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REPORT ON OBJECTIVES FI SCAL YEAR 2015

Offce of the
Investor
Advocate
U. S . S E CURI T I E S AND E XCHANGE COMMI S S I ON
TheOfceoftheInvestorAdvocatewas
establishedpursuanttoSection915ofthe
Dodd-FrankWallStreetReformand
ConsumerProtectionActof2010,as
codiedunderSection4(g)oftheSecurities
ExchangeActof1934,15U.S.C.78d(g).

OFFICEOFTHEINVESTORADVOCATE
REPORTONOBJECTIVES
F I S CAL YEAR 2 01 5
THEOFFICEOFTHEINVESTORADVOCATEwasestablishedpursuanttoSection915of
theDodd-FrankWallStreetReformandConsumerProtectionActof2010(theDodd-Frank
Act),ascodiedunderSection4(g)oftheSecuritiesExchangeActof1934(theExchange
Act),15U.S.C.78d(g).ExchangeActSection4(g)(2)(A)(ii)providesthattheInvestorAdvo-
catebeappointedbytheChairoftheU.S.SecuritiesandExchangeCommission(theCommis-
sionortheSEC)inconsultationwiththeotherCommissionersandthattheInvestorAdvo-
catereportdirectlytotheChair.
1
OnFebruary24,2014,SECChairMaryJoWhiteappointed
RickA.FlemingastheCommissionsrstInvestorAdvocate.
ExchangeActSection4(g)(6)requirestheInvestorAdvocatetoletworeportsperyearwith
theCommitteeonBanking,Housing,andUrbanAffairsoftheSenateandtheCommitteeon
FinancialServicesoftheHouseofRepresentatives.
2
AReportonObjectivesisduenotlaterthan
June30ofeachyear,anditspurposeistosetforththeobjectivesoftheInvestorAdvocateforthe
followingscalyear.
3
TheinstantreportistheInvestorAdvocatesrstReportonObjectives.It
containsasummaryoftheInvestorAdvocatesprimaryobjectivesforFiscalYear2015,begin-
ningOctober1,2014.
AReportonActivitiesisduenolaterthanDecember31ofeachyear.
4
Thisreportshalldescribe
theactivitiesoftheInvestorAdvocateduringtheimmediatelyprecedingscalyear.Amongother
things,thereportmustincludeinformationonstepstheInvestorAdvocatehastakentoimprove
theresponsivenessoftheCommissionandself-regulatoryorganizations(SROs)toinvestor
concerns,asummaryofthemostseriousproblemsencounteredbyinvestorsduringthereporting
period,identicationofCommissionorSROactionthatwastakentoaddressthoseproblems,
andrecommendationsforadministrativeandlegislativeactionstoresolveproblemsencountered
byinvestors.
5
TherstsuchreportwillbeledbyDecember31,2014,andwilldescribethe
activitiesoftheOfceoftheInvestorAdvocatefromitsinceptiononFebruary24,2014,through
theremainderofFiscalYear2014,endingSeptember30,2014.
Disclaimer: PursuanttoSection4(g)(6)(B)(iii)oftheExchangeAct,15U.S.C.78d(g)(6)(B)(iii),this
ReportisprovideddirectlytoCongresswithoutanypriorrevieworcommentfromtheCommission,any
Commissioner,anyotherofceroremployeeoftheCommission,ortheOfceofManagementandBudget.
Accordingly,theReportexpressessolelytheviewsoftheInvestorAdvocate.Itdoesnotnecessarilyreect
theviewsoftheCommission,theCommissioners,orstaffoftheCommission,andtheCommissiondis-
claimsresponsibilityfortheReportandallanalyses,ndings,andconclusionscontainedherein.
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | i
CONTENTS
MESSAGEFROMTHEINVESTORADVOCATE. . . . . . . . . . . . . . . . . . . . . . . . . .1
OBJECTIVESOFTHEINVESTORADVOCATE. . . . . . . . . . . . . . . . . . . . . . . . . 5
AssistingRetailInvestors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
IdentifyingAreasinWhichInvestorsWouldBenetFromRegulatoryChanges . . . . . . . . 5
IdentifyingProblemswithFinancialServiceProvidersandInvestmentProducts . . . . . . . . .6
AnalyzingthePotentialImpactonInvestorsofProposedRulesandRegulations. . . . . . . . 6
ProposingAppropriateChangestotheCommissionandtoCongress. . . . . . . . . . . . . . 6
AppointinganOmbudsmanandStafngtheOfceoftheInvestorAdvocate . . . . . . . . . 6
Rulemaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SupportingtheInvestorAdvisoryCommittee . . . . . . . . . . . . . . . . . . . . . . . . . . 7
POLICYAGENDAFORFISCALYEAR2015. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
EquityMarketStructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
InvestorFlight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
MunicipalMarketReform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
DataProtectionandCybersecurity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
EffectiveDisclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ElderAbuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
RECOMMENDATIONOFTHEINVESTORADVOCATE. . . . . . . . . . . . . . . . . . . . .15
SUMMARYOFIACRECOMMENDATIONSANDSECRESPONSES . . . . . . . . . . . . . .19
Crowdfunding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
DecimalizationandTickSizes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
LegislationtoFundInvestmentAdviserExaminations. . . . . . . . . . . . . . . . . . . . . .21
Broker-DealerFiduciaryDuty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
UniversalProxyBallot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
DataTagging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
TargetDateMutualFunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
JOBSAct:GeneralSolicitationandAdvertising . . . . . . . . . . . . . . . . . . . . . . . . . 22
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | iii
Ipersonallyprosecutedaninvestmentadviserwho
stolemorethan$7millioninaPonzischeme.He
wassenttoprisonforhiscrime,buthisclients
wereleftunabletorecovertheirfundstheir
dreamsofacomfortableretirementshatteredby
alicensedprofessional.Iamconvincedthata
morefrequentexaminationcyclewouldhave
ledtoanearlierdiscoveryoftheschemeand
minimizedtheharm....

MESSAGEFROMTHE
INVESTORADVOCATE
O
nFebruary24,2014,theOfceoftheInvestorAdvocate(theOfce)wascreatedat
theSecuritiesandExchangeCommissionwhenChairMaryJoWhitesworemeinto
serveastheCommissionsrstInvestorAdvocate.Itismyprivilegetoservealongside
thethousandsofotherdedicatedemployeesattheCommissionwhospendeachdayprotecting
investors.
COREFUNCTIONS
TheOfcehasthreecorefunctions.First,wewillworktoensure
thatthevoicesofinvestorsareheardasdecisionsarebeingmade
withintheCommission,atself-regulatoryorganizations(SROs),
andinCongress.AsmorefullydescribedinthisReport,thescope
ofourstatutorymandateisquitebroad.Weareexpectednotonly
tomonitorcurrentpolicyinitiatives,butalsotoidentifyproblems
thatinvestorshavewithinvestmentproductsandnancialservice
providersandtoproposelegislationorregulationsthatpromotethe
interestsofinvestors.
AnothercorefunctionoftheOfcewillbetheworkofan
Ombudsman.PursuanttoSection4(g)(8)oftheSecuritiesExchangeActof1934,theInvestor
AdvocatemustappointanOmbudsmanwithin180daysaftertheInvestorAdvocatesappoint-
ment.TheOmbudsmanwillactasaliaisontoresolveproblemsthatretailinvestorsmayhave
withtheCommissionorwithanSRO.
TheOfcewillalsoprovidestaffandoperationalsupportfortheSECsInvestorAdvisoryCom-
mittee(theCommitteeortheIAC),agroupestablishedbySection911oftheDodd-Frank
Acttopromoteinvestorcondenceandprotectinvestorsinterests.TheInvestorAdvocateisa
statutorymemberoftheIACandparticipatesinitsactivities.
OBJECTIVESFORFISCALYEAR2015
TheprimaryobjectivesoftheOfceforFiscalYear2015willreectourthreecorefunctions.
Forexample,wewillsupporttheworkoftheIACinavarietyofwaysinthecomingyear.We
willparticipateinsubcommitteeconferencecalls,assistinconnectingtheIACwithsubjectmat-
terexpertsattheCommission,prepareminutes,andmakeallofthearrangementsforin-person
Committeemeetings.AsvacanciesoccurontheCommittee,wewillalsoprocesstheappoint-
mentsofnewmembers.
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | 1

Onceselected,theOmbudsmanmustassessthevariouschannelsinwhichinvestorscurrently
communicatewiththeCommissionanddeterminewhichofthosecommunicationsshouldbe
routedtotheOmbudsman.TheOmbudsmanmustestablishandimplementsystemsthatpre-
scribehowfuturecomplaintsaretobemade,received,andactedupon,includingthescopeand
mannerofformalinvestigationsandinformalresolutions.
Asaroutinematter,theOfcewillreviewrulemakingsthattheCommissionandSROspropose,
inordertoensurethattheproposalsgiveappropriateconsiderationtotheneedsofinvestors.
Wewillstrivetoengageintherulemakingprocessearlyon,whileconceptsarestilldeveloping,
insteadofwaitingtocommentuponnishedproposals.
Inadditiontoreviewingrulemakingsastheyoccur,wewillbeforward-lookingandattemptto
buildmomentumforreformsthatbenetinvestors.However,withaninitialstaffofsixemploy-
ees,andgiventhebroadscopeofpolicyissuesimpactinginvestors,itseemsprudenttonarrow
ourfocustoamanageablenumberofissuesinwhichwecandevelopexpertiseandprovidea
strongvoiceforinvestors.Towardthisend,wehavedevelopedaPolicyAgendaforFiscalYear
2015thatisdescribedingreaterdetailinthisReport.
Indevelopingourpolicyagenda,wehavebeenmindfuloftherecommendationsalreadymade
bytheIAC.GiventheresourceconstraintsoftheOfce,wedonotwishtoduplicatethework
oftheCommittee.Therefore,wheretheIAChasspokentoanissue,wearelesslikelytoaddress
thatissueindependently.However,becausethoseissuesareimportanttoinvestorsandwould
logicallybeapartoftheOfcespolicyagenda,wewillspotlighttherecommendationsofthe
IACinourreportstoCongress.Accordingly,youwillndinthisReportalistoftheIACsof-
cialrecommendationstotheCommission,alongwithasummaryoftheCommissionsresponse
toeachIACrecommendation.
FIRSTRECOMMENDATIONOFTHEINVESTORADVOCATE
ByJune30ofeachyear,theInvestorAdvocateisrequiredtosubmitareporttoCongressoutlin-
ingobjectivesforthecomingscalyear(theReportonObjectives).ByDecember31,theOf-
cemustsubmitareportonitsactivitiesforthepreviousscalyear(theReportonActivities).
TheReportonActivitiesmustincluderecommendationsforsuchlegislativeactionsasmaybe
appropriatetoresolveproblemsencounteredbyinvestors.
AlthoughourrstReportonActivitiesisnotdueuntilDecember31,weincludewithinthis
inauguralReportonObjectivesarecommendationtoaddressasubstantialandcontinuingrisk
toinvestors.Specically,werecommendthatCongressprovidesufcientresourcestotheSECto
conductanadequatenumberofinvestmentadviserexaminations.
WhileworkingasGeneralCounselfortheOfceoftheKansasSecuritiesCommissioner,I
personallyprosecutedaninvestmentadviserwhostolemorethan$7millioninaPonzischeme.
Hewassenttoprisonforhiscrime,buthisclientswereleftunabletorecovertheirfundstheir
dreamsofacomfortableretirementshatteredbyalicensedprofessional. Iamconvincedthat
amorefrequentexaminationcyclewouldhaveledtoanearlierdiscoveryoftheschemeand
minimizedtheharm,andtheStateofKansassubsequentlyenhanceditsexaminationprogramto
detersuchmisconductinthefuture.
2 | OF F I CE OF T HE I NVESTOR ADVOCAT E

