REPORT ON ACTIVITIES FISCAL YEAR 2019

Office of the 

Investor

 Advocate

U.S. SECURITIES AND EXCHANGE COMMISSION

REPORT ON ACTIVITIES: FISCAL YEAR 2019 | i

OFFICE OF THE INVESTOR ADVOCATE

REPORT ON ACTIVITIES

FISCAL YEAR 2019

Section 4(g)(6) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78d(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.1 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.2 On 

June 29, 2018, the Office of the Investor Advocate (Office) filed a Report on Objectives for Fiscal 

Year 2019, which identified nine policy areas that the Office would focus on during the year.3

In addition to the Report on Objectives, a Report on Activities is due no later than December 31 

of each year.4The Report on Activities describes 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 Securities and 

Exchange Commission (Commission or SEC) 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 taken to address those problems, 

and recommendations for administrative and legislative actions to resolve problems encountered 

by investors.

5
ii | OFFICE OF THE INVESTOR ADVOCATE

Functions of the Investor Advocate Reporting Obligation

According to Exchange Act Section 4(g)(4), 15 

U.S.C. § 78d(g)(4), the Investor Advocate shall:

(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 Commission 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.

According to Exchange Act Section 4(g)(6)

(B), 15 U.S.C. § 78d(g)(6)(B), the Investor 

Advocate shall submit to Congress, not later 

than December 31 of each year, a report on 

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

This “Report on Activities” must include 

the following:

(I) appropriate statistical information 

and full and substantive analysis;

(II) information on steps that the Investor Advocate has taken during the 

reporting period to improve investor 

services and the responsiveness of 

the Commission and SROs to investor concerns;

(III) a summary of the most serious

problems encountered by investors 

during the reporting period; 

(IV) an inventory of the items described 

in subclause (III) that includes—

(aa) identification of any action 

taken by the Commission or 

the SRO and the result of 

such action;

(bb) the length of time that each

item has remained on such 

inventory; and 

(cc) for items on which no action 

has been taken, the reasons for 

inaction, and an identification 

of any official who is responsible for such action;

(V) recommendations for such administrative and legislative actions as may 

be appropriate to resolve problems 

encountered by investors; and 

(VI) other information, as determined 

appropriate by the Investor Advocate.

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

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

any Commissioner, any other officer or employee of the Commission outside of the Office of the Investor 

Advocate, or the Office of Management and Budget. This Report on Activities 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 this Report on Activities and all analyses, 

findings, and conclusions contained herein.
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | iii

CONTENTS

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

REPORT ON ACTIVITIES RELATING TO THE 

FISCAL YEAR 2019 POLICY AGENDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Public Company Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Equity Market Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Fixed Income Market Reform. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Accounting and Auditing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Standards of Conduct for Broker-Dealers and Investment Advisers. . . . . . . . . . . . . . . .10

Exchange-Traded Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Enhanced Disclosure for Funds and Variable Annuities . . . . . . . . . . . . . . . . . . . . . . 14

Transfer Agents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Impact of Kokesh v. SEC on Enforcement Actions . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Protecting Senior Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

PROBLEMATIC INVESTMENT PRODUCTS AND PRACTICES. . . . . . . . . . . . . . . . . . . . 17

Reverse Factoring’s Rising Popularity and Hidden Risks. . . . . . . . . . . . . . . . . . . . . . . 19

Dual-Class Share Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Transition from LIBOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

OMBUDSMAN’S REPORT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

Service by the Numbers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

Service Behind the Numbers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Streamlined Communications with Retail Investors. . . . . . . . . . . . . . . . . . . . . . . . . .29

Standards of Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Areas of Interest and Importance to Retail Investors. . . . . . . . . . . . . . . . . . . . . . . . .32

Outreach Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Outlook for Fiscal Year 2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

REPORT ON INVESTOR TESTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

SUMMARY OF IAC RECOMMENDATIONS 

AND SEC RESPONSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

ENDNOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 1

MESSAGE FROM THE

INVESTOR ADVOCATE

On behalf of the Office of the Investor 

Advocate, I am pleased to provide this 

Report on Activities for Fiscal Year 2019. 

This report reflects the enormous efforts of our 

staff, for whom I am ever grateful. In the face of an 

ever-increasing workload, they continued to meet 

the challenges and provided a remarkable level of 

service to American investors.

Our biggest challenge has impacted the SEC’s 

Ombudsman, Tracey McNeil. As shown in the 

Ombudsman’s Report below, the number of 

matters brought by investors to the attention of 

the Ombudsman has tripled during the past year. 

Unfortunately, staffing has not kept pace with the 

increasing volume of work, as Tracey continues to 

receive assistance from one staff attorney and two 

non-permanent contractors. This very small team 

has worked as efficiently as possible to manage 

the large volume of inquiries, but we are in need 

of additional human capital in order to maintain a 

high level of service. 

As we reflect on our policy work during Fiscal 

Year 2019, we continue to appreciate the opportunity to advocate for investors. Day in and day 

out, policy choices are being made in Washington 

and major financial centers, and those choices 

have real impacts on the ability of Americans to 

invest in order to purchase homes, send children 

to college, and enjoy a secure retirement. Most 

investors, of course, have little awareness 

about the regulations that protect their investments, much less the proposed changes to those 

regulations, so they are unlikely to submit 

public comments or express their views about 

regulatory policy. We are 

pleased to provide a voice 

for investors so that their 

needs will be front-ofmind while important 

decisions are made at the 

SEC and self-regulatory 

organizations.

Naturally, we do not 

always agree with the 

decisions of policymakers, 

and sometimes we openly express our criticisms. 

We are equally transparent about our support for 

policy ideas that we believe will serve investors 

well. But, in reality, most of our work occurs 

behind the scenes, as staff from our Office review 

thousands of pages of rulemaking drafts and 

provide feedback to the rulemaking teams, or as I 

meet one-on-one with Commissioners and other 

leaders to advocate privately for investors on a 

multitude of issues. In this Report, we provide a 

glimpse of the work we have done, both formally 

and informally, to advocate zealously for investors 

during Fiscal Year 2019.
2 | OFFICE OF THE INVESTOR ADVOCATE

In addition to our policy work, we continue 

our efforts to conduct basic research into the 

demographics of investors, their financial 

capability, and the ways they process information 

to make financial decisions. This effort, led by Dr. 

Brian Scholl, is beginning to bear fruit as described 

further in this Report. 

Finally, we report on the work of the SEC’s Investor 

Advisory Committee. I have the privilege of serving 

on this body, and staff for the Office of the Investor 

Advocate provide day-to-day support to the 

Committee. The recommendations of the Investor 

Advisory Committee, as well as the SEC’s responses 

to those recommendations, are discussed below.

Again, it is a distinct honor to lead a hard-working 

and talented group of professionals who are so 

devoted to serving the needs of investors. I am 

proud of the work they have done during Fiscal 

Year 2019, and I would be pleased to answer any 

questions from Members of Congress.

Respectfully Submitted,

Rick A. Fleming

Investor Advocate
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 3

REPORT ON ACTIVITIES 

RELATING TO THE FISCAL YEAR 

2019 POLICY AGENDA

Pursuant to Exchange Act Section 4(g)(4), the 

Office of the Investor Advocate is required 

to identify areas in which investors would 

benefit from changes in the regulations of the 

Commission or the rules of self-regulatory organizations. We also are expected to 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.6

On June 29, 2018, the Office of the Investor 

Advocate filed a Report on Objectives for Fiscal 

Year 2019.7The Report identified nine key 

policy areas that would be the primary focus 

of the Office during Fiscal Year 2019:8 public 

company disclosure, equity market structure, 

fixed income market reform, accounting and 

auditing, standards of conduct for broker-dealers 

and investment advisers, exchange-traded funds, 

enhanced disclosure for funds and variable 

annuities, transfer agents, and the impact of 

Kokesh v. SEC on enforcement actions. This 

Report on Activities describes our activities and 

recommendations within each of those policy 

areas from October 1, 2018 to September 30, 

2019 (the Reporting Period). It also describes 

some additional work we have done to advocate 

for the protection of senior investors.

PUBLIC COMPANY DISCLOSURE

As described in our prior reports, the Commission 

has undertaken a multi-year, comprehensive 

Disclosure Effectiveness Initiative to review and 

modernize public company reporting requirements in Regulation S-K and Regulation S-X. 

Over the course of Fiscal Year 2019, our Office 

closely followed developments in this area, 

reviewed and commented on draft rulemaking 

releases, and, in a couple of instances, added our 

views to the public record. 

On August 8, 2019, the Commission proposed 

amendments to Regulation S-K to modernize the 

description of business, legal proceedings, and 

risk factor disclosures that registrants are required 

to provide.9

 Among other features, the proposed 

amendments would revise Items 101(a) (description 

of the general development of the business), 101(c) 

(narrative description of the business), and 105 

(risk factors) to emphasize a more principles-based 

approach on the rationale that some aspects of 

these disclosures may be material to a particular 

registrant while other aspects may not. Additional 

rule text revisions are designed to encourage 

registrants to enhance the salience of information 

by streamlining and avoiding duplication. Perhaps 

the most notable substantive development was a 

proposal to replace the current requirement for a 

registrant to disclose the number of employees with 

a broader requirement to disclose a description 
4 | OFFICE OF THE INVESTOR ADVOCATE

of the registrant’s human capital resources. This 

would include any human capital measures 

or objectives that management focuses on in 

managing the business, such as measures or objectives that address the attraction, development, and 

retention of personnel.10We view the proposed 

amendments as sensible improvements to the 

disclosure framework. 

In two other, related Disclosure Effectiveness 

work streams, the Commission sought to refresh 

industry-specific disclosure requirements. First, on 

October 31, 2018, the Commission adopted rules 

to update the disclosures provided by registrants 

that have material mining operations.11 Second, on 

September 17, 2019, the Commission proposed 

rules to update the statistical disclosures provided 

by bank and savings and loan registrants.12 The 

mining property disclosure requirements and 

the banking disclosure requirements are to be 

consolidated in new subparts of Regulation S-K 

and would replace obsolete industry guides. These 

rulemaking releases require considerable technical 

expertise to evaluate and, not surprisingly, have 

attracted few comment letters with direct bearing 

on the informational needs of investors. For our 

part, we advocated primarily for requiring the 

disclosures to be provided in a machine-readable 

format.13 For example, the Commission requires 

mining registrants to disclose for each material 

property the “location, accurate to within one mile, 

using an easily recognizable coordinate system.”14

We believe that if the Commission were to specify 

the coordinate system and require that the location 

data be provided in a structured format, investors 

would more easily be able to run queries and 

retrieve the information that they want (such as 

a registrant’s exposure to drought or geopolitical 

risk).15 Although we were disappointed when the 

Commission opted not to prioritize structured 

disclosures in this rulemaking and in the banking 

disclosure rulemaking,16 we believe it is only a 

matter of time before machine-readability is viewed 

as imperative. In fact, the Open, Public, Electronic 

and Necessary (OPEN) Government Data Act, 

signed into law on January 14, 2019, provides a 

sweeping, government-wide mandate for all federal 

agencies to publish government information in a 

machine-readable format by default.17

There were other rulemakings that we reviewed 

that were not part of the Disclosure Effectiveness 

Initiative but were otherwise relevant to disclosure, 

capital raising, and corporate governance. On 

September 26, 2019, the Commission adopted 

a new rule to allow all issuers to gauge investor 

interest in a potential initial public offering or other 

registered securities offering through discussions 

with certain types of institutional investors prior to, 

or following, the filing of a registration statement.18

We considered the earlier objections of The Credit 

Roundtable, a group of fixed-income institutional 

asset managers focused principally on the primary 

market for investment-grade corporate bonds, 

concerning a 2018 bill before the U.S. House of 

Representatives and a 2009 rulemaking proposal 

that was similar but never finalized.19 The Credit 

Roundtable expressed concern that underwriters’ 

pre-marketing of new bond issues could exacerbate 

the pressure that many Roundtable members say 

induces them to submit orders for book-building 

based on suboptimal information. In our outreach 

to the Roundtable, however, we determined that 

the present rulemaking likely would not impact 

the reported problem one way or the other. This is 

because there is no regulation of the book-building 

process, meaning that underwriters already may 

sell to whomever they want, need not extend the 
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 5

offering to all investors equally, and need not hold 

open the offering for any prescribed period of time. 

Moreover, the practice of limited pre-marketing 

was already common in the fixed-income market. 

We value our involvement in helping gather and 

interpret input from these market participants,20

and we believe the problem they have reported 

deserves further study. 

In addition to reviewing the disclosure requirements for public offerings of securities, the 

Commission has begun a broad review of the 

regulatory framework for non-public offerings.21

On June 18, 2019, the Commission published 

a concept release seeking public comment on 

ways to simplify, harmonize and improve the 

exemptions from the Securities Act registration 

requirements.22 We agree that a fresh examination 

of these exemptions is warranted in light of the 

widely acknowledged complexity of the exemptive 

framework and the surge in capital-raising through 

exempt offerings. Nonetheless, we worry that the 

Commission may be inclined to implement recommendations that would further erode the protections of Securities Act registration for companies 

seeking to raise capital from retail investors, 

without a commensurate benefit to investors or 

a genuine improvement in capital formation. On 

July 11, 2019, we submitted a comment letter 

to the rulemaking file questioning some of the 

assumptions implicit in the recommendations 

put forward in the release.23 Citing data from 

the Federal Reserve Board’s Survey of Consumer 

Finances, we questioned whether it is reasonable 

to expect that retail investors who do not already 

meet the definition of accredited investor will have 

the wherewithal to invest in exempt offerings and 

earn higher risk-adjusted returns, as compared to 

investing in the public markets. Subsequently, the 

U.S. House of Representatives held a hearing on 

this topic during which one of the witnesses—Duke 

University School of Law Professor Elisabeth de 

Fontenay—argued more forcefully that:

If Congress and the SEC are concerned 

about investment opportunities for retail 

investors, the solution lies not in throwing 

retail investors to the wolves in the private 

markets, but rather in ensuring a healthy 

pipeline of companies going and remaining 

public. This may require reversing course 

on Congress’s approach of allowing 

companies to remain private indefinitely, 

despite multi-billion-dollar valuations and 

widely dispersed share ownership.24

Lastly, the Commission is looking at the proxy 

process. On November 15, 2018, SEC staff held 

a public roundtable to discuss: (1) the proxy 

solicitation and voting process; (2) shareholder 

engagement through the shareholder proposal 

process; and (3) the role of proxy advisory firms.25

The third item in the preceding list is the subject of 

considerable controversy. For instance, corporate 

executives sometimes disagree with the voting 

recommendations of proxy advisory firms that 

institutional investors have engaged to provide 

research and assistance with voting in annual and 

special meetings. Corporate lobbying groups calling 

for greater regulation of proxy advisory firms 

claim that those firms’ voting recommendations 

contain errors and undisclosed conflicts of interest. 

In an April 8, 2019 speech, the Investor Advocate 

summarized the prevailing view of institutional 

investors, which is that the proxy advisory firms 

perform essential services relatively well, and 

that there is no market failure warranting further 

regulatory intervention.26 Moreover, we reviewed 
6 | OFFICE OF THE INVESTOR ADVOCATE

many of the alleged “errors” and determined 

that most would be more appropriately characterized as differences of opinion. Nevertheless, 

the Commission waded into the fray. On August 

21, 2019, the Commission published guidance 

clarifying the fiduciary obligations of investment 

advisers in fulfilling their proxy-voting responsibilities.27 The Commission also published an 

interpretation concluding that proxy-voting advice 

provided by proxy advisory firms generally constitutes a “solicitation” under the federal proxy rules, 

and providing related guidance about the application of the antifraud rule to voting advice.28We 

believe that these interpretive releases may have the 

effect of inhibiting investment advisers’ engagement 

in proxy voting and, arguably, should have been 

subject to a notice and comment process. 

In a related action, the Commission on November 

5, 2019, proposed a new rule that, among other 

things, would require proxy advisory firms to give 

a preview of their voting recommendations to the 

subject companies before communicating with 

the investor clients who purchased the advice.29

On the same day, the Commission proposed rule 

changes that would make it easier for companies 

to exclude shareholder proposals from corporate 

proxy statements.30 Because the proposals 

occurred after the conclusion of Fiscal Year 2019, 

we will discuss them in greater detail in our next 

Report on Activities. 

EQUITY MARKET STRUCTURE

In November 2018, the Commission adopted 

rules that, for the first time, require brokerdealers to disclose the handling of institutional 

orders to customers under existing Rule 606 

of Regulation NMS.31This should provide 

customers with better information to evaluate 

the quality of execution for the orders they 

place.32 We evaluated the proposal, including 

questions surrounding the proposed definition of 

institutional order and its impact on the ability 

of institutional customers to obtain information 

about all their orders, and we are pleased that 

the Commission finalized this proposal. We 

continue to monitor the implementation schedule 

for this rule, originally set for May 20, 2019, but 

partially and conditionally extended to provide 

additional time for broker-dealers to complete 

their preparation through the spring of 2020.33

In December 2018, the Commission adopted a rule 

to conduct a transaction fee pilot for NMS stocks.34

The rule will subject the stock exchanges to new 

temporary pricing restrictions across two test 

groups and thereby reduce or eliminate the use of 

so-called “maker-taker” fee-and-rebate pricing for 

transactions in those securities. We evaluated the 

proposed pilot and believe that it can potentially 

answer questions concerning broker-dealer conflicts 

of interest in order routing behavior. Accordingly, 

the Investor Advocate, as a voting member of the 

Investor Advisory Committee, supported a recommendation to the Commission to move forward 

with the pilot.35 In March 2019, the Commission 

partially stayed the pilot pending judicial review 

after several national securities exchanges 

challenged the rule in court,36 and we continue to 

monitor the ongoing litigation. 

In addition to reviewing Commission rulemakings, 

the Office of the Investor Advocate is responsible 

for analyzing the potential impact on investors of 

proposed rules of SROs.37 In furtherance of this 

objective, the Office has analyzed the potential 

impact of various SRO proposals related to equity 

market structure. For example, in June 2019, the 

Cboe EDGA Exchange, Inc. (EDGA) proposed to 

create a 4-millisecond speedbump for all executable 

orders submitted to the exchange, except for 

modification and cancel instructions for existing 

quotes.38 In September 2019, the Commission instituted proceedings to determine whether to approve 

or disapprove this rule proposal, soliciting further 

comment as to whether the proposal was consistent 
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 7

with the Exchange Act.39 We reviewed the proposal 

and the comments submitted,40 and we recently 

recommended that the Commission disapprove the 

proposed speedbump.41

There were numerous other SRO rule proposals 

that we monitored closely during the Reporting 

Period. As examples, we have reviewed proposed 

rules to give order book priority for equity orders 

submitted on behalf of retail investors,42 a request 

for comment from NASDAQ on initial listing 

requirements related to trading liquidity,43 and 

the application to register a new equity exchange, 

the Long-Term Shareholders Exchange.44 During 

the reporting period, the Division of Trading and 

Markets published guidance to assist the national 

securities exchanges and FINRA in preparing fee 

filings that meet their burden to demonstrate that 

proposed fees are consistent with the requirements 

of the Exchange Act,45 which we hope will make 

our review of significant SRO fee filings more 

efficient and effective. 

We continue to monitor progress on the implementation of the Commission’s Consolidated Audit 

Trail, which is intended to enhance, centralize, and 

generally update the regulatory data infrastructure 

available to market regulators.46

FIXED INCOME MARKET REFORM

As discussed in the Report on Activities for 

Fiscal Year 2018,47 on September 17, 2018, the 

Office of the Investor Advocate filed a public 

comment letter in response to MSRB Regulatory 

Notice 2018-15, Request for Comment on Draft 

Amendments to MSRB Rules on Primary Offering 

Practices (Regulatory Notice 2018-15).48 In 

pertinent part, Regulatory Notice 2018-15 

sought comment on two issues of particular 

interest to the Office of the Investor Advocate: 

(1) whether to auto-populate into Form 

G-32 certain information that is submitted to 

Depository Trust Company’s (DTC) New Issue 

Information Dissemination Service (NIIDS) but 

is not currently required to be provided on Form 

G-32;49 and (2) whether to require additional 

information on Form G-32 that is not currently 

provided to NIIDS.50 During the Reporting Period, 

the MSRB proposed and received Commission 

approval to amend MSRB rules relating to primary 

offerings of municipal securities for brokers, 

dealers and municipal securities dealers.51 The 

Office reviewed the proposals and the comments 

submitted, and was encouraged to see that the 

proposed rules addressed many of the points raised 

in our September 2018 comment letter.52

On June 11, 2019, the Commission’s Fixed Income 

Market Structure Committee (FIMSAC)53 adopted 

a recommendation to curb the practice known 

as “pennying” in the corporate and municipal 

bond auction process.54 Typically, a bond dealer 

places a retail client’s bid-wanted out to the market 

and compiles the bids received to determine the 

winning bid, but a broker engages in “pennying” 

when it nominally exceeds the high bid in order to 

purchase for its own account rather than execute 

the trade with the highest external bidder.55 During 

the MSRB’s first quarterly board meeting of Fiscal 

Year 2020, the MSRB Board approved acting on 

the FIMSAC’s recommendation that the MSRB 

coordinate with FINRA on further analysis of the 

issue.56 Our Office will continue to monitor what, if 

any, actions the MSRB and FINRA take to address 

the practice of pennying. 

Based on another recommendation from the 

FIMSAC,57 FINRA requested public comment 

on a pilot program to study potential changes to 

the public dissemination of corporate bond block 

trades.58 In the request, FINRA sought input from 

the public on increasing current dissemination 

caps for corporate bond trades and delaying the 

dissemination of any information about large 

trades above the proposed dissemination caps for 

48 hours. Currently, FINRA’s Trade Reporting 
8 | OFFICE OF THE INVESTOR ADVOCATE

and Compliance Engine (TRACE) disseminates 

information to the marketplace about corporate 

bond trades, including trade price and size, 

immediately upon receipt. FINRA explained that, 

by delaying the reporting of large bond trades, 

the pilot program would provide data regarding 

the balance between trade transparency and bond 

liquidity. During the Reporting Period, we reviewed 

the public comments submitted to FINRA, many 

of which expressed concerns about the proposed 

pilot. We continue to monitor this issue for further 

developments, and we are likely to recommend 

disapproval if a similar proposal is submitted to the 

Commission for approval. We share commenters 

concerns that information asymmetry in the market 

could benefit a small subset of larger market 

participants at the expense of other participants, 

including small institutional investors. 

ACCOUNTING AND AUDITING

On December 7, 2018, SEC Chairman Jay Clayton, 

then-SEC Chief Accountant Wes Bricker, and 

Public Company Accounting Oversight Board 

(PCAOB) Chairman William D. Duhnke III issued 

a joint statement that declared:

The bedrock of this [global] capital market 

system is high quality, reliable financial 

statements. This is indisputable. Without high 

quality and reliable financial information, 

capital markets do not function well.

