REPORT ON OBJECTIVES FISCAL YEAR 2015
 
 

Office of the 

Investor 

Advocate 

U.S. SECURITIES AND EXCHANGE COMMISSION
 
 
The Office of the Investor Advocate was 

established pursuant to Section 915 of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act of 2010, as 

codified under Section 4(g) of the Securities 

Exchange Act of 1934, 15 U.S.C. § 78d(g). 
OFFICE OF THE INVESTOR ADVOCATE 

REPORT ON OBJECTIVES
 
 

FISCAL YEAR 2015 

THE OFFICE OF THE INVESTOR ADVOCATE was established pursuant to Section 915 of 

the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank 

Act”), as codified under Section 4(g) of the Securities Exchange Act of 1934 (the “Exchange 

Act”), 15 U.S.C. § 78d(g). Exchange Act Section 4(g)(2)(A)(ii) provides that the Investor Advocate be appointed by the Chair of the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”) in consultation with the other Commissioners and that the Investor Advocate report directly to the Chair.1 On February 24, 2014, SEC Chair Mary Jo White appointed 

Rick A. Fleming as the Commission’s first Investor Advocate. 

Exchange Act Section 4(g)(6) requires the Investor Advocate to file two reports per year with 

the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on 

Financial Services of the House of Representatives.2 A Report on Objectives is due not later than 

June 30 of each year, and its purpose is to set forth the objectives of the Investor Advocate for the 

following fiscal year.3 The instant report is the Investor Advocate’s first Report on Objectives. It 

contains a summary of the Investor Advocate’s primary objectives for Fiscal Year 2015, beginning October 1, 2014. 

A Report on Activities is due no later than December 31 of each year.4 This report shall describe 

the activities of the Investor Advocate during the immediately preceding fiscal year. Among other 

things, the report must include information on steps the Investor Advocate has taken to improve 

the responsiveness of the Commission and self-regulatory organizations (“SROs”) to investor 

concerns, a summary of the most serious problems encountered by investors during the reporting 

period, identification of Commission or SRO action that was taken to address those problems, 

and recommendations for administrative and legislative actions to resolve problems encountered 

by investors.5 The first such report will be filed by December 31, 2014, and will describe the 

activities of the Office of the Investor Advocate from its inception on February 24, 2014, through 

the remainder of Fiscal Year 2014, ending September 30, 2014. 

Disclaimer: Pursuant to Section 4(g)(6)(B)(iii) of the Exchange Act, 15 U.S.C. § 78d(g)(6)(B)(iii), this 

Report is provided directly to Congress without any prior review or comment from the Commission, any 

Commissioner, any other officer or employee of the Commission, or the Office of Management and Budget. 

Accordingly, the Report expresses solely the views of the Investor Advocate. It does not necessarily reflect 

the views of the Commission, the Commissioners, or staff of the Commission, and the Commission disclaims responsibility for the Report and all analyses, findings, and conclusions contained herein. 

R E PORT ON OBJECT I VES: FISCAL YEAR 201 5 | i

CONTENTS
 

MESSAGE FROM THE INVESTOR ADVOCATE . . . . . . . . . . . . . . . . . . . . . . . . . . 1
 

OBJECTIVES OF THE INVESTOR ADVOCATE . . . . . . . . . . . . . . . . . . . . . . . . . 5
 

Assisting Retail Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
 

Identifying Areas in Which Investors Would Benefit From Regulatory Changes . . . . . . . . 5
 

Identifying Problems with Financial Service Providers and Investment Products . . . . . . . . .6
 

Analyzing the Potential Impact on Investors of Proposed Rules and Regulations . . . . . . . . 6
 

Proposing Appropriate Changes to the Commission and to Congress. . . . . . . . . . . . . . 6
 

Appointing an Ombudsman and Staffing the Office of the Investor Advocate . . . . . . . . . 6
 

Rulemaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
 

Supporting the Investor Advisory Committee . . . . . . . . . . . . . . . . . . . . . . . . . . 7
 

POLICY AGENDA FOR FISCAL YEAR 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
 

Equity Market Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
 

Investor Flight. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
 

Municipal Market Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
 

Data Protection and Cybersecurity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
 

Effective Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
 

Elder Abuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
 

RECOMMENDATION OF THE INVESTOR ADVOCATE . . . . . . . . . . . . . . . . . . . . . 15
 

SUMMARY OF IAC RECOMMENDATIONS AND SEC RESPONSES . . . . . . . . . . . . . . 19
 

Crowdfunding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
 

Decimalization and Tick Sizes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
 

Legislation to Fund Investment Adviser Examinations. . . . . . . . . . . . . . . . . . . . . . 21
 

Broker-Dealer Fiduciary Duty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
 

Universal Proxy Ballot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
 

Data Tagging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
 

Target Date Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
 

JOBS Act: General Solicitation and Advertising . . . . . . . . . . . . . . . . . . . . . . . . . 22
 

R E PORT ON OBJECT I VES: FISCAL YEAR 201 5 | iii
I personally prosecuted an investment adviser who 

stole more than $7 million in a Ponzi scheme. He 

was sent to prison for his crime, but his clients 

were left unable to recover their funds—their 

dreams of a comfortable retirement shattered by 

a licensed “professional.” I am convinced that a 

more frequent examination cycle would have 

led to an earlier discovery of the scheme and 

minimized the harm. . . . 
MESSAGE FROM THE
 
 

INVESTOR ADVOCATE
 
 

On February 24, 2014, the Office of the Investor Advocate (the “Office”) was created at 

the Securities and Exchange Commission when Chair Mary Jo White swore me in to 

serve as the Commission’s first Investor Advocate. It is my privilege to serve alongside 

the thousands of other dedicated employees at the Commission who spend each day protecting 

investors. 

CORE FUNCTIONS 

The Office has three core functions. First, we will work to ensure 

that the voices of investors are heard as decisions are being made 

within the Commission, at self-regulatory organizations (“SROs”), 

and in Congress. As more fully described in this Report, the scope 

of our statutory mandate is quite broad. We are expected not only 

to monitor current policy initiatives, but also to identify problems 

that investors have with investment products and financial service 

providers and to propose legislation or regulations that promote the 

interests of investors. 

Another core function of the Office will be the work of an 

Ombudsman. Pursuant to Section 4(g)(8) of the Securities Exchange Act of 1934, the Investor 

Advocate must appoint an Ombudsman within 180 days after the Investor Advocate’s appointment. The Ombudsman will act as a liaison to resolve problems that retail investors may have 

with the Commission or with an SRO. 

The Office will also provide staff and operational support for the SEC’s Investor Advisory Committee (the “Committee” or the “IAC”), a group established by Section 911 of the Dodd-Frank 

Act to promote investor confidence and protect investors’ interests. The Investor Advocate is a 

statutory member of the IAC and participates in its activities. 

OBJECTIVES FOR FISCAL YEAR 2015 

The primary objectives of the Office for Fiscal Year 2015 will reflect our three core functions. 

For example, we will support the work of the IAC in a variety of ways in the coming year. We 

will participate in subcommittee conference calls, assist in connecting the IAC with subject matter experts at the Commission, prepare minutes, and make all of the arrangements for in-person 

Committee meetings. As vacancies occur on the Committee, we will also process the appointments of new members. 

REPORT ON OBJECTIVES: FISCAL YEAR 201 5 | 1
 

 

Once selected, the Ombudsman must assess the various channels in which investors currently 

communicate with the Commission and determine which of those communications should be 

routed to the Ombudsman. The Ombudsman must establish and implement systems that prescribe how future complaints are to be made, received, and acted upon, including the scope and 

manner of formal investigations and informal resolutions. 

As a routine matter, the Office will review rulemakings that the Commission and SROs propose, 

in order to ensure that the proposals give appropriate consideration to the needs of investors. 

We will strive to engage in the rulemaking process early on, while concepts are still developing, 

instead of waiting to comment upon finished proposals. 

In addition to reviewing rulemakings as they occur, we will be forward-looking and attempt to 

build momentum for reforms that benefit investors. However, with an initial staff of six employees, and given the broad scope of policy issues impacting investors, it seems prudent to narrow 

our focus to a manageable number of issues in which we can develop expertise and provide a 

strong voice for investors. Toward this end, we have developed a Policy Agenda for Fiscal Year 

2015 that is described in greater detail in this Report. 

In developing our policy agenda, we have been mindful of the recommendations already made 

by the IAC. Given the resource constraints of the Office, we do not wish to duplicate the work 

of the Committee. Therefore, where the IAC has spoken to an issue, we are less likely to address 

that issue independently. However, because those issues are important to investors and would 

logically be a part of the Office’s policy agenda, we will spotlight the recommendations of the 

IAC in our reports to Congress. Accordingly, you will find in this Report a list of the IAC’s official recommendations to the Commission, along with a summary of the Commission’s response 

to each IAC recommendation. 