Investorsneedasimilarenhancementtodayatthefederalleveltoprovideformorefrequent
examinationsofSEC-registeredinvestmentadvisers.Whilemostadvisersobservethehighest
standardsofintegrity,itisdifcultfortheCommissiontodetectlessethicalbehaviorswhenthe
Commissionexaminesonly9percentofitsregistrantseachyear.Asyoureadthis,itisquitepos-
sibleevenlikelythatinvestorssomewhereinthiscountryarebeingdefraudedbyanunscru-
pulousinvestmentadviserwhosecrimeshavenotyetcometolight.Otherinvestorscontinueto
sufferabusethroughvariousunethicalpractices,includingexcessivefees,excessivetrading,and
undisclosedconictsofinterest.MorefrequentcomplianceexaminationswillallowtheSECto
haltthesetypesofactivitiessoonerandwillprovideastrongerdeterrenttoadviserswhomight
otherwisesuccumbtothetemptationtostealorengageinunethicalpractices.
Asdiscussedherein,thisissuepresentsarareconvergenceofinterests,whereboththeregulator
andtheregulatedgenerallyagreeontheproblemandthesolution.AllthatisneededisCongres-
sionalaction.
CONCLUSION
ItismyhonortosubmitthisrstReportonObjectivesonbehalfoftheOfceoftheInvestor
Advocate.IwouldbepleasedtoanswerquestionsfromMembersofCongress.
Sincerely,
RICKA.FLEMING
InvestorAdvocate
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | 3

OBJECTIVESOFTHE
INVESTORADVOCATE
T
heInvestorAdvocateisresponsibleforperformingseveralenumeratedstatutoryfunc-
tions.TheobjectivesoftheInvestorAdvocateforFiscalYear2015aretostafftheOfce
oftheInvestorAdvocateandtobeginmeetingthestatutorypurposesoftheOfce,asset
forthinExchangeActSection4(g)(4),15U.S.C.78d(g)(4).
Bystatute,theInvestorAdvocateshallperformthefollowingfunctions:
(A) assistretailinvestorsinresolvingsignicantproblemssuchinvestorsmayhave
withtheCommissionorwithSROs;
(B) identifyareasinwhichinvestorswouldbenetfromchangesintheregulations
oftheCommissionortherulesofSROs;
(C) identifyproblemsthatinvestorshavewithnancialserviceprovidersand
investmentproducts;
(D) analyzethepotentialimpactoninvestorsofproposedregulationsoftheCom-
missionandrulesofSROs;and
(E) totheextentpracticable,proposetotheCommissionchangesintheregulations
orordersoftheCommissionandtoCongressanylegislative,administrative,or
personnelchangesthatmaybeappropriatetomitigateproblemsidentiedand
topromotetheinterestsofinvestors.
ASSISTINGRETAILINVESTORS
ExchangeActSection4(g)(4)(A)directstheInvestorAdvocatetoassistretailinvestorsinre-
solvingsignicantproblemssuchinvestorsmayhavewiththeCommissionorwithSROs.
6
As
discussedbelow,theInvestorAdvocatewillappointanOmbudsmanto,amongotherthings,
actasaliaisonbetweentheCommissionandanyretailinvestorinresolvingproblemsthatretail
investorsmayhavewiththeCommissionorwithSROs.
7
Incarryingouttheseduties,theOm-
budsmanisauthorizedtoutilizepersonneloftheCommissiontotheextentpracticable.
8
IDENTIFYINGAREASINWHICHINVESTORSWOULD
BENEFITFROMREGULATORYCHANGES
ExchangeActSection4(g)(4)(B)authorizestheInvestorAdvocatetoidentifyareasinwhich
investorswouldbenetfromchangesintheregulationsoftheCommissionortherulesofSROs.
9
Thisisabroadmandate.ItenablestheInvestorAdvocatetoexaminetheentireregulatory
scheme,includingexistingrulesandregulations,toidentifythoseareasthatcouldbeimproved
forthebenetofinvestors.Forexample,theInvestorAdvocatemaylookattherulesandregula-
tionsgoverningexistingequitymarketstructuretodeterminewhetheranychangeswouldbenet
investors.Similarly,theInvestorAdvocatemayreviewcurrentmunicipalmarketpracticesto
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | 5

evaluatewhetheranychangesmightbenetinvestors.Theseconcernsarediscussedingreater
detailinthesectionentitledPolicyAgendaforFiscalYear2015.
IDENTIFYINGPROBLEMSWITHFINANCIALSERVICE
PROVIDERSANDINVESTMENTPRODUCTS
ExchangeActSection4(g)(4)(C)requirestheInvestorAdvocatetoidentifyproblemsthatinves-
torshavewithnancialserviceprovidersandinvestmentproducts.
10
TheInvestorAdvocate
willmonitorinvestorinquiriesandcomplaints,SECandSROstaffreports,enforcementactions,
andotherdatatodeterminewhichnancialserviceprovidersandinvestmentproductsmaybe
problematic.
ANALYZINGTHEPOTENTIALIMPACTONINVESTORSOF
PROPOSEDRULESANDREGULATIONS
ExchangeActSection4(g)(4)(D)directstheInvestorAdvocatetoanalyzethepotentialimpacton
investorsofproposedregulationsoftheCommissionandproposedrulesofSROs.
11
Asamatter
ofroutine,therefore,theOfcewillreviewrulemakingsofinteresttoinvestors.Itwillalsocom-
municatewithinvestorsandtheirrepresentativestodeterminethepotentialimpactoninvestors
ofproposedrules.
Tofulllthedualstatutorymandateofanalyzingthepotentialimpactofproposedrulesand
identifyingareasinwhichinvestorswouldbenetfromchangestotherules,theInvestorAdvo-
cateconsidersitimperativetobeinvolvedinrulemakingsattheearlieststage.Becominginvolved
inarulemakingatinceptionisvitaliftheInvestorAdvocateistoplayaconstructiveroleon
behalfofinvestorsintherulemaking.
PROPOSINGAPPROPRIATECHANGESTOTHE
COMMISSIONANDTOCONGRESS
ExchangeActSection4(g)(4)(E)providesthat,totheextentpracticable,theInvestorAdvocate
mayproposetotheCommissionchangesintheregulationsorordersoftheCommissionandto
Congressanylegislative,administrative,orpersonnelchangesthatmaybeappropriatetomiti-
gateproblemsidentiedandtopromotetheinterestsofinvestors.
12
ConsistentwithExchangeActSection4(g)(4)(E),theInvestorAdvocatehasidentiedaseri-
ousrisktoinvestorsthatwarrantsimmediateattention.Specically,theInvestorAdvocate
hasidentiedsignicantcapacitychallengesintheCommissionsregisteredinvestmentadviser
examinationprogramthat,ifnotaddressedimmediately,willcontinuetobedetrimentaltothe
interestsofinvestors.Tomitigatethisproblemandpromotetheinterestsofinvestors,theInves-
torAdvocateproposesthatCongressapproveadequatefundingfortheSEC,andfortheSECs
OfceofComplianceInspectionsandExaminationsinparticular,toprovideresourcesformore
frequenton-siteexaminationsofSEC-registeredinvestmentadvisers.TheRecommendationof
theInvestorAdvocatesectionofthisReportcontainsadetaileddiscussionofthisproblemand
therecommendedsolution.
APPOINTINGANOMBUDSMANANDSTAFFINGTHE
OFFICEOFTHEINVESTORADVOCATE
TheInvestorAdvocatemayretainoremployvariousstaffastheInvestorAdvocatedeemsnec-
essarytocarryoutthefunctions,powers,anddutiesoftheOfce.
13
TheInvestorAdvocateis
alsoresponsibleforappointinganOmbudsmanto: (i)actasaliaisonbetweentheCommission
6 | OF F I CE OF T HE I NVESTOR ADVOCAT E

andanyretailinvestorinresolvingproblemsthatretailinvestorsmayhavewiththeCommis-
sionorwithSROs;(ii)reviewandmakerecommendationsregardingpoliciesandproceduresto
encouragepersonstopresentquestionstotheInvestorAdvocateregardingcompliancewiththe
securitieslaws;and(iii)establishsafeguardstomaintainthecondentialityofcommunications
betweeninvestorsandtheOmbudsman.
14
TheInvestorAdvocatemustappointtheOmbuds-
mannotlaterthan180daysfollowingthedateoftheInvestorAdvocatesappointment.
15
Inthecomingyear,theInvestorAdvocatewillcontinuetohirestaff,includingtheOmbudsman.
Inaddition,theInvestorAdvocatewillassisttheOmbudsmaninimplementingsystemsforthe
receiptandprocessingofinvestorinquiries.
RULEMAKING
Section915oftheDodd-FrankActmandatestheadoptionofarulethatrelatestotheOfceof
theInvestorAdvocate.
16
Thismandate,ascodiedinExchangeActSection4(g)(7),requiresthe
Commission,byregulation,toestablishproceduresrequiringaformalresponsetoallrecommen-
dationssubmittedtotheCommissionbytheInvestorAdvocate,notlaterthanthreemonthsafter
thedateofsuchsubmission.
17
Inthecomingyear,theOfcewillworkwiththeSECsOfceof
theGeneralCounseltoinitiatethisrequiredrulemaking.
SUPPORTINGTHEINVESTORADVISORYCOMMITTEE
ExchangeActSection39,asamendedbySection911oftheDodd-FrankAct,establishesthe
InvestorAdvisoryCommittee.
18
AsdiscussedingreaterdetailinthesectionentitledSummary
ofIACRecommendationsandSECResponses,thepurposeoftheCommitteeistoadviseand
consultwiththeCommissiononregulatorypriorities,issuesimpactinginvestors,initiativesto
protectinvestors,andrelatedmatters.
Bystatute,theInvestorAdvocateisamemberoftheIAC.
19
Accordingly,theInvestorAdvocate
willparticipateintheactivitiesoftheCommittee.Inaddition,theOfcewillprovidestaffand
operationalsupporttotheIAC.
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | 7