In turn, confidence in the quality and 

reliability of financial statements is driven 

by a combination of quality audit services 

and regulatory oversight. Effective audits 

and regulatory oversight require timely 

access to comprehensive information.59

While their public statement addressed certain 

international issues, these words have special 

resonance for the U.S. market. Investor confidence 

in the audited financial statements of public 

companies listed in the U.S. helps to make our 

capital markets the deepest and most liquid in 

the world. 

Hence the critical role of the PCAOB, which was 

established by the Sarbanes Oxley Act (SOX) 

to oversee the audits of public companies and 

SEC-registered brokers and dealers. The PCAOB’s 

mission is to protect investors and further the 

public interest in the preparation of informative, 

accurate, and independent audit reports. During 

the Reporting Period, we monitored developments 

at the PCAOB, and we will continue to do so. In 

particular, we find it troubling that the PCAOB has 

not convened a meeting of its Investor Advisory 

Group since November 2018.60

In addition, we monitored activity at the Financial 

Accounting Standards Board (FASB) as well as 

developments related to auditing and accounting 

policies at the Commission. During the Reporting 

Period, this has included a significant SEC 

rulemaking proposal to expand the exemption 

from the requirement, under Section 404(b) of 

the Sarbanes-Oxley Act, for issuers to obtain 

independent auditor attestation of management’s 

assessment of the effectiveness of the company’s 

internal control over financial reporting (ICFR).

On May 9, 2019, the Commission proposed 

amendments that would exclude companies with 

annual revenue of less than $100 million from the 

auditor attestation requirement.61Commenters 

representing investors and investor interests 

consistently have opposed this proposal to lift 

the auditor attestation requirement for the 

specified companies.62

The economic analysis in the proposing release, in 

particular, triggered criticisms from commenters 

representing investors and various academics. 
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 9

These criticisms included assertions that the 

proposing release contained statements or 

analytic interpretations that were misleading, 

misrepresentative, had omitted critical information, 

or had relied on outdated information. These 

are very serious charges that raise the specter of 

regulatory hypocrisy, given that the SEC often takes 

enforcement action against market participants 

who misrepresent the facts or cherry-pick data to 

present misleading half-truths.

For example, accounting professors Weili Ge, 

Allison Koester, and Sarah McVay jointly filed 

a comment letter (the Ge Letter) objecting to 

the way in which the proposal characterized 

a study they had conducted.63Their study,64

which quantified measurable costs and benefits 

of exempting non-accelerated filers from ICFR 

auditor attestation requirement, was cited widely 

in the proposing release (as the “Ge et al. 2017 

Study”). Yet the Ge Letter takes issue with 

how their Study is characterized, because “our 

inference is precisely the opposite of how the 

release characterizes our findings” [emphasis 

added].65 According to the professors, “We 

believe that 404(b) attestation would materially 

reduce internal control misreporting.” 

Another group of professors, in their comment 

letter, called the proposal’s economic analysis 

“misleading” in one important respect. The 

comment letter, co-authored by Mary Barth and 

three other business school professors (the Barth 

Letter), noted that the economic analysis focused 

on the rate, but not the magnitude, of restatements 

among companies that would be affected by the 

proposed rollback of the 404(b) requirement. 

In their own preliminary analysis of companies 

that would be affected by the proposed rule, the 

commenters found 11 companies that had restated 

their financial statements in 2018. These companies 

restated a total of approximately $65 million 

in net income and lost more than $294 million 

in stock market value. Those costs dwarf the 

projected average annual cost savings of $210,000 

per affected company, or a total of $75 million in 

annual savings across all affected companies.66

Commenters also criticized the proposal’s economic 

analysis of a phenomenon called “bunching.” 

Bunching refers to an attempt by companies to 

avoid auditor attestation by staying just below 

the $75 million public float threshold that would 

trigger the current requirement. The proposing 

release interprets bunching as evidence that 

managers consider the costs of auditor attestation 

to be significant: “[S]tudies have demonstrated that 

smaller reporting issuers find the total compliance 

costs associated with the ICFR auditor attestation 

requirement to be significant by providing evidence 

that non-accelerated filers may seek to avoid 

crossing the $75 million public float threshold and 

becoming accelerated filers.”67

But that conclusion is unfounded, the Barth 

Letter asserts, because it fails to consider another 

plausible explanation of bunching: company 

managers might seek to avoid an audit, not simply 

to save the company money, but “because they 

are engaging in opportunistic behavior, and the 

audit would increase the probability such behavior 

would be detected.”68 Indeed, as the Barth Letter 

notes, one academic study on bunching found 

higher levels of earnings management among 

companies whose public float fell just below the 

$75 million threshold.69 Although the proposing 

release’s economic analysis cited this study, it 

omitted any mention of the study’s discussion of 

earnings management. 
10 | OFFICE OF THE INVESTOR ADVOCATE

Commissioner Robert Jackson, meanwhile, criticized the proposing release’s economic analysis of 

bunching from a different perspective. He stated:

[T]he proposal’s analysis of the costs of 

Section 404(b) relies heavily on a study 

using data from 2004 to show that 

companies with a public float under $75 

million—the level under which auditor 

attestation is not required—seemed to 

“bunch” under that threshold. . . . If that 

were still true in today’s markets, that 

would offer some basis for this proposal. 

But it’s not. The proposal makes no effort 

to update these studies, simply claiming that 

old data is enough basis for new rules.70

Commissioner Jackson also asserted that the 

economic analysis made “no serious attempt 

to evaluate the benefits of attestation.”71To fill 

that gap, his Office produced its own analysis 

of investor reactions to news of an internal 

control failure in two groups of companies: those 

that would receive a rollback of 404(b) under 

the proposal and those that would not. “The 

evidence is striking,” Commissioner Jackson 

concludes, because “[t]he data show we are 

proposing today to roll back 404(b) for exactly 

the group of companies where investors care 

about the benefits of auditor attestation most” 

[Emphasis in original].72

Finally, the economic analysis drew criticism for 

not subjecting the proposal to a rigorous analysis 

of the risk of fraud among affected companies. 

The economic analysis does cite academic studies 

on the risk of fraud. Nonetheless, the Barth Letter 

argues that the Commission itself is in the best 

position to quantify the extent of fraud and suspicious or misstated filings for affected companies. 

Specifically, the letter argued, the Commission 

should have—but failed to—analyze four data 

sources at its disposal: the historical rate of 

fraud; the incidence of SEC Accounting and 

Auditing Enforcement Releases; the incidence of 

Wells Notices; and the incidence of formal 

SEC investigations.73

In our view, the proposed rule has profound 

implications for investor protection. Thus, we find 

the depth and range of criticisms from investor 

groups and scholars to be concerning. Should this 

proposal advance toward adoption, we urge that 

the economic analysis be amplified to address 

these criticisms.

STANDARDS OF CONDUCT 

FOR BROKER-DEALERS AND 

INVESTMENT ADVISERS

On June 5, 2019, the Commission adopted a 

package of rulemakings and interpretations that, 

according to the Commission, would enhance 

the quality and transparency of retail investors’ 

relationships with investment advisers and brokerdealers, bring the legal requirements and mandated 

disclosures in line with reasonable investor expectations, and preserve access (in terms of choice 

and cost) to a variety of investment services and 

products.74 These actions followed an April 18, 

2018 Commission proposal that was discussed in 

our Report on Objectives for Fiscal Year 2019.75

Specifically, these actions included new Regulation 

Best Interest,76 a new Form CRS Relationship 

Summary,77 and two separate new interpretations 

under the Investment Advisers Act of 1940.78

Regulation Best Interest

Regulation Best Interest imposes a new standard 

of conduct specifically for broker-dealers, intended 

to enhance the broker-dealer standard of conduct 

beyond existing suitability obligations. According 

to the adopting release, the new standard of 

conduct draws from key fiduciary principles and 

cannot be satisfied through disclosure alone. It 

provides specific requirements to address certain 

aspects of the relationships between broker-dealers 
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 11

and their retail customers, including certain 

conflicts related to compensation.79 In short, 

when making a recommendation of a securities 

transaction or an investment strategy involving 

securities, a broker-dealer must act in the retail 

customer’s best interest and cannot place its own 

interests ahead of the customer’s interests. 

More specifically, Regulation Best Interest includes 

the following components:

§	Disclosure Obligation: Broker-dealers must 

disclose material facts about the relationship 

and recommendations, including specific 

disclosures about the capacity in which the 

broker is acting, fees, the type and scope of 

services provided, conflicts, limitations on 

services and products, and whether the brokerdealer provides monitoring services.80

§	Care Obligation: A broker-dealer must 

exercise reasonable diligence, care and skill 

when making a recommendation to a retail 

customer. The broker-dealer must understand 

potential risks, rewards, and costs associated 

with the recommendation. The broker-dealer 

must then consider these factors in light of the 

retail customer’s investment profile and make a 

recommendation that is in the retail customer’s 

best interest. The final regulation, in a change 

from its originally proposed iteration, explicitly 

requires the broker-dealer to consider the costs 

of the recommendation.81

§	Conflict of Interest Obligation: The brokerdealer must establish, maintain, and enforce 

written policies and procedures reasonably 

designed to identify and at a minimum disclose 

or eliminate conflicts of interest. This obligation 

specifically requires policies and procedures to:

» Mitigate conflicts that create an incentive 

for the firm’s financial professionals to place 

their interest or the interests of the firm 

ahead of the retail customer’s interest;

» Prevent material limitations on offerings, 

such as a limited product menu or offering 

only proprietary products, from causing the 

firm or its financial professional to place his 

or her interest or the interests of the firm 

ahead of the retail customer’s interest; and

» Eliminate sales contests, sales quotas, 

bonuses, and non-cash compensation that 

are based on the sale of specific securities or 

specific types of securities within a limited 

period of time.82

§	Compliance Obligation: In a change from the 

proposed version of Regulation Best Interest, the 

final version requires broker-dealers to establish, 

maintain and enforce policies and procedures 

reasonably designed to achieve compliance with 

Regulation Best Interest as a whole.83

Regulation Best Interest, in a change from its 

originally proposed iteration, applies to account 

recommendations, including recommendations 

to roll over or transfer assets in a workplace 

retirement plan account to an individual retirement 

account (IRA), and recommendations to take a 

plan distribution. It also applies to implicit “recommendations to hold” that result from agreed-upon 

account monitoring.84

Form CRS Relationship Summary

The Form CRS Relationship Summary requires 

investment advisers and broker-dealers to 

deliver certain information to retail investors at 

the beginning of their relationship. Firms must 

summarize information about services, fees and 

costs, conflicts of interest, the legal standard of 

conduct, and whether or not the firm and its 

financial professionals have disciplinary history. 

This relationship summary utilizes a standardized 

question-and-answer format to serve as a guide 

for disclosure and prompt additional conversation 
12 | OFFICE OF THE INVESTOR ADVOCATE

between investors and financial professionals. The 

form also directs investors to the Commission’s 

investor education website, www.Investor.gov, 

which offers the investing public educational 

information, including a series of educational 

videos designed to provide ordinary investors with 

some basic information about broker-dealers and 

investment advisers.85

Commission Interpretation—Standard 

of Conduct for Investment Advisers

An investment adviser owes a fiduciary duty to 

its clients under the Investment Advisers Act. This 

duty is principles-based and applies to the entire 

relationship between an investment adviser and 

its client. According to the Commission, its new 

“Commission Interpretation—Standard of Conduct 

for Investment Advisers” serves to reaffirm, and 

in some cases clarify, certain aspects of the federal 

fiduciary duty that an investment adviser owes to 

its clients.86

Commission Interpretation—

Broker-Dealer Exclusion

A broker-dealer exclusion under the Investment 

Advisers Act excludes from the definition of 

investment adviser—and thus from the application 

of the Investment Advisers Act—a broker or dealer 

whose performance of advisory services is solely 

incidental to the conduct of its business as a broker 

or dealer and receives no special compensation for 

those services. The “Commission Interpretation— 

Broker-Dealer Exclusion” confirms and clarifies 

the Commission’s interpretation of the “solely 

incidental” prong of the broker-dealer exclusion 

of the Advisers Act. Specifically, the final interpretation states that a broker-dealer’s advice as to the 

value and characteristics of securities or as to the 

advisability of transacting in securities falls within 

the “solely incidental” prong of this exclusion if 

the advice is provided in connection with and is 

reasonably related to the broker-dealer’s primary 

business of effecting securities transactions.87

Public Statement of the Investor Advocate 

Regarding the Commission’s Standard of 

Conduct Rulemaking Package

On June 5, 2019, following the Commission vote 

to adopt the aforementioned rulemakings and interpretations, the Investor Advocate issued a public 

statement that included the following assessment:

Regulation Best Interest, while not as 

strong as it could be, is a step in the right 

direction because it is an improvement 

over the existing suitability standard 

for broker-dealers. However, what 

investors have gained in [Regulation Best 

Interest] has been undermined by what 

investors have lost in the Commission’s 

interpretation of the fiduciary duty that 

applies to investment advisers. And 

while the new Form CRS Relationship 

Summary will provide useful information 

to investors about their particular financial 

professional and account, it likely will not 

achieve its original goal of preventing the 

financial harm that results from investor 

confusion about the differences between 

investment advisers and broker-dealers. 

Finally, while the interpretation of “solely 

incidental” presented an opportunity to 

sharpen the distinctions between brokerdealers and investment advisers, the 

interpretation merely serves to formalize 

the Commission’s longstanding deference to 

broker-dealers who engage in conduct that 

is advisory in nature.88

EXCHANGE-TRADED FUNDS

In our Report on Objectives for Fiscal Year 2019, 

we indicated that we supported Commission efforts 

to permit exchange-traded funds (ETFs) that satisfy 

certain conditions to operate without the expense 

and delay of obtaining an exemptive order insofar 

as such efforts do not sacrifice investor protection.89

On September 25, 2019, the Commission adopted 

a new rule and form amendments designed to 
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 13

modernize the regulation of ETFs by establishing 

a clear and consistent framework for the vast 

majority of ETFs operating today.90 We believe the 

ETF Rule will facilitate greater competition and 

innovation in the ETF marketplace—increasing the 

number of ETF options available to investors—

without sacrificing investor protection. It also 

will allow ETFs to come to market more quickly 

without the expense and delay of applying for 

individual exemptive relief.

ETFs are hybrid investment products not originally allowed under the U.S. securities laws. 

Their shares trade on an exchange like a stock 

or closed-end fund, but they also allow identified 

large institutions to transact directly with the 

fund. Since 1992, the Commission has issued 

more than 300 exemptive orders allowing ETFs 

to operate under the Investment Company Act.91

ETFs have grown substantially in that period, and 

today there are approximately 2,000 ETFs with 

over $3.3 trillion in total net assets.92 Investors 

use ETFs for a variety of purposes, including core 

components of long-term investment portfolios, 

investment of temporary cash holdings, and for 

hedging portfolios.

ETFs relying on the ETF Rule will need to comply 

with standardized conditions.93 First, an ETF 

will be required to provide daily portfolio transparency on its website. Second, an ETF will only 

be permitted to use “custom baskets” (baskets 

of securities that do not reflect a pro-rata representation of the fund’s portfolio or that differ 

from the initial basket used in transactions on 

the same business day) if the ETF adopts written 

policies and procedures regarding the construction 

and acceptance of custom baskets that are in the 

best interests of the ETF and its shareholders. 

Additionally, the rule requires an ETF to disclose 

certain information on its website, including 

historical information regarding premiums and 

discounts and bid-ask spread information. These 

website disclosures should help inform investors 

about the costs of investing in an ETF and the 

efficiency of an ETF’s arbitrage process. Finally, 

the rule also will require an ETF to comply with 

certain recordkeeping requirements.

The ETF rule will be available to ETFs organized as 

open-end funds, the structure for the vast majority 

of ETFs today.94 ETFs organized as unit investment 

trusts (UITs), leveraged or inverse ETFs, ETFs 

structured as a share class of a multi-class fund, and 

non-transparent ETFs will not be able to rely on 

the rule. To help create a consistent ETF regulatory 

framework, one year after the effective date of the 

ETF Rule (December 23, 2019), the Commission 

will rescind exemptive relief previously granted to 

ETFs that will be permitted to operate in reliance 

on the rule.95 The Commission also adopted, as 

part of the ETF Rule, several ETF registration form 

amendments intended to provide more useful, 

ETF-specific information to investors who purchase 

ETF shares on an exchange.96

We stated in our Report on Objectives for Fiscal 

Year 2019 that, while we supported the Commission’s rulemaking efforts with respect to traditional, 

“plain vanilla” ETFs, we believed the treatment of 

leveraged and inverse ETFs and non-transparent 

ETFs necessitated special consideration.97 We 

are encouraged that these products will not be 

able to rely on the ETF Rule.98 The Commission 

acknowledged the special investor protection 

concerns presented by leveraged and inverse ETFs, 

indicated that it should complete a broader consideration of the use of derivatives by registered funds 

before considering allowing leveraged and inverse 

ETFs to rely on the rule, and explicitly included a 

condition that excludes leveraged and inverse ETFs 

from the rule’s scope.99 These ETFs must instead 

continue to rely on individualized exemptive relief. 

Additionally, as noted above, an ETF relying on 

the rule must provide daily portfolio transparency 

on its website, necessitating that non-transparent 

products also continue to rely on individualized 

exemptive relief.100
14 | OFFICE OF THE INVESTOR ADVOCATE

The exclusion of these non-traditional ETFs from 

the ETF Rule, as well as the rule’s important 

investor protection safeguards, helped earn the rule 

accolades from many market commentators as a 

“win” for both investors and the ETF industry.101

We will continue to work with Commission staff 

on rulemaking efforts that similarly protect the 

interests of investors while modernizing outdated 

regulatory frameworks.

ENHANCED DISCLOSURE FOR FUNDS 

AND VARIABLE ANNUITIES

In our Report on Objectives for Fiscal Year 2019, 

we discussed the importance of fund disclosures, 

noting that millions of individuals invest in funds 

as a means of achieving their financial goals, 

such as saving for retirement and funding their 

children’s educations.102 We stated that, given this 

level of investor participation in funds, it makes 

sense for the Commission to seek the input of 

Main Street investors on how they use, and how to 

improve, fund disclosures.103We also stated that we 

continue to support the development of a summary 

prospectus for variable annuities that would 

disclose the key facts that investors need to know 

about the risks and costs, as well as the benefits, 

of their investment.104

In June 2018, the Commission issued a request 

for comment to elicit the views of retail investors 

with respect to mutual funds, ETFs, and other 

pooled investment vehicles.105 The purpose of the 

request for comment was to help the Commission 

learn how individual investors and other interested 

parties use disclosures by funds and how investors 

believe those disclosures could be improved to help 

investors make investment decisions.

On October 30, 2018, informed in part by 

responses to this request for comment, the SEC 

proposed rule and form amendments intended 

to help investors make informed investment 

decisions regarding variable annuity and variable 

life insurance contracts.106 Among other things, 

these proposed changes would permit a person to 

satisfy its prospectus delivery obligations under the 

Securities Act for a variable annuity or variable life 

insurance contract by sending or giving a summary 

prospectus to investors and making the statutory 

prospectus available online. 

More specifically, the Commission proposed new 

rule 498A under the Securities Act, which would 

permit the use of two distinct types of contract 

summary prospectuses: initial summary prospectuses covering variable contracts offered to new 

investors, and updating summary prospectuses for 

existing investors. The initial summary prospectus 

would include an overview of the contract, a table 

summarizing certain key information about the 

contract’s fees, risks, and other important considerations, and more detailed disclosures relating to 

fees, purchases, withdrawals, and other contract 

benefits. The updating summary prospectus would 

include a brief description of certain changes to the 

contract that occurred during the previous year, as 

well as the key information table from the initial 

summary prospectus.

In certain types of variable contracts, investors 

allocate their investment to one or more underlying 

investment options (typically, mutual funds). Key 

information about these funds would be provided 

in both the initial summary prospectus and 

updating summary prospectus.107

The Commission also proposed related amendments to Forms N-3, N-4, and N-6—the registration forms for variable contracts—designed 

to update and enhance the disclosure regime for 

these investment products. These amendments 

are intended to improve the content, format, and 

presentation of information to investors, including 

by updating the required disclosures to reflect 
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 15

industry developments (e.g., the prevalence of 

optional insurance benefits in today’s variable 

contracts). In addition, the Commission proposed 

amendments to require the use of the machinereadable Inline eXtensible Business Reporting 

Language (Inline XBRL) format for the submission 

of certain required disclosures in the variable 

contract statutory prospectus. This would provide a 

mechanism for allowing investors, their investment 

professionals, data aggregators, and other data 

users to efficiently analyze and compare the 

available information about variable contracts.108

As we stated in our Report on Objectives for 

Fiscal Year 2019, we have consistently advocated 

for enhanced disclosure concerning separate 

accounts that offer variable annuities, including 

the development of a summary prospectus for 

variable annuities,109 and we are encouraged by the 

Commission’s proposed rule and form amendments 

in this area. We look forward to working with 

Commission staff as they evaluate comments on 

the proposal and as they consider recommending 

additional action.

TRANSFER AGENTS

Transfer agents are critical gatekeepers who 

perform an important role in investor protection, 

but they have received relatively little regulatory 

attention over the years. Thus, our Office was 

encouraged to see transfer agents highlighted on 

a variety of occasions by the Commission during 

Fiscal Year 2019. For example, in March 2019, 

Chairman Clayton and Trading and Markets 

Director Brett Redfearn presented joint remarks 

wherein Director Redfearn acknowledged the 

potential gap in current protection for retail 

investors.110 Director Redfearn highlighted the 

role transfer agents play in removing restrictive 

legends, and the potential harm improper removal 

of such legends could pose for investors.111

Director Redfearn concluded his remarks on 

transfer agents by stating, “I anticipate that the 

Division of Trading and Markets staff will present 

a recommendation to the Commission to update 

the transfer agent rules, including considering 

a rule that would specify transfer agent obligations with respect to the tracking and removal of 

restrictive legends.”112

In an April 2019 speech, the Investor Advocate 

echoed the concern surrounding the improper 

removal of restrictive legends, stating “. . . a refresh 

of the antiquated transfer agent rules could curb 

abuses such as the improper removal of restrictive 

legends, a practice that facilitates the illegal 

public distribution of securities.”113Then in May 

2019, Peter Driscoll, Director of the SEC’s Office 

of Compliance Inspections and Examinations 

(OCIE), noted that “OCIE plans to examine the 

role of transfer agents in the issuance of microcap 

securities and the removal of legends from 

restricted stocks.”114

According to the Commission’s agenda that was 

publicized in accordance with the Regulatory Flexibility Act, Commission staff is considering updates 

and refinements to the Commission’s transfer agent 

regulatory regime.115 We welcome a staff recommendation to modernize transfer agent regulations, 

and we will continue to monitor developments in 

this area. 