FIRST RECOMMENDATION OF THE INVESTOR ADVOCATE 

By June 30 of each year, the Investor Advocate is required to submit a report to Congress outlining objectives for the coming fiscal year (the “Report on Objectives”). By December 31, the Office must submit a report on its activities for the previous fiscal year (the “Report on Activities”). 

The Report on Activities must include “recommendations for such...legislative actions as may be 

appropriate to resolve problems encountered by investors.” 

Although our first Report on Activities is not due until December 31, we include within this 

inaugural Report on Objectives a recommendation to address a substantial and continuing risk 

to investors. Specifically, we recommend that Congress provide sufficient resources to the SEC to 

conduct an adequate number of investment adviser examinations. 

While working as General Counsel for the Office of the Kansas Securities Commissioner, I 

personally prosecuted an investment adviser who stole more than $7 million in a Ponzi scheme. 

He was sent to prison for his crime, but his clients were left unable to recover their funds—their 

dreams of a comfortable retirement shattered by a licensed “professional.” I am convinced that 

a more frequent examination cycle would have led to an earlier discovery of the scheme and 

minimized the harm, and the State of Kansas subsequently enhanced its examination program to 

deter such misconduct in the future. 

2 | OFFICE OF THE INVESTOR ADVOCATE 
 

 

 

 

Investors need a similar enhancement today at the federal level to provide for more frequent 

examinations of SEC-registered investment advisers. While most advisers observe the highest 

standards of integrity, it is difficult for the Commission to detect less ethical behaviors when the 

Commission examines only 9 percent of its registrants each year. As you read this, it is quite possible—even likely—that investors somewhere in this country are being defrauded by an unscrupulous investment adviser whose crimes have not yet come to light. Other investors continue to 

suffer abuse through various unethical practices, including excessive fees, excessive trading, and 

undisclosed conflicts of interest. More frequent compliance examinations will allow the SEC to 

halt these types of activities sooner and will provide a stronger deterrent to advisers who might 

otherwise succumb to the temptation to steal or engage in unethical practices. 

As discussed herein, this issue presents a rare convergence of interests, where both the regulator 

and the regulated generally agree on the problem and the solution. All that is needed is Congressional action. 

CONCLUSION 

It is my honor to submit this first Report on Objectives on behalf of the Office of the Investor 

Advocate. I would be pleased to answer questions from Members of Congress. 

Sincerely, 

RICK A. FLEMING 

Investor Advocate 

REPORT ON OBJECTIVES: FISCAL YEAR 201 5 | 3

 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

OBJECTIVES OF THE

 

INVESTOR ADVOCATE
 
 

The Investor Advocate is responsible for performing several enumerated statutory functions. The objectives of the Investor Advocate for Fiscal Year 2015 are to staff the Office of the Investor Advocate and to begin meeting the statutory purposes of the Office, as set 

forth in Exchange Act Section 4(g)(4), 15 U.S.C. § 78d(g)(4). 

By statute, the Investor Advocate shall perform the following functions: 

(A)	 assist retail investors in resolving significant problems such investors may have

 

with the Commission or with SROs;

 

(B)	 identify areas in which investors would benefit from changes in the regulations

 

of the Commission or the rules of SROs;

 

(C)	 identify problems that investors have with financial service providers and

 

investment products;

 

(D)	 analyze the potential impact on investors of proposed regulations of the Com­
 

mission and rules of SROs; and

 

(E)	 to the extent practicable, propose to the Commission changes in the regulations 

or orders of the Commission and to Congress any legislative, administrative, or 

personnel changes that may be appropriate to mitigate problems identified and 

to promote the interests of investors. 

ASSISTING RETAIL INVESTORS 

Exchange Act Section 4(g)(4)(A) directs the Investor Advocate to assist retail investors in resolving significant problems such investors may have with the Commission or with SROs.6 As 

discussed below, the Investor Advocate will appoint an Ombudsman to, among other things, 

act as a liaison between the Commission and any retail investor in resolving problems that retail 

investors may have with the Commission or with SROs.7

 In carrying out these duties, the Ombudsman is authorized to “utilize personnel of the Commission to the extent practicable.”8 

IDENTIFYING AREAS IN WHICH INVESTORS WOULD 

BENEFIT FROM REGULATORY CHANGES 

Exchange Act Section 4(g)(4)(B) authorizes the Investor Advocate to identify areas in which 

investors would benefit from changes in the regulations of the Commission or the rules of SROs.9 

This is a broad mandate. It enables the Investor Advocate to examine the entire regulatory 

scheme, including existing rules and regulations, to identify those areas that could be improved 

for the benefit of investors. For example, the Investor Advocate may look at the rules and regulations governing existing equity market structure to determine whether any changes would benefit 

investors. Similarly, the Investor Advocate may review current municipal market practices to 

REPORT ON OBJECTIVES: FISCAL YEAR 201 5 | 5
 

 

evaluate whether any changes might benefit investors. These concerns are discussed in greater 

detail in the section entitled Policy Agenda for Fiscal Year 2015. 

IDENTIFYING PROBLEMS WITH FINANCIAL SERVICE 

PROVIDERS AND INVESTMENT PRODUCTS 

Exchange Act Section 4(g)(4)(C) requires the Investor Advocate to identify problems that investors have with financial service providers and investment products.10 The Investor Advocate 

will monitor investor inquiries and complaints, SEC and SRO staff reports, enforcement actions, 

and other data to determine which financial service providers and investment products may be 

problematic. 

ANALYZING THE POTENTIAL IMPACT ON INVESTORS OF 

PROPOSED RULES AND REGULATIONS 

Exchange Act Section 4(g)(4)(D) directs the Investor Advocate to analyze the potential impact on 

investors of proposed regulations of the Commission and proposed rules of SROs.11 As a matter 

of routine, therefore, the Office will review rulemakings of interest to investors. It will also communicate with investors and their representatives to determine the potential impact on investors 

of proposed rules. 

To fulfill the dual statutory mandate of analyzing the potential impact of proposed rules and 

identifying areas in which investors would benefit from changes to the rules, the Investor Advocate considers it imperative to be involved in rulemakings at the earliest stage. Becoming involved 

in a rulemaking at inception is vital if the Investor Advocate is to play a constructive role on 

behalf of investors in the rulemaking. 

PROPOSING APPROPRIATE CHANGES TO THE 

COMMISSION AND TO CONGRESS 

Exchange Act Section 4(g)(4)(E) provides that, to the extent practicable, the Investor Advocate 

may propose to the Commission changes in the regulations or orders of the Commission and to 

Congress any legislative, administrative, or personnel changes that may be appropriate to mitigate problems identified and to promote the interests of investors.12 

Consistent with Exchange Act Section 4(g)(4)(E), the Investor Advocate has identified a serious risk to investors that warrants immediate attention. Specifically, the Investor Advocate 

has identified significant capacity challenges in the Commission’s registered investment adviser 

examination program that, if not addressed immediately, will continue to be detrimental to the 

interests of investors. To mitigate this problem and promote the interests of investors, the Investor Advocate proposes that Congress approve adequate funding for the SEC, and for the SEC’s 

Office of Compliance Inspections and Examinations in particular, to provide resources for more 

frequent on-site examinations of SEC-registered investment advisers. The Recommendation of 

the Investor Advocate section of this Report contains a detailed discussion of this problem and 

the recommended solution. 

APPOINTING AN OMBUDSMAN AND STAFFING THE 

OFFICE OF THE INVESTOR ADVOCATE 

The Investor Advocate may retain or employ various staff “as the Investor Advocate deems necessary to carry out the functions, powers, and duties of the Office.”13 The Investor Advocate is 

also responsible for appointing an Ombudsman to: (i) act as a liaison between the Commission 

6 | OFFICE OF THE INVESTOR ADVOCATE 
 

 

 

and any retail investor in resolving problems that retail investors may have with the Commission or with SROs; (ii) review and make recommendations regarding policies and procedures to 

encourage persons to present questions to the Investor Advocate regarding compliance with the 

securities laws; and (iii) establish safeguards to maintain the confidentiality of communications 

between investors and the Ombudsman.14 The Investor Advocate must appoint the Ombudsman not later than 180 days following the date of the Investor Advocate’s appointment. 15 

In the coming year, the Investor Advocate will continue to hire staff, including the Ombudsman. 

In addition, the Investor Advocate will assist the Ombudsman in implementing systems for the 

receipt and processing of investor inquiries. 

RULEMAKING 

Section 915 of the Dodd-Frank Act mandates the adoption of a rule that relates to the Office of 

the Investor Advocate.16 This mandate, as codified in Exchange Act Section 4(g)(7), requires the 

Commission, by regulation, to establish procedures requiring a formal response to all recommendations submitted to the Commission by the Investor Advocate, not later than three months after 

the date of such submission.17 In the coming year, the Office will work with the SEC’s Office of 

the General Counsel to initiate this required rulemaking. 