POLICYAGENDAFOR
FISCALYEAR2015
T
hestatutorymandatefortheOfceoftheInvestorAdvocateisbroad,butourresources
arelimited.Becausewewillbeunabletoexamineeverypossibleissueindepth,itwillbe
necessarytonarrowourfocustoamanageablenumberofissuessothatwecaneffectively
advisepolicymakersandmakethegreatestimpactforinvestors.
Afterdiscussionswithnumerousknowledgeableindividuals,bothinsideandoutsidetheCom-
mission,andafterdueconsideration,theInvestorAdvocatehasdeterminedthattheOfce
shouldfocusonthefollowingissuesduringFiscalYear2015:equitymarketstructure,investor
ight,municipalmarketreform,cybersecurity,effectivedisclosure,andelderabuse.Otherissues
undoubtedlywillarisethatrequiretheattentionoftheOfce,buttheseissueswillremainonour
policyagenda.
EQUITYMARKETSTRUCTURE
ThesecondarymarketforU.S.-listedequitieshasbecomedispersedandcomplex,partlyasa
resultofthedecades-longtransitionfromamarketstructuredominatedbymanualtradingtoa
marketstructurecharacterizedprimarilybyautomatedtrading.
20
Theevolutionoftechnologies
forgenerating,routing,andexecutingordershasenhancedthespeed,capacity,andsophistica-
tionofthetradingfunctionsthatareavailabletomarketparticipants.
21
Inaddition,trading
volumehasbecomedispersedamongmanytradingcentersthatcompetefororderowinthe
samestocks,andtradingcentersofferawiderangeofservicesdesignedtoattractdifferenttypes
ofmarketparticipantswithvaryingtradingneeds.
22
Regulatoryactionshavecontributedtochangesinequitymarketstructureforexample,Regu-
lationNMS(adoptedin2005),
23
theOrderHandlingRules(adoptedin1996),
24
andcertain
enforcementactions.Inparticular,theequitymarkethasevolvedsignicantlysincetheadoption
ofRegulationNMS,whichwasintendedtomodernizeandstrengthentheregulatorystructure
oftheU.S.equitymarkets.
25
RegulationNMSwasalsointendedtoprotectinvestors,promote
faircompetition,andenhancemarketefciency.
26
Tounderstandtheeffectsofthetransformationinequitytradingmorecompletely,theCommis-
sionhasbeenconductingacomprehensivereviewofequitymarketstructure.
27
Likeothersat
theCommission,theOfceoftheInvestorAdvocateissensitivetothefactthatmarketstructure
issuesarecomplexandrequireabroadunderstandingofstatutoryrequirements,economic
principles,andpracticaltradingconsiderations.
28
However,whilewerecognizethatcompeting
interestsmustbebalancedformarketstoworkefciently,theOfcewillfocusononeoverriding
concernasweexaminetheseissues:istheequitymarkettodayfairforinvestors?
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | 9

FairnessisintegraltotheSECsthree-partmission:(1)toprotectinvestors;(2)tomaintain
fair,orderly,andefcientmarkets;and(3)tofacilitatecapitalformation.
29
Consistentwiththe
secondprongoftheSECsmission,therelevantquestionfortheInvestorAdvocateisnotsimply
whethertheequitymarketisbettertodaythanbeforetheadoptionofRegulationNMS,but
rather,whethertheequitymarketisfunctioningasfairlyandefcientlyaspossibletoday.
Toexaminethefairnessissue,theOfcemayconsideranumberofquestions,including:
Howtodeneafairmarketwhatconstitutesafairmarket?
Doinvestorsperceivethecurrentequitymarkettobefair?
Areanyparticularelementsofthecurrentequitymarketunfairtoinvestors?
Whatarethenegativeimpactsoninvestorsfromthecurrentequitymarketstructure?
Dotheincentivesinherentinthecurrentequitymarketstructurefavorordisfavorindividual
investors?
Onbalance,wouldanyproposedchangeshelporharmindividualinvestors?
Byevaluatinganswerstotheseandrelatedquestions,theOfcewillbebetterequippedtopro-
poseandsupportmeasuresdesignedtobenetinvestorsandtheequitymarketasawhole.
INVESTORFLIGHT
Concurrentwithourevaluationoftheequitymarketsfairness,theOfcewillexaminearelated
issue.Wewillexplorewhetherindividualinvestorsareabandoningtheequitymarketbecause
theyarewaryofit.Thisquestionhasbeenarecurringthemeinthemediaduringthepastfew
years,withsomenewsreportsdescribingpersistentinvestoranxietyaboutinvestinginequities
30
andothermediasourcesclaimingthattheperceivedphenomenonofinvestorightisamyth.
31
Someacknowledgethatanumberofretailinvestorshaveliquidatedtheirindividualstockhold-
ings,buttheyarguethatthoseinvestorsarereinvestingtheirfundsintotargetdatefundsand
exchange-tradedfunds,therebyparticipatingindirectlyintheequitymarket.
32
Nonetheless,a
January2014Gallupsurveyfoundthatabouthalfofinvestorswerewaryofinvestinginthe
stockmarketatthetimedespiterecentmarketgains.
33
Moreover,thesamesurveyfoundthat
thepercentageofAmericanhouseholdsthatownsecurities(eitherdirectlyorthroughamutual
fundorself-directedretirementaccount)hasdeclinedfromapproximately65percentinApril
2007toapproximately54percentinJanuary2014.
34
Iftrue,thisdeclineinindividualinvest-
mentcouldconstituteasignicantdragoncapitalformationandtheU.S.economy.
Inaddition,nearlythree-quartersofthosepolledinanApril2014Bankratemonthlysurvey
indicatedthattheywerenotmoreinclinedtoinvestinthestockmarketdespitepersistentlow
interestyieldsinsavingsaccountsandcerticatesofdeposit.
35
AnotherrecentGallupsurvey
foundthatAmericanstendtobelievethatrealestateisthebestoptionforlong-terminvestments,
comparedtostocksandgold.
36
Indeed,thatGallupsurveyfoundthatlower-incomeAmericans
(thoseearninglessthan$30,000annually)tendtobelievethatgoldisthebestlong-terminvest-
mentchoice,followedbyrealestateandsavingsaccountsorcerticatesofdeposit.
37
Thereareobviousreasonsforinvestorwithdrawalfromtheequitymarket,manyofwhichare
relatedtotherecentnancialcrisis.Withthelossofinvestedassets,highunemployment,andthe
housingmarketcollapsethatcontributedtothedeteriorationoftheso-calledwealtheffect,
investorsmaybeunabletoparticipateinthemarketastheyhavedonesointhepast.Yetthere
mayexistdeeperandlessapparentreasonsbeyondtheanecdotalandtheobviousforinves-
torightfromtheequitymarket.
10 | OF F I CE OF T HE I NVESTOR ADVOCAT E

Inlightofconictingperceptionsofinvestorbehavior,theOfcewillanalyzeadditionaldata
todeterminewhetherindividualinvestorshaveinfactretreatedfromtheequitymarket.Tothe
extentthatindividualinvestorshaveedthemarket,theOfcewillexaminethereasonsforthat
withdrawalanddeterminewhatpolicies,ifany,mightbeimplementedtoencouragethoseinves-
torstoreturntotheequitymarket.
TheOfcewillalsosupporttheCommissioninitscontinuingeffortstoaddressnegativeimpacts
onindividualinvestorsintheequitymarket.WewillcollaboratewiththeCommissiontopursue
moreimmediatemeasurestobenetinvestorswhilewestudylonger-termapproachestoremedy-
ingmarketimbalancesthatdisadvantageindividualinvestors.
MUNICIPALMARKETREFORM
OnJuly31,2012,theCommissionissuedaReportontheMunicipalSecuritiesMarket(the
MunicipalMarketReport).
38
AccordingtoSECstaffestimates,thevalueofoutstandingmu-
nicipalbondstotaled$3.7trillionin2011.
39
Remarkably,about50.2percentofmunicipalsecu-
ritieswerehelddirectlybyindividualinvestorsasofDecember31,2011,andanother25percent
wereownedindirectlybyindividualinvestorsthroughmutualfunds,moneymarketfunds,or
closedendfundsandexchange-tradedfunds.
40
Municipalsecuritiescanbeanimportantpartof
investorsretirementplansandavaluablesourceoffundsforlocalprojectsthataffectinvestors
qualityoflifeintheircommunities.
TheMunicipalMarketReportexplainsthatthemunicipalsecuritiesmarkethastraditionally
beenconsideredabuy-and-holdmarketbecausemanyretailinvestorsholdmunicipalsecuri-
tiesuntilmaturity.Secondarytradingisconductedinadecentralizedover-the-counterdealer
marketthatisilliquidandopaque.
41
Inthesesecondarytrades,retailinvestorshavelimited
accesstopricinginformation,andthecompensationpaidtodealersmaynotbereadilyapparent
totheinvestors.
42
Toaddresstheseandothershortcomingsinthemunicipalsecuritiesmarkets,theMunicipal
MarketReportissuedanumberofrecommendations.Forexample,itrecommendedthatthe
MunicipalSecuritiesRulemakingBoardshouldconsiderrequiringmunicipalbonddealersto
seekbestexecutionofcustomerordersanddisclosemarkupsormarkdownsonconrmations
forrisklessprincipaltransactions.
TheOfcewillworkwithothersattheCommissionandrelevantSROstoencouragereforms
designedtobenetinvestorsinthemunicipalsecuritiesmarkets.Totheextentthatlegislationis
requiredtoimprovedisclosuresandpracticesinthismarket,theOfcewillmakerecommenda-
tionstoCongressasappropriate.
DATAPROTECTIONANDCYBERSECURITY
Asmarketsandnancialserviceshavebecomeincreasinglyautomated,investorprotectionshave
notkeptpacewithtechnologicalevolution.Asaresult,investorsarenowatriskinwaysthat
werenotevencontemplatedoneortwodecadesago.Marketshavebeenwhipsawedbytech-
nologicalglitchesandotheranomalies,withinvestorssubjectedtolargepriceswingswithout
economicjustication.
43
Moreover,becausehackersandelectronicterroristspresentaconstant
threattothenancialsecurityandprivacyofinvestors,nancialserviceprovidersandmarket
participantsmustbevigilantinsafeguardinginvestorsassetsandprivateinformation.
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | 11

