Remarks at the September 18th Investor Advisory Committee Meeting

Good morning. I'd like to start my remarks today with a welcome to the IAC's newest members, Rodney, James, John, and Sergio. Thank you all for accepting your nominations and thank you in advance for the time and thoughtful engagement that I know you will bring to the Committee. Your combined years of expertise and diversity of views will be an asset to the Commission on the many important topics that the IAC will tackle during your tenure. Of course, I'd also like to thank the other Committee members who have joined us today.

The Committee's mandate is more important now than ever. In a word, this Commission is... busy. We beginning to tackle all manner of issues with increasing speed, and it is deeply important that we hear from you, the voice of investors, as we grapple with pivotal policy choices.

Today's agenda covers two topics on which the Commission is eager for input: foreign private issuers and retail access to private markets.

Foreign Private Issuers

The eligibility criteria for, and regulatory treatment of, foreign private issuers is, of course, a subject on which the Commission recently published a concept release, calling for public input.

As you will recall, at the time that we put out the release, I voiced support for a review which was animated by the need to level the playing field between foreign and domestic issuers, and to close loopholes which allowed access to our markets without concomitant disclosures or protections.

Our regulatory framework should, of course, accommodate foreign private issuers to the extent they are already subject to a comparable, robust regulatory framework in their home country-which would require, for example, substantive disclosure, comparable to what U.S. investors receive from domestic issuers.

But, foreign private issuers should not be advantaged over U.S. companies in our own markets. Nor should our laws offer loopholes to foreign companies, or incentives to forum shop. When regulations in this area become too lenient, U.S. companies and investors lose.

The concept release addressed some concerning data, for example that over half of 20-F filers trade exclusively in the U.S. (and, not in their home country or other markets), raising the possibility that these companies are not actually subject to another regulatory framework-a presumption baked into the regulations as they exist today.

And, we know from the research of today's panelist, Professor Dan Taylor, that other loopholes in our foreign issuer regime exist. Professor Taylor wrote a paper demonstrating that certain foreign insiders, especially in the non-extradition countries of Russia and China, appear to engage in opportunistic and potentially abusive trading (lining their pockets to the detriment of U.S. investors), because of regulatory loopholes that we've left open for them under Section 16 of the Exchange Act.[1]

We've also heard from others, such as the Council for Institutional Investors (with Jeff Mahoney on today's Panel), about the potential problems posed by an increase in Variable Interest Entities (VIEs) in our markets.[2] VIEs are legal structures used overwhelmingly by Chinese companies to list on U.S. exchanges, where the company is controlled through contractual arrangements other than direct ownership. These entities pose a number of uncertainties-as to the legality of their structure, myriad risks to U.S. investors, potential money laundering and other concerns.

In response to the Commission's publication of the concept release, we have received over 75 comment letters with different potential concerns and solutions. I'm interested to hear from moderator Professor George Georgiev and our panel of experts today about whether we are properly regulating foreign private issuers, given the demography of our markets? Have we framed the question correctly - have we properly identified the precise problem relating to foreign issuers? If not, help us pose the right question. And how do we fix the problem in a targeted manner, without causing too much disruption to compliant issuers and exchanges? What is the solution that best levels the playing field and provides adequate protections for investors and markets?

Thank you in advance for your insights and expertise on today's panel. And thank you in particular to our esteemed colleagues from the FCA for being part of today's discussion. We welcome your considerable insights.

Private Market Access

The second item on today's agenda is retail access to private markets. As you know, there is significant interest in this topic from all levels of government and industry - as evidenced by the recent Executive Order on access to alternative assets for 401(K) investors.[3] So your recommendations today are extremely timely.[4]

I have deep reverence for the public-private markets divide that is one of the hallmarks of our regulatory landscape. So, I appreciate your firm warning to the Commission on the need for guardrails if we do decide to push the boundaries of that divide as they currently exist - particularly with respect to direct retail access.[5]

Registered Funds

I am concerned, however, about the idea that registered funds are the silver bullet to facilitate greater private market access. Of course, I understand your desire to steer investors toward products with more protections if they are going to have exposure to riskier private markets, but I worry about contorting registered funds into something they are not.