SUPPORTING THE INVESTOR ADVISORY COMMITTEE 

Exchange Act Section 39, as amended by Section 911 of the Dodd-Frank Act, establishes the 

Investor Advisory Committee.18 As discussed in greater detail in the section entitled Summary 

of IAC Recommendations and SEC Responses, the purpose of the Committee is to advise and 

consult with the Commission on regulatory priorities, issues impacting investors, initiatives to 

protect investors, and related matters. 

By statute, the Investor Advocate is a member of the IAC.19 Accordingly, the Investor Advocate 

will participate in the activities of the Committee. In addition, the Office will provide staff and 

operational support to the IAC. 

REPORT ON OBJECTIVES: FISCAL YEAR 201 5 | 7

 

POLICY AGENDA FOR
 
 

FISCAL YEAR 2015
 
 

The statutory mandate for the Office of the Investor Advocate is broad, but our resources 

are limited. Because we will be unable to examine every possible issue in depth, it will be 

necessary to narrow our focus to a manageable number of issues so that we can effectively 

advise policymakers and make the greatest impact for investors. 

After discussions with numerous knowledgeable individuals, both inside and outside the Commission, and after due consideration, the Investor Advocate has determined that the Office 

should focus on the following issues during Fiscal Year 2015: equity market structure, investor 

flight, municipal market reform, cybersecurity, effective disclosure, and elder abuse. Other issues 

undoubtedly will arise that require the attention of the Office, but these issues will remain on our 

policy agenda. 

EQUITY MARKET STRUCTURE 

The secondary market for U.S.-listed equities has become dispersed and complex, partly as a 

result of the decades-long transition from a market structure dominated by manual trading to a 

market structure characterized primarily by automated trading.20 The evolution of technologies 

for generating, routing, and executing orders has enhanced the speed, capacity, and sophistication of the trading functions that are available to market participants. 21 In addition, trading 

volume has become dispersed among many trading centers that compete for order flow in the 

same stocks, and trading centers offer a wide range of services designed to attract different types 

of market participants with varying trading needs.22 

Regulatory actions have contributed to changes in equity market structure—for example, Regulation NMS (adopted in 2005),23 the Order Handling Rules (adopted in 1996),24 and certain 

enforcement actions. In particular, the equity market has evolved significantly since the adoption 

of Regulation NMS, which was intended to modernize and strengthen the regulatory structure 

of the U.S. equity markets. 25 Regulation NMS was also intended to “protect investors, promote 

fair competition, and enhance market efficiency.”26 

To understand the effects of the transformation in equity trading more completely, the Commission has been conducting a comprehensive review of equity market structure. 27 Like others at 

the Commission, the Office of the Investor Advocate is sensitive to the fact that market structure 

issues are complex and require a broad understanding of statutory requirements, economic 

principles, and practical trading considerations. 28 However, while we recognize that competing 

interests must be balanced for markets to work efficiently, the Office will focus on one overriding 

concern as we examine these issues: is the equity market today fair for investors? 

REPORT ON OBJECTIVES: FISCAL YEAR 201 5 | 9
 

 

 

 

Fairness is integral to the SEC’s three-part mission: (1) to protect investors; (2) to maintain

 

fair, orderly, and efficient markets; and (3) to facilitate capital formation.29 Consistent with the

 

second prong of the SEC’s mission, the relevant question for the Investor Advocate is not simply

 

whether the equity market is better today than before the adoption of Regulation NMS, but

 

rather, whether the equity market is functioning as fairly and efficiently as possible today.
 
 

To examine the fairness issue, the Office may consider a number of questions, including:
 
 

§ How to define a fair market—what constitutes a fair market?

 

§ Do investors perceive the current equity market to be fair?

 

§ Are any particular elements of the current equity market unfair to investors?

 

§ What are the negative impacts on investors from the current equity market structure?

 

§ Do the incentives inherent in the current equity market structure favor or disfavor individual

 

investors? 

§ On balance, would any proposed changes help or harm individual investors? 

By evaluating answers to these and related questions, the Office will be better equipped to propose and support measures designed to benefit investors and the equity market as a whole. 

INVESTOR FLIGHT 

Concurrent with our evaluation of the equity market’s fairness, the Office will examine a related 

issue. We will explore whether individual investors are abandoning the equity market because 

they are wary of it. This question has been a recurring theme in the media during the past few 

years, with some news reports describing persistent investor anxiety about investing in equities30 

and other media sources claiming that the perceived phenomenon of investor flight is a myth.31 

Some acknowledge that a number of retail investors have liquidated their individual stock holdings, but they argue that those investors are reinvesting their funds into target date funds and 

exchange-traded funds, thereby participating indirectly in the equity market.32 Nonetheless, a 

January 2014 Gallup survey found that about half of investors were wary of investing in the 

stock market at the time—despite recent market gains.33 Moreover, the same survey found that 

the percentage of American households that own securities (either directly or through a mutual 

fund or self-directed retirement account) has declined from approximately 65 percent in April 

2007 to approximately 54 percent in January 2014.34 If true, this decline in individual investment could constitute a significant drag on capital formation and the U.S. economy. 

In addition, nearly three-quarters of those polled in an April 2014 Bankrate monthly survey 

indicated that they were not more inclined to invest in the stock market despite persistent low 

interest yields in savings accounts and certificates of deposit.35 Another recent Gallup survey 

found that Americans tend to believe that real estate is the best option for long-term investments, 

compared to stocks and gold.36 Indeed, that Gallup survey found that lower-income Americans 

(those earning less than $30,000 annually) tend to believe that gold is the best long-term investment choice, followed by real estate and savings accounts or certificates of deposit. 37 

There are obvious reasons for investor withdrawal from the equity market, many of which are 

related to the recent financial crisis. With the loss of invested assets, high unemployment, and the 

housing market collapse that contributed to the deterioration of the so-called “wealth effect,” 

investors may be unable to participate in the market as they have done so in the past. Yet there 

may exist deeper and less apparent reasons—beyond the anecdotal and the obvious—for investor flight from the equity market. 

10 | OFFICE OF THE INVESTOR ADVOCATE 
 

In light of conflicting perceptions of investor behavior, the Office will analyze additional data 

to determine whether individual investors have in fact retreated from the equity market. To the 

extent that individual investors have fled the market, the Office will examine the reasons for that 

withdrawal and determine what policies, if any, might be implemented to encourage those investors to return to the equity market. 

The Office will also support the Commission in its continuing efforts to address negative impacts 

on individual investors in the equity market. We will collaborate with the Commission to pursue 

more immediate measures to benefit investors while we study longer-term approaches to remedying market imbalances that disadvantage individual investors. 

MUNICIPAL MARKET REFORM 

On July 31, 2012, the Commission issued a Report on the Municipal Securities Market (the 

“Municipal Market Report”).38 According to SEC staff estimates, the value of outstanding municipal bonds totaled $3.7 trillion in 2011.39 Remarkably, about 50.2 percent of municipal securities were held directly by individual investors as of December 31, 2011, and another 25 percent 

were owned indirectly by individual investors through mutual funds, money market funds, or 

closed end funds and exchange-traded funds.40 Municipal securities can be an important part of 

investors’ retirement plans and a valuable source of funds for local projects that affect investors’ 

quality of life in their communities. 

The Municipal Market Report explains that the municipal securities market has traditionally 

been considered a “buy-and-hold” market because many retail investors hold municipal securities until maturity. Secondary trading is conducted in a “decentralized over-the-counter dealer 

market that is illiquid and opaque.”41 In these secondary trades, retail investors have limited 

access to pricing information, and the compensation paid to dealers may not be readily apparent 

to the investors.42 

To address these and other shortcomings in the municipal securities markets, the Municipal 

Market Report issued a number of recommendations. For example, it recommended that the 

Municipal Securities Rulemaking Board should consider requiring municipal bond dealers to 

seek “best execution” of customer orders and disclose markups or markdowns on confirmations 

for riskless principal transactions. 

The Office will work with others at the Commission and relevant SROs to encourage reforms 

designed to benefit investors in the municipal securities markets. To the extent that legislation is 

required to improve disclosures and practices in this market, the Office will make recommendations to Congress as appropriate. 

DATA PROTECTION AND CYBERSECURITY 

As markets and financial services have become increasingly automated, investor protections have 

not kept pace with technological evolution. As a result, investors are now at risk in ways that 

were not even contemplated one or two decades ago. Markets have been whipsawed by technological “glitches” and other anomalies, with investors subjected to large price swings without 

economic justification. 43 Moreover, because hackers and electronic terrorists present a constant 

threat to the financial security and privacy of investors, financial service providers and market 

participants must be vigilant in safeguarding investors’ assets and private information. 