DuringFiscalYear2015,theOfcewillsurveytheeffortsoftheCommission,FINRA,thestock
exchanges,alternativetradingsystems,andothermarketparticipantstoprotectinvestors.Inpar-
ticular,wewillevaluatetheimpactofRegulationSCIasitisimplemented
44
andlookforother
improvementsthatwouldbenetinvestorsandprotectthemfromcyberthreats.
EFFECTIVEDISCLOSURE
DisclosureisattheveryheartofoursystemofsecuritiesregulationintheUnitedStates.Inthe
offerorsaleofsecurities,allmaterialfactsmustbedisclosedtoinvestorssotheycanmakefully
informedinvestmentdecisions.Enforcingthesedisclosurerequirementsisacriticalelementof
investorprotection.
Ideally,issuersandsellersofsecuritiesshouldprovideinformationtoinvestorsinamannerthat
enhancesinvestorsabilitytounderstandit.Fullandaccurateinformationshouldbeprovidedin
ameaningfulway,withoutunnecessaryrepetitionandwithoutburyingimportantinformation
withinlessimportantdisclosures.
InDecember2013,theCommissionissuedtheReportonReviewofDisclosureRequirements
inRegulationS-K(theS-KReport),areportmandatedbyCongressundertheJumpstartOur
BusinessStartupsAct(theJOBSAct).
45
TheS-KReportdescribestheevolutionofthedisclo-
surerequirementswithinRegulationS-Kandrecommendsareevaluationofthosedisclosurere-
quirements.TheS-KReportrecommendspotentialissuesforfurtherstudyandidentiesspecic
areasofRegulationS-Kthatmaybenetfromfurtherreview.
OnApril11,2014,theSECsDivisionofCorporationFinanceannouncedadisclosurereform
initiativethatbuildsupontheS-KReport.
46
Theinitiativewillbeginwithareviewofthebusi-
nessandnancialdisclosuresthatarereectedinperiodicorcurrentreports(Forms10-K,10-Q,
and8-K).CommissionstaffwilldeterminewhethertherequirementsofRegulationsS-KandS-X
canbeupdatedtoreducethecostsandburdenstoissuerswhilecontinuingtoprovidematerial
informationandeliminateduplicativedisclosures.Inthefuture,Commissionstaffwillalsocon-
siderwaystoupdateandmodernizedisclosuresthatformthebasisformostproxydisclosure.
Inthenextyear,theOfcewillassisttheDivisionofCorporationFinanceandothersinthe
explorationofpotentialdisclosurereforms.Amongotherthings,wewillhelpthestaffdetermine
whatinformationinvestorsndmostuseful,whethertechnologycanbeusedtocommunicate
informationmoreeffectively,whetheradditionalmaterialinformationshouldbedisclosed,and
theimpactofproposedchangesoninvestors.
ELDERABUSE
Asinvestorsage,somebegintosufferfromdiminishedcapacityduetodementiaorotherhealth
conditions.
47
Afterbuildingassetsforalifetime,theseinvestorsmaybecomevulnerabletonan-
cialabusenotonlyfromscamartists,butalsofromunethicalcaregivers,familymembers,and
nancialserviceproviders.
AstheBabyBoomergenerationretires,thisproblemwilllikelyincrease.Thisnewgeneration
ofretireeswillprobablylivelongerthantheirparents,makingdiagnosesofdiminishedcapacity
morecommon.Theseretireeswillalsoexercisemoredirectcontroloftheirretirementassetsthan
precedinggenerationsbecause,inthepastfewdecades,thenumberofdenedbenetretirement
12 | OF F I CE OF T HE I NVESTOR ADVOCAT E

planshasfallenwhilethenumberofdenedcontributionplanshasgrown.
48
Asof2011,assets
withindenedcontributionplansneared$4trillion,
49
andthisconcentrationofwealthwillbea
temptingtargetforunscrupulousindividualsseekingtoexploitvulnerableseniors.
Inthecomingscalyear,theOfcewillstudythisissueingreaterdepth.Wewillevaluatethe
currentinitiativesunderwayattheCommission,atSROs,andatotherstateandfederalagencies
toprotectseniorsfromnancialabuse.Wewillsupplementthoseeffortsbypromotingpolicies
tobenetinvestorswithdiminishedcapacity.Wewilllookforwaystoequipnancialservice
professionalswithbettertoolstoprotectvulnerableclients,aswellaswaystopreventabuseby
roguenancialprofessionalswhotakeadvantageofclients.
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | 13

RECOMMENDATIONOFTHE
INVESTORADVOCATE
E
xchangeActSection4(g)(4)(E)statesthatoneofthefunctionsoftheInvestorAdvocateis
toproposetoCongressanylegislativechangesthatmaybeappropriatetomitigateprob-
lemsencounteredbyinvestors.Inaddition,ExchangeActSection4(g)(6)(B)requiresthe
InvestorAdvocatetosubmitaReportonActivitiesbyDecember31ofeachyear,andtheReport
onActivitiesmustincluderecommendationsforsuchlegislativeactionsasmaybeappropriate
toresolveproblemsencounteredbyinvestors.
50
AlthoughourrstReportonActivitiesisnot
dueuntilDecember31,2014,weneverthelessincludewithinthisinauguralReportonObjec-
tives(dueJune30eachyear)arecommendationtoaddressasubstantialandcontinuingriskto
investors:
CongressshouldimmediatelyappropriatefundstoincreasethenumberofSEC
staffwhoexamineregisteredinvestmentadvisers,andshouldauthorizetheSECto
collectfeesfrominvestmentadvisersinordertocreateamorestableandscalable
sourceofrevenueforinvestmentadviserexaminationsinfutureyears.
THEPROBLEMENCOUNTEREDBYINVESTORS
Theproblemforinvestorsiswellknownandeasilyunderstood.Overthepastdecade,the
numberandcomplexityofregisteredinvestmentadvisershasincreaseddramatically,whilethe
numberofSECexaminershasremainedrelativelyat.
ThenumberofSEC-registeredadvisershasgrownbyapproximately40percentoverthepast
decadetonearly11,500today.Theamountofassetsmanagedbyinvestmentadvisersisonan
evensteeperascent,goingfrom$20trillionadecadeagotoanestimated$55trillionbytheend
ofFiscalYear2015.
51
Arecenttransferofmid-sizeadvisersfromSECtostateregistrationhadlessimpactthanex-
pected.FeweradvisersthananticipatedmadetheswitchfromSECtostateregistration,
52
and
theSECsimultaneouslytookonnewresponsibilitiesfortheregistrationandoversightofprivate
fundadvisers,municipaladvisors,andsecurities-basedswapparticipants.
53
Asthenumberofinvestmentadvisershasgrown,sotoohastheircomplexity.Asignicant
percentageofSEC-registeredadvisershavemorethan$1billioninassetsundermanagement,
andadvisersincreasinglyarepartofcomplexfamiliesofnancialservicescompanieswith
integratedoperations.
54
Advisersareusingnewandcomplexproducts,includingderivativesand
certainstructuredproducts,andalsoareincreasingtheiruseoftechnologiesthatfacilitatesuch
activitiesashigh-frequencyandalgorithmictrading.
55
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | 15

Theincreasingsize,sophistication,andcomplexityofinvestmentadvisersmakeSECexamina-
tionsmorechallengingandtime-consuming.Yet,SECresourcesdevotedtoexaminationshave
notreectedthemagnitudeofthechangesintheindustry.Inthepastdecade,thestaffinthe
SECsOfceofComplianceInspectionsandExaminations(OCIE)hasgrownonlyabout10
percent,from825full-timeequivalentsinFiscalYear2004to914today.
56
Asaresult,theSEC
examinedonlyabout9percentofregisteredinvestmentadvisersinFiscalYear2013.
57
This
equatestoafrequencyofapproximatelyonceevery11years,aratethatCongressshouldnd
unacceptable.
ANAGREED-UPONSOLUTION
Thereisastraightforwardsolutiontothisproblem.TheSECneedsadditionalresourcesto
bolsteritsexamprogram.Thissolutionhasgarneredanextraordinarylevelofsupportnotonly
fromtheCommissionitself,butalsofromahostofindustryassociations.
58
TheSEChaslongsoughtadditionalresourcestoenhanceitsexaminationprogram.Forexample,
theJanuary19,2011,StudyonEnhancingInvestmentAdviserExaminationsconductedpursu-
anttoSection914oftheDodd-FrankAct(theSection914Study)concludedthattheSECs
investmentadviserexaminationprogramrequiresasourceoffundingthatissufciently
stabletopreventadviserexaminationresourcesfromperiodicallybeingoutstrippedbygrowth
inthenumberofregisteredinvestmentadvisers.
59
Morerecently,theSECsubmittedaFiscal
Year2015budgetrequesttofund316additionalstaffpositionsintheexaminationprogramof
OCIE.
60
Notably,industryassociationscomprisedofSEC-registeredinvestmentadvisershavesupported
anincreaseinfundingfortheirregulator.Forexample,thefollowingorganizationssubmitted
commentstotheCommissioninresponsetotheSection914Study:
TheInvestmentAdviserAssociation(IAA),whichrepresentsSEC-registeredinvestment
adviserrmsandhasamembershipofmorethan500rmsthatcollectivelymanagein
excessof$9trillion:
Consistentwithourlongstandingposition,wecontinuetostronglysupport
givingtheCommissiontheresourcesitneedstoconductaneffectiveand
appropriateexaminationandenforcementprogramforregisteredadvisers.
61
TheFinancialPlanningCoalition,acoalitionconsistingoftheCertiedFinancialPlanner
BoardofStandards,Inc.(CFPBoard),theFinancialPlanningAssociation(FPA),and
theNationalAssociationofPersonalFinancialAdvisors(NAPFA),whotogetherrepresent
over75,000nancialplanners:
TheCoalitionstronglyurgestheCommissiontoseek,andCongressto
providetheCommissionwith,alltheresourcesitneedstoenhanceits
currentdirectoversightofCommission-registeredinvestmentadvisers.
62
TheCFAInstitute,aglobalprofessionalassociationofnearly107,000investmentanalysts,
advisers,portfoliomanagers,andotherinvestmentprofessionals:
CFAInstitutebelievesthatthebest,mostefcientmannerofenhancing
investmentadviserexaminationsinvolvesincreasedCongressionalfunding
fortheSECthatwouldallowittomeetitsregulatoryresponsibilitiesfor
oversightofregisteredinvestmentadvisers(RIAs).
63
16 | OF F I CE OF T HE I NVESTOR ADVOCAT E

