Good morning. I am pleased to speak with the Investor Advisory Committee. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the staff.
I want to thank the Committee members who will be leaving in November. We as a Commission have benefitted from your insights, and I wish you all the best.
I’d also like to welcome the new members to the Committee. I thank each of you for your willingness to serve, and for providing the Commission with important perspectives on behalf of investors.
I understand you will have two discussions today, one with regards to investment advisers’ fiduciary obligations, and another with regards to investors’ shareholder proposals and Section 11 claims.
One hundred years ago, in 1924, Edward Leffler, a salesman of pots and pans, invented the mutual fund. After the stock market crash of 1929 and in the midst of the Great Depression, Congress asked the then-newly formed SEC for recommendations dealing with risks in this new field.
In 1940, SEC Commissioner Robert Healy told Congress that, left unchecked, these risks and conflicts had produced a “shocking” number of abuses.
“Too often, investment trusts and investment companies were organized and operated as adjuncts to the business of the supervisors and insiders to advance their personal interest at the expense of and to the detriment of their stockholders,” Healy said. He added, “It is perhaps not too much to say that the disregard of fiduciary standards lies at the root of many investment company problems.”
In response, Congress passed the Investment Advisers Act, establishing duties of care and loyalty to clients of investment advisers. Twenty years later, the Supreme Court addressed fiduciary duty in the seminal 1963 case, SEC v. Capital Gains Research Bureau, Inc.[1]
While today’s panel is focused on differences between fiduciary obligations under various federal and state laws, there is a common theme across all these fiduciary standards. To put it plainly, fiduciary duty comes down to an obligation to put the interests of clients ahead of the investment adviser. Here at the SEC, we are committed to holding advisers accountable for meeting that standard.
I understand the Committee also will discuss shareholder proposals and Section 11 claims under the Securities Act of 1933.
I think President Roosevelt and Congress understood the importance of aligning the interests of managers with those of shareholders in crafting the federal securities laws and the SEC to oversee them.
When shareholders buy stock in a public company, they own a piece of the company, which comes with certain rights under state law. That includes the right to elect directors to the company’s board and the right to make proposals to the management team for consideration by fellow shareholders.
In the Securities Exchange Act of 1934, Congress included provisions about shareholder participation in the proxy process. For decades, there have been debates about which shareholder proposals must be included in the proxy for consideration by other shareholders and which can be excluded.
In 1942, the SEC first adopted a version of what is now Rule 14a-8, and it has been amended from time to time since. In essence, the existing rule outlines the 13 substantive bases on which companies may exclude shareholder proposals from their proxy materials.
With regards to the Committee’s discussion of Section 11 claims, I would like to emphasize that this Section is an important part of our federal securities law architecture. In Section 11 of the ’33 Act, Congress imposed on directors and officers liability for inaccurate registration statements. These gatekeepers provide an essential function to police fraud and ensure the accuracy of disclosure to investors.
I thank the Committee and their panelists for contributing on these matters.
Thank you.
[1] See Supreme Court Case Law, “SEC v. Capital Gains Research Bureau, Inc.,” (October 1963), available at https://www.sec.gov/divisions/investment/capitalgains1963.pdf.