REPORT ON OBJECTIVES: FISCAL YEAR 201 5 | 11
 

 

During Fiscal Year 2015, the Office will survey the efforts of the Commission, FINRA, the stock 

exchanges, alternative trading systems, and other market participants to protect investors. In particular, we will evaluate the impact of Regulation SCI as it is implemented44 and look for other 

improvements that would benefit investors and protect them from cyber threats. 

EFFECTIVE DISCLOSURE 

Disclosure is at the very heart of our system of securities regulation in the United States. In the 

offer or sale of securities, all material facts must be disclosed to investors so they can make fully 

informed investment decisions. Enforcing these disclosure requirements is a critical element of 

investor protection. 

Ideally, issuers and sellers of securities should provide information to investors in a manner that 

enhances investors’ ability to understand it. Full and accurate information should be provided in 

a meaningful way, without unnecessary repetition and without burying important information 

within less important disclosures. 

In December 2013, the Commission issued the Report on Review of Disclosure Requirements 

in Regulation S-K (the “S-K Report”), a report mandated by Congress under the Jumpstart Our 

Business Startups Act (the “JOBS Act”).45 The S-K Report describes the evolution of the disclosure requirements within Regulation S-K and recommends a reevaluation of those disclosure requirements. The S-K Report recommends potential issues for further study and identifies specific 

areas of Regulation S-K that may benefit from further review. 

On April 11, 2014, the SEC’s Division of Corporation Finance announced a disclosure reform 

initiative that builds upon the S-K Report.46 The initiative will begin with a review of the business and financial disclosures that are reflected in periodic or current reports (Forms 10-K, 10-Q, 

and 8-K). Commission staff will determine whether the requirements of Regulations S-K and S-X 

can be updated to reduce the costs and burdens to issuers while continuing to provide material 

information and eliminate duplicative disclosures. In the future, Commission staff will also consider ways to update and modernize disclosures that form the basis for most proxy disclosure. 

In the next year, the Office will assist the Division of Corporation Finance and others in the 

exploration of potential disclosure reforms. Among other things, we will help the staff determine 

what information investors find most useful, whether technology can be used to communicate 

information more effectively, whether additional material information should be disclosed, and 

the impact of proposed changes on investors. 

ELDER ABUSE 

As investors age, some begin to suffer from diminished capacity due to dementia or other health 

conditions.47 After building assets for a lifetime, these investors may become vulnerable to financial abuse not only from scam artists, but also from unethical caregivers, family members, and 

financial service providers. 

As the Baby Boomer generation retires, this problem will likely increase. This new generation 

of retirees will probably live longer than their parents, making diagnoses of diminished capacity 

more common. These retirees will also exercise more direct control of their retirement assets than 

preceding generations because, in the past few decades, the number of defined benefit retirement 

12 | OFFICE OF THE INVESTOR ADVOCATE 
plans has fallen while the number of defined contribution plans has grown.48 As of 2011, assets 

within defined contribution plans neared $4 trillion,49 and this concentration of wealth will be a 

tempting target for unscrupulous individuals seeking to exploit vulnerable seniors. 

In the coming fiscal year, the Office will study this issue in greater depth. We will evaluate the 

current initiatives underway at the Commission, at SROs, and at other state and federal agencies 

to protect seniors from financial abuse. We will supplement those efforts by promoting policies 

to benefit investors with diminished capacity. We will look for ways to equip financial service 

professionals with better tools to protect vulnerable clients, as well as ways to prevent abuse by 

rogue financial professionals who take advantage of clients. 

REPORT ON OBJECTIVES: FISCAL YEAR 201 5 | 13

 

RECOMMENDATION OF THE
 
 

INVESTOR ADVOCATE
 
 

Exchange Act Section 4(g)(4)(E) states that one of the functions of the Investor Advocate is 

to propose to Congress any legislative changes that may be appropriate to mitigate problems encountered by investors. In addition, Exchange Act Section 4(g)(6)(B) requires the 

Investor Advocate to submit a Report on Activities by December 31 of each year, and the Report 

on Activities must include “recommendations for such...legislative actions as may be appropriate 

to resolve problems encountered by investors.”50 Although our first Report on Activities is not 

due until December 31, 2014, we nevertheless include within this inaugural Report on Objectives (due June 30 each year) a recommendation to address a substantial and continuing risk to 

investors: 

Congress should immediately appropriate funds to increase the number of SEC 

staff who examine registered investment advisers, and should authorize the SEC to 

collect fees from investment advisers in order to create a more stable and scalable 

source of revenue for investment adviser examinations in future years. 

THE PROBLEM ENCOUNTERED BY INVESTORS 

The problem for investors is well known and easily understood. Over the past decade, the 

number and complexity of registered investment advisers has increased dramatically, while the 

number of SEC examiners has remained relatively flat. 

The number of SEC-registered advisers has grown by approximately 40 percent over the past 

decade to nearly 11,500 today. The amount of assets managed by investment advisers is on an 

even steeper ascent, going from $20 trillion a decade ago to an estimated $55 trillion by the end 

of Fiscal Year 2015.51 

A recent transfer of mid-size advisers from SEC to state registration had less impact than expected. Fewer advisers than anticipated made the switch from SEC to state registration,52 and 

the SEC simultaneously took on new responsibilities for the registration and oversight of private 

fund advisers, municipal advisors, and securities-based swap participants.53 

As the number of investment advisers has grown, so too has their complexity. A significant 

percentage of SEC-registered advisers have more than $1 billion in assets under management, 

and advisers increasingly are part of complex “families” of financial services companies with 

integrated operations.54 Advisers are using new and complex products, including derivatives and 

certain structured products, and also are increasing their use of technologies that facilitate such 

activities as high-frequency and algorithmic trading.55 

REPORT ON OBJECTIVES: FISCAL YEAR 201 5 | 15
 

 

 

 

 

The increasing size, sophistication, and complexity of investment advisers make SEC examinations more challenging and time-consuming. Yet, SEC resources devoted to examinations have 

not reflected the magnitude of the changes in the industry. In the past decade, the staff in the 

SEC’s Office of Compliance Inspections and Examinations (“OCIE”) has grown only about 10 

percent, from 825 full-time equivalents in Fiscal Year 2004 to 914 today.56 As a result, the SEC 

examined only about 9 percent of registered investment advisers in Fiscal Year 2013.57 This 

equates to a frequency of approximately once every 11 years, a rate that Congress should find 

unacceptable. 

AN AGREED-UPON SOLUTION 

There is a straightforward solution to this problem. The SEC needs additional resources to 

bolster its exam program. This solution has garnered an extraordinary level of support not only 

from the Commission itself, but also from a host of industry associations.58 

The SEC has long sought additional resources to enhance its examination program. For example, 

the January 19, 2011, Study on Enhancing Investment Adviser Examinations conducted pursuant to Section 914 of the Dodd-Frank Act (the “Section 914 Study”) concluded that the SEC’s 

investment adviser examination program “requires a source of funding...that is sufficiently 

stable to prevent adviser examination resources from periodically being outstripped by growth 

in the number of registered investment advisers.”59 More recently, the SEC submitted a Fiscal 

Year 2015 budget request to fund 316 additional staff positions in the examination program of 

OCIE.60 

Notably, industry associations comprised of SEC-registered investment advisers have supported 

an increase in funding for their regulator. For example, the following organizations submitted 

comments to the Commission in response to the Section 914 Study: 

§ The Investment Adviser Association (“IAA”), which represents SEC-registered investment 

adviser firms and has a membership of more than 500 firms that collectively manage in 

excess of $9 trillion: 

Consistent with our longstanding position, we continue to strongly support 

giving the Commission the resources it needs to conduct an effective and 

appropriate examination and enforcement program for registered advisers.61 

§ The Financial Planning Coalition, a coalition consisting of the Certified Financial Planner 

Board of Standards, Inc. (“CFP Board”), the Financial Planning Association (“FPA”), and 

the National Association of Personal Financial Advisors (“NAPFA”), who together represent 

over 75,000 financial planners: 

The Coalition strongly urges the Commission to seek, and Congress to 

provide the Commission with, all the resources it needs to enhance its 

current direct oversight of Commission-registered investment advisers.62 

§ The CFA Institute, a global professional association of nearly 107,000 investment analysts, 

advisers, portfolio managers, and other investment professionals:

 

CFA Institute believes that the best, most efficient manner of enhancing
 
 

investment adviser examinations involves increased Congressional funding

 

for the SEC that would allow it to meet its regulatory responsibilities for

 

oversight of registered investment advisers (“RIAs”).63

 

16 | OFFICE OF THE INVESTOR ADVOCATE 
 

 

 

It is also important to note that the industry is willing to pay the price for increased examinations. As recently as December 4, 2013, a coalition of groups including the IAA, FPA, CFP 

Board, and NAPFA publicly supported legislation to authorize the SEC to collect an annual 

“user fee.” This fee would be collected from registered investment advisers in order to increase 

the frequency of investment adviser examinations.64 

The SEC Investor Advisory Committee has endorsed the user fee model. Warning that the current frequency of exams is “simply inadequate to detect or credibly deter fraud,” the IAC called 

for user fees to provide a scalable source of funding.65 On November 22, 2013, the IAC recommended that the SEC seek Congressional authority to impose user fees on SEC-registered investment advisers to fund an enhanced examination program. 