Itisalsoimportanttonotethatthe industry is willing to pay the price for increased examina-


tions.AsrecentlyasDecember4,2013,acoalitionofgroupsincludingtheIAA,FPA,CFP
Board,andNAPFApubliclysupportedlegislationtoauthorizetheSECtocollectanannual
userfee. Thisfeewouldbecollectedfromregisteredinvestmentadvisersinordertoincrease
thefrequencyofinvestmentadviserexaminations.
64
TheSECInvestorAdvisoryCommitteehasendorsedtheuserfeemodel.Warningthatthecur-
rentfrequencyofexamsissimplyinadequatetodetectorcrediblydeterfraud,theIACcalled
foruserfeestoprovideascalablesourceoffunding.
65
OnNovember22,2013,theIACrecom-
mendedthattheSECseekCongressionalauthoritytoimposeuserfeesonSEC-registeredinvest-
mentadviserstofundanenhancedexaminationprogram.
WHYINVESTMENTADVISEREXAMINATIONSARE
IMPORTANTTOINVESTORS
OrdinaryAmericansareincreasinglyturningtoinvestmentadvisersforhelpinnavigatingnan-
cialmarketsandinvestmentproductsthathavegrownincomplexity,andinvestmentadvisers
playanimportantroleintheirclientseconomicsecurityandmobility. Investmentadvisersman-
agetheinvestmentassetsformillionsofmiddle-classAmericans,
66
includingretirementfunds,
childrenscollegefunds,andmoneyfordownpaymentsontheirhomes.Theseassetsaffectthe
hopesanddreamsofinvestors.
TheSECsnationalexaminationprogramproducesresultsthatmatterforindividualinvestors.
InFiscalYear2013,35percentofOCIEexaminationsresultedinasignicantndingofa
practicethatcouldcauseharmtoclientsorinvolvedrecidivistmisconduct.
67
Ofallexams,13
percentweredeemedseriousenoughtowarrantareferraltotheSECDivisionofEnforcement.
68
Typicalreferralsinvolvedmisappropriationoffunds;conictsofinterest,suchasundisclosed
arrangements;brokerageandinvestmentpracticesthatfavorcertainclientsoverothers;trading
aheadofclients;andfalseandmisleadingadvertisementsorperformancecalculations.
Moreoften,examsidentifytechnicaldecienciesthatarecorrectedwithoutformalaction.InFis-
calYear2013,forexample,80percentofexaminationsresultedindeciencyletters.
69
Decien-
ciesareoftencorrectedbyamendingoraddingtowrittencompliancepoliciesandprocedures,
enhancingdisclosurestoclients,andsoon.
70
Insomecases,theexamsidentifyissuesrelated
tothecalculationofadvisoryfees,includingunintentionalbillingerrors.Theseexamsresult
insubstantialsumsbeingreturnedtoinvestors,evenwithoutareferraltotheSECDivisionof
Enforcement.
RECOMMENDATION:INCREASEFUNDINGTOENHANCE
INVESTMENTADVISEREXAMINATIONPROGRAM
Onbehalfofinvestors,theOfceoftheInvestorAdvocateaddsitsvoiceinsupportofgreaterre-
sourcestoenhancetheSECsinvestmentadviserexaminationprogram.Amorefrequentexami-
nationcyclewouldallowSECstafftoidentifyintentionalandunintentionalviolationssooner,
whichwouldminimizeharmtoinvestors.Inaddition,agreaterregulatorypresencewouldactas
adeterrenttofuturefraudulentandabusiveconduct.
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | 17

Optimally,webelievethatSEC-registeredinvestmentadvisersshouldbeexaminedatleastevery
threeyearsonaverage.OCIEshouldhavetheexibilitytoexaminehigher-riskrmsmoreoften,
andnormshouldgolongerthanveyearswithoutacomprehensiveexamination.
WerecommendthatCongress
appropriatetheneededfundsthis
yearsothattheCommissioncan
hiremoreexaminerswithout
furtherdelay.Wealsorecommend
thatCongressauthorizetheSEC
tocollectanannualuserfee
fromregisteredinvestmentadvisers
andtolimittheuseofthosefunds
toexpensesassociatedwith
investmentadviserexaminations.
Itwilltakeasignicantcommitmentofresources
togofromexamining9percentofrmsperyear
tocoverageof33percentperyear.Inthisregard,
theSECbudgetrequestappearsmodestbecauseit
wouldaddonly316positionstothecurrentOCIE
staffof914.However,theenhancedfundingwould
beamajorstepintherightdirection.
Thesimplestsolutiontoaddresstheresourceissue
istoapprovetheSECscurrentbudgetrequest.This
isalsothequickestwaytogetmorebootsonthe
ground.Accordingly,werecommendthatCon-
gressappropriatetheneededfundsthisyearsothat
theCommissioncanhiremoreexaminerswithout
furtherdelay.
However,astheIAChasobserved,amoreeffective
long-termsolutionwouldbetogranttheSECthe
authoritytoassessuserfeesoninvestmentadvisers.
Thiswouldprovideaconsistent,scalablesourceof
revenuetoprotectinvestorswithanadequatelevel
ofinvestmentadviserexaminations.Thiswould
alsoplacethecostofregulationontheindustry
whosereputationwillbenetfromtheenhancedregulatorypresence.Therefore,wealsorecom-
mendthatCongressauthorizetheSECtocollectanannualuserfeefromregisteredinvest-
mentadvisersandtolimittheuseofthosefundstoexpensesassociatedwithinvestmentadviser
examinations.
CongresscanbeassuredthattheInvestorAdvocatewillmonitortheSECsuseofenhanced
resourceswhetherobtainedthroughdirectappropriationsoruserfeestodeterminewhether
thoseresourcesarebeingusedappropriatelytoincreasethenumberofinvestmentadviser
examinationsandmaximizeprotectionforinvestors.
18 | OF F I CE OF T HE I NVESTOR ADVOCAT E

SUMMARYOFIAC
RECOMMENDATIONSAND
SECRESPONSES
C
ongressestablishedtheInvestorAdvisoryCommitteetoadviseandconsultwiththe
Commissiononregulatorypriorities,initiativestoprotectinvestorinterests,initiatives
topromoteinvestorcondenceandtheintegrityofthesecuritiesmarketplace,andother
issues.
71
TheCommitteeiscomposedoftheInvestorAdvocate,arepresentativeofstatesecuri-
tiescommissions,arepresentativeoftheinterestsofseniorcitizens,
andnotfewerthantenormorethantwentymembersappointed
bytheCommission.Federallyregisteredlobbyistsmaynotserveon
theCommittee,
72
andtheCommission-appointedmembersmustbe
selectedfromamongindividualswho: (i)representtheinterestsof
individualequityanddebtinvestors,includinginvestorsinmutual
funds;(ii)representtheinterestsofinstitutionalinvestors,including
theinterestsofpensionfundsandregisteredinvestmentcompanies;
(iii)areknowledgeableaboutinvestmentissuesanddecisions;and
(iv)havereputationsofintegrity.
73
Thetermofserviceformembers
oftheCommitteeisfouryears.
74
ExchangeActSection39authorizestheCommitteetosubmitnd-
ingsandrecommendationsforreviewandconsiderationbythe
Commission.
75
ThestatutealsorequirestheSECtopromptly
issueapublicstatementassessingeachndingorrecommendation
oftheCommitteeanddisclosingtheaction,ifany,theCommissionintendstotakewithrespect
tothendingorrecommendation.
76
WhiletheCommissionmustrespondtotheIACsrecom-
mendations,itisundernoobligationtoagreewithoractupontherecommendations.
77
AspartofourreportstoCongress,theOfceintendstoreportontheIACrecommendations.
WewillalsoreportontheSECsresponsestotherecommendations,whichmaybecommuni-
catedinvariousformats.Frequently,anIACrecommendationpertainstoacurrentrulemaking,
inwhichcasetheproposingreleaseortheadoptingreleasemayconstitutetheCommissions
response.WhereanIACrecommendationdoesnotinvolveacurrentrulemaking,SECChair
MaryJoWhitehasindicatedthattheCommissionwillrespondwithawrittenstatement.
78
CommissionstaffincludingtheOfceoftheInvestorAdvocateareprohibitedfromdisclos-
ingnonpublicinformation.
79
Therefore,itisimportanttonotethattheCommissionmaybe
pursuinginitiativesthatareresponsivetoIACrecommendationsbutarenotyetpublic.Those
non-publicinitiativesarenotreectedinthisreport.
KURTSCHACHT,Chairman
InvestorAdvisoryCommittee
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | 19