IMPACT OF KOKESH V. SEC ON 

ENFORCEMENT ACTIONS 

In our Report on Objectives for Fiscal Year 2019, 

we discussed the U.S. Supreme Court’s June 2017 

decision in Kokesh v. SEC116 and the limits it placed 

on the Commission’s ability to recover funds on 

behalf of harmed investors.117 The Division of 

Enforcement’s 2019 Annual Report indicates 

that the Kokesh decision continues to impact the 
16 | OFFICE OF THE INVESTOR ADVOCATE

Commission’s ability to disgorge and return funds 

to investors injured by long-running frauds, such 

as Ponzi schemes, that often directly impact retail 

investors.118 The Division of Enforcement estimates 

that the Commission has had to forgo approximately $1.1 billion dollars in disgorgement in filed 

cases because of the Kokesh decision.119

We are pleased that legislation has recently passed 

the House of Representatives, which would allow 

the Commission to seek to recover illegal profits 

from defendants for 14 years after an alleged 

securities violation.120 To prevent further harm to 

investors, we are hopeful that the legislation or a 

reasonable alternative will soon pass the Senate and 

be signed into law.

PROTECTING SENIOR INVESTORS

During the Reporting Period, our Office continued 

its efforts to raise public awareness on the issues 

of elder financial exploitation and protecting 

seniors. In June 2019, we published a white 

paper titled, “How the SEC Works to Protect 

Senior Investors.”121This followed an earlier paper 

entitled “Elder Financial Exploitation: Why it is 

a concern, what regulators are doing about it, 

and looking ahead,” which was published in June 

2018.122 The recent paper has been distributed at 

three events, two of them at SEC Headquarters in 

Washington, D.C. and a third at a conference for 

investment professionals in Rockville, Maryland. In 

addition, the paper’s author, staff member Stephen 

Deane, delivered two presentations on protecting 

seniors before audiences comprising legal and 

investment advice professionals. 

In August 2019, FINRA announced that it was 

conducting a retrospective review to assess its 

rules and processes aimed at protecting senior 

investors from financial exploitation.123 FINRA 

requested public comment on a number of 

questions related to this issue. Among other 

things, FINRA asks whether it should extend 

the safe harbor in Rule 2165, which permits 

broker-dealers to place a temporary hold on 

a disbursement of funds or securities from the 

account of a “specified adult” customer—

including persons age 65 and older—when the 

firm reasonably suspects financial exploitation. 

We commend FINRA for launching this holistic 

review. We were also pleased to see a number 

of substantive comments submitted in response. 

The comments came from a variety of entities 

and expressed a range of views, reflecting the 

challenges of protecting seniors while respecting 

their rights, autonomy and dignity. We hope 

that the initiative also will produce data on how 

firms are using the new tools they have received 

in recent years as a result of FINRA rule changes 

and new state laws aimed at protecting senior 

investors from financial exploitation. We will 

continue to monitor FINRA’s initiative. 
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 17

PROBLEMATIC INVESTMENT 

PRODUCTS AND PRACTICES

Among other statutory duties, the Investor 

Advocate is required to identify problems 

that investors have with financial service 

providers and investment products. Exchange 

Act Section 4(g)(6)(B) mandates that the Investor 

Advocate, within the annual Report on Activities, 

shall provide a summary of the most serious 

problems encountered by investors during the 

preceding fiscal year. The statute also requires the 

Investor Advocate to make recommendations for 

such administrative and legislative actions as may 

be appropriate to resolve those problems.124

To determine the most serious problems related to 

financial service providers and investment products, 

staff of the Office of the Investor Advocate 

reviewed information from the following sources:

§	Investor Alerts, Tips, and Bulletins issued by 

the SEC, FINRA, and the North American 

Securities Administrators Association, Inc. 

(NASAA) during Fiscal Year 2019; 

§	SEC enforcement actions and FINRA 

disciplinary actions during the Reporting Period; 

§	NASAA’s Activity Report,125 2019 Enforcement 

Report,126 and Top Investor Threats;127

§	The SEC’s Office of Compliance Inspections 

and Examinations’ Examination Priorities 

for 2019;128

§	SEC and SRO staff reports providing guidance 

and interpretations relating to investment 

products; 

§	Discussions and correspondence with SRO 

staff, including a November 12, 2019, letter 

from Nanette D. Lawson, Interim Chief 

Executive Officer and Chief Financial Officer, 

MSRB, highlighting municipal market practices 

that may have an adverse impact on retail 

investors;129 and 

§	Discussions with the SEC Retail Strategy 

Task Force.130

The table below lists certain potentially 

problematic products or practices during Fiscal 

Year 2019 as reported by these sources. Although 

not exhaustive, the lists reflect some of the 

concerns of these organizations. Details regarding 

these products and practices are available on these 

organizations’ websites.
18 | OFFICE OF THE INVESTOR ADVOCATE

SEC131 NASAA132

 Initial Coin Offerings, Cryptocurrency, 

and Blockchain 

 Impersonation of a “Regulator” or SEC 

Employee, or False Claims of SEC or 

CFTC Approval

 Scams Related to Natural Disasters 

 Investment Fees and Expenses 

 Affinity Fraud

 Social Sentiment Investing Tools (trading based 

on social media)

 Fraudsters Offering “Charitable” Investments

 Real Estate Related Investments

 Oil/Gas Investments

 Ponzi/Pyramid Schemes

 Promissory Notes

 Affinity Fraud

 Variable Annuities Sales Practices

 Robo-Advisors

 Cross-Selling of Unsuitable Products and Services

 Opportunity Zone Investments

 Initial Loan Procurements (crowdfunding for 

blockchain companies)

 Marijuana-Related Investments

 Contracts for Difference (speculative 

derivative contracts)

FINRA133 MSRB134

 Stock Fraud in the Wake of Hurricanes

 Social Sentiment Investing Tools

 Broker Imposter Scams (confirming broker 

registration)

 Fake Check Scams

 High-Yield CD Offers as Bait for HighCommission Investments

 Fraudulent Binary Options

 Pennying135

 Potential Impact of the SEC’s October 2019 

Proposed Exemptive Order136

 Potential Impact of Regulation Best Interest 

 London Interbank Offered Rate (LIBOR)

 Sustained Historically Low Interest Rates

 Cyberattacks 

 Climate Factors

 Municipal Market Disclosure Practices 

Each of the products and practices listed above 

were areas of concern for investors during the 

Reporting Period. Based on our review of the 

resources described above and consultations with 

knowledgeable professionals, however, we will 

highlight three areas of concern: reverse factoring’s 

rising popularity and hidden risks; dual-class share 

structures; and the transition from the London 

Interbank Offered Rate (LIBOR). Previous reports 

have highlighted other issues, including initial coin 

offerings,137 binary options,138 public non-traded 

REITS,139 municipal market disclosure practices,140

below minimum denomination positions in 

municipal securities,141 and Simple Agreements for 

Future Equity in crowdfunding investments.142
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 19

REVERSE FACTORING’S RISING 

POPULARITY AND HIDDEN RISKS

In recent years, there has been an increase in the 

number of companies working with intermediaries to arrange trade payable programs as well 

as an evolution in the types of programs used. To 

illustrate how such a program typically works, 

consider a company that purchases goods and 

services from multiple suppliers. The purchaser 

arranges for an intermediary to pay the suppliers 

on its behalf. The purchaser then settles its obligations with the intermediary and pays the intermediary a fee. Newer fintech intermediaries have 

developed software platforms that enable these 

types of purchasers to manage supplier relationships much more efficiently. A purchaser also may 

use such a program to stretch out its payment 

obligations by paying the intermediary on a 

delayed basis. Doing so enables the purchaser to 

hold cash on hand for longer, improving working 

capital.143 A supplier may benefit as well, to the 

extent that the intermediary pays the supplier 

earlier than the supplier has requested (although 

an early payment is typically at a discount). 

While these programs are referred to by a number 

of names (e.g., reverse factoring, supply-chain 

financing, structured trade payables, and vendor 

payable programs), some analysts and rating 

agencies are inclined to see the purchaser’s liability 

to the intermediary as a form of borrowing. 

However, it is not a standard accounting practice 

to account for it as such.144 Moreover, because 

there are no specific disclosure requirements in 

U.S. GAAP concerning these types of programs, 

there has been limited disclosure even about their 

existence. Earlier this year, UBS reported that 

only 34 out of 1,354 companies in its coverage 

universe—less than three percent—disclosed the 

use of reverse factoring in published documents 

despite evidence indicating that a much greater 

percentage—perhaps as much as 40 percent—were 

using reverse factoring.145 Similarly, Moody’s 

reported that fewer than 5% of the non-financial 

companies that it rated globally disclosed such a 

program in their financial statements, whereas a 

contemporaneous PwC survey indicated a greater 

prevalence in reality.146 PwC had surveyed 80 

companies and found 49% reporting using reverse 

factoring with suppliers and a further 37% actively 

considering it.147

As we have learned in our outreach to investors, a 

company could use reverse factoring to stretch out 

its payables in order to improve its working capital 

and claim to the analyst community that it is 

deleveraging. The company may not disclose its use 

of reverse factoring at all in its annual report, even 

though an analyst or other investor would want 

to know what the company’s program terms were, 

what portion of the supplier base was utilizing the 

program, who the capital providers were (i.e., a 

global, regulated bank versus a less well-capitalized 

fintech company), and the level of risk on the 

supplier side. Reverse factoring as a business is not 

cycle-tested, which means that it is unclear what 

might happen in an economic downturn (i.e., there 

may be a snap-back in working capital). The worry 

is that curtailment of reverse factoring availability 

represents a liquidity risk which could lead to an 

immediate and material working capital outflow.148

Unfortunately, without greater disclosure, many 

investors are left wondering how sustainable 

reverse factoring is as a source of capital. 

On October 2, 2019, the Big Four accounting 

firms submitted a rare joint letter to the Financial 

Accounting Standards Board to request formal 

guidance regarding the financial statement 

disclosures and presentation of cash flows that 

an entity entering into such a program should 

provide.149Citing the SEC Division of Corporation 

Finance’s renewed attention to such programs 

in recent comment letters, the signatories 
20 | OFFICE OF THE INVESTOR ADVOCATE

acknowledged the lack of disclosure provided in 

practice and suggested that the FASB’s Emerging 

Issues Task Force address the issue so that “users 

of the financial statements will have a better 

basis for making informed decisions with respect 

to the entity’s financial position, liquidity, and 

cash flows.”150 We agree and look forward to 

monitoring the FASB’s action in this area.

DUAL-CLASS SHARE STRUCTURE

Recent events involving so-called “unicorn” 

companies with weak corporate governance should 

have us revisiting a troubling trend involving dualclass shares. Companies have increasingly utilized 

capitalization structures that contain two or more 

classes of shares—one of which has significantly 

more voting power than the other.151 This is distinct 

from the more common single-class structure, 

which gives shareholders equal equity and voting 

power.152 In a dual-class structure, public shareholders receive shares with one vote per share, 

while insiders receive shares that empower them 

with multiple votes.153 Recently, some firms have 

issued shares that give ordinary public investors no 

vote at all.154

Dual-class shares are common in founder-led 

companies where the founders are perceived to 

be instrumental in the success of the company.155

Proponents of dual-class shares argue that 

company founders and insiders are given more 

votes per share than public shareholders because 

the founders are so visionary and charismatic that 

the companies could not be as successful—or not 

be successful at all—without them. By going public 

with multiple classes of shares, a company allows 

the public an opportunity to participate in the 

company’s growth, and the lack of voting rights for 

the public shareholders is advantageous because 

it allows the founders to guard against activists 

who demand short-term profits at the expense of 

long-term growth. Dual-class share structures are 

also common in founder-led companies where the 

company has had to raise a significant amount of 

funding before an initial public offering to fund 

rapid growth, and when founders are averse to a 

change in control and therefore use the dual-class 

share structure as a defense mechanism.156

In our view, the use of dual-class shares by 

companies is troubling. Without an appropriate level of accountability to shareholders, 

investors may suffer significant financial harm.157

Unchecked corporate control can lead to many 

poor behaviors, such as self-dealing, poor 

accounting controls, outsized optimism, groupthink, discriminatory practices, and a tendency 

to burn cash by investing in ancillary businesses 

to satisfy personal whims. Dual class shares can 

also make it difficult to remove control persons 

who begin to suffer from declining physical or 

mental health. And, as Commissioner Jackson has 

observed, when dual-class shares are perpetual, 

long-term public shareholders must place their 

faith not only in a founder, but also the founder’s 

children and grandchildren.158 Long after the 

original visionary is gone, there will still be no 

disciplining governance mechanism. 

A growing body of research suggests that over the 

long term, entrenchment of founders produces 

lower returns for investors. Specifically, companies 

with dual-class structures tend to underperform 

companies with dispersed voting power.159

There is a great deal the Commission and stock 

exchanges can do to address this issue. For 

example, we have encouraged the exchanges 

to consider reforms suggested by the investor 

community.160 These suggested reforms include the 
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 21

sun-setting of super-voting rights, which would 

protect a visionary founder from activist investors 

for a reasonable length of time while preventing 

the harms that may occur over the long term due 

to poor corporate governance.161 We also urge the 

Commission to require public companies to provide 

more fulsome disclosure of the risks associated with 

dual class shares, as recommended by the Investor 

Advisory Committee.162

TRANSITION FROM LIBOR

The London Interbank Offered Rate (LIBOR), 

an indicative measure of the average interest rate 

at which banks could borrow from one another, 

has been used extensively as a benchmark for 

commercial and financial contracts, including 

interest rate swaps and other derivatives, as well as 

mortgages and debt. Many institutional investors, 

such as pension funds, use derivatives referencing 

LIBOR to hedge risk and execute investment 

strategies. Some municipal bonds, such as floating 

rate notes, may reset their interest rate periodically 

based on LIBOR.

However, the banks currently reporting information used to set LIBOR will likely stop after 

2021. This is largely due to questions about 

manipulation, as some banks falsely inflated or 

deflated their rates to profit from trades or give the 

impression that they were more creditworthy than 

they were. These concerns led market participants 

to look elsewhere for a reference rate. 

The Alternative Reference Rate Committee—

a group convened by the Federal Reserve that 

includes major market participants, and on which 

SEC staff and other regulators participate—has 

proposed an alternative rate to replace LIBOR. 

This new rate, known as the Secured Overnight 

Financing Rate, or “SOFR,” is based on transactions in the liquid market for overnight Treasury 

repurchase agreement transactions. Daily volumes 

in that market can exceed $700 billion, which is a 

level of trading activity that is expected to provide 

a stable and reasonably accurate reference rate for 

short-term lending. But, it is important to note that 

SOFR will not perfectly match LIBOR, and the 

impact of the transition from LIBOR to SOFR is 

highly dependent upon the specific contracts that 

utilize the reference rates.

The Commission has noted that a significant risk 

for many market participants—whether public 

companies or municipalities that have floatingrate obligations tied to LIBOR, or broker-dealers, 

investment companies or investment advisers that 

have exposure to LIBOR—is how to manage 

the transition from LIBOR to a new rate such as 

SOFR, particularly with respect to contracts that 

will still be outstanding at the end of 2021.163 The 

Federal Reserve estimates that there are approximately $200 trillion in notional transactions 

referencing LIBOR, more than $35 trillion of which 

would mature after 2021.164 Many legacy contracts 

have interest rate provisions referencing LIBOR 

that did not contemplate the permanent discontinuation of LIBOR and, as a result, there may be 

uncertainty over how to interpret the contracts.

The Commission has recognized that there are also 

risks related to the differences in the structure of 

SOFR and LIBOR that could impact how products 

perform in periods of stress.165 The existing LIBOR 

benchmark reflects both a risk free rate and an 

additional bank lending spread. SOFR is, however, 

an overnight rate that does not reflect a fluctuating 

bank funding spread. More work needs to be done 

to develop a SOFR term structure that will facilitate 

the transition from term-based LIBOR rates. 

Simply adding an additional fixed spread to SOFR 
22 | OFFICE OF THE INVESTOR ADVOCATE

would not fully incorporate the floating bank 

funding spread captured by LIBOR.

Accordingly, although these are risks that the 

Commission must monitor with the Federal 

Reserve, Treasury Department and other financial 

regulators, ultimately market participants must 

plan and act.166 Issuers should consider the risks 

presented by LIBOR’s expected discontinuation 

and keep investors informed about the progress 

towards risk identification and mitigation, and the 

anticipated impact on the company, if material. 

Funds that invest in instruments referencing 

LIBOR should consider how the discontinuation 

of LIBOR may impact the functioning, liquidity 

and value of these investments, whether any provisions need to be renegotiated, and whether any 

risks associated with LIBOR need to be disclosed 

to their investors. And brokers and central 

counterparties should consider how their customer 

business and their internal risk management could 

be impacted by the changes. 
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 23

OMBUDSMAN’S REPORT

As set forth in Exchange Act Section 

4(g)(8), 15 U.S.C. § 78d(g)(8), the 

Ombudsman is required to: (i) act as a 

liaison between the Commission and any retail 

investor in resolving problems that retail investors 

may have with the Commission or with selfregulatory organizations; (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.167

The Ombudsman is also required to “submit a 

semi-annual report to the Investor Advocate that 

describes the activities and evaluates the effectiveness of the Ombudsman during the preceding 

year” (Ombudsman’s Report).168The Ombudsman’s Report must be included in the semi-annual 

reports submitted by the Investor Advocate to 

Congress. To maintain reporting continuity, the 

Ombudsman’s Report included in the Investor 

Advocate’s June 30 Report on Objectives will 

describe the Ombudsman’s activities during the first 

six months of the current fiscal year and provide 

the Ombudsman objectives and outlook for the 

following full fiscal year. The Ombudsman’s Report 

included in the Investor Advocate’s December 

31 Report on Activities will provide a look back 

on the Ombudsman’s activities during the full 

preceding fiscal year. 

Accordingly, this Ombudsman’s Report provides 

a look back on the Ombudsman’s activities for 

the full fiscal year period from October 1, 2018 

through September 30, 2019 (Reporting Period) 

and discusses the Ombudsman’s outlook for Fiscal 

Year 2020. 

SERVICE BY THE NUMBERS

The Ombudsman169 assists retail investors— 

sometimes referred to as individual investors or 

Main Street investors—and other persons with 

concerns or complaints about the SEC or SROs 

the SEC oversees. The assistance the Ombudsman 

provides includes, but is 

not limited to:

§	listening to inquiries, 

concerns, complaints, 

and related issues;

§	helping persons 

explore available SEC 

options and resources;

§	clarifying certain SEC 

decisions, policies, 

and practices;

§	taking objective measures to informally resolve 

matters that fall outside of the established 

resolution channels and procedures at the SEC; 

and,

§	acting as an alternate channel of communication 

between retail investors and the SEC.
24 | OFFICE OF THE INVESTOR ADVOCATE

In practice, individuals often seek the Ombudsman’s assistance as an initial point of contact 

to resolve their inquiries or as a subsequent or 

ongoing point of contact when they are dissatisfied 

with the outcome, rate of progress, or resolution. 

At times, individuals request the Ombudsman’s 

assistance with things the Ombudsman does not 

do. For example, individuals may ask us to provide 

financial or legal advice, participate in a formal 

investigation, make binding decisions or legal 

determinations for the SEC, or overturn decisions 

of existing dispute resolution or appellate bodies.

The following graphic illustrates the standard 

lifecycle of what happens when investors or 

other interested persons contact the Ombudsman 

for assistance:

Figure 1: What Happens When You Contact the Ombudsman

START

END

We review 

your information, 

determine if you are a 

retail investor and if your 

matter concerns the SEC 

or a related SRO, and 

confirm that your 

matter is entered 

in OMMS. We review 

your matter in detail, 

including any related 

background information, 

laws, and policies.

The Ombudsman 

may contact you, 

SEC staff, and other key 

persons for more details 

on the matter. The 

Ombudsman will discuss 

your concerns about 

confidentiality, if any, 

at this point.

The Ombudsman 

and staff discuss 

your matter internally

 to determine the best 

options for resolution 

and to identify other 

resources that may 

be helpful to you.

The Ombudsman 

and staff may contact 

you to gather more 

information and to 

reply to any interim 

correspondence. This 

may occur several times 

as we work to resolve 

your matter.

The Ombudsman 

resolves your matter 

or provides options for 

you to consider. You may 

be informed that your 

matter was referred 

to another SEC division 

or office for further 

assistance or 

resolution.

We update 

your matter record 

accordingly. This 

provides the Ombudsman 

with easy access to your 

matter information 

should you have 

additional questions 

or concerns.
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 25

To respond to inquiries effectively and efficiently, 

the Ombudsman monitors the volume of inquiries 

and the staff resources devoted to addressing 

the particular concerns raised. The Ombudsman 

tracks all inquiries received by, or referred to, the 

Ombudsman, as well as all related correspondence 

and communications to and from Ombudsman 

staff. We track the status of the inquiry from its 

receipt to its ultimate resolution or referral, and 

we monitor the amount of staff engagement and 

resources that were utilized to respond to the 

inquiry. We maintain these types of records in order 

to identify and respond to problems raised, analyze 

inquiry volume and trends, and provide data-driven 

support for recommendations presented by the 

Ombudsman to the Investor Advocate for review 

and consideration.

Inquiry volume is counted in terms of matters 

and contacts. The initial contact—a new, discrete 

inquiry received by or referred to the Ombudsman 

—is the contact that creates a matter. When a 

matter is created, the Ombudsman reviews the 

facts, circumstances, and concerns, and assesses 

the staff engagement and resources that may be 

required to respond to, refer, or resolve the matter. 

Once a matter is created, it may generate subsequent contacts—related inquiries and communications to or from the Ombudsman staff deriving 

from the matter. These contacts often require 

further attention to answer additional investor 

questions, explain or clarify proposed resolution 

options, discuss issues with appropriate SEC or 

SRO staff, or respond to challenging or persistent 

communications from an investor. This system 

of counting matters and contacts helps the 

Ombudsman quickly assess volume and resource 

issues related to each matter. 

Data Across Primary Issue Categories

During the Reporting Period, retail investors, 

industry professionals, concerned citizens, and 

other interested persons contacted the Ombudsman 

for assistance on 1,480 matters covering 10 

primary issue categories: 

Figure 2: Matters by Primary Issue Category

October 1, 2018–September 30, 2019

SEC Questions / Complaints (375)

Non-SEC / Other Matters (340)

Allegations of Securities Law Violations / Fraud (319)

Securities Ownership (152)

Investment Products / Retirement Accounts (99)

SEC Investigation / Litigation / Enforcement Actions (60)

Securities Laws / Rules / Regulations / Procedures (46)

Atypical Matters (44)

Company Disclosures and Information (38)

FINRA Arbitration / Rules / Procedures (7)

25%

22%

7%

10%

0.5%

3%

4%

23%

3%

3%

In addition to the 1,480 matters received, we 

fielded 2,213 contacts covering 11 primary issue 

categories during the Reporting Period, for a total 

of 3,693 contacts. The chart that follows displays 
26 | OFFICE OF THE INVESTOR ADVOCATE

the distribution of the 3,693 total contacts by 

primary issue category:

Figure 3: Contacts by Primary Issue Category

October 1, 2018–September 30, 2019

Non-SEC / Other Matters (971)

SEC Questions / Complaints (872)

Allegations of Securities Law Violations / Fraud (767)

Securities Ownership (338)

Investment Products / Retirement Accounts (228)

SEC Investigation / Litigation / Enforcement Actions (168)

Securities Laws / Rules / Regulations / Procedures (109)

Atypical Matters (98)

Company Disclosures and Information (88)

FINRA Arbitration / Rules / Procedures (52)

SRO Rules / Procedures (2)

26%

21%

6%

9%

0.5%

3%

5%

24%

2%

3%

1%

How the Numbers Inform Our Efforts

The Ombudsman tracks matter and contact data to 

maintain a comprehensive view of the allocation of 

staff resources and to identify matters and contacts 

that significantly alter workflow volumes, call 

for the realignment of Ombudsman staff assignments, or require added staff support to manage 

effectively. The data also informs staff resource 

allocation considerations related to proposed 

program development, training, and outreach 

efforts. By tracking the distribution of matters and 

contacts across primary issue categories, the data 

helps the Ombudsman identify potential areas of 

concern or interest and enables the Ombudsman 

to act as an early warning system, as necessary, 

to alert agency leaders about the number and 

potential impact of particular issues and concerns 

raised by retail investors and others. 