WHY INVESTMENT ADVISER EXAMINATIONS ARE 

IMPORTANT TO INVESTORS 

Ordinary Americans are increasingly turning to investment advisers for help in navigating financial markets and investment products that have grown in complexity, and investment advisers 

play an important role in their clients’ economic security and mobility.Investment advisers manage the investment assets for millions of middle-class Americans,66 including retirement funds, 

children’s college funds, and money for down payments on their homes. These assets affect the 

hopes and dreams of investors. 

The SEC’s national examination program produces results that matter for individual investors. 

In Fiscal Year 2013, 35 percent of OCIE examinations resulted in a “significant finding” of a 

practice that could cause harm to clients or involved recidivist misconduct.67 Of all exams, 13 

percent were deemed serious enough to warrant a referral to the SEC Division of Enforcement.68 

Typical referrals involved misappropriation of funds; conflicts of interest, such as undisclosed 

arrangements; brokerage and investment practices that favor certain clients over others; trading 

ahead of clients; and false and misleading advertisements or performance calculations. 

More often, exams identify technical deficiencies that are corrected without formal action. In Fiscal Year 2013, for example, 80 percent of examinations resulted in deficiency letters. 69 Deficiencies are often corrected by amending or adding to written compliance policies and procedures, 

enhancing disclosures to clients, and so on.70 In some cases, the exams identify issues related 

to the calculation of advisory fees, including unintentional billing errors. These exams result 

in substantial sums being returned to investors, even without a referral to the SEC Division of 

Enforcement. 

RECOMMENDATION: INCREASE FUNDING TO ENHANCE 

INVESTMENT ADVISER EXAMINATION PROGRAM 

On behalf of investors, the Office of the Investor Advocate adds its voice in support of greater resources to enhance the SEC’s investment adviser examination program. A more frequent examination cycle would allow SEC staff to identify intentional and unintentional violations sooner, 

which would minimize harm to investors. In addition, a greater regulatory presence would act as 

a deterrent to future fraudulent and abusive conduct. 

REPORT ON OBJECTIVES: FISCAL YEAR 201 5 | 17
 

 

Optimally, we believe that SEC-registered investment advisers should be examined at least every 

three years on average. OCIE should have the flexibility to examine higher-risk firms more often, 

and no firm should go longer than five years without a comprehensive examination. 

We recommend that Congress 

appropriate the needed funds this 

year so that the Commission can 

hire more examiners without 

further delay. We also recommend 

that Congress authorize the SEC 

to collect an annual “user fee” 

from registered investment advisers 

and to limit the use of those funds 

to expenses associated with 

investment adviser examinations. 

It will take a significant commitment of resources 

to go from examining 9 percent of firms per year 

to coverage of 33 percent per year. In this regard, 

the SEC budget request appears modest because it 

would add only 316 positions to the current OCIE 

staff of 914. However, the enhanced funding would 

be a major step in the right direction. 

The simplest solution to address the resource issue 

is to approve the SEC’s current budget request. This 

is also the quickest way to get more “boots on the 

ground.” Accordingly, we recommend that Congress appropriate the needed funds this year so that 

the Commission can hire more examiners without 

further delay. 

However, as the IAC has observed, a more effective 

long-term solution would be to grant the SEC the 

authority to assess user fees on investment advisers. 

This would provide a consistent, scalable source of 

revenue to protect investors with an adequate level 

of investment adviser examinations. This would 

also place the cost of regulation on the industry 

whose reputation will benefit from the enhanced regulatory presence. Therefore, we also recommend that Congress authorize the SEC to collect an annual “user fee” from registered investment advisers and to limit the use of those funds to expenses associated with investment adviser 

examinations. 

Congress can be assured that the Investor Advocate will monitor the SEC’s use of enhanced 

resources—whether obtained through direct appropriations or user fees—to determine whether 

those resources are being used appropriately to increase the number of investment adviser 

examinations and maximize protection for investors. 

18 | OFFICE OF THE INVESTOR ADVOCATE 
SUMMARY OF IAC
 
 

RECOMMENDATIONS AND
 
 

SEC RESPONSES

 

Congress established the Investor Advisory Committee to advise and consult with the 

Commission on regulatory priorities, initiatives to protect investor interests, initiatives 

to promote investor confidence and the integrity of the securities marketplace, and other 

issues.71 The Committee is composed of the Investor Advocate, a representative of state securities commissions, a representative of the interests of senior citizens, 

and not fewer than ten or more than twenty members appointed 

by the Commission. Federally registered lobbyists may not serve on 

the Committee,72 and the Commission-appointed members must be 

selected from among individuals who: (i) represent the interests of 

individual equity and debt investors, including investors in mutual 

funds; (ii) represent the interests of institutional investors, including 

the interests of pension funds and registered investment companies; 

(iii) are knowledgeable about investment issues and decisions; and 

(iv) have reputations of integrity.73 The term of service for members 

of the Committee is four years. 74 

Exchange Act Section 39 authorizes the Committee to submit findings and recommendations for review and consideration by the 

Commission.75 The statute also requires the SEC to “promptly” 

issue a public statement assessing each finding or recommendation 

of the Committee and disclosing the action, if any, the Commission intends to take with respect 

to the finding or recommendation.76 While the Commission must respond to the IAC’s recommendations, it is under no obligation to agree with or act upon the recommendations.77 

As part of our reports to Congress, the Office intends to report on the IAC recommendations. 

We will also report on the SEC’s responses to the recommendations, which may be communicated in various formats. Frequently, an IAC recommendation pertains to a current rulemaking, 

in which case the proposing release or the adopting release may constitute the Commission’s 

response. Where an IAC recommendation does not involve a current rulemaking, SEC Chair 

Mary Jo White has indicated that the Commission will respond with a written statement.78 

Commission staff—including the Office of the Investor Advocate—are prohibited from disclosing nonpublic information.79 Therefore, it is important to note that the Commission may be 

pursuing initiatives that are responsive to IAC recommendations but are not yet public. Those 

non-public initiatives are not reflected in this report. 

KURT SCHACHT, Chairman 

Investor Advisory Committee 

REPORT ON OBJECTIVES: FISCAL YEAR 201 5 | 19
 

 

Between October 2012 and April 2014, the IAC made eight sets of recommendations. The SEC 

has taken interim or final action on three of them (involving tick sizes, Title II of the JOBS Act, 

and target date retirement funds). In addition, Chair White has informed the IAC publicly that 

Commission staff is working on the remaining IAC recommendations.80 

CROWDFUNDING 

At its meeting on April 10, 2014, the IAC adopted a package of six recommendations for the 

SEC to strengthen its proposed rules to implement the crowdfunding provisions of the JOBS 

Act.81 The Committee stated that its recommendations would better ensure that investors understand the risks of crowdfunding and avoid unaffordable financial losses. Among other things, the 

Committee recommended that the SEC: 

§ Adopt tighter limits on the amount of money that investors could invest in crowdfunding; 

§ Strengthen the mechanisms for the enforcement of the investment limits in order to better prevent errors and evasion; 

§ Clarify and strengthen the obligations of crowdfunding intermediaries to ensure that 

issuers comply with their legal obligations; clarify the requirements for background 

checks; clearly affirm the right of portals to “curate” offerings; and consider a tiered 

regulatory structure based upon factors such as the size of offering, investment limits, 

and participation by individuals with a record of securities law violations; 

§ Enhance the effectiveness of educational materials for investors; 

§ Replace the proposed definition of electronic delivery with a stronger definition that, 

at a minimum, requires disclosure of a specific URL where required disclosures can be 

found; and 

§ Replace its proposal to eliminate application of the integration doctrine with a narrower 

approach. 

These recommendations relate to proposed rules that are still under consideration.82 Accordingly, it is anticipated that the SEC’s response to the IAC recommendations will be reflected in the 

adopting release for the final rule. 

DECIMALIZATION AND TICK SIZES 

In a split vote on January 31, 2014, the IAC adopted a resolution opposing any test or pilot programs to increase the tick sizes in the securities markets.83 The resolution argued that larger tick 

sizes would harm retail investors by raising prices and would not improve the research coverage 

or liquidity of small-cap companies. The resolution urged the SEC to maintain its current policy 

on decimalization and to focus on other ways to enhance liquidity and capital formation without 

sacrificing investor protections. However, should the SEC decide to pursue a pilot program of increasing tick sizes, the IAC recommended a short “sunset” on the pilot unless benefits are proven 

to outweigh the costs; a careful evaluation of costs and benefits to investors, with a particular 

focus on retail investors; and the piloting of other competition-based measures designed to encourage trading and capital formation. 

