Securities and Exchange Commission Open Meeting
Securities and Exchange Commission
Open Meeting
Wednesday, August 5, 2020
Opening Statements
Chairman Jay Clayton
In his opening statement, Clayton emphasized that the items under consideration illustrate the Securities and Exchange Commission’s (SEC) ongoing work to modernize the disclosure framework and increase transparency for investors. Regarding the first proposal, Clayton summarized that it would establish a new disclosure framework for mutual funds and exchange traded funds (ETFs) that modernizes the shareholder reports provided to existing investors and the prospectuses provided to new investors. He highlighted that this new framework embraces a layered disclosure approach, elaborating that a concise and visually engaging shareholder report, one that highlights disclosures that investors find most important, should serve as the primary fund disclosure while additional information would remain available online via Form N-CSR. Clayton continued that under this proposal, the amount and type of information available to investors would remain largely unchanged, but investors would receive the information they most need. He also noted that the proposal addresses the following: 1) the presentation in prospectuses of fees, expenses, and principal risks; 2) new flexibilities for electronic shareholder reports to promote user-friendly design features; and 3) amendments to the presentation of fee and expense information in investment company advertisements. Clayton concluded by noting his support for the proposal and reiterating his belief that it will enhance the investor experience for the millions of Main Street investors that own shares in mutual funds and registered investment companies.
Regarding the second proposal, Clayton summarized the role and importance of the Investor Advisory Committee (IAC). He then outlined the deficiencies in the historical process for the selection and appointment of members to the IAC, saying that this proposal addresses these deficiencies and facilitates increased transparency while being consistent with established and proven governance practices. He concluded by emphasizing his belief that these changes will lead to better outcomes in terms of identifying and nominating a diverse and qualified group of individuals.
Staff Presentations
Tailored Shareholder Reports, Treatment of Annual Prospectus Updates for Existing Investors, and Improved Fee and Risk Disclosure for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements
Staff:
- Dalia Blass, Director, Division of Investment Management
- Angela Mokodean, Senior Counsel, Division of Investment Management
- S.P. Kothari, Chief Economist & Director, Division of Economic and Risk Analysis
Blass stated the impetus for this proposal is that disclosure should help investors make informed investment decisions and that these recommendations are designed to make fund disclosures clear, digestible, and visually engaging so that investors can find the key information they need easily. She emphasized that this proposal is a direct result of substantial feedback from investors and other market participants, specifically noting investor support for a layered disclosure approach. Mokodean then described the recommendation in increased detail, highlighting that the Commission will publish a summary graphic on the SEC website to illustrate the differences between the existing framework and the proposed improvements. She also noted that staff recommends the Commission approve the issuance of two flyers to gather more information from smaller funds and retail investors. Kothari summarized the economic impact of the recommendations stating that they will streamline shareholder report delivery to existing investors, thereby allowing them to be more efficient with their time. He stated that while some firms will have lower costs in terms of preparing disclosures, others may experience an increase in such costs.
Commissioner Statements
Commissioner Hester Peirce
Peirce voiced her support for the proposal stating that it represents another critical step in ensuring that investors are equipped to make informed decisions. She encouraged robust engagement throughout the comment period stating that she is especially interested in comments as to where there is more that can be done to encourage technological innovation in this space and move away from a paper-based default. She concluded by calling on the Commission to make a greater effort in drafting these recommendations in a plain-English manner as she asserted that this proposal is simply too long and dense to be consumed by Main Street investors.
Commissioner Elad Roisman
Roisman stated that he is pleased to support the proposal and added that he is interested in comments on performance reporting, particularly the existing requirement that funds report performance by reference to a “broad-based securities index.” He continued that while comparing to an index is a common way to evaluate fund performance, he maintains that this methodology has some drawbacks and is concerned about entrenching the market power of the major index providers.
Commissioner Allison Herren Lee
Lee outlined her support for the proposal and said that while there are various items in the measure she hopes will improve, it does improve disclosure requirements to provide investors with information that is more digestible, user-friendly, relevant, and engaging. She specifically noted the proposal’s simplification of the presentation of fees and expenses in both the prospectus and the new summary shareholder report. Regarding areas in need of improvement, Lee outlined her concern with the proposal’s treatment of acquired fund fees and expenses (AFFE), specifically that it would allow funds to exclude AFFE from their bottom line expense figure if the fund invests less than 10 percent of its assets in other funds. In conclusion, Lee emphasized that the Commission should undertake its own investor testing to ensure that rules are properly designed for retail investors and called on commenters to contact the Commission if they require a longer comment period.
Vote
The proposal was approved unanimously.
Publication on the Commission’s Website of Procedures for Nominating Candidates for Appointment to the Investor Advisory Committee
Staff:
- Laura Jarsulic, Office of the General Counsel
Jarsulic summarized the proposal, specifically noting that the use of staff-led nominating committees and functional membership categories is already in place at the Fixed Income Market Structure Advisory Committee (FIMSAC), the Asset Management Advisory Committee (AMAC) and the Small Business Capital Formation Advisory Committee (SBCFAC). She also stated that while the nominating process will be led by SEC staff, the ultimate authority for nomination will remain with the commissioners.
Commissioner Statements
Commissioner Hester Peirce
Peirce outlined her support for this proposal stating that this measure will provide structure, transparency, and intra-agency participation in the nomination process of the IAC.
Commissioner Elad Roisman
Roisman expressed support for the recommendation. He said that compared to commissioners, SEC staff are better suited to choose candidates for the IAC because they have more relevant technical experience and practical knowledge. Roisman called for a purposeful and methodical approach to recruiting diverse candidates and voiced support for implementing term limits for committee members.
Commissioner Allison Herren Lee
Lee highlighted that the current member nomination process is not broken, elaborating that it has resulted in the bulk of current IAC members having relevant experience and expertise on a wide range of issues that have produced a number of serious and substantive policy recommendations. She then outlined her opposition to the proposed measure, saying that the new process could undermine the effectiveness of the IAC by singling it out in a way that fails to prioritize the most pressing needs of investors. She did note recent criticism from Congress over the SEC’s lack of diversity, saying that the Commission should swiftly address the issue across all committees. She continued her criticism of the proposed nomination process, specifically noting that it could result in the exclusion of critical investor issues such as ESG investing, climate change and governance matters.
Vote
The proposal was approved in a 3-1 vote, with Commissioner Lee dissenting.
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