To bring this into perspective, all of the activities

and initiatives covered in this Ombudsman’s 

Report, including the review, responses, and 

recordkeeping for the 3,693 contacts fielded during 

this Reporting Period, were led and completed by 

the Ombudsman and one attorney-adviser on detail 

from another SEC division, along with support 

from one contract law clerk for six months and 

one contract paralegal for four months. From FY 

2015 through the end of FY 2019, at peak staffing 

levels, the Ombudsman team was comprised 

of the Ombudsman, one full-time attorneyadviser, one contract attorney, and one contract 

paralegal—and these staffing levels have fluctuated 

from time to time. The total number of matters 

and contacts received and responded to by the 

Ombudsman since FY 2015, the first full fiscal year 

of Ombudsman operations, grew from 727 in FY 

2015 to 3,693 matters and contacts in FY 2019, an 

increase of 407.9 percent. 

Figure 4: 9,140 Total Contacts

Fiscal Year 2015–Fiscal Year 2019

6,264 Contacts

2,876 Matters

0

1,000

2,000

3,000

4,000

228

499

1,224

222 226

1,105

1,494

449

2,213

1,480

FY 2015

727

FY 2016

1,446

FY 2017

1,331

FY 2018

1,943

FY 2019

3,693
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 27

SERVICE BEHIND THE NUMBERS

While the matter and contact data quantify the 

volume and categories of inquiries the Ombudsman 

receives, the data does not capture the full value 

of the service the Ombudsman provides to the 

investing public. Among the most common 

problems and concerns investors bring to the 

Ombudsman are those where the investors are 

unfamiliar with the existing channels established to 

resolve the particular concerns they raise, unsure 

which resolution channel to use, or unable to 

get the specific outcome they want through the 

resolution channels available. Typically, investors 

who are unfamiliar with or unsure of the available 

resolution channels will thoughtfully consider the 

advantages and disadvantages of the resolution 

options the Ombudsman presents, and establish 

their expectations based upon the potential 

outcome each option offers. For these investors, the 

Ombudsman serves a valuable resource function, 

but the investor retains responsibility for choosing 

how to proceed based on the resources the 

Ombudsman presents.

Numerous investors contacted the Ombudsman from late December 2018 through late January 2019 while 

the SEC was closed due to the partial federal government shutdown. Although the Ombudsman was unable 

to respond to routine investor matters during that time, the Ombudsman monitored all investor inquiries on 

a regular basis. Many investors submitted questions and concerns relating to potential advance fee fraud 

schemes during the shutdown. Advance fee fraud generally involves a request for personal information and 

a fee to be paid up front—in advance of receiving any proceeds, money, stocks, or warrants—to complete a 

transaction. After the investor pays the advance fee, the soliciting person or entity may break off contact. 

In the end, the proposed transaction or settlement does not take place, and the investor is never paid and 

never recovers the fees paid in advance. Given the limited SEC staff available during the shutdown and the 

time sensitive nature of this type of fraud, the Ombudsman personally responded to each of these investors and provided information and resources to help these investors avoid becoming victims of advance fee 

fraud scams.

Investors who want a particular outcome or 

believe that the Ombudsman is permitted to do 

whatever they request can be more challenging to 

assist. The Ombudsman routinely receives requests 

from investors who want the Ombudsman to, for 

example, automatically grant them SEC whistleblower status and provide monetary awards, 

reveal confidential information relating to SEC 

investigations, stop a publicly traded company 

from taking certain corporate actions, prosecute a 

particular broker or investment adviser, overturn an 

arbitration decision, or terminate specific SEC or 

SRO personnel. At times, they resist the Ombudsman’s efforts to engage in a productive dialogue 

and conclude that the only acceptable outcome is 

the particular outcome they want.

The vignettes that follow give a sense of the variety 

of issues addressed by the Ombudsman from FY 

2015 through FY 2019. Collectively, they offer 

a closer look at the how the Ombudsman’s time, 

effort, and commitment provide a meaningful 

service to investors and other interested persons, 

and demonstrate the value of the one-on-one 

interactions with Main Street investors work more 

effectively than the numbers alone.
28 | OFFICE OF THE INVESTOR ADVOCATE

After a breakout session at the SEC Town Hall in Atlanta, Georgia, an investor asked the Ombudsman about 

a matter he submitted to the SEC many months prior. After discussing the matter with the investor, the 

Ombudsman also took a few moments to personally introduce the investor to the SEC Chairman and other 

senior staff in attendance. Back at SEC headquarters, the Ombudsman liaised with colleagues in several SEC 

divisions and offices to coordinate a conference call with the investor to discuss his matter in detail. The investor was extremely satisfied with the time and attention he received from senior SEC staff and with the resolution of his concerns.

An elderly investor was referred to the Ombudsman for assistance in replacing lost physical stock certificates. The investor spoke with the Ombudsman for more than 30 minutes about his investments over the 

years and his age-related mobility issues. At the end of the call, the investor stated that he truly appreciated 

having someone to talk to about his concerns.

A number of retail investors repeatedly contacted the Ombudsman to complain about how the SEC handled 

social media posts relating to a publicly traded company’s business and financial outlook. The investors 

alleged that, by not shutting down the social media accounts or preventing specific persons from posting 

statements, the SEC was harming, rather than protecting, the investors. Furthermore, the investors feared that 

the SEC’s pending enforcement actions, coupled with the ongoing social media posts, would negatively affect 

the value of their shares. The investors demanded that the Ombudsman either stop the social media posts or 

stop the SEC’s pending enforcement actions.

A small business owner contacted the Ombudsman to complain about a request for proposal and related 

documents she received from the SEC Office of Acquisitions. Upon review, the Ombudsman realized that 

the business owner was contacted by someone impersonating SEC staff, and confirmed with the Office of 

Acquisitions that the request for proposal was a fraud. The Ombudsman subsequently contacted the business 

owner to advise her not to respond to the fraudulent proposal, and also provided her with additional resources relating to the SEC contracting process.

The Ombudsman was contacted by another SEC office to assist an investor entitled to receive funds 

obtained in an SEC enforcement action against a fraudster who preyed on unsophisticated investors. The 

Ombudsman recognized that the investor needed to act quickly to remain eligible to receive a portion of 

the distributed funds. The Ombudsman spoke with the investor, provided an overview of the distribution 

process, and connected the investor with SEC Division of Enforcement staff and the distribution agent in 

time to preserve his eligibility.

A concerned son-in-law sought the Ombudsman’s help. His elderly mother-in-law lost her entire life’s savings due to the unscrupulous practices of her investment adviser, and the family was waiting for funds to 

be returned to her and the other harmed investors through a fair fund distribution. The son-in-law felt that 

the money the adviser paid to satisfy the SEC disgorgement penalty was money that rightfully belonged to 

the harmed investors. Consequently, he felt that the SEC was exacerbating the harm by not returning the 

disgorged funds to the investors. The Ombudsman explained why, in this case, the disgorged funds were not 

returned to the investors. While disappointed with the outcome, he expressed appreciation that the Ombudsman took the time to personally return his call and discuss his concerns.
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 29

Our interactions with investors provide insight 

into the information investors rely upon and the 

assistance they want when making investment 

decisions. The tailored information and responses 

the Ombudsman provides to investors are unique 

and require a high degree of securities law analysis 

and expertise, conflict resolution skills, diplomacy, 

and judgment. Even when the information or 

response communicated to an investor appears 

simple, the threshold questions and considerations 

required to understand the inquiry and to identify 

next steps, SEC staff resources, and potential policy 

implications necessitate having staff with a level of 

securities law knowledge typically gained through 

several years of prior industry experience. When 

our interactions with investors highlight their lack 

of information or gaps in their understanding, we 

attempt to deliver personalized, straightforward 

service by communicating the information 

necessary to help investors better understand the 

solutions the SEC can provide, by liaising with 

the appropriate persons and entities, and by 

empowering and equipping investors to make 

well-informed decisions. 

STREAMLINED COMMUNICATIONS 

WITH RETAIL INVESTORS

The Ombudsman Matter Management System 

(OMMS) is an electronic platform for receiving 

inquiries, as well as tracking and analyzing matter 

and contact information, while ensuring all 

necessary data management, confidentiality, and 

reporting requirements are met. The OMMS Form, 

a web-based, mobile friendly form permitting the 

submission of inquiries, complaints, and documents 

directly to the Ombudsman, guides the submitter 

through a series of questions specifically tailored 

to elicit information concerning matters within the 

scope of the Ombudsman’s function. In addition, 

the OMMS Form allows submitters to easily 

upload and submit related documents for staff 

review. For any persons who do not wish, or are 

unable, to use the OMMS Form, they may still 

contact the Ombudsman by email, telephone, fax, 

and mail.

When an OMMS Form is submitted, OMMS 

automatically creates a matter record. The 

Ombudsman also manually creates an OMMS 

matter record for each inquiry received by 

telephone, email, or other means outside of the 

OMMS Form. Once an OMMS matter record 

is created, the Ombudsman and staff can review 

the matter details, track all related contacts and 

correspondence, update matter comments, and 

communicate with the investor via the OMMS 

platform. OMMS also allows the Ombudsman 

and staff to search and analyze matters and 

contacts by submitter, primary issue, fiscal year, 

and a number of other categories, and review 

data and customize specific reports when a 

deeper examination is required. 

The Ombudsman worked with the SEC Office of 

Public Affairs (OPA) during the Reporting Period 

to create a stronger public presence on the SEC’s 

www.sec.gov home page and on the SEC’s social 

media channels to better inform the public about 

the role of the Ombudsman and the resources 

the Ombudsman provides. For example, a 

button linking to the www.sec.gov/Ombudsman

web page and OMMS Form is available on the 

www.sec.gov homepage. Another web-based 

effort, “Q&A with the SEC Ombudsman,” now 

available on the Ombudsman web page, was 

featured as an SEC Spotlight topic on the 

www.sec.gov home page for several weeks, and 

was posted on the SEC News Twitter account. 

The Ombudsman also worked with the technology 

contractor to make some back office improvements to OMMS to enable the Ombudsman staff 

to enter and update matter and contact data with 

enhanced efficiency. The technology contractor 

also created excellent custom solutions and report 

options for the Ombudsman’s use in response to 

specific recordkeeping and reporting needs that 

arose during the Reporting Period. OMMS and 

the OMMS Form have proven so useful and well 

received that several SEC staff, and ombudsmen 

from other state and federal agencies and 

organizations, asked the Ombudsman to provide 
30 | OFFICE OF THE INVESTOR ADVOCATE

overviews and demonstrations on the creation and 

functionality of OMMS and the OMMS Form.

As a result of our ongoing efforts to streamline 

and enhance communications with retail investors 

during FY 2019, we received 791 new matters 

submitted via the OMMS Form, representing 

53.4 percent of the 1,480 new matters received 

during FY 2019. As a comparison, during FY 

2018, the first full fiscal year the OMMS Form 

was available to the public, we received 164 

new matters submitted via the OMMS Form, 

representing 36.5 percent of the 449 new matters 

received during FY 2018. The Ombudsman will 

continue to encourage persons to submit their 

inquiries via the OMMS Form, closely monitor 

questions and suggestions relating to the OMMS 

Form, and work with OIT, the technology 

contractor, and OPA to enhance the OMMS user 

experience and the Ombudsman-related information and resources available to the public. 

STANDARDS OF PRACTICE

Any retail investor with an issue or concern 

related to the SEC or an SRO subject to SEC 

oversight may contact the Ombudsman. The 

Ombudsman is available to identify existing 

SEC options and resources to address issues or 

concerns, and to explore informal, objective steps 

to address issues or concerns that may fall outside 

of the agency’s existing inquiry and complaint 

processes. Similar to ombudsmen at other federal 

agencies, the Ombudsman follows three core 

standards of practice:

CONFIDENTIALITY IMPARTIALITY INDEPENDENCE

The Ombudsman has established 

safeguards to protect confidentiality, 

including the use of OMMS, a separate 

email address, dedicated telephone 

and fax lines, and secure file storage. 

The Ombudsman generally treats 

matters as confidential, and takes 

reasonable steps to maintain the 

confidentiality of communications. The 

Ombudsman also attempts to address 

matters without sharing information 

outside of the Ombudsman staff, 

unless given permission to do so. 

However, the Ombudsman may 

need to contact other SEC divisions 

or offices, SROs, entities, and/or 

individuals and share information 

without permission under certain 

circumstances including, but not 

limited to: a threat of imminent risk or 

serious harm; assertions, complaints, 

or information relating to violations 

of the securities laws; allegations of 

government fraud, waste, or abuse; or 

if otherwise required by law.

The Ombudsman does 

not represent or act as an 

advocate for any individual 

or entity, and does not take 

sides on any issues. The 

Ombudsman maintains a 

neutral position, considers 

the interests and concerns 

of all involved parties, 

and works to resolve 

questions and complaints 

by clarifying issues and 

procedures, facilitating 

discussions, and identifying 

options and resources.

By statute, the Ombudsman 

reports directly to the 

Investor Advocate, who 

reports directly to the 

Chairman of the SEC. 

However, the Office of the 

Investor Advocate and the 

Ombudsman are designed 

to remain somewhat 

independent from the rest 

of the SEC. Through the 

Congressional reports filed 

every six months by the 

Investor Advocate, the 

Ombudsman reports directly 

to Congress without any 

prior review or comment 

by the Commission or other 

Commission staff.
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 31

The Ombudsman’s Challenge

The mission statement of the SEC is to “protect 

investors, maintain fair, orderly, and efficient 

markets, and facilitate capital formation.”170At 

the center of many complaints the Ombudsman 

receives is a misunderstanding about the SEC’s 

relationship and obligations to individual investors 

because of the “protect investors” language in the 

mission statement. In these situations, investors 

frequently assume the purpose for SEC investigations and enforcement actions is to address 

their specific allegations or protect their specific, 

individual interests. While the SEC’s enforcement 

actions may at times align with the personal 

interests of harmed investors, the SEC does not 

pursue investigations and enforcement actions 

solely to represent a specific investor’s particular 

legal interests or to recover money a particular 

investor may have lost. 

Another frequent complaint from investors 

surrounds the “We are the Investor’s Advocate” 

language and similar messaging found on the 

www.sec.gov website and in other materials used 

across the agency. Investors regularly express 

confusion and disappointment when they are 

informed that the grammatically correct interpretation of “the investor’s”—as a singular possessive 

noun—is not what is meant by the language, and 

that the SEC is not the advocate for a particular 

investor or for an investor’s specific interests 

or needs. Rather, the SEC advocates for—or 

supports—the collective interests of all investors 

and the public by maintaining fair, orderly, and 

efficient capital markets through the enforcement 

of the federal securities laws. 

A primary question we encounter is, then, what can 

the Ombudsman do for investors who have been 

harmed by violations of the federal securities laws? 

In appropriate circumstances, the Ombudsman 

may be able to present options to investors or 

foster communications between the investor and 

SEC or SRO staff. However, the Ombudsman is 

not authorized to do many things that investors 

request, including:

§	deciding the facts in a dispute that the investor 

has with the Commission or an SRO, or in a 

dispute before an SRO, such as an arbitration 

or mediation;

§	intervening on behalf of, or representing the 

interest of, an investor in a formal dispute or 

investigation process;

§	providing advice on how the federal securities 

laws may impact their particular investments or 

legal options; or

§	changing formal outcomes, including decisions 

about whether to investigate an allegation of 

wrongdoing, settle an enforcement action, or 

create a Fair Fund.

With these limitations in mind, the Ombudsman 

routinely explains to investors that they have the 

ability to protect their interests and preserve their 

legal rights in ways that the Ombudsman cannot. 

For example, an investor can file an arbitration 

or mediation complaint with FINRA to address 

a broker dispute, or hire private legal counsel to 

advise the investor on the best ways to protect the 

investor’s rights or reach a particular outcome. 

Investors who do not have the means to hire 

legal counsel may want to request representation 

through no-cost legal clinics sponsored by various 

law schools.

While the Ombudsman staff cannot represent the 

interests of investors in private disputes, we do 

serve these investors by providing information that 

will assist them in making better informed choices 

for themselves. 

Assisting Investors through Advocacy

Even when we cannot help investors achieve the 

specific results they desire, the concerns we hear 

from investors help to shape the policy agenda of 
32 | OFFICE OF THE INVESTOR ADVOCATE

the Office of the Investor Advocate. We also engage 

with those who represent investors, including law 

school investor advocacy clinics, to gain a deeper 

understanding of potential legal and structural 

barriers encountered by investors. 

To retail investors, FINRA is perhaps the most 

well-known SRO under SEC oversight. FINRA 

operates BrokerCheck171 and a dispute resolution 

forum,172 both of which are commonly used by 

retail investors. As discussed in prior reports, the 

Ombudsman closely follows FINRA’s rulemaking 

and dispute resolution forum activities that may 

have a direct and significant impact on retail 

investors. We also look for ways to improve SEC 

or SROs processes and regulations for the collective 

benefit of investors, and we advocate for those 

types of reforms. Selected areas of interest and 

importance to retail investors are discussed below. 

AREAS OF INTEREST AND 

IMPORTANCE TO RETAIL INVESTORS

Restricted Firms and Broker Migration

In our Report on Objectives for Fiscal Year 2020, we 

discussed FINRA Regulatory Notice 19-17173 and 

Proposed Rule 4111—Restricted Firm Obligations, 

which would authorize FINRA to implement 

financial restrictions and other conditions on certain 

unsafe members.174 The proposed rule focuses on 

firms that have histories of misconduct and those that 

employ a high concentration of brokers with such 

histories.175 Under the proposed rule, FINRA would 

disincentivize these members from hiring or retaining 

bad brokers by imposing a soft cap on risk.176

Specifically, Proposed Rule 4111 introduces a 

multi-step process by which firms exceeding 

a certain risk threshold for broker or member 

misconduct are subject to sanctions by FINRA. 

For purposes of the proposed rule, risk is calculated 

by assigning point values to various categories 

of misconduct.177 Firms that score higher than 

the allowable threshold would be provided an 

opportunity to explain why they should not be 

sanctioned.178 Alternatively, firms may conduct a 

one-time reduction in staff in order to shed risk.179

Firms that do not take these steps, or are 

unsuccessful in doing so, will be designated as 

“restricted firms” and may be required to make 

deposits of cash or qualified securities into a 

restricted deposit account.180 These deposits may 

not be withdrawn without prior written consent 

by FINRA.181 In addition, restricted firms may be 

subject to unspecified additional conditions and 

restrictions at FINRA’s discretion.182

During the Reporting Period, we reviewed 

Regulatory Notice 19-17 and the public comment 

file.183 In general, investors and their advocates 

noted four areas of concern relating to Proposed 

Rule 4111. First, the proposed rule suggests that it 

may help address the problem of unpaid arbitration 

awards.184However, the proposed rule does not 

explicitly state whether, and if so, how, restricted 

deposit amounts may be used to satisfy unpaid 

arbitration awards. As such, additional clarification 

on how the proposed rule may solve the unpaid 

arbitration award problem may be beneficial.

Second, the proposed rule grants FINRA discretion 

whether to impose sanctions on restricted firms. To 

the extent that sanctions are imposed, the proposed 

rule does not specify minimum or maximum 

deposit amounts, nor does it define the additional 

conditions and restrictions that may be levied by 

FINRA instead of, or in addition to, the deposit 

requirement. This unbounded regulatory discretion 

may have a deterrent effect that undermines the 

confidence of retail investors. Additional guidance 

on FINRA’s discretion, including how restricted 

deposit amounts will be determined, may also 

be beneficial. 
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 33

Third, several commenters argued that restricted 

firms should be publicly disclosed. The notion 

that investors might unwittingly invest with firms 

deemed the worst of the worst is an unacceptable, 

yet predictable outcome if these restricted firms 

are not publicly identified. Increased disclosure of 

broker risk data,185 including publicly identifying 

firms with dangerous concentrations of risky 

brokers, is information that may prove beneficial 

to retail investors. 

Fourth, some commenters expressed disappointment 

that the preliminary criteria for identification under 

the proposed rule were not specific, and that only 

a very small number of firms would satisfy the 

preliminary criteria.186

As FINRA considers whether to submit a proposed 

rule to the Commission for approval, we trust 

that FINRA will consider the comments provided 

during the public comment process by investor 

advocacy groups. With some modifications, the 

rule could serve as a positive step to limit the ability 

of bad brokers to repeatedly find employment 

at new firms by dissuading, and sanctioning, if 

necessary, those firms most likely to take them in. 

Unpaid Arbitration Awards

As discussed above and in prior Reports187, FINRA 

has issued multiple regulatory notices for comment 

related to bad brokers and bad firms.188 In this 

regard, commenters for and against Proposed 

Rule 4111189 expressed support for the creation 

of a FINRA restitution fund to satisfy unpaid 

arbitration claims.190 As discussed in our Report 

on Activities for Fiscal Year 2018,191 there are 

numerous other potential remedies available as 

well.192 We look forward to FINRA filing proposed 

rules that address the problem of unpaid arbitration 

awards and that provide viable solutions.

Investor Advocacy Clinic Funding and 

Recent Clinic Closures

As previously discussed in our Report on Objectives for Fiscal Year 2019, the law school investor 

advocacy clinics193 were started in 1997 to address 

concerns expressed in town halls by small retail 

investors.194 In response to these concerns, then 

Chairman Arthur Levitt announced the creation 

of pilot arbitration clinics at two New York-area 

law schools.195 A fifteen-year period of expansion 

followed during which investor advocacy clinics 

were launched at law schools across the country. 

These clinics were funded by a variety of sources 

including state securities fraud enforcement cases,196

state securities commissions,197 and FINRA’s 

Investor Education Foundation (Foundation), the 

largest single source of clinic grant start-up funds.198

At their peak, twenty-two investor advocacy clinics 

were in operation nationally.199 However, since 

2012, there have been no additional start-up grants 

from the Foundation to help launch new clinics. 

