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“As we all know, retirement investing can be complicated, and many retirement investors turn to financial professionals for advice. Retirement investors reasonably expect and believe the financial experts they turn to will act in their best interests, and retirement investors trust and rely on the advice they receive.”

“You know what retirement investors don’t want or expect? To be steered to overpriced, suboptimal products or services that aren’t in their best interest by people who seek to evade their regulatory obligations and accountability, all so they can get a big payday.”

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For 35 years Barbara Roper has served to protect consumers at the Consumer Federation of America.  “Her efforts to institutionalize a fiduciary responsibility in the financial marketplace is legendary and has served as the benchmark for those interested in a healthy, responsible and fair financial marketplace,” added Gillis.

As the Federation looks to find a permanent successor for Barbara, Mike Canning will be joining CFA in a consulting capacity as Investor Protection Consultant. Mike has recently announced that he will be leaving the North American Securities Administrators Association at the end of September to form The LXR Group, a public policy consulting firm.  He and Dylan Bruce, CFA’s Financial Services Counsel, will be continuing Barb’s work in protecting American Investors.

Contact: Jack Gillis, 202-939-1018

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The letter outlines deep institutional failures at the Financial Accounting Standards Board (FASB), the Public Company Accounting Oversight Board (PCAOB), and the SEC’s Office of Chief Accountant. It calls on the SEC to:

• Reconstitute FASB and the Financial Accounting Foundation to include a majority of investor members with expertise in the use of financial reports and knowledge of the accounting standard-setting process;
• Undertake a top-to-bottom housecleaning at the PCAOB, including changing its leadership, increasing its budget, restoring the expertise of its staff, increasing the frequency and rigor of inspections and backing them up with strong enforcement, and reinvigorating the standard-setting process; and
• Appointing investor representatives as Chief and Deputy Chief Accountants in order to refocus that office on its investor protection mission.

“Market integrity, investor confidence, and the efficient allocation of capital all depend on complete, accurate, and comparable financial reporting. Currently, however, the institutions that make up the financial reporting infrastructure – FASB, PCAOB, and the SEC Office of Chief Accountant – are in a state of serious disrepair. …  We look forward to working with you to restore these entities to their appropriate role of ensuring that financial reports are complete, accurate, and comparable – to the benefit of investors, the markets, and the health of our economy,” the letter concludes.

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The bad news, Roper wrote, is that Regulation Best Interest, the Investment Advisers Act fiduciary guidance, and the Customer Relationship Summary all have serious deficiencies. “The good news is that we do not believe it will be necessary to scrap these rules and start from scratch in order to deliver the protections investors expect and deserve when they turn to financial professionals for help with their investments,” she added. “Despite their many flaws, these regulations can provide a framework on which to build a more robust regulatory approach.”

“For decades, the Commission has failed to live up to its central investor protection mission when it comes to the regulation of broker-dealers and investment advisers,” Roper concluded. “You have an opportunity to correct that failure, and we urge you to do so. It is, in CFA’s view, the most important step you can and should take to protect the interests of millions of financially unsophisticated individuals who turn to the markets to save for retirement or other important life goals and desperately need advice they can trust to navigate those decisions. CFA stands ready to do whatever we can to assist you in this effort.”

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The white paper, Caution: Slippery Slope, How Delaware Supreme Court’s Blue Apron Decision Could Harm Investors and Undermine Market Integrity, examines the broader investor protection implications of the Court’s decision in Salzberg v. Sciabacucchi (commonly referred to as “Blue Apron”). That decision addressed a relatively narrow, though important issue – whether it is permissible under Delaware law for corporations to adopt charter provisions that require shareholder lawsuits under the federal Securities Act of 1933 to be brought exclusively in federal, rather than state, court. The court ruled that such provisions were facially permissible under Delaware law.