BetweenOctober2012andApril2014,theIACmadeeightsetsofrecommendations.TheSEC
hastakeninterimornalactiononthreeofthem(involvingticksizes,TitleIIoftheJOBSAct,
andtargetdateretirementfunds).Inaddition,ChairWhitehasinformedtheIACpubliclythat
CommissionstaffisworkingontheremainingIACrecommendations.
80
CROWDFUNDING
AtitsmeetingonApril10,2014,theIACadoptedapackageofsixrecommendationsforthe
SECtostrengthenitsproposedrulestoimplementthecrowdfundingprovisionsoftheJOBS
Act.
81
TheCommitteestatedthatitsrecommendationswouldbetterensurethatinvestorsunder-
standtherisksofcrowdfundingandavoidunaffordablenanciallosses.Amongotherthings,the
CommitteerecommendedthattheSEC:
Adopttighterlimitsontheamountofmoneythatinvestorscouldinvestincrowdfund-
ing;
Strengthenthemechanismsfortheenforcementoftheinvestmentlimitsinordertobet-
terpreventerrorsandevasion;
Clarifyandstrengthentheobligationsofcrowdfundingintermediariestoensurethat
issuerscomplywiththeirlegalobligations;clarifytherequirementsforbackground
checks;clearlyafrmtherightofportalstocurateofferings;andconsideratiered
regulatorystructurebaseduponfactorssuchasthesizeofoffering,investmentlimits,
andparticipationbyindividualswitharecordofsecuritieslawviolations;
Enhancetheeffectivenessofeducationalmaterialsforinvestors;
Replacetheproposeddenitionofelectronicdeliverywithastrongerdenitionthat,
ataminimum,requiresdisclosureofaspecicURLwhererequireddisclosurescanbe
found;and
Replaceitsproposaltoeliminateapplicationoftheintegrationdoctrinewithanarrower
approach.
Theserecommendationsrelatetoproposedrulesthatarestillunderconsideration.
82
Accord-
ingly,itisanticipatedthattheSECsresponsetotheIACrecommendationswillbereectedinthe
adoptingreleaseforthenalrule.
DECIMALIZATIONANDTICKSIZES
InasplitvoteonJanuary31,2014,theIACadoptedaresolutionopposinganytestorpilotpro-
gramstoincreasetheticksizesinthesecuritiesmarkets.
83
Theresolutionarguedthatlargertick
sizeswouldharmretailinvestorsbyraisingpricesandwouldnotimprovetheresearchcoverage
orliquidityofsmall-capcompanies.TheresolutionurgedtheSECtomaintainitscurrentpolicy
ondecimalizationandtofocusonotherwaystoenhanceliquidityandcapitalformationwithout
sacricinginvestorprotections.However,shouldtheSECdecidetopursueapilotprogramofin-
creasingticksizes,theIACrecommendedashortsunsetonthepilotunlessbenetsareproven
tooutweighthecosts;acarefulevaluationofcostsandbenetstoinvestors,withaparticular
focusonretailinvestors;andthepilotingofothercompetition-basedmeasuresdesignedtoen-
couragetradingandcapitalformation.
OnJune24,2014,theCommissiondirectedthenationalsecuritiesexchangesandFINRAto
implementapilotprogramtotestaticksizeof5centspershareinthreegroupsofsecurities.
20 | OF F I CE OF T HE I NVESTOR ADVOCAT E

Thedifferentgroupswillmeasuretheimpactofothervariables,includingtheminimumprice
incrementsandatrade-atrequirement. Thepilotprogramwillsunsetinoneyear.
LEGISLATIONTOFUNDINVESTMENTADVISEREXAMINATIONS
OnNovember22,2013,theIACrecommendedthattheSECrequestlegislationfromCongress
thatwouldauthorizetheCommissiontoimposeuserfeesonSEC-registeredinvestmentadvisers
toprovideascalablesourceoffundingformorefrequentcomplianceexaminationsofadvisers.
84
TheIACassertedthatcurrentpracticesequatetoanapproximately13-14yearexamination
cycleforSEC-registeredinvestmentadvisers,whichtheCommitteefoundinadequatetodetect
ordeterfraud.Insupportofitsrecommendation,theIACnotedthattheSECsoughtdirect
appropriationsinFiscalYear2014tohiremoreexaminers,buttheIACopinedthatCongress
wasunlikelytoappropriatethefundsforthispurpose.
TheCommissionhasnottakenaformalpositiononuserfees,butitsFiscalYear2015budget
requestidentiesincreasedexaminationsofinvestmentadvisersasatoppriority.Therequest
callsforsufcientappropriationstoadd316positionstotheexaminationprogramintheSECs
OfceofComplianceInspectionsandExaminations.
85
BROKER-DEALERFIDUCIARYDUTY
OnNovember22,2013,theIACadoptedasetofrecommendationsencouragingtheSECto
establishaduciarydutyforbroker-dealerswhentheyprovidepersonalizedinvestmentadviceto
retailinvestors.
86
TheCommitteepreferredtoaccomplishthisobjectivebynarrowingtheexclu-
sionforbroker-dealerswithinthedenitionofaninvestmentadviserundertheInvestment
AdvisersActof1940.Asanalternative,theCommitteerecommendedtheadoptionofarule
underSection913oftheDodd-FrankActtorequirebroker-dealerstoactinthebestinterests
oftheirretailcustomerswhenprovidingpersonalizedinvestmentadvice,withsufcientex-
ibilitytopermitcertainsale-relatedconictsofinterestthatarefullydisclosedandappropriately
managed.Inaddition,theCommitteerecommendedtheadoptionofauniform,plainEnglish
disclosuredocumenttobeprovidedtocustomersandpotentialcustomersofbroker-dealers
andinvestmentadvisers.Thedocumentwoulddiscloseinformationaboutthenatureofservices
offered,feesandcompensation,conictsofinterest,andthedisciplinaryrecordofthebroker-
dealerorinvestmentadviser.
TheSECsresponsetotheserecommendationsispending.
UNIVERSALPROXYBALLOT
OnJuly25,2013,theIACadoptedarecommendationurgingtheSECtoexploretherelaxation
ofExchangeActRule14a-4(d)(1)(thebonadenomineerule)toprovideproxycontestants
withtheoption,butnottheobligation,touseuniversalproxyballotsinconnectionwithshort
slatedirectornominations.
87
TheIACalsoencouragedtheCommissiontoholdoneormore
roundtablediscussionsonthetopic.
TheSECsresponsetothisrecommendationispending.
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | 21

DATATAGGING
AlsoatitsmeetingonJuly25,2013,theIACadoptedarecommendationfortheSECtopro-
motethecollection,standardization,andretrievalofdataledwiththeSECusingmachine-
readabledatataggingformats.
88
TheCommitteeurgedtheSECtotakestepstoreducethecosts
ofprovidingtaggeddata,particularlyforsmallerissuersandinvestors,bydevelopingapplica-
tionsthatallowuserstoenterinformationonformsthatcanbeconvertedtomachine-readable
formatsbytheSEC.Inaddition,theIACrecommendedthattheSECgiveprioritytothedata
taggingofdisclosuresoncorporategovernance,includinginformationaboutexecutivecompen-
sationandshareholdervoting.
TheSECsresponsetotheserecommendationsispending.
TARGETDATEMUTUALFUNDS
OnApril11,2013,theIACadoptedrecommendationsfortheCommissiontoreviseitsproposal
regardingtargetdateretirementfundnamesandmarketing.
89
ThepackageofveIACrecom-
mendationspertainedtoa2010SECproposalthatwould,amongotherthings,requiremarket-
ingmaterialsfortargetdateretirementfundstoincludeatable,chart,orgraphdepictingthe
fundsassetallocationovertime(i.e.,anassetallocationglidepath).
90
AseitherareplacementfororsupplementtotheSECsproposedassetallocationglidepath
illustration,theIACrecommendedthattheCommissiondevelopaglidepathillustrationthat
wouldbebasedonameasureoffundrisk.Topromotecomparabilitybetweenfunds,theIAC
recommendedtheadoptionofstandardmethodologiestobeusedinglidepathillustrations.In
addition,theIACurgedtheCommissiontorequireclearerdisclosureabouttheriskofloss,the
cumulativeimpactoffees,andtheassumptionsusedtodesignandmanagethefunds.
ChairWhiteinitiallyrespondedtotheIACrecommendationswithaletterdatedNovember20,
2013,indicatingthattheCommissionwouldseekpubliccommentontheIACproposal.
91
The
CommissiondidsoonApril3,2014,byreopeningthecommentperiodtoseekpubliccomment
ontheIACsrecommendationtoadoptarisk-basedglidepathillustrationandthemethodology
tobeusedformeasuringrisk.
92
JOBSACT:GENERALSOLICITATIONANDADVERTISING
TitleIIoftheJOBSActrequiredtheSECtoliftthebanongeneralsolicitationandadvertisingin
Rule506securitiesofferings.
93
Inaddition,Section926oftheDodd-FrankActrequiredtheSEC
todisqualifybadactorsfromtheuseofRule506.
94
OnOctober12,2012,theIACadoptedasetofsevenrecommendationsrelatedtothesestatu-
torymandates.
95
Therecommendationsweredesignedtostrengtheninvestorprotectionsand
enhanceregulatorsabilitytopolicetheprivateplacementmarket.Insummary,theIACrecom-
mendedthattheSEC:
Requireallissuerswhoutilizegeneralsolicitationtoleanewformorarevised
versionofFormD;
RequirethatallsolicitationmaterialbefurnishedtotheSEC;
Adoptasafeharborthatprovidesclearandenforceablestandardsforverication
ofaccreditedinvestorstatus,andpromoterelianceonregulatedthirdpartiesfor
verication;
22 | OF F I CE OF T HE I NVESTOR ADVOCAT E