On June 24, 2014, the Commission directed the national securities exchanges and FINRA to 

implement a pilot program to test a tick size of 5 cents per share in three groups of securities. 

20 | OFFICE OF THE INVESTOR ADVOCATE 
 

 

 

The different groups will measure the impact of other variables, including the minimum price 

increments and a trade-at requirement. The pilot program will sunset in one year. 

LEGISLATION TO FUND INVESTMENT ADVISER EXAMINATIONS 

On November 22, 2013, the IAC recommended that the SEC request legislation from Congress 

that would authorize the Commission to impose user fees on SEC-registered investment advisers 

to provide a scalable source of funding for more frequent compliance examinations of advisers.84 

The IAC asserted that current practices equate to an approximately 13-14 year examination 

cycle for SEC-registered investment advisers, which the Committee found inadequate to detect 

or deter fraud. In support of its recommendation, the IAC noted that the SEC sought direct 

appropriations in Fiscal Year 2014 to hire more examiners, but the IAC opined that Congress 

was unlikely to appropriate the funds for this purpose. 

The Commission has not taken a formal position on user fees, but its Fiscal Year 2015 budget 

request identifies increased examinations of investment advisers as a top priority. The request 

calls for sufficient appropriations to add 316 positions to the examination program in the SEC’s 

Office of Compliance Inspections and Examinations.85 

BROKER-DEALER FIDUCIARY DUTY 

On November 22, 2013, the IAC adopted a set of recommendations encouraging the SEC to 

establish a fiduciary duty for broker-dealers when they provide personalized investment advice to 

retail investors.86 The Committee preferred to accomplish this objective by narrowing the exclusion for broker-dealers within the definition of an “investment adviser” under the Investment 

Advisers Act of 1940. As an alternative, the Committee recommended the adoption of a rule 

under Section 913 of the Dodd-Frank Act to require broker-dealers to act in the best interests 

of their retail customers when providing personalized investment advice, with sufficient flexibility to permit certain sale-related conflicts of interest that are fully disclosed and appropriately 

managed. In addition, the Committee recommended the adoption of a uniform, plain English 

disclosure document to be provided to customers and potential customers of broker-dealers 

and investment advisers. The document would disclose information about the nature of services 

offered, fees and compensation, conflicts of interest, and the disciplinary record of the brokerdealer or investment adviser. 

The SEC’s response to these recommendations is pending. 

UNIVERSAL PROXY BALLOT 

On July 25, 2013, the IAC adopted a recommendation urging the SEC to explore the relaxation 

of Exchange Act Rule 14a-4(d)(1) (the “bona fide nominee rule”) to provide proxy contestants 

with the option, but not the obligation, to use universal proxy ballots in connection with short 

slate director nominations.87 The IAC also encouraged the Commission to hold one or more 

roundtable discussions on the topic. 

The SEC’s response to this recommendation is pending. 

REPORT ON OBJECTIVES: FISCAL YEAR 201 5 | 21
 

DATA TAGGING 

Also at its meeting on July 25, 2013, the IAC adopted a recommendation for the SEC to promote the collection, standardization, and retrieval of data filed with the SEC using machinereadable data tagging formats.88 The Committee urged the SEC to take steps to reduce the costs 

of providing tagged data, particularly for smaller issuers and investors, by developing applications that allow users to enter information on forms that can be converted to machine-readable 

formats by the SEC. In addition, the IAC recommended that the SEC give priority to the data 

tagging of disclosures on corporate governance, including information about executive compensation and shareholder voting. 

The SEC’s response to these recommendations is pending. 

TARGET DATE MUTUAL FUNDS 

On April 11, 2013, the IAC adopted recommendations for the Commission to revise its proposal 

regarding target date retirement fund names and marketing.89 The package of five IAC recommendations pertained to a 2010 SEC proposal that would, among other things, require marketing materials for target date retirement funds to include a table, chart, or graph depicting the 

fund’s asset allocation over time (i.e., an “asset allocation glide path”).90 

As either a replacement for or supplement to the SEC’s proposed asset allocation glide path 

illustration, the IAC recommended that the Commission develop a glide path illustration that 

would be based on a measure of fund risk. To promote comparability between funds, the IAC 

recommended the adoption of standard methodologies to be used in glide path illustrations. In 

addition, the IAC urged the Commission to require clearer disclosure about the risk of loss, the 

cumulative impact of fees, and the assumptions used to design and manage the funds. 

Chair White initially responded to the IAC recommendations with a letter dated November 20, 

2013, indicating that the Commission would seek public comment on the IAC proposal.91 The 

Commission did so on April 3, 2014, by reopening the comment period to seek public comment 

on the IAC’s recommendation to adopt a risk-based glide path illustration and the methodology 

to be used for measuring risk.92 

JOBS ACT: GENERAL SOLICITATION AND ADVERTISING 

Title II of the JOBS Act required the SEC to lift the ban on general solicitation and advertising in 

Rule 506 securities offerings.93 In addition, Section 926 of the Dodd-Frank Act required the SEC 

to disqualify “bad actors” from the use of Rule 506.94 

On October 12, 2012, the IAC adopted a set of seven recommendations related to these statutory mandates.95 The recommendations were designed to strengthen investor protections and 

enhance regulators’ ability to police the private placement market. In summary, the IAC recommended that the SEC: 

§ Require all issuers who utilize general solicitation to file a new form or a revised 

version of Form D; 

§ Require that all solicitation material be furnished to the SEC; 

§ Adopt a safe harbor that provides clear and enforceable standards for verification 

of accredited investor status, and promote reliance on regulated third parties for 

verification; 

22 | OFFICE OF THE INVESTOR ADVOCATE 
 

§ Make the filing of Form D a condition for relying on the exemption, while avoiding 

undue penalties for inadvertent violations by small, unsophisticated issuers. 

§ Ensure that any performance claims in solicitation materials are based upon appropriate 

performance reporting standards; 

§ Amend the natural persons prong of the accredited investor definition to better reflect a 

population that has the financial sophistication to analyze the risks in private offerings 

and/or the wealth to withstand potential losses; and 

§ Disqualify “bad actors” from the use of Rule 506, as required by Section 926 of the 

Dodd-Frank Act and as previously proposed by the Commission.96 

On July 10, 2013, the SEC took three related actions. First, the Commission adopted a final rule 

permitting general solicitation and advertising in Rule 506 offerings.97 Second, it adopted a final 

rule disqualifying offerings involving felons and other bad actors.98 Third, it proposed an additional rule to enhance the Commission’s ability to evaluate the development of market practices 

in Rule 506 offerings and to address concerns that may arise once the ban is lifted.99 The Commission has twice sought public comment on the rule proposal, but the proposal has not yet been 

adopted. Taken together, the two final rules and the proposed rule generally reflect consideration 

of the IAC recommendations.100 

END NOTES
 
 

1 Exchange Act § 4(g)(2)(A)(ii), 15 U.S.C. § 78d(g)(2)(A)(ii) (2012). 

2 Exchange Act § 4(g)(6), 15 U.S.C. § 78d(g)(6). 

3 Exchange Act § 4(g)(6)(A)(i), 15 U.S.C. § 78d(g)(6)(A)(i). 

4 Exchange Act § 4(g)(6)(B)(i), 15 U.S.C. § 78d(g)(6)(B)(i). 

5 Id. 

6 Exchange Act § 4(g)(4)(A), 15 U.S.C. § 78d(g)(4)(A). 

7 Exchange Act § 4(g)(8)(A), 15 U.S.C. § 78d(g)(8)(A). 

8 Exchange Act § 4(g)(8)(C), 15 U.S.C. § 78d(g)(8)(C). 

9 Exchange Act § 4(g)(4)(B), 15 U.S.C. § 78d(g)(4)(B). 

10 Exchange Act § 4(g)(4)(C), 15 U.S.C. § 78d(g)(4)(C). 

11 Exchange Act § 4(g)(4)(D), 15 U.S.C. § 78d(g)(4)(D). 

12 Exchange Act § 4(g)(4)(E), 15 U.S.C. § 78d(g)(4)(E). 

13 Exchange Act § 4(g)(3), 15 U.S.C. § 78d(g)(3). In addition to the Investor Advocate and an 

Ombudsman, the Office of the Investor Advocate currently has authorization to hire four full-time 

permanent staff. 