Similarly, securing other funding sources to sustain 

the operations of existing clinics has also been a 

challenge. As a result, the number of clinics has 

dwindled to critical levels. There are currently only 

fourteen active clinics remaining,200 as two clinics 

closed during this Reporting Period.201

Main Street investors bear the brunt of each clinic 

closure. These clinics are often the only hope for 

retail investors who need to pursue small, but 

actionable, claims, those without the means to 

retain counsel, and those that cannot retain legal 

counsel due to the small dollar amount in dispute. 

For example, due to recent closures, there are no 

longer any investor advocacy law school clinics 

in Georgia or upstate New York to assist retail 

investors. When law school clinics close, many 

investors are left without affordable access to 

representation.202 When clinics are unable to secure 
34 | OFFICE OF THE INVESTOR ADVOCATE

adequate funding, they are forced to reduce the 

number of investor cases they take on, and in some 

cases, decline investor cases altogether. The scope 

of investor outreach and education they are able to 

provide to their local communities suffers as well.

In March 2018, the SEC Investor Advisory 

Committee (IAC) recommended several steps to 

address the funding crisis threatening investor 

advocacy clinics.203 The IAC recommendations 

included, among others, the creation of a matching 

grant program to fund the clinics through a 

combination of federal and clinic-sourced funds,204

appropriation of certain fines and monetary 

penalties levied by FINRA against its members,205

and legislative action authorizing the use of the 

SEC Investor Protection Fund to support law 

school clinics. 

As the agency continues its focus on Main Street 

investors, immediate and creative problem solving 

is needed from regulators, legislators, and the 

industry to address the urgent funding needs 

of investor advocacy clinics. The Ombudsman 

continues to support the recommendations made 

by the IAC and welcomes the opportunity to work 

with the Commission and others to explore viable 

ideas to fund existing and proposed clinics to ensure 

that as many retail investors as possible have access 

to competent, affordable legal representation. 

Law School Clinic Outreach Program

As discussed in prior Ombudsman’s Reports, we 

launched the Law School Clinic Outreach Program 

(LSCOP) to complement our statutory mandate 

and core functions. One goal of LSCOP was, and 

remains, the exchange of information and ideas 

between the law school investor advocacy clinics 

and SEC staff. In their unique role as counsel 

to retail investors with small claims or limited 

incomes, clinics are privy to valuable information 

about the real world causes and consequences of 

bad market conduct and risky investment products. 

In practice, clinics are uniquely poised to see issues 

that confront retail investors from a perspective 

unavailable to SEC staff. 

Over the past five years, the hallmark of LSCOP 

has been its flexibility and dynamism. The 

program has joined clinic directors and their law 

students with SEC staff in a variety of settings to 

discuss the challenges facing retail investors. These 

interactions typically occur multiple times each 

year—during clinic visits to the SEC which are 

hosted by the Ombudsman and during site visits 

by the Ombudsman to the clinics or to clinicsponsored events.206

These in-person exchanges supplement the more 

frequent and informal communications between the 

Ombudsman and the clinic directors. This ongoing 

dialogue ensures that when important information 

gathered by the clinics needs to be brought to the 

attention of SEC staff, it is not only received in a 

timely manner, but is also provided to the appropriate SEC staff for review.

During this fiscal year, the Ombudsman took significant steps to strengthen the Office’s relationship 

with the clinics by hosting the first ever SEC 

Investor Advocacy Clinic Summit (the Summit), 

discussed below. The Summit marked an important 

LSCOP milestone and provided an exceptional 

opportunity to draw a greater depth and breadth 

of information from the various clinical practices 

during a single event. 

SEC Investor Advocacy Clinic Summit

As briefly noted in the Report on Objectives 

for Fiscal Year 2020, the Ombudsman and 

staff devoted considerable time and resources 

to launch the inaugural SEC Investor Advocacy 

Clinic Summit, held on April 4, 2019 at 

SEC headquarters.207
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 35

Pre-Summit Planning

The Summit was designed as an opportunity for 

clinics from across the country to gather at SEC 

headquarters to participate in collaborative sessions 

with senior SEC staff and share ideas and perspectives on issues of importance to retail investors 

across the country. While several clinics have 

visited the SEC and met with staff members in the 

past, those hosted visits did not include structured 

working sessions with SEC staff. In contrast, the 

Summit was a first-of-its-kind opportunity for the 

students of the various clinics to work with each 

other and with SEC attorneys on behalf of Main 

Street investors. Despite a compressed planning 

schedule due to the weeks the agency was closed 

due to the partial government shutdown, the 

Ombudsman and staff contacted each clinic to 

preliminarily assess levels of interest and areas 

of expertise; coordinated participation by SEC 

Commissioners, senior SEC staff attorneys, and 

senior representatives from FINRA and NASAA; 

and resolved myriad other substantive and logistical challenges.208 When the Summit convened, 

nearly 100 attendees, speakers, and participants, 

including 10 investor advocacy clinic directors and 

over 50 law students, were present.

The Summit—Morning Session 

The Summit began with introductory remarks 

from several speakers, including SEC Commissioner Robert Jackson, the Investor Advocate, 

the Ombudsman, and Gerri Walsh, senior vice 

president of investor education at FINRA and 

president of the FINRA Foundation.209 The 

speakers discussed their unique roles and responsibilities relating to retail investors, and shared real 

world examples of the value and importance of the 

services provided by the clinics. The speakers also 

answered questions about careers in the securities 

industry, provided an overview of the day’s events, 

and expressed appreciation for the clinics traveling 

to the SEC to participate in this first-ever Summit. 
36 | OFFICE OF THE INVESTOR ADVOCATE

The Summit—Breakout Sessions

Following the morning remarks, the clinic participants moved to one of three breakout sessions 

focused on a substantive topic relevant to the 

Division of Corporation Finance, the Division 

of Investment Management, or the Division of 

Trading and Markets.210As breakout session 

preferences were selected by the clinics in advance 

of the Summit, clinic participants were able to 

develop, research, and test ideas before arriving 

at the SEC, and then engage in enthusiastic and 

nuanced debates on the merits of various potential 

solutions to problems facing retail investors during 

the sessions.

Breakout Session Summary 

Private Placements 

and the Accredited 

Investor Definition 

The breakout session focused on the accredited investor definition and 

retail investor participation in private placement offerings. Clinics discussed, 

as a threshold policy question, how federal regulators should balance 

the desire by some Main Street investors for expanded access to private 

investment opportunities against the need to protect unsophisticated 

investors from risky private offerings. The group discussed the relative 

merits of various investor sophistication standards and the efficacy of an 

accredited investor definition based on comprehensive investor testing, 

such as actual knowledge versus imputed knowledge, and wealth tests. In 

a related inquiry, the clinics also examined the degree to which investor 

sophistication is fluid and subject to change over time, and the feasibility of 

enhanced third-party assistance for unsophisticated investors.

The Fund Retail 

Investor Experience 

and Variable Annuities 

The breakout session focused on the experiences of retail investors who 

purchase funds and variable annuities. Clinic participants contemplated 

how and when regulators may best ensure that individual investors receive 

sufficient information to make informed investment decisions without 

being overwhelmed. The participants also explored the practical disparities 

relating to access to information and discussed alternatives means of 

disclosure. For example, the law students expressed interest in a future 

regulatory model that incorporates multimedia alternatives to traditional 

text-based disclosures. Participants also discussed the prevalence of 

bad brokers selecting unsuitable investments—including risky funds and 

complex variable rate annuities—for investors of limited means.

Combating Retail 

Investor Fraud 

The breakout session focused on retail investor fraud victims represented 

by the clinics and policy choices that might better protect victims in 

the future. Among the topics raised by the clinics were investor “speed 

bumps” to slow transaction times and add a buffer for additional 

deliberation and, if necessary, cancellation by investors, and the inclusion 

of additional legends on broker-dealer forms to identify investor-specific 

risks, such as instructions to provide a client with additional supervision, or 

cautionary red flags for high risk products. The clinics also examined ways 

in which the inability to assess levels of appropriate financial literacy may 

make many retail investors easy prey for fraudsters.
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 37

The breakout sessions were designed to encourage 

open and direct dialogue between clinic participants and SEC staff. The sessions also encouraged 

clinic participants to grapple with pertinent 

topics on the regulatory horizon. Each breakout 

discussion was spirited and robust, in significant 

part because clinic participants were keenly aware 

that the matters at issue involved difficult real 

world policy considerations, and not abstract or 

theoretical practice exercises. For example, in the 

months following the Summit, the Division of 

Corporate Finance published a concept release on 

the harmonization of private exemptions,211 and the 

Commission adopted a proposal by the Division 

of Trading and Markets and the Division of 

Investment Management establishing new fiduciary 

standards for broker-dealers.212

The Summit—Afternoon Session 

During the afternoon session, Summit attendees 

heard from additional speakers from the SEC and 

other industry groups, including SEC Commissioner Elad Roisman, Charu Chandrasekhar, SEC 

Assistant Regional Director and chief of the SEC 

Retail Strategy Task Force, Rick Berry, FINRA’s 

executive vice president and director of dispute 

resolution, and Joseph Brady, executive director 

of the North American Securities Administrators 

Association (NASAA).213 In addition to their 

remarks, the speakers also welcomed questions 

and comments from the law students and clinic 

directors on topics ranging from SEC internship 

opportunities to targeted outreach specifically 

created for retail investors.
38 | OFFICE OF THE INVESTOR ADVOCATE

The remainder of the afternoon was reserved 

for student-led presentations on various topics 

relating to securities regulation and retail investor 

concerns.214The Ombudsman did not select or 

vet the presentation topics; instead, clinics were 

asked to present on areas in which they could 

provide unique or pertinent perspectives to SEC 

staff gained from their experiences representing 

their clients. 215 The presentation topics included 

the customer relationship summary form, referral 

arrangements, the fiduciary duty standard for 

broker-dealers, investor outreach education, the 

frequency of errors in customer account profiles, 

and investor empowerment. In each case, the 

clinics presented careful insights on the needs and 

concerns of retail investors and then responded to 

questions and comments from their clinic peers and 

SEC, FINRA, and NASAA staff in attendance.

The Summit—Feedback and Impact 

In the days following the Summit, the Ombudsman 

received extensive positive feedback from attendees, 

including the excerpts below:

The opportunity to meet Commissioners, lead 

counsels and other high-ranking SEC officials was 

invaluable. I particularly enjoyed the breakout 

sessions, where we heard from agency counsel and 

learned about the SEC’s complex decision-making 

process. Sharing experiences with other clinics was 

very interesting as well. I was surprised to hear that 

immigrant communities are being targeted not only 

for affinity fraud, but for the sale of unsuitable and 

risky financial products. 

— Student, St. John’s University School 

of Law Securities Arbitration Clinic

The event was truly unique and informative, while 

also allowing us, the students, to be heard by SEC 

staff who make a real difference. 

— Student, Benjamin N. Cardozo School 

of Law Securities Arbitration Clinic

The SEC organized an impressive and extremely 

educational experience for its first ever clinic 

summit! I really enjoyed the opportunity to meet 

key leaders in the field, and discuss how pending 

regulations will affect our clients in the clinic 

and their ability to manage their own accounts. 

Additionally, the opportunity to converse with 

other clinics from across the country and compare 

experiences was extremely valuable as it validated 

the work that we are all doing, and gave insights for 

other potential avenues that our clinic could explore 

in managing its casework.

— Student, St. John’s University School 

of Law Securities Arbitration Clinic

We really enjoyed the event—it was very well done. 

The students thought it was the highlight of their law 

school careers and are still talking about how lucky 

they were to share their thoughts with policymakers. 

Thanks for all you do with the clinics! 

— Professor Nicole Iannarone, Director, 

Investor Advocacy Clinic, Georgia State 

University College of Law

Thank you for setting up such an amazing 

opportunity for my students. They were 

overwhelmingly satisfied with the day, calling it ‘by 

far the most memorable law school experience,’ 

‘a fantastic experience, both educationally and 

professionally,’ ‘invaluable,’ ‘one of the best 

experiences I have had so far in law school,’ and 

‘impressive and extremely educational.’

— Professor Christine Lazaro, Director, 

Securities Arbitration Clinic, St. John’s 

University School of Law 

My students could not stop talking about the 

wonderful experience they had at the SEC! In 

addition to providing the Investor Advocate and 

others at the SEC with feedback about what clinics 

are seeing on the street, it provided them with an 

opportunity to meet two of the Commissioners, 

others at the SEC, FINRA and, of course, each 

other. We hope that the office will do this again. 

— Professor Teresa Verges, Director, University of 

Miami School of Law Investor Rights Clinic
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 39

Given the tremendous success of the Summit, 

we anticipate developing similar events and 

programming as part of the continued growth 

of the Law School Clinic Outreach Program. 

OUTREACH ACTIVITIES

During the Reporting Period, in addition to the 

Summit, the Ombudsman continued to seek out 

opportunities to increase awareness and elevate the 

visibility of the services the SEC provides to retail 

investors. These opportunities included participation in the following ombudsman and securities 

industry events, professional conferences, and 

outreach activities.

§	American Bar Association Section of 

Dispute Resolution—Ombuds Subcommittee 

monthly meetings 

§	Coalition of Federal Ombudsmen 

monthly meetings

§	Federal Financial Ombudsmen Working Group 

quarterly meetings

§	Northeast Ombudsmen Working Group 

quarterly meetings

§	Coalition of Federal Ombudsmen 

Annual Conference

§	American Bar Association Section of Dispute 

Resolution—Annual Spring Meeting

§	International Ombudsman Association 

Annual Conference

§	Securities Arbitration Clinics Annual 

Roundtable

§	Corporate Counsel Women of Color 

Annual Conference

§	International Network of Financial Services 

Ombudsmen Schemes Annual Conference

§	SEC-hosted visit and panel discussions for the 

George Washington University School of Law 

Securities Seminar students 

§	On site visit, Legal Analytics Presentation on 

FINRA Research, Georgia State University 

College of Law, Investor Advocacy Clinic and 

Legal Analytics and Innovation Initiative 

§	Panelist, Women as Regulators in the 

Securities Industry, Women and Corporate 

Governance Conference, the George 

Washington University School of Law and 

George Washington Law Review

§	Featured Presenter, Federal Chapter Session, 

United States Ombudsman Association 

Annual Conference

OUTLOOK FOR FISCAL YEAR 2020

As Ombudsman, I bridge a unique gap. Among 

my duties, I am required to both field complaints 

directly from retail investors about the SEC or 

the SROs we oversee, and serve as a liaison to 

help resolve those complaints. Analyzing those 

complaints and relaying pertinent, actionable 

information to SEC staff tasked with addressing 

regulatory concerns on a regular basis is an added 

value to both the SEC and the investing public, 

the importance of which grows more apparent 

with the increasing number and complexity of 

complaints received. However, staffing levels hinder 

my ability to provide this value on an ongoing basis 

while also fielding the rising volume of investor 

matters and contacts. Compared to the 3,693 

investor contacts that I and one attorney-adviser 

on detail from another SEC division reviewed and 

responded to in Fiscal Year 2019—an average 

of 1,846 investor contacts each—other divisions 

and offices with similar external response duties 

average significantly lower numbers, peaking in the 

mid-hundreds per staff person per fiscal year. The 

additional staffing support proposed for Fiscal Year 

2021 is much needed. It will help me address the 

volume and complexity of investor complaints and 

collaborate with my colleagues across the agency 

to ensure that the concerns of Main Street investors 

are considered throughout the regulatory process.

To appropriately focus my existing staff resources, 

I will continue to track detailed matter and contact 

information relating to investor complaints. In 

Fiscal Year 2020, I anticipate adding secondary 
40 | OFFICE OF THE INVESTOR ADVOCATE

issue category reporting capability to OMMS to 

identify additional areas of concern within certain 

primary issue categories to allow for more targeted 

research, analysis, and reporting. I will also 

continue to identify areas where SEC messaging 

and processes that significantly impact Main Street 

investors may be refined and improved. Given 

some recent concerns and complaints raised by 

Main Street investors, areas of focus may include 

the messaging surrounding the Fair Fund process, 

including how and what the SEC communicates to 

retail investors awaiting Fair Fund distributions, 

messaging relating to advance fee fraud scams, and 

clarified messaging on how the SEC protects Main 

Street investors.

As discussed in this Ombudsman’s Report, 

bringing the investor advocacy clinics together 

for an in-person summit in April 2019 was an 

extraordinary opportunity for SEC staff to hear 

directly from the clinics, and for the clinics to 

establish and strengthen their relationships with 

each other as they work to address retail investor 

concerns. Despite ongoing funding and operational 

challenges, investor advocacy clinics continue to 

Tracey L. McNeil

Ombudsman

provide critical services to Main Street investors 

with small dollar amount claims who otherwise 

would have no practical options for legal representation. Investor advocacy clinic directors and 

law students are eager to identify areas in which 

retail investors may benefit from rulemaking and 

policy changes, and to offer feedback and practical 

solutions. I expect to convene another investor 

advocacy clinic summit or similar event in Fiscal 

Year 2020 to provide a forum for clinic directors 

and law students to share their perspectives on 

retail investor protection with each other and with 

SEC staff. 

Finally, Fiscal Year 2020 should provide several 

opportunities to share my work and the work of 

the SEC with industry participants and the broader 

ombudsman and dispute resolution communities in 

ways that may directly benefit retail investors. I will 

also continue to explore ways to best use outreach 

opportunities, industry and investor events, and 

technology to better connect with investors and 

industry participants. I look forward to providing 

additional updates on Fiscal Year 2020 activities 

and progress in my next Ombudsman’s Report. 
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 41

I

n 2017, the Office of the Investor Advocate 

formally launched the POSITIER investor 

testing initiative. POSITIER stands for Policy 

Oriented Stakeholder and Investor Testing for 

Innovative and Effective Regulation. POSITIER 

represents a flexible and sophisticated research 

and data collection architecture that is unique 

in government. 

What makes POSITIER so unique? POSITIER 

provides rapidly deployable, cost-effective, and 

high quality data collection capacities with a high 

degree of flexibility. By the end of calendar year 

2019, we will have completed 16 surveys, roughly 

28 testing activities, 7 large qualitative studies and 

numerous research and policy studies. The result 

will be close to 35,000 completed survey questionnaires, hundreds of qualitative interview and focus 

group participants, and approximately 18.5 million 

unique quantitative data elements collected. 

Benefits of Investor Testing

The traditional method by which agencies gather 

feedback from the public—the notice and comment 

process—has significant shortcomings. This is 

particularly true at the SEC, where it is unlikely 

that such feedback will come from a typical 

household or even a typical investor who has little 

awareness about securities regulation and policy 

developments at the SEC. More than likely, the 

comments will be provided by organizations with 

large stakes in the policy change—those with 

much to lose or gain from its enactment and that, 

importantly, have the resources and expertise to 

understand the effect of the policy change on their 

organizations. Indeed, some organizations may 

encourage others with a similar interest to send in 

comments anonymously or under the guise of a 

typical investor to suggest that the preponderance 

of opinion and evidence points in their favor. At the 

same time, some consumer 

advocacy groups similarly 

may organize their own 

networks to send in 

commentary favorable to 

their point of view. 

All of this information can 

play an important role 

in the policy process, but 

the policymaker receiving 

such information is often 

unable to assess how the information lines up 

with the policy’s costs and benefits for society as a 

whole. Officials may form an inaccurate impression 

based on data resources that are shared with them 

rather than using data that has been independently 

developed for the purpose of understanding the 

issue. In essence, the information that is submitted 

through the comment process tends to be normatively biased and may also suffer from specific 

statistical biases. This makes it difficult or impossible—and often inappropriate—to use the information in cost-benefit analysis for a policy because 

it does not provide a complete, clear and unbiased 

picture of the implications of the proposed policy 

REPORT ON 

INVESTOR TESTING
42 | OFFICE OF THE INVESTOR ADVOCATE

for others that may either be adversely or beneficially affected. 

Through POSITIER, we seek to supplement 

the comment process by obtaining information 

directly from investors that is objective and useful 

for decision-making at the SEC and elsewhere. 

Thus, in our efforts to build a flexible, responsive 

and rapidly deployable research initiative, we 

have placed the highest priority on high quality 

data collection. We can deploy a survey or a 

test to collect data using the best statistical and 

social science methods available. Our surveys are 

all nationally representative probability-based 

surveys similar to those conducted by the Census 

for various agencies. Our research endeavors are 

sequential and cumulative, meaning that we often 

analyze some results from a prior study before 

developing a new test. 

Importantly, POSITIER is not simply a survey 

program—in fact, we intend to reduce reliance 

on surveys as alternative data sources become 

available. The crux of POSITIER is testing, and we 

focus on getting to measurable outcomes rather 

than opinions. This might include, for example, a 

test in which some households receive one type of 

disclosure document while other households receive 

a different version. With testing, we can collect 

evidence that helps to illuminate how proposals 

may work in the real world with real people. 

Primary Research vs. Rulemaking 

POSITIER is designed to accommodate research 

in support of a rule proposal and research that 

is more fundamental in nature. In the fall of 

2018, for example, we published a study on the 

“Retail Market for Investment Advice” with 

support from the RAND Corporation. Although 

we did not directly work on the rulemaking, our 

research work was conducted to provide insights 

for the rulemaking process that ultimately led to 

Regulation Best Interest. 

In designing POSITIER, we made a conscious 

effort to compress timeframes for research projects 

in order to accommodate the needs of agency 

leaders with respect to their rulemaking agendas. 

In order for our research to be decision-useful, it 

must be timely. We accomplished this objective 

in our research study on the Retail Market for 

Investment Advice when, in under six months, 

the project moved from the point of inception to 

completion of a full research report. This includes 

all time required for procurement, design, fielding 

of a survey instrument, data cleaning and report 

writing. By comparison, prior to POSITIER, a 

previous similar research project at the Commission 

took about three years from start to finish.

To date, most of the POSITIER effort has been 

devoted to primary research rather than research 

related to specific rulemakings. This type of fundamental research, done apart from the demands of 

a particular rule proposal, helps us to understand 

investors more generally and either provide a 

foundation for future policy or simply enrich the 

SEC’s understanding of investors. For example, 

what do households know about investing and 

investing products? How do they invest? What 

prevents them from investing? How do they 

interact with and process disclosure information? 

How do they evaluate investment options? Are they 

overloaded in terms of choice or information? Do 

households interact with financial markets in the 

way that economic and regulatory theory assume 

that they do? In our view, for the SEC to become 

an even more effective regulatory institution, it 

must pursue basic questions like these. 

Supporting a New Way of Doing Business 

In some regulatory agencies, rule proposals 

originate with rule writers and only undergo 

economic analysis at the back-end after most 

or all key decisions have been locked in. In fact, 

those conducting the economic analysis may 

have no influence on the proposal and in some 
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 43

circumstances are only informed about the details 

of the proposal after it has been drafted and 

submitted to them. Pressure inevitably mounts to 

obtain economic analysis that is supportive of the 

rule, rather than analysis that provides a critical 

assessment of the rule. In effect, such analysis 

becomes more of a justification for decisions that 

have already been made. The lack of concrete data 

often means that the economic analysis itself is 

qualitative and speculative as to the impacts of 

the proposal. 