MakethelingofFormDaconditionforrelyingontheexemption,whileavoiding
unduepenaltiesforinadvertentviolationsbysmall,unsophisticatedissuers.
Ensurethatanyperformanceclaimsinsolicitationmaterialsarebaseduponappropriate
performancereportingstandards;
Amendthenaturalpersonsprongoftheaccreditedinvestordenitiontobetterreecta
populationthathasthenancialsophisticationtoanalyzetherisksinprivateofferings
and/orthewealthtowithstandpotentiallosses;and
DisqualifybadactorsfromtheuseofRule506,asrequiredbySection926ofthe
Dodd-FrankActandaspreviouslyproposedbytheCommission.
96
OnJuly10,2013,theSECtookthreerelatedactions.First,theCommissionadoptedanalrule
permittinggeneralsolicitationandadvertisinginRule506offerings.
97
Second,itadoptedanal
ruledisqualifyingofferingsinvolvingfelonsandotherbadactors.
98
Third,itproposedanaddi-
tionalruletoenhancetheCommissionsabilitytoevaluatethedevelopmentofmarketpractices
inRule506offeringsandtoaddressconcernsthatmayariseoncethebanislifted.
99
TheCom-
missionhastwicesoughtpubliccommentontheruleproposal,buttheproposalhasnotyetbeen
adopted.Takentogether,thetwonalrulesandtheproposedrulegenerallyreectconsideration
oftheIACrecommendations.
100
ENDNOTES
1 ExchangeAct4(g)(2)(A)(ii),15U.S.C.78d(g)(2)(A)(ii)(2012).
2 ExchangeAct4(g)(6),15U.S.C.78d(g)(6).
3 ExchangeAct4(g)(6)(A)(i),15U.S.C.78d(g)(6)(A)(i).
4 ExchangeAct4(g)(6)(B)(i),15U.S.C.78d(g)(6)(B)(i).
5 Id.
6 ExchangeAct4(g)(4)(A),15U.S.C.78d(g)(4)(A).
7 ExchangeAct4(g)(8)(A),15U.S.C.78d(g)(8)(A).
8 ExchangeAct4(g)(8)(C),15U.S.C.78d(g)(8)(C).
9 ExchangeAct4(g)(4)(B),15U.S.C.78d(g)(4)(B).
10 ExchangeAct4(g)(4)(C),15U.S.C.78d(g)(4)(C).
11 ExchangeAct4(g)(4)(D),15U.S.C.78d(g)(4)(D).
12 ExchangeAct4(g)(4)(E),15U.S.C.78d(g)(4)(E).
13 ExchangeAct4(g)(3),15U.S.C.78d(g)(3).InadditiontotheInvestorAdvocateandan
Ombudsman,theOfceoftheInvestorAdvocatecurrentlyhasauthorizationtohirefourfull-time
permanentstaff.
14 ExchangeAct4(g)(8)(B),15U.S.C.78d(g)(8)(B).
15 ExchangeAct4(g)(8)(A).
16 Dodd-FrankWallStreetReformandConsumerProtectionAct915,15U.S.C.78d(g).
17 ExchangeAct4(g)(7),15U.S.C.78d(g)(7).
18 ExchangeAct39,15U.S.C.78pp.
19 ExchangeAct39(b)(1)(A),15U.S.C.78pp(b)(1)(A).
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | 23






20 SeegenerallyConceptReleaseonEquityMarketStructure,ExchangeActReleaseNo.61358
(Jan.14,2010)[75FR3594(Jan.21,2010)].
21 Id.
22 Id.
23 RegulationNMS:FinalRulesandAmendmentstoJointIndustryPlans,ExchangeActReleaseNo.
51808(June9,2005)[70FR37496(June29,2005)].Amongotherthings,RegulationNMSelimi-
natedtrade-throughprotectionformanualquotations.
24 OrderExecutionObligations,ExchangeActReleaseNo.37619A(Sept.6,1996)[61FR48290(Sept.
12,1996)].
25 ExchangeActReleaseNo.51808,supranote23.
26 Id.at37498.
27 SeeMaryJoWhite,Chair,SEC,EnhancingOurEquityMarketStructure,SandlerONeill&Partners,
L.P.GlobalExchangeandBrokerageConference,June5,2014(transcriptavailableathttp://www.sec.
gov/News/Speech/Detail/Speech/1370542004312)(observingthatthelargelypositivedataonbroad
marketqualitydoesnotmean,however,thatthecurrentmarketstructureiswithoutissues);Concept
ReleaseonEquityMarketStructure,ExchangeActReleaseNo.61358(Jan.14,2010)[75FR3594,
3596(Jan.21,2010)].
28 Seeid.
29 See,e.g.,SEC,http://www.sec.gov/about/whatwedo.shtml.
30 See,e.g.,E.S.Browning,BondYieldsIndicateWorry,WALL ST. J.,June2,2014,atC1;DaisyMaxey,
StillAfraidofStocks?AdvisersTrytoLureClientsBackIn,WALL ST. J.,May24-25,2014,atB8.
31 See,e.g.,WilliamBaldwin,DumbIdea: InvestorsareFleeingStocks,Forbes(Mar.18,2013),http://
www.forbes.com/sites/baldwin/2013/03/18/dumb-idea-investors-are-eeing-stocks/.
32 See,e.g.,JasonZweig,AreRetailInvestorsFleeingStocks?,WALL ST. J.,Aug.27,2012,http://blogs.
wsj.com/totalreturn/2012/08/27/are-retail-investors-eeing-stocks/;JasonZweig,AreIndividualInves-
torsFleeingStocks?Nope,WALL ST. J.,June27,2012,http://blogs.wsj.com/totalreturn/2012/06/27/
are-individual-investors-eeing-stocks-nope/.
33 ArtSwift,DespiteHighStockPrices,HalfinU.S.WaryofInvesting,Gallup(Jan.17,2014),http://
www.gallup.com/poll/166886/despite-high-stock-prices-half-wary-investing.aspx.
34 Id.
35 ChrisKahn,April2014FinancialSecurityIndexcharts,Bankrate(Apr.21,2014),http://www.
bankrate.com/nance/consumer-index/nancial-security-charts-0414.aspx.
36 SeeRebeccaRiffkin,AmericansSoldonRealEstateasBestLong-TermInvestment,Gallup(Apr.
17,2014)(reportingresultsfromGallupsApril3-6EconomyandPersonalFinancesPollthatasked
Americanstochoosethebestoptionforlong-terminvestments),http://www.gallup.com/poll/168554/
americans-sold-real-estate-best-long-term-investment.aspx?version=print.
37 Id.
38 SEC,ReportontheMunicipalSecuritiesMarket,July31,2012,http://www.sec.gov/news/stud-
ies/2012/munireport073112.pdf.
39 Id.at5.
40 Id.at12.
41 Id.atv.
42 Id.atvi-vii.
24 | OF F I CE OF T HE I NVESTOR ADVOCAT E

43 See,e.g.,CallieBost,SamMamudi&EricLam,NYSEComputerErrorPromptsCancellationof
Almost20,000Trades,Bloomberg,Apr.30,2014,http://www.bloomberg.com/news/2014-04-29/
nyse-options-markets-cancel-almost-20-000-trades-following-error.html;MatthewLeising,JeffWilson
&ElizabethCampbell,CMESaysSomeTradingHaltedBecauseofTechnicalIssues,Bloomberg,
Apr.8,2014,http://www.bloomberg.com/news/2014-04-08/cme-says-some-trading-halted-because-of-
technical-issues-1-.html;SEC,FindingsRegardingtheMarketEventsofMay6,2010:Reportofthe
StaffsoftheCFTCandSECtotheJointAdvisoryCommitteeonEmergingRegulatoryIssues,http://
www.sec.gov/news/studies/2010/marketevents-report.pdf.
44 ExchangeActReleaseNo.69077(Mar.8,2013)[78FR18083(Mar.25,2013)].
45 SEC,ReportonReviewofDisclosureRequirementsinRegulationS-K,Dec.2013,http://www.sec.
gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf.
46 KeithF.Higgins,Director,DivisionofCorporationFinance,SEC,DisclosureEffectiveness:Remarks
BeforetheAmericanBarAssociationBusinessLawSectionSpringMeeting,Apr.11,2014(transcript
availableathttp://www.sec.gov/News/Speech/Detail/Speech/1370541479332).
47 Itshouldbenoted,however,thatdiminishedcapacityisnotuniquetotheelderly,andthatmany
elderlypeoplesuffernosuchimpairments.
48 DeptofLabor,Emp.BenetsSec.Admin.,PrivatePensionPlanBulletinHistoricalTablesand
Graphs,at2GraphE1g,June2013,http://www.dol.gov/ebsa/pdf/historicaltables.pdf.
49 Id.at14GraphE11g.
50 ExchangeAct4(g),15U.S.C.78d(g).
51 SEC,FY2015CongressionalBudgetJustication,FY2015AnnualPerformancePlan,FY2013
AnnualPerformanceReport,at55-56(Mar.2014)(hereinafterCongressionalBudgetJustication),
http://www.sec.gov/about/reports/secfy15congbudgjust.pdf.
52 Initialestimatesindicatedthatupto4,000adviserswouldmaketheswitchfromfederaltostate
registrationasaresultoftheDodd-FrankAct.NorthAmericanSecuritiesAdministratorsAssociation,
(NASAA),TheIASwitch: ASuccessfulCollaborationtoEnhanceInvestorProtection7
(May2013),http://www.nasaa.org/wp-content/uploads/2011/08/IA-Switch-Report.pdf.Inreality,
approximately2,100advisersmadetheswitch.Id.at2.
53 CongressionalBudgetJustication,supranote51,at56.SincetheeffectivedateoftheDodd-Frank
Act,approximately1,800adviserstohedgefundsandprivateequityfundshaveregisteredfortherst
time.TestimonyonOversightoftheSECsAgenda,OperationsandFY2015BudgetRequest,Before
H.Subcomm.onFin.Services&Gen.GovtoftheH.Comm.OnAppropriations,113thCong.
(Apr.29,2014)(statementofMaryJoWhite,Chair,SEC),http://www.sec.gov/News/Testimony/Detail/
Testimony/1370541674457.
54 CongressionalBudgetJustication,supranote51,at5.In2013,atotalof2,877registeredinvestment
advisers,or27percent,hadassetsundermanagementrangingfrom$1billionto$100billionormore.
InvestmentAdviserAssociationandNationalRegulatoryServices,2013EvolutionRevolution:
AProleoftheInvestmentAdviserProfession,at8-9(2013).
55 Id.
56 SEC,InBrief: Fiscal2006CongressionalBudgetRequest,at2(Feb.2005),http://www.sec.gov/about/
secfy06budgetreq.pdf;CongressionalBudgetJustication,supranote51,at55.
57 CongressionalBudgetJustication,supranote51,at56.InFiscalYear2013,examinersconducted
964investmentadviserexaminations.TestimonyonOversightoftheSECsAgenda,Operationsand
FY2015BudgetRequest,BeforeH.Subcomm.onFin.Services&Gen.GovtoftheH.Comm.On
Appropriations,113thCong.(Apr.29,2014)(statementofMaryJoWhite,Chair,SEC),http://www.
sec.gov/News/Testimony/Detail/Testimony/1370541674457.
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | 25