Traditional retail funds, including open- and closed-end funds, are intended to offer varying degrees of liquidity - but still more liquidity than private market investments.[6] In fact, reliable liquidity is the marquee feature of registered funds: retail investors can invest with confidence because they know they will be able to get their money out if they need it. Even retail investors in closed-end funds, which are designed for less liquid investments, have an expectation that their investments are indeed "'40 Act products" with the associated protections under the Investment Company Act of 1940.[7] We should be careful to avoid an outcome where registered funds effectively become private funds disguised in a registered fund wrapper.

While I remain skeptical about the overall proposition of stuffing an increasing amount of inherently illiquid investments into registered funds, I wholeheartedly agree with some of the Committee's other recommendations - should this Commission send us down this path of increased private markets access. In particular, I welcome the idea of increased and improved retail fund disclosure of all types.[8] Of course, the valuation incongruity between registered funds, most of which price daily,[9] and private market investments, with significant pricing opacity, is hard to reconcile. To that end, the idea of more disclosure about valuation and third-party appraisals, coupled with increased fund-director oversight in this area, seems particularly appropriate and necessary.[10] More digestible and accessible risk disclosures and layered-disclosure formats wherever possible is also an important point.[11]

In addition to those high-level reactions, I want to flag several specific recommendations from the Committee that warrant more consideration. First, I am not convinced that co-investment flexibility for open-end funds is consistent with Section 17(d) and Rule 17d-1 under the Investment Company Act.[12] Section 17(d) and Rule 17d-1 are cornerstone protections of the '40 Act, further eroding them for retail investors in open-end funds is perilous. Is it wise to encourage open-end funds to become entangled with private markets in ways that the '40 Act expressly forbids?

The Committee's recommendation to allow certain closed-end funds to operate as series funds also caught my attention.[13] Unlike open-end funds, closed-end funds generally file on registration statements that are declared effective by the staff (also known as "acceleration").[14] By contrast, open-end funds may file registration statements for a "new series" of an existing trust that become automatically effective after a certain timeframe.[15]

While I appreciate that there are efficiencies of the series structure for open-end funds, there are potential downsides to applying that same structure to close-end funds - particularly where we are already jumping in head-first to so many other closed-end fund changes.[16] Most importantly, allowing close-end funds to operate as series funds would remove an important opportunity for staff input via the decision to accelerate filings. So, I would urge us to proceed iteratively and slowly if we are going to reinvent - or significantly erode - the public-private markets divide with these types of changes.

Direct Access

This brings me to your draft recommendation on direct access to the private markets for retail investors. The Committee's composition of diverse and divergent voices is one of the things that makes it such a successful and useful body. That is reflected in the proposed recommendation. I understand why the Committee ultimately could not come to a recommendation on expanding access to private markets. But, understanding that some forms of expanded access may be likely, you have put forward some very thoughtful proposed guardrails.

In particular, the Committee notes that increased access should be paired with increased information. As you point out, SEC v. Ralston Purina, 246 U.S. 119, 127 (1953), opened the door for certain investors to participate in unregistered offerings because "they have access to the kind of information which registration would disclose." And, in Hill York, the Fifth Circuit noted that if investors "did not possess the information requisite for a registration statement, they could not bring their sophisticated knowledge of business affairs to bear" in deciding whether to invest.[17] As the Committee so sensibly observes in the proposed recommendation, "sophistication without information is of limited use in navigating the private markets."[18]

I agree with the Committee that reforms to Reg D are warranted in light of the spectacular growth of the private markets-and this becomes even more important if expanded access becomes a reality. Investors should be entitled to basic, unbiased, material information before they invest in a company, and then on an ongoing basis related to their investments. Investors should know about the management, operations, and financial health of a company about which they are considering investment. The information required could be scaled based on the size of the issuance and the issuer. But it must be meaningful and consistent across companies. Your proposed recommendation that we make reforms in this area, consistent with these principles, are worthy of Commission consideration.

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As you can tell, I am deeply invested in the work of the Committee on these important topics. Thank you again for all that you do on behalf of American investors, and, as always, I look forward to our continued engagement.