With POSITIER, we can support a different 

way of conducting research, whereby intended 

outcomes are set forth up front and the rulemaking 

is designed to find the best way to achieve those 

outcomes. Instead of economic analysis being 

conducted on the back end, social science and other 

inputs can be used to gather available evidence 

in order to develop potential policy interventions, with a well-articulated “theory of change” 

describing how those interventions can produce 

the desired outcomes. POSITIER could then be 

utilized to design and implement a set of tests that 

could determine how the ideas work in practice, 

and in particular, to determine if the assumptions 

underlying the rule (e.g. that a new disclosure will 

be read by investors) are borne out in reality. 

Challenges Facing POSITIER

Since its beginning, POSITIER has received strong 

support from SEC leadership. Nonetheless, we 

continue to face challenges that make it difficult to 

realize the full potential of POSITIER. In particular, 

we suffer from resource constraints, most acutely in 

terms of human capital.

During Fiscal Year 2019, POSITIER was staffed

with one full-time senior economist and one 

contract research assistant to conduct seven 

new data collection projects and much analysis 

of data. In contrast, similar research programs 

at other financial regulatory agencies typically 

devote multiple economists as well as other staff 

to each project because testing efforts require 

careful planning, enormous attention to detail, 

and a variety of highly specialized skills. We look 

forward to the addition of a decision scientist and 

a part-time academic fellow to the POSITIER 

team in early 2020, but we will still lack the 

resources that are needed to have a full-fledged 

investor testing program. 

As with many government agencies, our work was 

negatively impacted by the lapse in government 

appropriations in December and January of 

2018-2019. The resulting government shutdown 

disrupted our workplan and required a considerable amount of effort to reprogram our activities. 

Moreover, because of the uncertain budget 

environment we had no choice but to compress a 

12-month workplan into six months. 

Looking ahead to the next year, we will continue 

to make progress on our current topical research 

streams and stand ready to support the Commission 

in other efforts where they deem that evidence 

could help to guide their work. We have made great 

strides in developing survey instruments and understanding some key cognitive and conceptual barriers 

for investors, and we look forward to sharing the 

results of our work. 

Brian Scholl, Ph.D.

Principal Economic Advisor and Senior Economist

Office of the Investor Advocate
44 | OFFICE OF THE INVESTOR ADVOCATE
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 45

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.216 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 10 or more than 20 members 

appointed by the Commission to represent the 

interests of various types of individual and institutional investors.217

Exchange Act Section 39 authorizes 

the Committee to submit findings and 

recommendations for review and consideration 

by the Commission.218 The statute also requires 

the SEC “promptly” to 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.219 While 

the Commission must respond to the IAC’s 

recommendations, it is under no obligation to 

agree with or act upon the recommendations.220

In each of its reports to Congress, including 

this one, the Office of the Investor Advocate 

summarizes the IAC recommendations and the 

SEC’s responses to them.221

In the past, the Commission has taken action that 

was responsive to a number of IAC recommendations, such as those related to Regulation Best 

Interest, Form CRS, and IA Fiduciary Guidance.222

This Report covers recommendations of the IAC 

to which the Commission responded in the latest 

reporting period or those to which the Commission 

response is pending. For more detailed summaries 

of previous Commission responses, please see our 

earlier reports to Congress.

The Commission may be pursuing initiatives that 

are responsive to IAC recommendations but have 

not yet been made public. Commission staff—

including the staff of this Office—are prohibited 

from disclosing nonpublic information.223

Therefore, any such initiatives are not reflected in 

this Report.

SUMMARY OF IAC 

RECOMMENDATIONS AND 

SEC RESPONSES
46 | OFFICE OF THE INVESTOR ADVOCATE

Topic Date IAC Recommendation SEC Response

Proxy Plumbing224 Sept. 5, 

2019

Require end-to-end 

confirmation of votes; enforce 

a duty to cooperate in more 

routine, off-cycle reconciliations; 

study share lending and 

investor preferences regarding 

anonymity; and relax current 

regulations that inhibit use of 

universal proxies.

Pending.

Investment 

Research in a 

Post-MiFID II 

World225

July 25, 

2019

Provide consumers of research 

a choice whether to purchase 

research bundled or unbundled 

from trading fees, and enhance 

transparency of costs. 

On Nov. 4, 2019, the SEC staff 

issued an extension of an earlier 

no-action letter until July 3, 2023. 

The original letter had been set to 

expire on July 3, 2020. Under the 

extension, the staff said it would 

not recommend enforcement 

action to the Commission under 

the Investment Advisers Act 

of 1940 against broker-dealers 

receiving payments in hard dollars 

or through research payment 

accounts from clients subject to 

MiFID II.226

Human Capital 

Management 

(HCM) 

Disclosure227

March 28, 

2019

Incorporate HCM as a part of 

the Commission’s effort to 

modernize corporate reporting 

and disclosure, including 

disclosure requirements 

regarding the number of 

people employed, competitive 

conditions, and how human 

capital within a firm is being 

incentivized and managed.

On Aug. 8, 2019, the Commission 

proposed rule amendments to 

modernize the description of 

business, legal proceedings, 

and risk factor disclosures that 

registrants are required to make 

pursuant to Regulation S-K. One 

amendment (of Item 101(c)) would 

include, as a disclosure topic, 

human capital resources, including 

any human capital measures or 

objectives that management 

focuses on in managing the 

business, to the extent such 

disclosures would be material 

to an understanding of the 

registrant’s business. Depending 

on the nature of the registrant’s 

business and workforce, disclosure 

items could include measures 

or objectives that address the 

attraction, development, and 

retention of personnel.228 The 

comment period ended on 

Oct. 22, 2019.
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 47

Topic Date IAC Recommendation SEC Response

Transaction Fee 

Pilot for NMS 

Stocks229

Sept. 13, 

2018

Adopt a proposed Transaction 

Fee Pilot with the following 

conditions: (1) include a “no 

rebate” bucket; (2) permit 

companies to opt out of 

the pilot; and (3) consider 

consolidating Test Groups 

1 and 2.

On Dec. 19, 2018, the SEC 

announced that it had voted 

to adopt new Rule 610T of 

Regulation NMS to conduct a 

Transaction Fee Pilot in NMS 

stocks.230 On March 28, 2019, 

following a lawsuit filed by several 

exchanges, the SEC issued an 

order staying the rule and pilot 

program pending final resolution 

of the petitions.231Litigation 

continued in the reporting period.

Financial 

Support for Law 

School Clinics 

that Support 

Investors232

March 8, 

2018

Explore ways to improve 

external funding sources to the 

law school investor advocacy 

clinics. Work with FINRA 

and other potential partners, 

and request legislation from 

Congress to consider permanent 

funding.

Pending. 

On April 4, 2019, the 

Ombudsman’s office hosted an 

Investor Advocacy Clinic Summit. 

Dual Class and 

Other Entrenching 

Governance 

Structures in Public 

Companies233

March 8, 

2018

The SEC Division of Corporation 

Finance should encourage 

companies to improve the 

disclosure of risks related to 

such structures and commence 

a pilot program to monitor 

shareholder disputes and 

to determine if enhanced 

disclosure requirements are 

necessary.

Pending. This topic was discussed 

on Nov. 15, 2018, at an SEC public 

roundtable on the proxy process.
48 | OFFICE OF THE INVESTOR ADVOCATE

Topic Date IAC Recommendation SEC Response

Mutual Fund Cost 

Disclosure234

April 14, 

2016

Enhance investors’ 

understanding of mutual fund 

costs and the impact of those 

costs on total accumulations 

over time. Provide standardized 

disclosure of actual dollar 

costs on customer account 

statements.

On June 4, 2018, the SEC issued 

a request for comment on ways 

to enhance the delivery, design, 

and content of fund disclosures, 

including shareholder reports 

and prospectuses. The request 

for comment solicited investor 

feedback on fund fees and 

expenses, and it included other 

questions related to the IAC 

recommendation (e.g., dollar vs. 

percentage disclosure, disclosure 

within account statements, etc.).235

On Oct. 30, 2018, the SEC 

proposed amendments to 

help investors make informed 

investment decisions regarding 

variable annuity and variable 

life insurance contracts.236 The 

release cited responses to the 

June 2018 request for comment 

to support the notion that 

investors prefer shorter summary 

disclosures, with additional 

information available online or 

upon request.237 The comment 

period closed on March 15, 2019.

Accredited 

Investor 

Definition238

Oct. 9, 

2014

Consider enabling individuals to 

qualify as accredited investors 

based on their financial 

sophistication.

On June 18, 2019, the SEC 

issued a Concept Release on 

Harmonization of Securities 

Offering Exemptions.239 The 

release sought comment 

regarding the “accredited 

investor” definition and whether 

it should include investors 

with demonstrable financial 

sophistication.

Previously, in Dec. 2015, the 

SEC issued a staff report 

that discussed, among other 

alternatives, using sophistication 

as an element of the accredited 

investor definition.240
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 49

Topic Date IAC Recommendation SEC Response

Impartiality in 

the Disclosure of 

Preliminary Voting 

Results241

Oct. 9, 

2014

Ensure impartiality in the 

disclosure of preliminary voting 

results.

Pending. 

Universal Proxy 

Ballots242

July 25, 

2013

Allow universal ballots in 

connection with short slate 

director nominations.

On October 26, 2016, the SEC 

proposed amendments to the 

proxy rules to require parties in a 

contested election to use universal 

proxy cards that would include 

the names of all board of director 

nominees. The comment period 

closed on January 9, 2017.243This 

topic was discussed on Nov. 15, 

2018, at an SEC public roundtable 

on the proxy process.
50 | OFFICE OF THE INVESTOR ADVOCATE

ENDNOTES

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

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

(A)(i).

3 See SEC, Office of the Investor Advocate, Report 

on Objectives, Fiscal Year 2019 (June 29, 2018) 

[hereinafter Report on Objectives, Fiscal Year 

2019], https://www.sec.gov/advocate/reportspubs/

annual-reports/sec-office-investor-advocate-report-onobjectives-fy2019.pdf.

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

(B)(i).

5 Id. Exchange Act Section 4(g)(6)(B) requires the 

Report on Activities to include an “inventory” of 

the most serious problems encountered by investors 

during the Reporting Period. The inventory must 

identify any action taken by the Commission or an 

SRO to resolve each problem, the length of time that 

each item has remained on our inventory and, for 

items on which no action has been taken, the reasons 

for inaction and an identification of any official who 

is responsible for such action.

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

7 Report on Objectives, Fiscal Year 2019, supra note 3. 

8 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 

(Dodd-Frank Act). On February 24, 2014, SEC Chair 

Mary Jo White appointed Rick A. Fleming as the 

Commission’s first Investor Advocate.

9 See Modernization of Regulation S-K Items 101, 103, 

and 105, Securities Act Rel. No. 10668, 84 Fed. Reg. 

44358 (Aug. 23, 2019). 

10 The disclosure would be required only “to the extent 

material to an understanding of the registrant’s business 

taken as a whole.” See id. at 44365.

11 See Modernization of Property Disclosures for Mining 

Registrants, Securities Act Rel. No. 10570, 83 Fed. 

Reg. 66344 (Dec. 26, 2018) [hereinafter Mining 

Registrants Adopting Release]. 

12 See Update of Statistical Disclosures for Bank and 

Savings and Loan Registrants, Securities Exchange Act 

Rel. No. 86984, 84 Fed. Reg. 52936 (Oct. 3, 2019) 

[hereinafter Banking Disclosure Proposing Release]. 

13 For an example of our public advocacy on this 

topic, see Rick A. Fleming, Investor Advocate, SEC, 

Improving Disclosure with Smart Data (Oct. 24, 

2016), https://www.sec.gov/news/speech/improvingdisclosure-with-smart-data.html. 

14 See Item 1304(b)(1)(i) of Regulation S-K.

15 See Modernization of Property Disclosures for Mining 

Registrants, Securities Act Release No. 10098, 81 Fed 

Reg. 41651, 41709 (June 27, 2016) (contemplating 

structured disclosures as an option in the proposal). 

“When registrants provide disclosure items in a 

structured data format, investors and other data 

users (e.g., analysts) can more easily retrieve and use 

the information reported by registrants and perform 

comparisons of common disclosures across registrants 

and reporting periods.” Id. See also “A Primer on 

Machine Readability for Online Documents and 

Data,” Data.gov Developers Blog, https://www.data.

gov/developers/blog/primer-machine-readability-onlinedocuments-and-data (last accessed Nov. 4, 2019).

16 See Mining Registrants Adopting Release, supra note 

11, at 66408 (stating that “presentation in a structured 

format, such as XBRL, would impose additional 

burdens on registrants without providing substantial 

additional benefits for users of the information”); 

Banking Disclosure Proposing Release, supra note 12, 

at 52958 (citing “limited feedback on this point”). 

17 See Foundations for Evidence-Based Policymaking Act 

of 2018, Pub. L. No. 115-435, § 201, 132 Stat. 5529, 

5534-5544 (2019) (with the OPEN Government Data 

Act beginning at Section 202).

18 See Solicitations of Interest Prior to a Registered Public 

Offering, Securities Act Rel. No. 10699, 84 Fed. Reg. 

53011 (Oct. 4, 2019). 

19 See Letter from The Credit Roundtable to Elizabeth M. 

Murphy, Secretary, SEC (Feb. 4, 2010), SEC File No. 

S7-30-09, https://www.sec.gov/comments/s7-30-09/

s73009-14.pdf; Letter from The Credit Roundtable 

to Hon. Jeb Hensarling and Hon. Maxine Waters, H. 

Comm. on Financial Servs. (June 12, 2019), https://

www.iimemberships.com/sites/iic/files/Credit%20

Roundtable%20Comment%20on%20Bill%20

H.R.%206035_2.pdf.

20 The group followed up with a submission to the 

rulemaking proposal’s comment file. See Letter from 

The Credit Roundtable to Brent J. Fields, Secretary, 

SEC (Apr. 29, 2019), SEC File No. S7-01-19, https://

www.sec.gov/comments/s7-01-19/s70119-5422921-

184609.pdf. 

21 See Jay Clayton, Chairman, SEC, SEC Rulemaking 

Over the Past Year, the Road Ahead and Challenges 

Posed by Brexit, LIBOR Transition and Cybersecurity 

Risks (Dec. 6, 2018), https://www.sec.gov/news/speech/

speech-clayton-120618. 

22 See Concept Release on Harmonization of Securities 

Offering Exemptions, Securities Act Rel. No. 10649, 

84 Fed. Reg. 30460 (June 26, 2019). 

23 See Letter from Rick A. Fleming, Investor Advocate, 

SEC to Vanessa Countryman, Secretary, SEC (July 11, 

2019), SEC File No. S7-08-19, https://www.sec.gov/

comments/s7-08-19/s70819-5800855-187067.pdf. 
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 51

24 See Testimony Before the Subcomm. on Investor 

Protection, Entrepreneurship, and Capital Markets 

of the H. Comm. on Financial Servs., 116th Cong. 

(Sept. 11, 2019) (testimony of Elisabeth de Fontenay, 

Professor of Law, Duke University), available at https://

financialservices.house.gov/calendar/eventsingle.

aspx?EventID=404232.

25 See November 15, 2018: Roundtable on the Proxy 

Process, available at https://www.sec.gov/proxyroundtable-2018.

26 See Rick Fleming, Investor Advocate, SEC, Important 

Issues for Investors in 2019 (Apr. 8. 2019), https://

www.sec.gov/news/speech/fleming-important-issuesinvestors-2019. 

27 See Commission Guidance Regarding Proxy Voting 

Responsibilities of Investment Advisers, Investment 

Advisers Act Release No. 5325, 84 Fed. Reg. 47420 

(Sept. 10, 2019).

28 See Commission Interpretation and Guidance 

Regarding the Applicability of the Proxy Rules to 

Proxy Voting Advice, Exchange Act Rel. No. 86721, 

84 Fed. Reg. 47416 (Sept. 10, 2019).

29 See Amendments to Exemptions from the Proxy Rules 

for Proxy Voting Advice, Exchange Act Release No. 

87457 (adopted Nov. 5, 2019), https://www.sec.gov/

rules/proposed/2019/34-87457.pdf.

30 See Procedural Requirements and Resubmission 

Thresholds under Exchange Act Rule 14a-8, Exchange 

Act Rel. No. 87458 (adopted Nov. 5, 2019), https://

www.sec.gov/rules/proposed/2019/34-87458.pdf.

31 See Disclosure of Order Handling Information, 

Exchange Act Release No. 84528, 83 Fed. Reg. 58338 

(adopted Nov. 2, 2018). 

32 See id.

33 See, e.g., Order Granting Application by The Financial 

Information Forum and Security Traders Association 

for an Exemption Pursuant to Rule 606(c) of 

Regulation NMS Under the Exchange Act from Certain 

Requirements of Rule 606 of Regulation NMS Under 

the Exchange Act, Exchange Act Release No. 86874 

(Sept. 4, 2019), 84 Fed. Reg. 47625 (Sept. 10, 2019), 

https://www.federalregister.gov/d/2019-19469.

34 See Transaction Fee Pilot for NMS Stocks, Exchange 

Act Release No. 84875, 84 Fed. Reg. 5,202 (adopted 

Dec. 19, 2018), https://www.federalregister.gov/d/2018-

27982. 

35 See SEC, Recommendation of the Investor Advisory 

Committee: Crowdfunding Regulations (Sept. 13, 

2018), https://www.sec.gov/spotlight/investor-advisorycommittee-2012/recommendation-transaction-fee-pilotfor-nms-stocks.pdf. 

36 See SEC, Order Issuing Stay, In the Matter of Rule 

610T of Regulation NMS, Exchange Act Release No. 

85447 (March 28, 2019), https://www.sec.gov/rules/

other/2019/34-85447.pdf.

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

38 See Cboe EDGA Exchange, Inc., Order Instituting 

Proceedings To Determine Whether To Approve or 

Disapprove a Proposed Rule Change To Introduce a 

Liquidity Provider Protection Delay Mechanism on 

EDGA, Exchange Act Release No. 87096, 84 Fed. 

Reg. 51657 (published Sept. 24, 2019), https://www.

federalregister.gov/d/2019-21096.

39 See id.

40 See Comments on Cboe EDGA Rulemaking, https://

www.sec.gov/comments/sr-cboeedga-2019-012/

srcboeedga2019012.htm. 

41 Memorandum from Rick A. Fleming, Investor 

Advocate, to the Securities and Exchange Commission 

(Dec. 13, 2019), https://www.sec.gov/advocate/investoradvocate-comment-letters.html.

42 See, e.g., Cboe EDGX Exchange, Inc.; Order Granting 

Approval of a Proposed Rule Change, as Modified 

by Amendment No. 1, To Introduce Retail Priority, 

Exchange Act Release No. 87200 (Oct. 2, 2019), 84 

Fed. Reg. 53788 (Oct. 8, 2019)).

43 See Nasdaq Inc., Solicitation of Comments on Behalf 

of the NASDAQ Listing and Hearing Review Counsel, 

Potential Changes to the Initial Listing Requirements 

to Enhance Investor Protection and the Liquidity of 

Listed Securities (Oct. 5, 2018), https://listingcenter.

nasdaq.com/assets/Liquidity_Measures_Comment_

Solicitation.pdf. The Commission approved some of 

the contemplated changes in July 2019. See Exchange 

Act Release No. 86314 (July 5, 2019), 84 Fed. Reg. 

33102 (July 11, 2019), https://www.federalregister.

gov/d/2019-14723.

44 See, e.g., In the Matter of the Application of Long Term 

Stock Exchange, Inc.; for Registration as a National 

Securities Exchange; Findings, Opinion, and Order of 

the Commission, Securities Exchange Act Release No. 

85828 (May 10, 2019), 84 Fed. Reg. 21841 (May 15, 

2018), https://www.federalregister.gov/d/2019-10037. 

45 See SEC, Staff Guidance on SRO Rule Filings Relating 

to Fees (May 21, 2019), https://www.sec.gov/tm/staffguidance-sro-rule-filings-fees. 

46 See Joint Industry Plan, Order Approving the National 

Market System Plan Governing the Consolidated 

Audit Trail, Exchange Act Release No. 79318 (Nov. 

15, 2016), https://www.sec.gov/rules/sro/nms/2016/34-

79318.pdf.

47 SEC, Office of the Investor Advocate, Report on 

Activities, Fiscal Year 2018 (Dec. 20, 2018) at 

10, https://www.sec.gov/advocate/reportspubs/

annual-reports/sec-investor-advocate-report-onactivities-2018.pdf.
52 | OFFICE OF THE INVESTOR ADVOCATE

48 Letter from Rick A. Fleming, Investor Advocate, 

SEC to Ronald W. Smith, Corp. Sec’y, Mun. Sec. 

Rulemaking Bd., RE: MSRB Regulatory Notice 

2018-15, Request for Comment on Draft Amendments 

to MSRB Rules on Primary Offering Practices (Sept. 

17, 2018), https://www.msrb.org/RFC/2018-15/SEC.

pdf [hereinafter Comment Letter, Regulatory Notice 

2018-15]. 

49 MSRB, Notice 2018-15, Request for Comment 

on Draft Amendments to MSRB Rules on Primary 

Offering Practices (July 19, 2018), http://www.msrb.

org/~/media/Files/Regulatory-Notices/RFCs/2018-15.

ashx??n=1 [hereinafter MSRB, Regulatory Notice 

2018-15].

50 Id. at 9.

51 Self-Regulatory Organizations; Municipal Securities 

Rulemaking Board; Notice of Filing of Amendment 

No. 1 and Order Granting Accelerated Approval of a 

Proposed Rule Change, as Modified by Amendment 

No. 1, Consisting of Proposed Amendments to MSRB 

Rule G-11 and MSRB Rule G-32 and Form G-32 

Regarding a Collection of Data Elements Provided in 

Electronic Format to the EMMA Dataport System in 

Connection with Primary Offerings, Exchange Act 

Release No. 86219, 81 Fed. Reg. 31961(July 3, 2019). 

52 See Comment Letter, Regulatory Notice 2018-15, supra

note 48. 

53 See SEC, Notice of Federal Advisory Committee 

Establishment, Fixed Income Market Structure 

Advisory Committee, Exchange Act Release No. 81958 

(Oct. 26, 2017), 82 Fed. Reg. 50460 (Oct. 31, 2017), 

https://www.federalregister.gov/d/2017-23670. 