“While that decision is itself a loss for investors, since federal courts are generally viewed as less friendly to shareholder claims, the real risk comes from how the court’s logic could be extended to other, related matters,” said CFA Director of Investor Protection Barbara Roper. “Taken to its logical extreme, the court’s ruling that corporations can include in their charters ‘any provision’ related to ‘the management of the business’ and the ‘conduct of the affairs of the corporation’ could result in its being applied much more broadly, including in areas with significant implications for investor protection and market integrity,” she added.

“Ultimately, the Delaware Supreme Court’s Blue Apron decision raises more questions than it answers about how far corporations will be permitted to go in limiting their shareholders’ rights,” Roper said. “While it is too soon to predict how courts will answer those questions, we do know that some Delaware corporations and their attorneys are already looking to capitalize on the decision to further restrict shareholder rights,” she added. “There is at least a plausible risk that the decision could be used to allow corporations to adopt, without shareholder approval,  forced arbitration clauses or loser pays provisions for federal securities law claims, either of which would effectively spell the end of private shareholder lawsuits.”

As CFA detailed in an earlier white paper, A Settled Matter: Mandatory Shareholder Arbitration Is Against the Law and the Public Interest, private shareholder lawsuits not only play an important role in compensating defrauded investors for their losses, they also provide an essential supplement to Securities and Exchange Commission enforcement of federal securities laws by detecting and deterring fraud. Provisions that undermine investors’ ability to bring such claims, including by forcing them to be litigated in private arbitration on an individual basis, therefore threaten the integrity and fairness of our capital markets, the report explains.

The new Blue Apron white paper was released earlier today at an Investor Protection Roundtable co-hosted by CFA, American Association for Justice, and Public Justice to discuss recent developments regarding shareholder rights at the state and federal level. “While we are not predicting how courts ultimately will decide these issues, the potential for harm is too dire for us to just sit back and hope for the best,” Roper said. “We need to be thinking now about the proper policy response. This white paper is intended to help launch that discussion.”

Contact: Barbara Roper, 719-543-9468

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While the paper does not predict how courts will decide these issues, it looks specifically at eight scenarios in which there is a plausible risk that the decision could be used to limit shareholder’s rights, with potentially harmful impacts on both investor protection and market integrity. It asks:

• Will Corporations Be Able to Bind Shareholders without their Express Consent?
• Will Corporate Boards Be Able to Regulate a Broader  Range of Investor Claims?
• Could the Decision Effectively Eliminate Shareholders’ Ability to Bring Securities Law Claims Derivatively?
• Could corporations opt shareholders out of aspects of the federal securities laws, such as shareholder proposals?
• Could corporations force investors to litigate federal    securities law claims in private arbitration on an individual basis?
• Could the decision enable corporations to include fee-shifting provisions for federal securities law claims?
• Could the decision create a path for corporations to force internal corporate claims into arbitration?
• Does the decision intrude on other states’ ability to protect their citizens and raise other federalism concerns?

The paper concludes that the risk of bad outcomes for investors are significant enough that they warrant a policy response, through the adoption of federal or state legislation, or both. “While not especially groundbreaking by its own terms, the Blue Apron decision has potentially far-reaching and troubling implications,” the paper concludes. “Based on their past actions and current statements, we fully expect that companies will try to use the decision to push the limits and see just how far they can go in binding current and future shareholders. If the most severe potential fallout from the decision becomes reality, investors’ ability to monitor corporate management going forward will be meaningfully neutered. The result would be to effectively insulate corporate America and management from being held accountable for wrongdoing, to the detriment of shareholders and market integrity and, ultimately, the health of the economy.”

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In its letter, CFA cited evidence from the PCAOB’s staff inspection reports that improvements to audit firms’ quality control systems are badly needed. It wrote, however, “We are concerned … that neither proposed ISQM 1 nor the Concept Release sets an appropriately high bar for what improvements to firms’ quality control systems should be designed to achieve.” And it outlined changes to the proposal that would be needed to achieve the desired improvement.

