Rick Fleming: Investors’ Inside Voice SEC’s First Investor Advocate Weighs in on Issues Facing Shareholders

Shareholder Advocate Spring 2019

April 25, 2019

By Richard E. Lorant and Laura H. Posner

Rick Fleming is the Securities and Exchange Commission’s first Investor Advocate. Established in 2014 under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC’s Office of the Investor Advocate has four core functions: to provide a voice for investors, to assist retail investors, to study investor behavior, and to support the SEC’s Investor Advisory Committee. While Mr. Fleming reports to the SEC Chair, the Investor Advocate has some independence, submitting reports directly to Congress without review from the SEC Commissioners or staff.

Prior to becoming Investor Advocate in February 2014, Mr. Fleming spent 15 years as a state securities regulator, including over a decade as general counsel for the Office of the Kansas Securities Commissioner. He also worked as deputy general counsel for the North American Securities Administrators Association (NASAA), representing the state securities regulators organization before Congress and federal agencies. Mr. Fleming agreed to answer questions of interest to Shareholder Advocate readers after speaking at the National Conference on Public Employee Retirement Systems’ (NCPERS) Legislative Conference earlier this year.1

The questions were posed by Director of Institutional Client Relations Richard Lorant and New York based Partner Laura Posner. Like Mr. Fleming, Ms. Posner was a state securities regulator, serving as Bureau Chief for the New Jersey Bureau of Securities before joining Cohen Milstein. During her three-year tenure as the state’s top regulator, she also was an active member of NASAA, where she served as Chair of Enforcement.

Shareholder Advocate: As the first Investor Advocate, how have you worked to establish an office that can effectively influence the Commission on behalf of investors? How do you maintain your independence?

Rick Fleming: Congress has given the Office of the Investor Advocate unique tools to ensure our independence and enhance our influence. For example, we are authorized to make recommendations to the Commission, and the Commission must respond to our recommendations within 90 days. We also report directly to Congress and describe the Commission’s responses to our recommendations. However, I also report to the Chairman of the Commission, so I am in a role that can involve public disagreement with my boss. I have been fortunate to have worked for two Chairmen who have respected my role and do not take my criticisms of Commission actions personally. On the other hand, I live by some simple rules that help me maintain a constructive role at the Commission—for example, I do not criticize decisions publicly unless I have already made my position clear privately.

SA: How did your experiences as a state securities regulator in Kansas and as deputy general counsel for the NASAA influence your approach to this job? What are the biggest differences working at the federal vs. the state level? Any suggestions for making the relationships more symbiotic?

RF: My experience as a state regulator provided an ideal background for this position. In the federal government, you tend to become highly specialized in a very narrow area, but in state government you deal with a very wide range of issues. For example, I helped attorneys for small companies understand the ways to raise capital, and I dealt with numerous technical issues related to broker-dealer and investment adviser operations. I also “advocated” for investors nearly every day. I litigated enforcement matters, including criminal cases, and have argued cases in front of juries and the Kansas appellate courts. In addition, I have drafted regulations and testified before lawmakers numerous times. But, the biggest difference between state and federal government is that state regulators tend to maintain much closer contact with Main Street investors. This means that state regulators are in a good position to judge how federal rulemakings may impact real people, and I am hopeful that the SEC will take better advantage of state regulators’ insights.

SA: In December, as part of its rules-making process, the Commission issued a request for comment on “the nature, content and timing of earnings releases and quarterly reports made by reporting companies.” [Ed. Note: the comment period ended March 21, 2019.] You have said publicly that you would favor maintaining or increasing the frequency or reporting, a position that aligns you with investor advocacy groups like the Council of Institutional Investors but puts you at odds with comments made by the president last year. Why is reducing the frequency of financial reporting a bad idea? What can we do to discourage the “short-termism” practiced by some publicly traded companies?

RF: The justification for reducing the frequency of reporting has been to give management the space to run a company without having to fixate on quarterly performance. Management does not like how strongly the market can react to bad quarterly news, and I get that. But less frequent financial reporting will not solve the problem—it will just create even greater volatility when six-month or full-year reports come out. It also creates greater pressure for favored investors to gain access to corporate leaders, which would contribute to greater informational asymmetries in the marketplace. A better solution for quarterly volatility may be to discourage companies from issuing quarterly guidance. This is an idea that I think is worth exploring.

SA: At NCPERS earlier this year, you mentioned your general support for Regulation Best Interest, which would heighten the suitability standard under which brokers currently operate, but said it remains to be seen how close the final rule will be to a fiduciary standard—or, we might add, one that actually requires brokers to act in the “best interests” of their clients. How do you think the currently proposed rule could be modified to make it more robust?

RF: My view about Reg BI is that it should be judged by whether it actually reduces bad conduct. If, in the end, it merely requires brokers to disclose that they are doing bad things to customers, but they can disclose it in a way that doesn’t cause those customers to push back or walk away, then the disclosure isn’t good enough. So, for me, the key is not whether we label the new standard of conduct “fiduciary” or “best interest,” but whether the rule has enough teeth to actually make brokers stop selling products that pad their pockets when superior products are available to the customer at less cost. This means that the part of the proposed rule that requires brokers to “mitigate” financial conflicts of interest will be of critical importance.

SA: You are on the record against allowing companies with permanent dual-class shares and mandatory arbitration clauses to issue publicly traded stock. How important are these threats to corporate accountability to company shareholders and what other threats would you identify as important?

RF: One of my biggest concerns is the extent to which the for-profit exchanges have allowed their listing standards to deteriorate, particularly with respect to corporate governance. Things like dual-class shares (or non-voting shares) tip the balance of power too far from the shareholders to management, which I believe will ultimately damage the markets. The Council of Institutional Investors has sponsored some strong research showing that founder control may enhance value in the first few years after a company goes public, but founder control begins to detract from value in future years. I believe the exchanges should be doing more to address this concern and should strongly consider sunsetting dual-class shares if they are allowed at all. As far as other threats to shareholders, I am currently concerned with the Commission’s focus on proxy advisors. The business community does not like the influence wielded by proxy advisors, so they have called for increased regulation of those firms. They couch their arguments in terms of investor protection, but I have yet to hear from investors who want to “fix” proxy advisors by giving corporations a greater say in the recommendations they produce.

SA: As the SEC’s first Investor Advocate, you have had the opportunity to shape the role to some degree. Has your team changed its approach since 2014 as you have worked under two different administrations to fulfill the office’s mission?

RF: The change in administrations has not altered our approach. The biggest challenge has been the fiscal environment in the past two years, which resulted in a hiring freeze that hindered our ability to build out the office as quickly as I would have preferred. In particular, we are working to build up our research capacities. Although rulemakings at the Commission are required to go out for “public comment,” it is not usually the public we are hearing from, so I want to utilize tools like surveys and focus groups to get a much better sense of how Main Street investors behave and how changes to the rules will impact them.

1The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. Mr. Fleming’s answers reflect his views and do not necessarily reflect those of the Commission, the Commissioners or other members of the staff.