54 See SEC, Press Release, SEC Issues Agenda for April 

15 Meeting of the Fixed Income of the Fixed Income 

Market Structure Advisory Committee, 2019-54 

(Apr. 11, 2019), https://www.sec.gov/news/pressrelease/2019-54; see also SEC, Fixed Income Market 

Structure Advisory Committee, Transcript of Meeting, 

April 15, 2019, https://www.sec.gov/spotlight/fixedincome-advisory-committee/fimsac-041519-transcript.

txt. Our Office also highlighted the issue of pennying 

in our Report on Objectives, Fiscal Year 2019 and our 

Report on Activities, Fiscal Year 2018. SEC, Office of 

the Investor Advocate, Report on Objectives, Fiscal 

Year 2019 (June 29, 2018), at 9, https://www.sec.gov/

advocate/reportspubs/annual-reports/sec-office-investoradvocate-report-on-objectives-fy2019.pdf; see SEC, 

Office of the Investor Advocate, Report on Activities, 

Fiscal Year 2018 (Dec. 20, 2018), at 16, n. 105, https://

www.sec.gov/advocate/reportspubs/annual-reports/

sec-investor-advocate-report-on-activities-2018.pdf. 

55 Letter from Lynnette Kelly, Exec. Dir., MSRB, to Rick 

A. Fleming, Investor Advocate, SEC, RE: Response to 

Investor Advocate Request Highlighting Municipal 

Market Practices (Oct. 19, 2018), http://www.msrb.

org/Market-Topics/~/media/1BD671EB464F40628296

8143A8A65274.ashx.

56 Press Release, Leah Szarek, Director of 

Communications, MSRB Holds First Quarterly Board 

Meeting of FY 2020 (Oct. 25, 2019), http://msrb.

org/About-MSRB/Governance/MSRB-Board-ofDirectors/~/link.aspx?_id=CD2CA7D229484D279295

24D3B4A54776&_z=z. 

57 See SEC, FIMSAC, Recommendation for a Pilot 

Program to Study the Market Implications of Changing 

the Reporting Regime for Block-Size Trades in 

Corporate Bonds (April 9, 2018), https://www.sec.gov/

spotlight/fixed-income-advisory-committee/fimsacblock-trade-recommendation.pdf. 

58 See FINRA, Trade Reporting and Compliance Engine 

(TRACE), Regulatory Notice 19-12 (April 12, 2019), 

https://www.finra.org/sites/default/files/notice_doc_file_

ref/Regulatory-Notice-19-12.pdf.

59 Jay Clayton, Chairman, SEC, Wes Bricker, Chief 

Accountant, SEC and William D. Duhnke III, 

Chairman, PCAOB, Statement on the Vital Role of 

Audit Quality and Regulatory Access to Audit and 

Other Information Internationally—Discussion of 

Current Information Access Challenges with Respect 

to U.S.-listed Companies with Significant Operations 

in China, (Dec. 7, 2018), at https://www.sec.gov/news/

public-statement/statement-vital-role-audit-quality-andregulatory-access-audit-and-other.

60 Polina Marinova, Why Investors Should Worry About 

the Regulator of U.S. Auditors, Fortune, Nov. 26, 

2019, https://fortune.com/2019/11/26/why-investorsshould-worry-about-the-regulator-of-u-s-auditors/.

61 See Amendments to the Accelerated Filer and Large 

Accelerated Filer Definitions, Exchange Act Release 

No. 85814, 84 Fed. Reg. 36434 (May 9, 2019), https://

www.sec.gov/rules/proposed/2019/34-85814.pdf.

62 See, e.g., comment letters from Better Markets, the 

Council of Institutional Investors (CII), the CFA 

Institute, and the Consumer Federation of America. 

The Comment file is available at SEC, Comments on 

Proposed Rule: Amendments to the Accelerated Filer 

and Large Accelerated Filer Definitions, https://www.

sec.gov/comments/s7-06-19/s70619.htm.

63 Letter from Weili Ge, Professor, University of 

Washington, Allison Koester, Associate Professor, 

Georgetown University, and Sarah McVay, Professor, 

University of Washington to SEC, Comments on 

S7-06-19 “Amendments to the Accelerated Filer and 

Large Accelerated Filer Definitions” (July 26, 2019), 

https://www.sec.gov/comments/s7-06-19/s70619-

5879065-188729.pdf [hereinafter Comment Letter, Ge, 

et al.].

64 Weili Ge, Allison Koester, & Sarah McVay, Benefits and 

Costs of Sarbanes-Oxley Section 404(b) Exemption: 

Evidence from Small Firms’ Internal Control 

Disclosures, 63 J. OF ACCT. AND ECON. 358 (2017) 

(“Ge et al. 2017 Study”).
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 53

65 Comment Letter, Ge, et al., supra note 63. 

66 Comment Letter, Mary Barth, Wayne Landsman, 

Joseph Schroeder, and Daniel Taylor to SEC, Re: 

Amendments to the Accelerated Filer and Large 

Accelerated Filer Definitions - File No. S7-06-19 (July 

11, 2019), https://www.sec.gov/comments/s7-06-19/

s70619-5802113-187069.pdf [hereinafter Comment 

Letter, Barth, et al.]

67 See Amendments to the Accelerated Filer and Large 

Accelerated Filer Definitions, Exchange Act Release 

No. 85814 (May 9, 2019), at 70, https://www.sec.gov/

rules/proposed/2019/34-85814.pdf.

68 Comment Letter, Barth, et al., supra note 66. 

69 That includes both Section 404(a), requiring 

management’s assessment of the effectiveness of the 

company’s ICFR, and 404(b), requiring ICFR auditor 

attestation. See Peter Iliev, The Effect of SOX Section 

404: Costs, Earnings Quality, and Stock Prices, 45 J. 

OF FIN. 1163 (2010), at 20-24.

70 Robert J. Jackson Jr., Commissioner, SEC, Public 

Statement: Statement on Proposed Amendments to 

Sarbanes Oxley 404(b) Accelerated Filer Definition 

(May 9, 2019), https://www.sec.gov/news/publicstatement/jackson-statement-proposed-amendmentsaccelerated-filer-definition. 

71 Id. 

72 Id.

73 Comment Letter, Barth, et al., supra note 66. 

74 SEC, Press Release and Fact Sheet, SEC Adopts 

Rules and Interpretations to Enhance Protections 

and Preserve Choice for Retail Investors in Their 

Relationships With Financial Professionals, 2019-89 

(June 5, 2019), https://www.sec.gov/news/pressrelease/2019-89 [hereinafter Regulation Best Interest 

Press Release and Fact Sheet].

75 See Report on Objectives, Fiscal Year 2019, supra note 

3, at 11.

76 See Regulation Best Interest: The Broker-Dealer 

Standard of Conduct, Exchange Act Release No. 

86031, 84 Fed. Reg. 33318 (adopted June 5, 2019) 

[hereinafter Regulation Best Interest].

77 See Form CRS Relationship Summary; Amendments 

to Form ADV, Exchange Act Release No. 86032, 

Investment Advisers Act Release No. 5247, 84 Fed. 

Reg. 33492 (adopted June 5, 2019) [hereinafter Form 

CRS Relationship Summary].

78 See Commission Interpretation Regarding Standard 

of Conduct for Investment Advisers, Investment 

Advisers Act Release No. 5248, 84 Fed. Reg. 33669 

(adopted June 5, 2019) [hereinafter Commission 

Interpretation—Standard of Conduct for Investment 

Advisers]; Commission Interpretation Regarding the 

Solely Incidental Prong of the Broker-Dealer Exclusion 

from the Definition of Investment Adviser, Investment 

Advisers Act Release No. 5249, 84 Fed. Reg. 33681 

(adopted June 5, 2019) [hereinafter Commission 

Interpretation—Broker-Dealer Exclusion].

79 See Regulation Best Interest Press Release and Fact 

Sheet, supra note 74.

80 See Regulation Best Interest, supra note 76, at section 

II.C.1.

81 See id. at section II.C.2.

82 See id. at section II.C.3.

83 See id. at section II.C.4.

84 See id.

85 See Regulation Best Interest Press Release and Fact 

Sheet, supra note 74.

86 See id.

87 See id.

88 See Rick A. Fleming, Investor Advocate, SEC, 

Statement Regarding the SEC’s Rulemaking Package 

for Investment Advisers and Broker-Dealers (June 5, 

2019), https://www.sec.gov/news/public-statement/

statement-regarding-sec-rulemaking-packageinvestment-advisers-broker-dealers.

89 See Report on Objectives, Fiscal Year 2019, supra note 

3, at 13.

90 See Exchange-Traded Funds, Securities Act Release 

No. 10695, Investment Company Act Release No. 

33646, 84 Fed. Reg. 57162 (adopted Sept. 25, 2019) 

[hereinafter ETF Rule].

91 See id. at nn. 6 and accompanying text.

92 See id. at nn. 2 and accompanying text.

93 See id. at section II.C.

94 See id. at section II.A.

95 See id. at section II.G.

96 See id. at sections II.H-I.

97 Report on Objectives, Fiscal Year 2019, supra note 3, 

at 13. 

98 See id at section II.A.3; id at nn. 8.

99 See id at section II.A.3.

100 See id at nn. 8.
54 | OFFICE OF THE INVESTOR ADVOCATE

101 See, e.g., Kathleen Moriarty, SEC’s New ETF Rule 

Is A Win For Issuers, Investors, Law 360 (Oct. 29, 

2019), https://www.law360.com/articles/1212866/

sec-s-new-etf-rule-is-a-win-for-issuers-investors; 

Sarah Max, Will the SEC’s New ETF Rule Benefit 

Investors?, Barron’s (Sept. 26, 2019), https://www.

barrons.com/articles/will-the-secs-new-etf-rule-benefitinvestors-51569519577.

102 See Report on Objectives, Fiscal Year 2019, supra note 

3, at 13.

103 See id.

104 See id.

105 See id; see also Request for Comment on Fund Retail 

Investor Experience and Disclosure, Securities Act 

Release No. 10503, Exchange Act Release No. 83376, 

Investment Company Act Release No. 33113 (June 5, 

2018), https://www.sec.gov/rules/other/2018/33-10503.

pdf [hereinafter Request for Comment on Fund Retail 

Investor Experience].

106 SEC, Press Release and Fact Sheet, SEC Proposes 

Disclosure Improvements for Variable Annuities 

and Variable Life Insurance Contracts, 2018-246 

(Oct. 30, 2018), https://www.sec.gov/news/pressrelease/2018-246 [hereinafter Disclosure Improvements 

Press Release and Fact Sheet]; see also Updated 

Disclosure Requirements and Summary Prospectus 

for Variable Annuity and Variable Life Insurance 

Contracts, Securities Act Release No. 10569, Exchange 

Act Release No. 84508, Investment Company Act 

Release No. 33286, 83 Fed. Reg. 61730 (proposed Oct. 

18, 2018) at nn. 39 and accompanying text (“Multiple 

comment letters that the Commission has received to 

date on [the Request for Comment on Fund Retail 

Investor Experience] reflect a preference for shorter 

summary disclosures, with additional information 

available online or upon request.”).

107 See Disclosure Improvements Press Release and Fact 

Sheet, supra note 106.

108 See id.

109 See Report on Objectives, Fiscal Year 2019, supra note 

3 at 13.

110 Jay Clayton, Chairman, SEC and Brett Redfearn, 

Director, Trading and Markets, SEC, Equity Market 

Structure 2019: Looking Back and Moving Forward: 

Remarks at Gabelli School of Business, Fordham 

University, New York, NY (Mar. 8, 2019), https://

www.sec.gov/news/speech/clayton-redfearn-equitymarket-structure-2019.

111 Jay Clayton, Chairman, SEC and Brett Redfearn, 

Director, Trading and Markets, SEC, Equity Market 

Structure 2019: Looking Back and Moving Forward: 

Remarks at Gabelli School of Business, Fordham 

University, New York, NY (Mar. 8, 2019), https://

www.sec.gov/news/speech/clayton-redfearn-equitymarket-structure-2019 (“Transfer agents who provide 

services to issuers of restricted and control securities 

generally are responsible for processing requests from 

selling shareholders to remove restrictive legends in 

connection with the intended resale of these securities 

by their owners. If a transfer agent improperly or 

inappropriately removes a legend, it could facilitate 

an illegal public distribution of securities that could 

harm investors.”). 

112 Jay Clayton, Chairman, SEC and Brett Redfearn, 

Director, Trading and Markets, SEC, Equity Market 

Structure 2019: Looking Back and Moving Forward: 

Remarks at Gabelli School of Business, Fordham 

University, New York, NY (Mar. 8, 2019), https://

www.sec.gov/news/speech/clayton-redfearn-equitymarket-structure-2019.

113 Rick Fleming, Investor Advocate, SEC, Important 

Issues for Investors in 2019: The SEC Speaks in 2019, 

Washington, D.C. (Apr. 8, 2019), https://www.sec.gov/

news/speech/fleming-important-issues-investors-2019. 

114 Peter Driscoll, Director, Office of Compliance 

Inspections and Examinations, SEC, Remarks at the 

SIFMA Operations Conference & Exhibition: Staying 

Vigilant to Protect Investors (May 8, 2019), https://

www.sec.gov/news/speech/driscoll-remarks-sifmaoperations-conference-050819. 

115 Office of Info. And Regulatory Affairs, Office of 

Mgmt. and Budget, Agency Rule List – Fall 2019, 

SEC, available at https://www.reginfo.gov/public/

do/eAgendaMain?operation=OPERATION_GET_

AGENCY_RULE_LIST¤tPub=true&agencyCo

de=&showStage=active&agencyCd=3235&Image58.

x=45&Image58.y=16&csrf_token=143DD8654FCB5

A263E8BF3E26CEEC90D54A278A41BF77433B1F1E

E467F80FA06020990AB0A7A5647FEFF3C9A2567B

CBE76F7 (last visited Nov. 21, 2019). 

116 Kokesh v. SEC, 137 S. Ct. 1635, 1645 (2017). 

117 Report on Objectives, Fiscal Year 2019, supra note 3, 

at 15-16. 

118 SEC, Division of Enforcement, 2019 Annual Report, 

at 21 (Nov. 6, 2019), https://www.sec.gov/files/

enforcement-annual-report-2019.pdf. 

119 Id.

120 Investor Protection and Capital Markets Fairness Act, 

H.R. 4344, 116th Cong. (2019). 

121 Stephen Deane, SEC, Office of the Investor Advocate, 

How the SEC Works to Protect Senior Investors (May 

2019), https://www.sec.gov/about/offices/investorad/

how-the-sec-works-to-protect-senior-investors.pdf. 

122 Stephen Deane, SEC, Office of the Investor Advocate, 

Elder Financial Exploitation: Why it is a concern, 

what regulators are doing about it, and looking ahead

(June 2018), https://www.sec.gov/files/elder-financialexploitation.pdf.
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 55

123 See FINRA, Regulatory Notice 19-27, Retrospective 

Rule Review, FINRA Requests Comment on Rules 

and Issues Relating to Senior Investors, (Aug. 9, 2019), 

https://www.finra.org/sites/default/files/2019-09/

Regulatory-Notice-19-27.pdf.

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

(B)(ii)(V).

125 NASAA, NASAA 2017-2018 Activity Report, Working 

Together to Protect Investors, https://www.nasaa.org/

wp-content/uploads/2019/06/NASAA-2017-2018-

Activity-Report.pdf [hereinafter NASAA, Activity 

Report]. 

126 NASAA, NASAA Enforcement Report: 2019 Report 

Based on 2018 Data (Sept. 2019), https://www.nasaa.

org/52518/nasaa-releases-annual-enforcement-report-5/

[hereinafter NASAA Enforcement Report]. 

127 NASAA, Top Investor Threats, https://www.nasaa.org/

investor-education/fraud-center/top-investor-threats/

(last visited Nov. 19, 2019).

128 SEC, Office of Compliance Inspections and 

Examinations, Examination Priorities for 2019

(Dec. 20, 2018), https://www.sec.gov/files/OCIE%20

2019%20Priorities.pdf. 

129 Letter from Nanette D. Lawson, Interim Chief 

Exec. Officer and Chief Financial Officer, MSRB, 

to Rick A. Fleming, Investor Advocate, SEC, 

RE: Response to Investor Advocate Request 

Highlighting Municipal Market Practices (Nov. 

12, 2019), http://msrb.org/Market-Topics/~/media/

A917F7F313A1457D857A4B9EEB4C99FE.ashx?. 

130 Throughout FY 2019, OIAD staff has engaged in 

conversations with the Division of Enforcement’s Retail 

Strategy Task Force. During FY 2019, the Division 

of Enforcement investigated and recommended 

numerous actions with an eye toward protecting the 

“Main Street” or retail investors including, but not 

limited to, offering frauds, pump-and-dump schemes, 

unscrupulous market participants, cyber threats, 

misconduct by issuers and auditors, and violations 

by financial institutions, investment advisers, brokerdealers, hedge funds, and other regulated market 

participants. Moreover, the Division of Enforcement 

remained focused on individual accountability. 

131 This list of problematic products identified by the SEC 

is based on staff analysis of the alerts and bulletins 

issued by the SEC’s Office of Investor Education 

and Advocacy and the SEC’s Office of Compliance 

Inspections and Examinations during FY 2019. See 

SEC, Office of Investor Education and Advocacy, 

Investor Alerts and Bulletins, https://www.sec.gov/

investor/alerts (last visited Nov. 13, 2019); see 

also SEC, Office of Compliance Inspections and 

Examinations, Risk Alerts, https://www.sec.gov/ocie

(last visited Nov. 13, 2019).

132 See NASAA, Investor Advisories, https://www.nasaa.

org/category/investor-education/investor-advisories/

(last visited Nov. 18, 2019); see also NASAA Activity 

Report, supra note 125; see also NASAA Enforcement 

Report, supra note 126; see also NASAA, Top Investor 

Threats, supra note 127. 

133 This list of problematic products is based on the alerts 

and bulletins issued by FINRA for investors during 

FY 2019.

134 Lawson, supra note 129. 

135 Typically, a municipal bond dealer places a retail 

client’s bid-wanted out to the market and compiles 

the bids received to determine the winning bid. In 

“pennying” or as it may also be called, “last look,” 

the dealer rather than execute a trade with the highest 

bidder, will nominally exceed the high bid to the 

client and buy the bond for the dealer’s own trading 

account. The MSRB has expressed concern that it 

can be harmful to investors over the long-term if the 

practice discourages broad market participation in the 

bidding process and renders the market less efficient. 

Lawson, supra note 130.

136 See Proposed Exemptive Order Granting a Conditional 

Exemption from the Broker Registration Requirements 

of Section 15(a) of the Securities Exchange Act of 1934 

for Certain Activities of Registered Municipal Advisors, 

Exchange Act Release No. 87204, 84 Fed. Reg. 54062 

(proposed Oct. 2, 2019), https://www.sec.gov/rules/

exorders/2019/34-87204.pdf. The proposed Exemptive 

Order would provide municipal advisors registered with 

the SEC a conditional exemption from the requirement 

to register as a broker when engaging in certain limited 

activities in connection with the direct placement of 

municipal securities. The MSRB is considering whether 

this change would result in regulatory disparities and 

potential impact to market transparency. 

137 SEC, Office of the Investor Advocate, Report on Activities, 

Fiscal Year 2018 (Dec. 20, 2018), at 17 https://www.sec.

gov/advocate/reportspubs/annual-reports/sec-investoradvocate-report-on-activities-2018.pdf.

138 SEC, Office of the Investor Advocate, Report on 

Activities, Fiscal Year 2014 (Dec. 23, 2014), at 10, 

https://www.sec.gov/advocate/reportspubs/sec-investoradvocate-report-on-activities-2014.pdf.

139 Id. at 8-9. 

140 SEC, Office of the Investor Advocate, Report on 

Activities, Fiscal Year 2015 (Dec. 23, 2015), at 

16-17, https://www.sec.gov/advocate/reportspubs/

annual-reports/sec-investor-advocate-report-onactivities-2015.pdf. 

141 SEC, Office of the Investor Advocate, Report on 

Activities, Fiscal Year 2017 (Dec. 20, 2017) at 

13-14, https://www.sec.gov/advocate/reportspubs/

annual-reports/sec-investor-advocate-report-onactivities-2017.pdf. 
56 | OFFICE OF THE INVESTOR ADVOCATE

142 SEC, Office of the Investor Advocate, Report on 

Activities, Fiscal Year 2016 (Dec. 21, 2016), at 

20 – 21, https://www.sec.gov/advocate/reportspubs/

annual-reports/sec-investor-advocate-report-onactivities-2016.pdf. 

143 See Robert Freedman, Reverse factoring in cash 

management prompts alarm from Moody’s, 

CFO Dive (Sept. 22, 2019), https://www.cfodive.

com/news/moodys-alarm-reverse-factoring-cashmanagement/563415/ (describing the ability of a 

purchaser to stretch out its payments as the 

“main benefit”).

144 See, e.g., Chris Bryant, SoftBank Invests in an Opaque 

$100 Billion Industry, Bloomberg Opinion (May 

15, 2019), https://www.bloomberg.com/opinion/

articles/2019-05-15/a-100-billion-finance-industry-fliesunder-radar (agreeing with this view). 

145 See Geoff Robinson, et al., Reverse factoring: The 

good, the bad, and the unknown, UBS (May 13, 2019) 

(global research report authored by UBS equities 

analysts), at 1.

146 See Accounting spotlight: Audit Firms urge FASB to 

address reverse factoring blind spot, Sector Comment, 

Moody’s Investors Service (Oct. 21, 2019). 

147 See id. (citing “SCF Barometer 2018/2019,” PwC & 

Supply Chain Finance Community, https://www.pwc.

com/vn/en/deals/assets/scf-barometer-2018-2019.pdf).

148 See supra note 143 (quoting a Moody’s report).

149 See Letter from Big Four Accounting Firms to 

Shayne Kuhaneck, Acting Technical Director, FASB 

(Oct. 2, 2019), https://www.fasb.org/jsp/FASB/

CommentLetter_C/CommentLetterPage&cid=1218220

137090&project_id=AR-2019.

150 Id. at 4.

151 Robert J. Jackson, Jr., Commissioner, SEC, Perpetual 

Dual-Class Stock: The Case Against Corporate Royalty 

(Feb. 15, 2018), https://www.sec.gov/news/speech/

perpetual-dual-class-stock-case-against-corporateroyalty [hereinafter Jackson, The Case Against 

Corporate Royalty]. 

152 See id.

153 See id.

154 See id. (citing Snap Inc., Form S-1 (Feb. 2, 2017) 

(“Holders of our Class A common stock—the only 

class being sold in this offering—are entitle to no vote 

on matters submitted to our stockholders.”)). 

155 See CFA Institute, “Dual-Class Shares: The Good, 

The Bad, and The Ugly: A Review of the Debate 

Surrounding Dual-Class Shares and their Emergence 

in Asia Pacific” (Aug. 2018), at 1, https://www.

cfainstitute.org/-/media/documents/survey/apac-dualclass-shares-survey-report.ashx [hereinafter CFA 

Institute, Dual-Class Shares]. 

156 See id.

157 Law professor Renee Jones has chronicled 

shortcomings of this governance structure for investors, 

employees, consumers and society. See Written 

Testimony of Renee M. Jones, Associate Dean for 

Academic Affairs and Profess of Law, Boston College 

Law School, Before the U.S. House of Representatives, 

Committee on Financial Services, Subcommittee on 

Capital Markets, Securities, and Investments (Sept. 9, 

2019), https://financialservices.house.gov/uploadedfiles/

hhrg-116-ba16-wstate-jonesr-20190911.pdf. See also

Renee M. Jones, The Unicorn Governance Trap, 166 

U. Pa. Law Rev. Online 165, 179-183 (2017) 

158 Jackson, The Case Against Corporate Royalty, supra 

note 151.