14 Exchange Act § 4(g)(8)(B), 15 U.S.C. § 78d(g)(8)(B). 

15 Exchange Act § 4(g)(8)(A). 

16 Dodd-Frank Wall Street Reform and Consumer Protection Act § 915, 15 U.S.C. § 78d(g). 

17 Exchange Act § 4(g)(7), 15 U.S.C. § 78d(g)(7). 

18 Exchange Act § 39, 15 U.S.C. § 78pp. 

19 Exchange Act § 39(b)(1)(A), 15 U.S.C. § 78pp(b)(1)(A). 

REPORT ON OBJECTIVES: FISCAL YEAR 201 5 | 23
 

 

 

 

 

 

 

 

 

20 See generally Concept Release on Equity Market Structure, Exchange Act Release No. 61358 

(Jan. 14, 2010) [75 FR 3594 (Jan. 21, 2010)]. 

21 Id. 

22 Id. 

23 Regulation NMS: Final Rules and Amendments to Joint Industry Plans, Exchange Act Release No. 

51808 (June 9, 2005) [70 FR 37496 (June 29, 2005)]. Among other things, Regulation NMS eliminated trade-through protection for manual quotations. 

24 Order Execution Obligations, Exchange Act Release No. 37619A (Sept. 6, 1996) [61 FR 48290 (Sept. 

12, 1996)]. 

25 Exchange Act Release No. 51808, supra note 23. 

26 Id. at 37498. 

27 See Mary Jo White, Chair, SEC, Enhancing Our Equity Market Structure, Sandler O’Neill & Partners, 

L.P. Global Exchange and Brokerage Conference, June 5, 2014 (transcript available at http://www.sec. 

gov/News/Speech/Detail/Speech/1370542004312) (observing that the “largely positive data on broad 

market quality does not mean, however, that the current market structure is without issues”); Concept 

Release on Equity Market Structure, Exchange Act Release No. 61358 (Jan. 14, 2010) [75 FR 3594, 

3596 (Jan. 21, 2010)]. 

28 See id. 

29 See, e.g., SEC, http://www.sec.gov/about/whatwedo.shtml. 

30 See, e.g., E.S. Browning, Bond Yields Indicate Worry, Wall St. J., June 2, 2014, at C1; Daisy Maxey, 

Still Afraid of Stocks? Advisers Try to Lure Clients Back In, Wall St. J., May 24-25, 2014, at B8. 

31 See, e.g., William Baldwin, Dumb Idea: Investors are Fleeing Stocks, Forbes (Mar. 18, 2013), http:// 

www.forbes.com/sites/baldwin/2013/03/18/dumb-idea-investors-are-fleeing-stocks/. 

32 See, e.g., Jason Zweig, Are Retail Investors ‘Fleeing’ Stocks?, Wall St. J., Aug. 27, 2012, http://blogs. 

wsj.com/totalreturn/2012/08/27/are-retail-investors-fleeing-stocks/; Jason Zweig, Are Individual Investors Fleeing Stocks? Nope, Wall St. J., June 27, 2012, http://blogs.wsj.com/totalreturn/2012/06/27/ 

are-individual-investors-fleeing-stocks-nope/. 

33 Art Swift, Despite High Stock Prices, Half in U.S. Wary of Investing, Gallup (Jan. 17, 2014), http:// 

www.gallup.com/poll/166886/despite-high-stock-prices-half-wary-investing.aspx. 

34 Id. 

35 Chris Kahn, April 2014 Financial Security Index charts, Bankrate (Apr. 21, 2014), http://www. 

bankrate.com/finance/consumer-index/financial-security-charts-0414.aspx. 

36 See Rebecca Riffkin, Americans Sold on Real Estate as Best Long-Term Investment, Gallup (Apr. 

17, 2014) (reporting results from Gallup’s April 3-6 Economy and Personal Finances Poll that asked 

Americans to choose the best option for long-term investments), http://www.gallup.com/poll/168554/ 

americans-sold-real-estate-best-long-term-investment.aspx?version=print. 

37 Id. 

38 SEC, Report on the Municipal Securities Market, July 31, 2012, http://www.sec.gov/news/studies/2012/munireport073112.pdf. 

39 Id. at 5. 

40 Id. at 12. 

41 Id. at v. 

42 Id. at vi-vii. 

24 | OFFICE OF THE INVESTOR ADVOCATE 
 

43	 See, e.g., Callie Bost, Sam Mamudi & Eric Lam, NYSE Computer Error Prompts Cancellation of 

Almost 20,000 Trades, Bloomberg, Apr. 30, 2014, http://www.bloomberg.com/news/2014-04-29/ 

nyse-options-markets-cancel-almost-20-000-trades-following-error.html; Matthew Leising, Jeff Wilson 

& Elizabeth Campbell, CME Says Some Trading Halted Because of Technical ‘Issues,’ Bloomberg, 

Apr. 8, 2014, http://www.bloomberg.com/news/2014-04-08/cme-says-some-trading-halted-because-oftechnical-issues-1-.html; SEC, Findings Regarding the Market Events of May 6, 2010: Report of the 

Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues, http:// 

www.sec.gov/news/studies/2010/marketevents-report.pdf. 

44	 Exchange Act Release No. 69077 (Mar. 8, 2013) [78 FR 18083 (Mar. 25, 2013)]. 

45	 SEC,Report on Review of Disclosure Requirements in Regulation S-K, Dec. 2013, http://www.sec. 

gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf. 

46	 Keith F. Higgins, Director, Division of Corporation Finance, SEC, Disclosure Effectiveness: Remarks 

Before the American Bar Association Business Law Section Spring Meeting, Apr. 11, 2014 (transcript 

available at http://www.sec.gov/News/Speech/Detail/Speech/1370541479332). 

47	 It should be noted, however, that diminished capacity is not unique to the elderly, and that many 

elderly people suffer no such impairments. 

48 Dep’t of Labor, Emp. Benefits Sec. Admin., Private Pension Plan Bulletin Historical Tables and 

Graphs, at 2 GraphE1g, June 2013, http://www.dol.gov/ebsa/pdf/historicaltables.pdf. 

49	 Id. at 14 GraphE11g. 

50	 Exchange Act § 4(g), 15 U.S.C. § 78d(g). 

51	 SEC,FY 2015 Congressional Budget Justification, FY 2015 Annual Performance Plan, FY 2013 

Annual Performance Report, at 55-56 (Mar. 2014) (hereinafter Congressional Budget Justification), 

http://www.sec.gov/about/reports/secfy15congbudgjust.pdf. 

52	 Initial estimates indicated that up to 4,000 advisers would make the switch from federal to state 

registration as a result of the Dodd-Frank Act. North American Securities Administrators Association, 

(“NASAA”), The IA Switch: A Successful Collaboration to Enhance Investor Protection 7 

(May 2013), http://www.nasaa.org/wp-content/uploads/2011/08/IA-Switch-Report.pdf. In reality, 

approximately 2,100 advisers made the switch. Id. at 2. 

53	 Congressional Budget Justification, supra note 51, at 56. Since the effective date of the Dodd-Frank 

Act, approximately 1,800 advisers to hedge funds and private equity funds have registered for the first 

time. Testimony on Oversight of the SEC’s Agenda, Operations and FY 2015 Budget Request, Before 

H. Subcomm. on Fin. Services & Gen. Gov’t of the H. Comm. On Appropriations, 113th Cong. 

(Apr.29, 2014) (statement of Mary Jo White, Chair, SEC), http://www.sec.gov/News/Testimony/Detail/ 

Testimony/1370541674457. 

54	 Congressional Budget Justification, supra note 51, at 5. In 2013, a total of 2,877 registered investment 

advisers, or 27 percent, had assets under management ranging from $1 billion to $100 billion or more. 

Investment Adviser Association and National Regulatory Services, 2013 Evolution Revolution: 

A Profile of the Investment Adviser Profession, at 8-9 (2013). 

55	 Id. 

56	 SEC,In Brief: Fiscal 2006 Congressional Budget Request, at 2 (Feb. 2005), http://www.sec.gov/about/ 

secfy06budgetreq.pdf; Congressional Budget Justification, supra note 51, at 55. 

57	 Congressional Budget Justification, supra note 51, at 56. In Fiscal Year 2013, examiners conducted 

964 investment adviser examinations. Testimony on Oversight of the SEC’s Agenda, Operations and 

FY 2015 Budget Request, Before H. Subcomm. on Fin. Services & Gen. Gov’t of the H. Comm. On 

Appropriations, 113th Cong. (Apr.29, 2014) (statement of Mary Jo White, Chair, SEC), http://www. 

sec.gov/News/Testimony/Detail/Testimony/1370541674457. 

REPORT ON OBJECTIVES: FISCAL YEAR 201 5 | 25
 

58	 An alternative solution would be to create a self-regulatory organization for investment advisers and 

give the SRO responsibility for conducting compliance examinations. However, this alternative is 

opposed by many in the industry. See, e.g., infra notes 61-64. 

59	 Staff of the SEC, Div. of Inv. Mgmt., Study on Enhancing Inv. Adviser Examinations, at 10-11 

(Jan. 2011), http://www.sec.gov/news/studies/2011/914studyfinal.pdf. 