58 Analternativesolutionwouldbetocreateaself-regulatoryorganizationforinvestmentadvisersand
givetheSROresponsibilityforconductingcomplianceexaminations.However,thisalternativeis
opposedbymanyintheindustry.See,e.g.,infranotes61-64.
59 StaffoftheSEC,Div.ofInv.Mgmt.,StudyonEnhancingInv.AdviserExaminations,at10-11
(Jan.2011),http://www.sec.gov/news/studies/2011/914studynal.pdf.
60 CongressionalBudgetJustication,supranote51,at55-56.
61 CommentLetter,DavidG.Tittsworth,IAA,RE: StudyonEnhancingInv.AdviserExaminations
underSection914oftheDodd-FrankWallStreetReformandConsumerProtectionAct,at2
(Oct.19,2010),https://www.sec.gov/comments/df-title-ix/enhancing-ia-examinations/enhancingiaex-
aminations-5.pdf.
62 CommentLetter,KevinR.Keller,CFPBoard,etal.,Re:StudyonEnhancingInv.AdviserExamina-
tionsUnderSection914oftheDodd-FrankWallStreetReformandConsumerProtectionAct,at3
(Dec.16,2010),http://www.sec.gov/comments/df-title-ix/enhancing-ia-examinations/enhancingiaex-
aminations-29.pdf.
63 CommentLetter,JohnD.Rogers&LindaL.Rittenhouse,CFAInstitute,Re:StudyonEnhancing
Inv.AdviserExaminations,at1(Dec.3,2010),http://www.sec.gov/comments/df-title-ix/enhancing-ia-
examinations/enhancingiaexaminations-25.pdf.
64 CommentLetter,JoyceA.Rogers,AARP,etal.,Re:H.R.1627,theInvestmentAdviserExamination
ImprovementActof2013(Dec.4,2013),http://www.cfp.net/docs/public-policy/2013-12-04-hr-1627-
letter-to-mocs.pdf?sfvrsn=2.
65 ThisconclusionechoesanearlieronebytheSECSection914Study.Seesupranote59andaccompa-
nyingtext.Otherindependentobservers,includingtheSECOfceoftheInspectorGeneralandthe
InternationalMonetaryFund,alsohavetakennoteoftheSECsinadequateresourcesforinvestment
adviserexams.
66 Evenwhenaninvestmentadviserprovidesadvicetoprivatefunds,includinghedgefundsorprivate
equityfunds,individualinvestorsareaffected.Thebiggestinvestorsinprivateequityincludepublic
andprivatepensionfunds,endowments,andfoundations,whichaccountedfor64percentofall
investmentinprivateequityin2012.AndrewJ.Bowden,Director,OfceofComplianceInspections
andExaminations,SEC,SpreadingSunshineinPrivateEquity,AddressatthePrivateFundCompli-
anceForum(May6,2014)(citingthePrivateEquityGrowthCapitalCouncil,FactandFiction,
www.pegcc.org/education/fact-and-ction/)(transcriptavailableatwww.sec.gov/News/Speech/Detail/
Speech/1370541735361).Privateequityadvisersarealsonotimmunetomisconduct. Inmorethan
50percentofexaminationsofprivateequityfeesandexpenses,OCIEhasfoundwhatitconsiders
tobeviolationsoflawormaterialweaknessesincontrols.TheheadofOCIEattributesthistothe
structureoftheindustry,theopaquenessoftheprivateequitymodel,thebreadthoflimitedpartnership
agreements,andthelimitedinformationrightsofinvestors.Id.Totheextentprivateequityadvisers
areengagedinimproperconduct,itadverselyaffectstheretirementsavingsofteachers,remen,police
ofcers,andotherworkersacrosstheUnitedStates.
67 CongressionalBudgetJustication,supranote51,at31.
68 Id.ThesestatisticsrefertoallOCIEexaminations,includingbroker-dealers,investmentadvisers,and
investmentcompanies.
69 Id.
70 Id.
71 ExchangeAct39(a),15U.S.C.78pp(a).
26 | OF F I CE OF T HE I NVESTOR ADVOCAT E

72 PresidentialMemorandumLobbyistsonAgencyBoardsandCommissions,75FR35955
(June18,2010).
73 ExchangeAct39(b),15U.S.C.78pp(b).
74 ExchangeAct39(b)(2),15U.S.C.78pp(b)(2).
75 ExchangeAct39(a)(2)(B),15U.S.C.78pp(a)(2)(B).
76 ExchangeAct39(g),15U.S.C.78pp(g).
77 ExchangeAct39(h),15U.S.C.78pp(h).
78 MaryJoWhite,Chair,SEC,RemarksattheMeetingoftheInv.AdvisoryComm.(July25,2013).
79 ExchangeAct24(b),15U.S.C.78x;5U.S.C.552a(i)(1);SECR18-2.
80 TranscriptofSECInv.AdvisoryComm.Meeting,at12(Apr.10,2014).
81 SEC,RecommendationoftheInvestorAdvisoryCommittee: CrowdfundingRegulations,Apr.10,
2014,http://www.sec.gov/spotlight/investor-advisory-committee-2012/investment-adviser-crowdfund-
ing-recommendation.pdf.
82 Crowdfunding,SecuritiesActReleaseNo.9470(Oct.23,2013)[78FR66427(Nov.5,2013)].
83 SEC,RecommendationoftheInvestorAdvisoryCommittee: DecimalizationandTickSizes,Jan.31,
2014,http://www.sec.gov/spotlight/investor-advisory-committee-2012/investment-adviser-decimiliza-
tion-recommendation.pdf.
84 SEC,RecommendationoftheInvestorAdvisoryCommittee: LegislationtoFundInvestmentAdviser
Examinations,Nov.22,2013,http://www.sec.gov/spotlight/investor-advisory-committee-2012/invest-
ment-adviser-examinations-recommendation-2013.pdf.
85 Testifyinginsupportofthebudgetrequest,ChairWhitestated,Thereisanimmediateandpressing
needforsignicantadditionalresourcestopermittheSECtoincreaseitsexaminationcoverageofreg-
isteredinvestmentadviserssoastobetterprotectinvestorsandourmarkets. BudgetHearing:Before
H.Subcomm.onFin.Service&Gen.GovtoftheH.Comm.onAppropriations,113thCong.(Apr.1,
2014)(statementofMaryJoWhite,Chair,SEC).
86 SEC,RecommendationoftheInvestorAdvisoryCommittee: Broker-DealerFiduciaryDuty,Nov.22,
2013,http://www.sec.gov/spotlight/investor-advisory-committee-2012/duciary-duty-recommenda-
tion-2013.pdf.
87 SEC,RecommendationsoftheInvestorAdvisoryCommitteeRegardingSECRulemakingtoExplore
UniversalProxyBallots,July25,2013,http://www.sec.gov/spotlight/investor-advisory-commit-
tee-2012/universal-proxy-recommendation-072613.pdf.
88 SEC,RecommendationsoftheInvestorAdvisoryCommitteeRegardingtheSECandtheNeedfor
theCostEffectiveRetrievalofInformationbyInvestors,July25,2013,http://www.sec.gov/spotlight/
investor-advisory-committee-2012/data-tagging-resolution-72513.pdf.
89 SEC,RecommendationoftheInvestorAdvisoryCommittee:TargetDateMutualFunds,Apr.11,
2013,http://www.sec.gov/spotlight/investor-advisory-committee-2012/iac-recommendation-target-
date-fund.pdf.
90 SEC,InvestmentCompanyAdvertising:TargetDateRetirementFundNamesandMarketing,
ExchangeActReleaseNo.9126(June16,2010)[75FR35920(June23,2010)].
91 MaryJoWhite,Chair,SEC,LettertotheIAC,Nov.20,2013,http://www.sec.gov/spotlight/investor-
advisory-committee-2012/chair-white-letter-target-date-funds.pdf.
REPORT ON OBJ ECT I VES : F I S CAL YEAR 2 01 5 | 27



92 SEC,InvestmentCompanyAdvertising:TargetDateRetirementFundNamesandMarketing,
supranote90.
93 JumpstartOurBusinessStartupsAct,Pub.L.No.112-106,sec.201(a),126Stat.306,313
(2012).
94 Pub.L.No.111-203,sec.926,124Stat.1376,1851(July21,2010)(codiedat15U.S.C.77d
note).
95 SEC,RecommendationsoftheInvestorAdvisoryCommitteeRegardingSECRulemakingto
LifttheBanonGeneralSolicitationandAdvertisinginRule506Offerings: EfcientlyBalancing
InvestorProtection,CapitalFormationandMarketIntegrity,Oct.12,2012,http://www.sec.gov/
spotlight/investor-advisory-committee-2012/iac-general-solicitation-advertising-recommendations.
pdf.
96 SEC,DisqualicationofFelonsandOtherBadActorsfromRule506Offerings,SecuritiesAct
ReleaseNo.9414(July10,2013)[78FR44729(July24,2013)].
97 EliminatingtheProhibitionAgainstGeneralSolicitationandGeneralAdvertisinginRule506
andRule144AOfferings,SecuritiesActReleaseNo.9415(July10,2013)[78FR44771(July
24,2013)].
98 SEC,DisqualicationofFelonsandOtherBadActorsfromRule506Offerings,supranote96.
99 AmendmentstoRegulationD,FormDandRule156,SecuritiesActReleaseNo.9416(July10,
2013)[78FR44806(July24,2013)].
100 AttheIACmeetingonJuly25,2013,ChairWhiteprovidedtheIACwithachartmappingeach
ofitsrecommendationstothecorrespondingtextintheCommissionsproposedandnalrule
releases.
28 | OF F I CE OF T HE I NVESTOR ADVOCAT E
OFFICEOFTHEINVESTORADVOCATE
U.S.SecuritiesandExchangeCommission
100FStreetNE
Washington,DC20549
202.551.3302