159 See CFA Institute, Dual-Class Shares, supra note 

155, at 16-20 (citing empirical research from SEC 

Commissioner Robert J. Jackson, Jr., among others). 

160 Rick Fleming, Investor Advocate, SEC, Dual-Class 

Shares: A Recipe for Disaster, ICGN Miami Conference 

(Oct. 15, 2019), https://www.sec.gov/news/speech/

fleming-dual-class-shares-recipe-disaster [hereinafter 

Fleming, A Recipe for Disaster] citing Connie Loizos, 

In the Dual-Class Shares Debate, the Big Exchanges 

Should Get Off the Sidelines (Sept. 30, 2019), https://

techcrunch.com/2019/09/30/in-the-dual-class-sharesdebate-the-big-exchanges-should-get-off-the-sidelines, 

and “CII letter to Nasdaq on sunset provisions” 

(Oct. 24, 2018), https://www.cii.org/files/issues_

and_advocacy/correspondence/2018/20181024%20

NASDAQ%20Petition%20on%20Multiclass%20

Sunsets%20FINAL.pdf.

161 Fleming, A Recipe for Disaster, supra note 159. 

162 SEC, Recommendation of the Investor Advisory 

Committee: Dual Class and Other Entrenching 

Governance Structures in Public Companies (Mar. 

8, 2018), https://www.sec.gov/spotlight/investoradvisory-committee-2012/recommendation-on-dualclass-shares.pdf.

163 See Jay Clayton, Chairman, SEC, SEC Rulemaking 

Over the Past Year, the Road Ahead and Challenges 

Posed by Brexit, LIBOR Transition and Cybersecurity 

Risks (Dec. 6, 2018), https://www.sec.gov/news/speech/

speech-clayton-120618. 

164 See Second Report of the Alternative Reference 

Rates Committee (Mar. 5, 2018), available at https://

www.newyorkfed.org/medialibrary/Microsites/arrc/

files/2018/ARRC-Second-report.com. 

165 See Jay Clayton, Chairman, SEC, Remarks to the SEC 

Fixed Income Market Structure Advisory Committee

(Nov. 4, 2019), https://www.sec.gov/news/publicstatement/statement-clayton-fimsac-110419.
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 57

166 See Division of Corporation Finance, Division of 

Investment Management, Division of Trading and 

Markets, and Office of the Chief Accountant, SEC, 

Staff Statement on LIBOR Transition (July 12, 2019), 

https://www.sec.gov/news/public-statement/libortransition. 

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

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

169 As used in this report, the term “Ombudsman” may 

refer to the Ombudsman, or to the Ombudsman and 

Office of the Investor Advocate staff and contractors 

directly supporting the ombudsman function.

170 What We Do, SEC (June 10, 2013), https://www.sec.

gov/Article/whatwedo.html.

171 BrokerCheck is a free tool that enables investors to 

research the professional backgrounds of brokers and 

brokerage firms. About BrokerCheck, http://www.

finra.org/investors/about-brokercheck (last visited Nov. 

1, 2018).

172 When an investor opens an account at a brokerage 

firm, the agreement almost always includes a 

mandatory pre-dispute arbitration clause that specifies 

that any legal dispute between the investor and the 

broker will be resolved via FINRA dispute resolution. 

As a result, investors have become aware of FINRA’s 

arbitration and mediation forum.

173 FINRA, Regulatory Notice 19-17, Protecting 

Investors from Misconduct (May 2, 2019), https://

www.finra.org/sites/default/files/2019-05/RegulatoryNotice-19-17.pdf [hereinafter FINRA, Regulatory 

Notice 19-17].

174 See SEC, Office of the Investor Advocate, Report on 

Objectives, Fiscal Year 2020, at 12 (June 27, 2019), 

https://www.sec.gov/files/sec-office-investor-advocatereport-on-objectives-fy2020.pdf [hereinafter Report on 

Objectives, Fiscal Year 2020].

175 FINRA, Regulatory Notice 19-17, p.3 (“FINRA has 

identified certain firms that have a concentration of 

individuals with a history of misconduct, and some of 

these firms consistently hire such individuals and fail 

to reasonably supervise their activities.). The proposed 

rule also touts itself as a partial remedy to the long 

unresolved problem of unpaid arbitration awards. 

176 We note that the new Rule 4111 would operate as 

a soft cap on risk because FINRA firms may exceed 

the acceptable risk thresholds specified in the rule. 

In other words, firms may still hire additional bad 

brokers once the risk limit is reached, provided that the 

firms satisfy a monetary deposit requirement levied by 

FINRA. A hard cap on risk would prevent firms from 

hiring additional bad brokers once the risk threshold is 

reached. Id. at 6.

177 Id. at 7-8.

178 FINRA evaluates firm risk by assessing six different 

categories of events or conditions: registered person 

adjudicated events, registered person pending events, 

registered person termination and internal review 

events, member firm adjudication events, member 

firm pending events, and registered persons associated 

with previously expelled firms. We note that five of 

the six categories measure the average number of 

risk events per registered broker at a firm; the sixth 

category of risk, association with previously expelled 

firms, measures, as a percentage, the concentration of 

registered persons at a firm who were associated, at any 

time in their career, with previously expelled firms.

179 Id. at 11-12.

180 Id. at 12. In addition to providing firms an opportunity 

to consult with FINRA at the initial identification stage, 

the proposed rule also provides firms an opportunity to 

appeal any final designation as a “restricted firm.”

181 Id.

182 Id. 

183 Thirty-two comment letters were submitted through 

the public comment process. See “Comments” tab at 

https://www.finra.org/rules-guidance/notices/19-17. The 

majority of commenters (mostly industry participants) 

expressed opposition to the proposal’s purpose 

and procedural mechanisms. In contrast, certain 

commenters (primarily investor advocacy groups and 

state securities commissioners) offered cautious support 

for the proposal. These commenters were generally 

in favor of FINRA’s stated objective, but offered 

substantial criticism of the proposed methodology. 

184 FINRA, Regulatory Notice 19-17, at 6 (stating “this 

proposal also aims to preserve funds for payment of 

arbitration awards against” member firms); see also, 

id. at 26 (stating “the proposal may also help address 

unpaid arbitration awards associated with firms 

identified as Restricted Firms under the proposal).

185 See SEC, Office of the Investor Advocate, Report 

on Activities, Fiscal Year 2018 (Dec. 20, 2018), at 

18-20, https://www.sec.gov/advocate/reportspubs/

annual-reports/sec-investor-advocate-report-onactivities-2018.pdf, [hereinafter Report on Activities, 

Fiscal Year 2018].

186 Specifically, Appendix D to Regulatory Notice 19-17 

shows that 1.6% to 2.4% of firms would have been 

met the preliminary criteria for identification by the 

proposed rule in 2013 to 2018. See https://www.

finra.org/sites/default/files/2019-05/Regulatory_

Notice_19-17_Attachment_D.pdf.

187 See Report on Activities, Fiscal Year 2018, supra note 

186, at 18; Report on Objectives, Fiscal Year 2020, 

supra note 174. 
58 | OFFICE OF THE INVESTOR ADVOCATE

188 See FINRA, Regulatory Notice 18-06, Membership 

Application Program (Feb. 8, 2018), http://www.finra.

org/sites/default/files/notice_doc_file_ref/RegulatoryNotice-18-06.pdf [hereinafter FINRA, Regulatory 

Notice 18-06] (limiting the ability of firms to transfer 

assets to avoid satisfaction of judgements and the 

ability of firms to expand by adding associated persons 

with certain pending arbitration claims or unpaid 

arbitration awards or settlements, subject to applicable 

materiality consultations); FINRA, Regulatory Notice 

18-16, High Risk Brokers, (Apr. 30, 2018), http://www.

finra.org/sites/default/files/Regulatory-Notice-18-16.

pdf [hereinafter FINRA, Regulatory Notice 18-16] 

(requiring each member firm to seek a materiality 

consultation with FINRA if it intends to hire a broker 

with a history of certain “specified risk events” or the 

broker seeks to become an owner, control person or 

principal of the firm). See also FINRA, Regulatory 

Notice 18-23, Membership Application Proceedings, at 

42 (July 26, 2018), http://www.finra.org/sites/default/

files/notice_doc_file_ref/Regulatory-Notice-18-23.

pdf (noting that FINRA has refrained from setting 

additional standards “pending further development” 

related to outstanding proposals in Regulatory Notice 

18-06 and Regulatory Notice 18-16 “to strengthen 

controls on brokers with a history of past misconduct 

and to ensure greater accountability for firms that 

choose to employ high-risk brokers, and to incentivize 

payment of arbitration awards.”).

189 See Letter from John Jay Legal Services, Inc. to FINRA 

(July 1, 2019), at 2, https://www.finra.org/sites/default/

files/2019-07/19-17_JohnJayLegal_comment.pdf; and 

Letter from Sichenzia Ross Ference LLP to FINRA 

(June 28, 2019) at 5, https://www.finra.org/sites/

default/files/2019-06/19-17_SRF_comment.pdf. 

190 Several states have created their own restitution funds 

in the absence of action at the federal level. However, 

state funds are typically limited in size and geographic 

availability. The resulting patchwork coverage is uneven 

and provides inadequate protection for investors. See

Joseph Maglich, Should States Compensate Ponzi 

Scheme Victims: Montana and New Hampshire Think 

So, Forbes.com (Mar. 18, 2013), https://www.forbes.

com/sites/jordanmaglich/2013/03/18/should-statescompensate-ponzi-scheme-victims-montana-and-newhampshire-think-so/#2bc942124374.

191 See Report on Activities, Fiscal Year 2018, supra note 

185, at 33. 

192 Id. These remedies may include, for example, fees or 

penalties levied on FINRA members and increased 

insurance requirements. See also id. at 34.

193 As formal clinic names vary, for purposes of this 

Report, all the law school securities law, securities 

arbitration, and investor protection focused clinics 

referenced herein are referred to as investor advocacy 

clinics or clinics.

194 Press Release, SEC, SEC Announces Pilot Securities 

Arbitration Clinic to Help Small Investors—Levitt 

Responds to Concerns Voiced at Town Meetings, 

97-101 (Nov. 12, 1997), available at https://www.sec.

gov/news/press/pressarchive/1997/97-101.txt.

195 See id.

196 Ex-Qwest Chairman Settles IPO suit, CNN Money 

(May 12, 2003), https://money.cnn.com/2003/05/13/

news/spitzer_ipo/index.htm.

197 Press Release, Univ. of Pittsburgh, Pitt Law School 

to Open Securities Arbitration Clinic (May 2, 2011), 

http://www.news.pitt.edu/news/pitt-law-school-opensecurities-arbitration-clinic.

198 See FINRA Investor Education Foundation, Press 

Release, FINRA Foundation Announces $1 Million 

in Grants to Fund Securities Advocacy Clinics (Jan. 

28, 2010), https://www.finra.org/media-center/

news-releases/2010/finra-foundation-announces-1-

million-grants-fund-securities-advocacy; see also Jill 

Gross, The Improbable Birth and Conceivable Death 

of the Securities Arbitration Clinic, 15 CARDOZO J. 

CONFLICT RESOL. 597, 604 (2014) (“As a result 

of these grants, clinics opened at other law schools 

such as Florida International University, Howard 

University, Suffolk University, and Pepperdine in 

2009; at Seton Hall University and University of 

Miami in 2010; and at Georgia State and Michigan 

State University in 2012.”).

199 In 2012, 22 investor advocacy clinics were in operation: 

twelve located in New York (Pace University Law 

School, Fordham Law School, Brooklyn Law School, 

Buffalo Law School, Benjamin N. Cardozo School of 

Law, Cornell University School of Law , Hofstra School 

of Law, New York Law School, St. John’s University 

School of Law, Syracuse University College of Law, 

Touro Law Center); two each in California (University 

of San Francisco School of Law, Pepperdine University 

School of Law), and Florida (Florida International 

University School of Law and University of Miami 

School of Law); and one each in District of Columbia 

(Howard University School of Law), Georgia (Georgia 

State University College of Law), Illinois (Northwestern 

University School of Law), Massachusetts (Suffolk 

University School of Law), Michigan (Michigan 

State University School of Law), New Jersey (Seton 

Hall University School of Law), and Pennsylvania 

(University of Pittsburgh School of Law). During the 

fifteen year span from 1997 to 2012, investor advocacy 

clinics were also established, and subsequently closed, 

at Albany Law School (2004 – 2005) and Duquesne 

Law School (2001- 2011). See Gross, supra note 198, 

at 602-603. 
REPORT ON ACTIVITIES: FISCAL YEAR 2019 | 59

200 As of the close of the Reporting Period, there were 

fourteen clinics in active operation: six located in New 

York (Benjamin N. Cardozo School of Law, Cornell 

Law School, Fordham University School of Law, 

New York Law School, Pace University School of 

Law, and St. John’s University School of Law); two in 

California (Pepperdine University School of Law, and 

University of San Francisco School of Law); and one 

each in the District of Columbia (Howard University 

School of Law), Florida (University of Miami School 

of Law), Illinois (Northwestern University School 

of Law), Nevada (University of Nevada Las Vegas 

School of Law), New Jersey (Seton Hall University 

School of Law), and Pennsylvania (University of 

Pittsburgh School of Law). In addition to these clinics, 

Brooklyn Law School maintains an investor advocacy 

clinic; however, it is unclear if the clinic is currently in 

operation or actively representing clients. 

201 The Georgia State University College of Law Investor 

Advocacy Clinic and the Syracuse University School of 

Law Securities Arbitration Clinic have closed.

202 Clinic clients often include senior citizens as well as 

middle-class and working class Americans such as 

hairdressers, mail carriers, welders, schoolteachers, 

first-time investors, and millennials. See Letter from 

Nicole G. Iannarone Director, Investor Advocacy 

Clinic, Georgia State University College of Law, et 

al. to FINRA (June 19, 2017), at 2, https://www.

finra.org/sites/default/files/notice_comment_file_ref/

SN-32117_G.

203 SEC, Recommendation of the Investor Advisory 

Committee: Financial Support for Law School Clinics 

that Support Investors (Mar. 8, 2018), https://www.

sec.gov/spotlight/investor-advisory-committee-2012/

law-clinics-recommendation.pdf.

204 Id.

205 Id.

206 During this fiscal year, LSCOP programming included 

a visit to the SEC by students enrolled in the George 

Washington University School of Law securities 

seminar; a visit by the Ombudsman to the Georgia 

State University College of Law Investor Advocacy 

Clinic, and the first SEC Investor Advocacy Clinic 

Summit. See Report on Objectives, Fiscal Year 2020, 

supra note 174, at 26. 

207 Id. at 26. The Ombudsman acknowledges and 

appreciates the contributions of Daniel Morris, 

Attorney-Adviser, SEC Division of Corporation 

Finance, on detail to the Office during the Reporting 

Period, in making the Summit a success.

208 Due to the partial federal government shutdown, we 

lost several weeks of Summit planning, as only certain 

SEC staff were permitted to work on critical agency 

matters during the shutdown. See Meghan Morris, 

The government shutdown hits the SEC starting 

Thursday—here’s how it’s impacted, Business Insider 

(Dec. 26, 2018), https://markets.businessinsider.com/

news/stocks/how-sec-affected-by-partial-governmentshutdown-2018-12-1027832560. 

209 The speakers discussed the importance of investor 

advocacy clinics to retail investors with small claim 

amounts or lower incomes, and the need for students to 

pursue meaningful work at the federal and state levels 

on behalf of retail investors.

210 Each breakout session was comprised of law students 

and directors from three or four clinics and was 

facilitated by a team of senior SEC attorneys. 

211 SEC, Concept Release on Harmonization of Securities 

Offering Exemptions, Securities Act Release No. 10649, 

Exchange Act Release No. 86129, Investment Advisers 

Act Release No. 5256, Investment Company Act Release 

No. 33512, 84 Fed. Reg. 30460 (June 26, 2019), 

https://www.sec.gov/rules/concept/2019/33-10649.pdf

[hereinafter Harmonization Concept Release].

212 Regulation Best Interest, supra note 76. 

213 Each speaker presented a perspective on the importance 

of protecting retail investors, whether through 

rulemaking, federal and state enforcement actions, or 

the arbitration process.

214 Student presentations were scheduled to ensure that 

each clinic was given an equal amount of time to 

present to the staff. 

215 The clinics were responsible for selecting and 

developing their presentation topics and content. SEC 

staff did not exercise any editorial control over the 

content of the clinic presentations.

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

217 Id.

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

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

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

221 According to Exchange Act Section 4(g)(6)(B)(ii), 15 

U.S.C. § 78d(g)(6)(B)(ii), a Report on Activities must 

include several enumerated items, and it may include 

“any other information, as determined appropriate by 

the Investor Advocate.”

222 SEC, Recommendation of the Investor Advisory 

Committee Regarding Proposed Regulation Best 

Interest, Form CRS, and Investment Advisers Act 

Fiduciary Guidance (Nov. 7, 2018), https://www.

sec.gov/spotlight/investor-advisory-committee-2012/

recommendation-on-proposed-reg-bi.pdf.

223 17 C.F.R. §§ 200.735-3(b)(2)(i), 230122 (2014); 

Exchange Act § 24(b), 15 U.S.C. § 78x; 5 U.S.C. 

§ 552a(i)(1); SECR18-2, Section 8.5 (Nonpublic 

Information) (July 31, 2005). 
60 | OFFICE OF THE INVESTOR ADVOCATE

224 SEC, Recommendation of the Investor Advisory 

Committee: Proxy Plumbing (Sept. 5, 2019), 

https://www.sec.gov/spotlight/investor-advisorycommittee-2012/iac-recommendation-proxyplumbing.pdf. 

225 SEC, Recommendation of the Investor Advisory 

Committee: Structural Changes to the US Capital 

Markets Re Investment Research in a Post-MiFID II 

World (July 25, 2019), https://www.sec.gov/spotlight/

investor-advisory-committee-2012/investment-researchpost-mfid-ii-world.pdf.

226 See SEC, Press Release, SEC Announces Extension 

of Temporary Measure to Facilitate Cross-Border 

Implementation of the European Union’s MiFID II’s 

Research Provisions (Nov. 4, 2019), at https://www.sec.

gov/news/press-release/2019-229.

227 SEC, Recommendation of the Investor Advisory 

Committee Regarding Human Capital Management 

Disclosure (Mar. 28, 2019), https://www.sec.gov/

spotlight/investor-advisory-committee-2012/humancapital-disclosure-recommendation.pdf.

228 See Modernization of Regulation S-K Items 101, 103, 

and 105, Release Nos. 33–10668 and 34–86614, 

84 Fed. Reg. 44358 (Aug. 23, 2019), at https://

www.govinfo.gov/content/pkg/FR-2019-08-23/

pdf/2019-17410.pdf. See also SEC, Press Release, 

SEC Proposes to Modernize Disclosures of Business, 

Legal Proceedings, and Risk Factors Under Regulation 

S-K (Aug. 8, 2019), https://www.sec.gov/news/pressrelease/2019-148.

229 SEC, Recommendation of the Investor Advisory 

Committee in Support of the Transaction Fee Pilot 

for NMS Stocks (Sept. 13, 2018), https://www.sec.

gov/spotlight/investor-advisory-committee-2012/

recommendation-transaction-fee-pilot-for-nms-stocks.pdf.

230 SEC, Transaction Fee Pilot for NMS Stock, Release 

No. 34-84875 (Dec. 19, 2018), https://www.sec.gov/

rules/final/2018/34-84875.pdf.

231 SEC, Order Issuing Stay (Mar. 28, 2019), https://www.

sec.gov/rules/other/2019/34-85447.pdf.

232 SEC, Recommendation of the Investor Advisory 

Committee: Financial Support for Law School Clinics 

that Support Investors (Mar. 8, 2018), https://www.

sec.gov/spotlight/investor-advisory-committee-2012/

law-clinics-recommendation.pdf.

233 SEC, Recommendation of the Investor Advisory 

Committee: Dual Class and Other Entrenching 

Governance Structures in Public Companies (Mar. 8, 

2018), https://www.sec.gov/spotlight/investor-advisorycommittee-2012/recommendation-on-dual-class-shares.pdf.

234 SEC, Recommendation of the Investor Advisory 

Committee Regarding Mutual Fund Cost Disclosure 

(Apr. 14, 2016), https://www.sec.gov/spotlight/investoradvisory-committee-2012/recommendation-mf-feedisclosure-041916.pdf. 

235 Request for Comment on Fund Retail Investor 

Experience and Disclosure, Securities Act Release No. 

10503, Exchange Act Release No. 83376, Investment 

Company Act Release No. 33113, 83 Fed. Reg. 

26891 (June 11, 2018), https://www.sec.gov/rules/

other/2018/33-10503.pdf.

236 See Updated Disclosure Requirements and Summary 

Prospectus for Variable Annuity and Variable Life 

Insurance Contracts, Securities Act Release No. 

10569, Exchange Act Release No. 84508, Investment 

Company Act Release No. 33286, 83 Fed. Reg. 

61730 (Nov. 30, 2018,) at https://www.federalregister.

gov/documents/2018/11/30/2018-24376/updateddisclosure-requirements-and-summary-prospectus-forvariable-annuity-and-variable-life

237 Id. at 61735, n. 39. 

238 SEC, Recommendation of the Investor Advisory 

Committee: Accredited Investor Definition (Oct. 9, 

2014), https://www.sec.gov/spotlight/investor-advisorycommittee-2012/investment-advisor-accrediteddefinition.pdf. 

239 Harmonization Concept Release, supra note 211. 

240 Staff of the SEC, Report on the Review of the 

Definition of “Accredited Investor” (Dec. 18, 

2015), https://www.sec.gov/corpfin/reportspubs/

special-studies/review-definition-of-accreditedinvestor-12-18-2015.pdf.

241 SEC, Recommendations of the Investor Advisory 

Committee: Impartiality in the Disclosure of 

Preliminary Voting Results (Oct. 9, 2014), https://www.

sec.gov/spotlight/investor-advisory-committee-2012/

impartiality-disclosure-prelim-voting-results.pdf. 

242 SEC, Recommendations of the Investor Advisory 

Committee Regarding SEC Rulemaking to Explore 

Universal Proxy Ballots (July 25, 2013), https://www.

sec.gov/spotlight/investor-advisory-committee-2012/

universal-proxy-recommendation-072613.pdf. 

243 Universal Proxy, Exchange Act Release No. 79164, 

Investment Company Act Release No. 32339, 81 

Fed. Reg. 79122 (Nov. 10, 2016), https://www.

federalregister.gov/documents/2016/11/10/2016-26349/

universal-proxy.

OFFICE OF THE 

INVESTOR ADVOCATE

U.S. Securities and 

Exchange Commission

100 F Street NE

Washington, DC 20549

202.551.3302