60	 Congressional Budget Justification, supra note 51, at 55-56. 

61	 Comment Letter, David G. Tittsworth, IAA, RE: Study on Enhancing Inv. Adviser Examinations 

under Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, at 2 

(Oct. 19, 2010), https://www.sec.gov/comments/df-title-ix/enhancing-ia-examinations/enhancingiaexaminations-5.pdf. 

62	 Comment Letter, Kevin R. Keller, CFP Board, et al.,Re: Study on Enhancing Inv. Adviser Examinations Under Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act,at 3 

(Dec. 16, 2010), http://www.sec.gov/comments/df-title-ix/enhancing-ia-examinations/enhancingiaexaminations-29.pdf. 

63	 Comment Letter, John D. Rogers & Linda L. Rittenhouse, CFA Institute, Re: Study on Enhancing 

Inv. Adviser Examinations, at 1 (Dec. 3, 2010), http://www.sec.gov/comments/df-title-ix/enhancing-iaexaminations/enhancingiaexaminations-25.pdf. 

64	 Comment Letter, Joyce A. Rogers, AARP, et al., Re: H.R. 1627, the Investment Adviser Examination 

Improvement Act of 2013 (Dec. 4, 2013), http://www.cfp.net/docs/public-policy/2013-12-04-hr-1627­

letter-to-mocs.pdf?sfvrsn=2. 

65	 This conclusion echoes an earlier one by the SEC Section 914 Study. See supra note 59 and accompanying text. Other independent observers, including the SEC Office of the Inspector General and the 

International Monetary Fund, also have taken note of the SEC’s inadequate resources for investment 

adviser exams. 

66	 Even when an investment adviser provides advice to private funds, including hedge funds or private 

equity funds, individual investors are affected. The biggest investors in private equity include public 

and private pension funds, endowments, and foundations, which accounted for 64 percent of all 

investment in private equity in 2012. Andrew J. Bowden, Director, Office of Compliance Inspections 

and Examinations, SEC, Spreading Sunshine in Private Equity, Address at the Private Fund Compliance Forum (May 6, 2014) (citing the Private Equity Growth Capital Council, “Fact and Fiction,” 

www.pegcc.org/education/fact-and-fiction/) (transcript available at www.sec.gov/News/Speech/Detail/ 

Speech/1370541735361). Private equity advisers are also not immune to misconduct. In more than 

50 percent of examinations of private equity fees and expenses, OCIE has found what it considers 

to be violations of law or material weaknesses in controls. The head of OCIE attributes this to the 

structure of the industry, the opaqueness of the private equity model, the breadth of limited partnership 

agreements, and the limited information rights of investors. Id. To the extent private equity advisers 

are engaged in improper conduct, it adversely affects the retirement savings of teachers, firemen, police 

officers, and other workers across the United States. 

67	 Congressional Budget Justification, supra note 51, at 31. 

68	 Id. These statistics refer to all OCIE examinations, including broker-dealers, investment advisers, and 

investment companies. 

69	 Id. 

70 Id.
 

71 Exchange Act § 39(a), 15 U.S.C. § 78pp(a).
 

26 | OFFICE OF THE INVESTOR ADVOCATE 
72	 Presidential Memorandum – Lobbyists on Agency Boards and Commissions, 75 FR 35955 

(June 18, 2010). 

73	 Exchange Act § 39(b), 15 U.S.C. § 78pp(b). 

74	 Exchange Act § 39(b)(2), 15 U.S.C. § 78pp(b)(2). 

75	 Exchange Act § 39(a)(2)(B), 15 U.S.C. § 78pp(a)(2)(B). 

76	 Exchange Act § 39(g), 15 U.S.C. § 78pp(g). 

77	 Exchange Act § 39(h), 15 U.S.C. § 78pp(h). 

78	 Mary Jo White, Chair, SEC, Remarks at the Meeting of the Inv. Advisory Comm. (July 25, 2013). 

79	 Exchange Act § 24(b), 15 U.S.C. § 78x; 5 U.S.C. § 552a(i)(1); SECR 18-2. 

80	 Transcript of SEC Inv. Advisory Comm. Meeting, at 12 (Apr. 10, 2014). 

81	 SEC, Recommendation of the Investor Advisory Committee: Crowdfunding Regulations, Apr. 10, 

2014, http://www.sec.gov/spotlight/investor-advisory-committee-2012/investment-adviser-crowdfunding-recommendation.pdf. 

82	 Crowdfunding, Securities Act Release No. 9470 (Oct. 23, 2013) [78 FR 66427 (Nov. 5, 2013)]. 

83	 SEC, Recommendation of the Investor Advisory Committee: Decimalization and Tick Sizes, Jan. 31, 

2014, http://www.sec.gov/spotlight/investor-advisory-committee-2012/investment-adviser-decimilization-recommendation.pdf. 

84	 SEC, Recommendation of the Investor Advisory Committee: Legislation to Fund Investment Adviser 

Examinations, Nov. 22, 2013, http://www.sec.gov/spotlight/investor-advisory-committee-2012/investment-adviser-examinations-recommendation-2013.pdf. 

85	 Testifying in support of the budget request, Chair White stated, “There is an immediate and pressing 

need for significant additional resources to permit the SEC to increase its examination coverage of registered investment advisers so as to better protect investors and our markets.” Budget Hearing: Before 

H. Subcomm. on Fin. Service & Gen. Gov’t of the H. Comm. on Appropriations, 113th Cong. (Apr. 1, 

2014) (statement of Mary Jo White, Chair, SEC). 

86	 SEC, Recommendation of the Investor Advisory Committee: Broker-Dealer Fiduciary Duty, Nov. 22, 

2013, http://www.sec.gov/spotlight/investor-advisory-committee-2012/fiduciary-duty-recommendation-2013.pdf. 

87	 SEC, Recommendations of the Investor Advisory Committee Regarding SEC Rulemaking to Explore 

Universal Proxy Ballots, July 25, 2013, http://www.sec.gov/spotlight/investor-advisory-committee-2012/universal-proxy-recommendation-072613.pdf. 

88	 SEC, Recommendations of the Investor Advisory Committee Regarding the SEC and the Need for 

the Cost Effective Retrieval of Information by Investors, July 25, 2013, http://www.sec.gov/spotlight/ 

investor-advisory-committee-2012/data-tagging-resolution-72513.pdf. 

89	 SEC, Recommendation of the Investor Advisory Committee: Target Date Mutual Funds, Apr. 11, 

2013, http://www.sec.gov/spotlight/investor-advisory-committee-2012/iac-recommendation-targetdate-fund.pdf. 

90	 SEC, Investment Company Advertising: Target Date Retirement Fund Names and Marketing, 

Exchange Act Release No. 9126 (June 16, 2010) [75 FR 35920 (June 23, 2010)]. 

91	 Mary Jo White, Chair, SEC, Letter to the IAC, Nov. 20, 2013, http://www.sec.gov/spotlight/investoradvisory-committee-2012/chair-white-letter-target-date-funds.pdf. 

REPORT ON OBJECTIVES: FISCAL YEAR 201 5 | 27
 

92	 SEC, Investment Company Advertising : Target Date Retirement Fund Names and Marketing, 

supra note 90. 

93	 Jumpstart Our Business Startups Act, Pub. L. No. 112-106, sec. 201(a), 126 Stat. 306, 313 

(2012). 

94	 Pub. L. No. 111-203, sec. 926, 124 Stat. 1376, 1851 (July 21, 2010) (codified at 15 U.S.C. 77d 

note). 

95 SEC, Recommendations of the Investor Advisory Committee Regarding SEC Rulemaking to 

Lift the Ban on General Solicitation and Advertising in Rule 506 Offerings: Efficiently Balancing 

Investor Protection, Capital Formation and Market Integrity, Oct. 12, 2012, http://www.sec.gov/ 

spotlight/investor-advisory-committee-2012/iac-general-solicitation-advertising-recommendations. 

pdf. 

96	 SEC, Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings,Securities Act 

Release No. 9414 (July 10, 2013) [78 FR 44729 (July 24, 2013)]. 

97 Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 

and Rule 144A Offerings, Securities Act Release No. 9415 (July 10, 2013) [78 FR 44771 (July 

24, 2013)]. 

98	 SEC, Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, supra note 96. 

99	 Amendments to Regulation D, Form D and Rule 156, Securities Act Release No. 9416 (July 10, 

2013) [78 FR 44806 (July 24, 2013)]. 

100 At the IAC meeting on July 25, 2013, Chair White provided the IAC with a chart mapping each 

of its recommendations to the corresponding text in the Commission’s proposed and final rule 

releases. 

28 | OFFICE OF THE INVESTOR ADVOCATE 

OFFICE OF THE INVESTOR ADVOCATE 

U.S. Securities and Exchange Commission 

100 F Street NE 

Washington, DC 20549 

202.551.3302