“The goal should not simply be to ensure compliance with applicable laws and standards, it should be designed to promote audits of the highest quality. Toward that end, the PCAOB should seek to develop a standard that has as its clear objective providing a high level of assurance that audit firms will rigorously guard their independence, approach audits with a high degree of professional skepticism, comply with all applicable audit standards and rules, meet their obligations to identify fraud and other material legal violations, and conduct the high quality, independent audits upon which the integrity of our financial system depends,” the letter concludes.

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Investors are affected by forced arbitration in two ways:

• Virtually all customers of broker-dealers must, as a condition of opening a brokerage account, agree to resolve any disputes with their broker in the industry-run arbitration forum operated by the Financial Industry Regulatory Authority (FINRA).
• New campaigns that have been launched in recent years to include forced arbitration clauses in corporate charters or bylaws and through proxy measures as a way to prevent shareholders from holding company management accountable in court when they commit securities fraud.

The Securities and Exchange Commission (SEC) has long prohibited public companies from adopting forced arbitration policies. However, a recent campaign to overturn that policy appears to enjoy strong support among certain SEC officials. As a result, the FAIR Act’s protections are urgently needed to protect defrauded shareholders’ right to seek compensation for their losses. Consumer advocates worry that without urgent action, shareholders may lose the right to band together in class actions involving corporate securities fraud.

If the FAIR Act were adopted, many investors would likely continue to choose FINRA arbitration to resolve their broker disputes. But others, including those whose claims are not well suited to arbitration, because they require extensive discovery or involve complex issues of law, would have a choice to pursue their claims in a court of law. And the right to participate in class actions would be protected from industry challenge. The FAIR Act would restore and protect investor rights, increase accountability and transparency, and make our financial system stronger and safer for the millions of Americans who rely on our capital markets to save and invest.

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Harvard Law Professor Hal Scott, who has long agitated in support of forced arbitration, filed the proposal with Johnson and Johnson. To its credit, the company then turned to the SEC for permission to reject the proposal. The SEC’s decision on that request could be made by the Commissioners in the near future.

“For decades, SEC leaders from both parties have defended the importance of class action lawsuits to compensate defrauded investors and to promote market integrity by holding corporate wrongdoers accountable,” said Barbara Roper, Director of Investor Protection at SOS coalition member group Consumer Federation of America. “This unfortunate new stunt from Hal Scott gives the SEC an opportunity to once again show that it stands on the side of hardworking Americans and not unscrupulous actors who would try to evade accountability by hiding behind forced arbitration clauses.”

Over the last several months, some current and former SEC officials have fueled speculation that the SEC was considering abandoning its decades-old view that forced arbitration clauses violate the securities laws. In contrast, while he has not taken a position on the issue, SEC Chairman Jay Clayton has provided assurances that any discussion about allowing forced arbitration in company charters would be conducted in public and ultimately decided “in a measured and deliberative manner” by the full Commission, not staff.

“The savings of millions of seniors, veterans, retired teachers and others who rely on retirement investments are at stake,” concluded Roper. “The SOS coalition and allied groups will be closely monitoring developments to ensure that Chairman Clayton’s promises are kept and that shareholders’ rights are protected.”

Contact: Barbara Roper, 719-543-9468

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“In a move that prioritizes profits of the mutual fund industry over informed investor decision-making, the Commission voted to erect new barriers for investors who prefer to have their disclosure documents delivered to them in paper through the mail. The Commission adopted this anti-investor proposal without providing any evidence that investors who prefer electronic delivery face any difficulties in exercising that choice, without taking into account extensive evidence that the change is likely to reduce investor readership of key disclosures, and despite the fact that promised cost savings, to the extent they exist at all, are likely to amount to pocket change for typical investors,” Roper said.

