets.

Thank you and I look forward to a productive meeting.

Endnotes

1See Securities and Exchange Commission, Unified Agenda (Fall 2017), available at https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST&currentPub=true&agencyCode=&showStage=active&agencyCd=3235&Image58.x=48&Image58.y=8; See also Chairman Jay Clayton, Governance and Transparency at the Commission and in Our Markets (Nov. 8, 2017), available at https://www.sec.gov/news/speech/speech-clayton-2017-11-08.(go back)

2See Chairman Jay Clayton, Testimony on “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission” (Feb. 6, 2018), available at https://www.c-span.org/video/?440770-1/jay-clayton-christopher-giancarlo-testify-hearing-virtual-currencies.(go back)

3See Congressional Research Service, U.S. Direct Investment Abroad: Trends and Current Issues (June 29, 2017), available at https://fas.org/sgp/crs/misc/RS21118.pdf.In addition, U.S. registered and listed foreign companies have alternative dispute resolution and forum selection clauses and other dispute protocols that differ substantially from those available for domestic U.S. listed public companies.(go back)

4Del. Code Title 8, § 115.(go back)