“In its press release on the vote, the Commission cynically presents this as ‘an important part of the Commission’s effort to better serve Main Street investors.’ In fact, as Commissioner Rob Jackson, the one commissioner to vote against the measure, has noted, reversing the default goes ‘contrary to everything we know about how individual investors actually behave,’” Roper added. “Meanwhile, an opportunity to improve mutual fund disclosures, as advocated by the SEC’s Investor Advisory Committee, has been squandered.”

Contact: Barbara Roper, 719-543-9468

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“So-called ‘loser pays’ provisions erect virtually insurmountable legal barriers for shareholders to overcome, thus deterring them from bringing suit against companies and their executives when they have been victims of corporate malfeasance. As a result, these provisions insulate companies and their management from being held accountable when they engage in wrongful conduct to shareholders. The legislation introduced yesterday addresses a critical piece of the problem, and should be commended. We urge the Delaware General Assembly to promptly pass this bill and for Governor Markell to sign it into law, and we look forward to working with policymakers to ensure that any remaining impediments to shareholders’ access to the courts as a result of the ATP Tour decision are removed.”

Contact: Micah Hauptman (202) 939-1004

The Consumer Federation of America is a national organization of more than 250 nonprofit consumer groups that was founded in 1968 to advance the consumer interest through research, advocacy, and education.

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Vote No on the Tester and Thune Amendments

Do Not Hijack the Pro-Investor STOCK Act to Weaken Important Investor Protections

Dear Senator:

As the Senate considers bipartisan legislation (S. 2308, The STOCK Act) to clarify that insider trading laws apply to members of Congress, we urge you to reject hasty and ill-conceived amendments that would weaken vital investor protections.  The Thune amendment would eliminate restrictions on general solicitations in private offerings, while the Tester amendment would make it easier for small companies to raise capital without providing the full transparency of reporting companies.  While both address issues that deserve attention from policymakers, neither does so in a way that adequately preserves protections for investors.  We urge you to vote no on both amendments.

The Thune amendment uses a sledgehammer where a scalpel is needed.  While changes in the marketplace may warrant some loosening of restrictions on general solicitation for private offering sold to sophisticated investors, the Thune amendment’s reach is much broader.  As the North American Securities Administrators Association has pointed out, in its current form the amendment would “permit general solicitation in all private placements, including those not restricted to ‘accredited investors,’ or covered by the investor protections associated with Regulation D, Rule 506 ‘safe harbor.’”  Moreover, we understand that the Securities and Exchange Commission is currently preparing a concept release to research appropriate approaches to this issue.  Surely a Congress that purports to value economic analysis should wait for that analysis to be complete before dictating a radical and risky approach.

The Tester amendment makes a good faith effort at incorporating at least some additional investor protections as it raises the ceiling on offerings under Regulation A. In particular, we appreciate its inclusion of at least limited up-front disclosures, periodic reporting, audited financial statements, SEC oversight, and a negligence-based litigation remedy. We are concerned, however, that the amendment imposes no cumulative limit on use of the Regulation A exemption in multiple years and gives the SEC unlimited authority to increase the ceiling for such offerings.  Thus, what is already a very substantial increase in the ceiling for offerings under the Regulation A exemption – from $5 million to $50 million – could be expanded many times over with no additional congressional action.  And companies could game the system, resorting to repeated use of the exemption in successive years to evade appropriate reporting requirements that promote market transparency and integrity.  With work, these short-comings in the legislation could be eliminated, but, if the goal is to strike an appropriate balance between investor protection and capital formation, the current version is still in need of significant revisions.

Legislation that makes it easier for companies to raise money from the public without meeting appropriate investor protection standards will not promote sustainable job growth – as the tech stock boom and bust of the late 1990s should have taught us.  Instead, it simply diverts limited capital from companies that could use that capital to create jobs.  Moreover, by increasing the risk of investing in small companies, such bills can be expected to also increase the cost of capital for such companies.  That is simple free market economics.

Amendments to weaken investor protections have no place in the STOCK Act. We urge you to vote no on the Thune and Tester amendments.

Respectfully submitted,

Barbara Roper

Director of Investor Protection

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