Securities and Exchange Commission Investor Advisory Committee

Minutes of January 31, 2014 Meeting[1]

The Investor Advisory Committee held its January 31, 2014 meeting at 10:00 a.m. in the multipurpose room of the Securities and Exchange Commission’s headquarters in Washington, D.C.  The meeting lasted until approximately 3:15 p.m. and was open to the public.  Those attending were:

Commissioners of the Securities and Exchange Commission
Chair Mary Jo White (morning session only)
Commissioner Luis Aguilar (morning session only)
Commissioner Daniel Gallagher (morning session only
Commissioner Kara Stein (morning session only
Commissioner Michael Piwowar (morning session only)

Advisory Committee Members
Darcy Bradbury
J. Robert Brown, Jr.
Roger Ganser (phone)
Craig Goettsch
Joseph Grundfest (phone, morning session only)
Mellody Hobson (phone, morning session only)
Stephen Holmes
Adam Kanzer
Roy Katzovicz (phone)
Barbara Roper
Kurt Schacht
Alan Schnitzer (phone, morning session only)
Jean Setzfand (phone, morning session only)
Damon Silvers (morning session only)
Steven Wallman
Ann Yerger

Staff of the Securities and Exchange Commission
Lori J. Schock, Office of Investor Education and Advocacy
M. Owen Donley III, Office of Investor Education and Advocacy
David Shillman, Division of Trading and Markets (afternoon session only)
Sebastian Gomez Abero, Division of Corporation Finance (afternoon session only)

OPENING[2]

Mr. Goettsch opened the meeting.  Chair White welcomed the Committee and delivered remarks summarizing the Commission’s rulemaking efforts since the Committee’s November 22, 2013 meeting and updated the Committee on Commission consideration of the Committee’s universal proxy ballots, data tagging, broker-dealer fiduciary duty, and legislation to fund investment adviser examinations recommendations.  Commissioners Aguilar, Gallagher, Stein, and Piwowar welcomed the Committee.

November 22, 2013 MEETING MINUTES APPROVAL[3]

The Committee approved the minutes without objection.

COMMITTEE OFFICERS’ MEETINGS WITH CHAIR WHITE, COMMISSIONER AGUILAR, COMMISSIONER GALLAGHER, AND THE SENATE BANKING COMMITTEE

Mr. Brown briefed the Committee on meetings the Vice Chairman, Secretary, Assistant Secretary, and the Chairs of the Investor as Purchaser and Market Structure Subcommittees had with Chair White, Commissioner Aguilar, and Commissioner Gallagher.  The participants discussed the procedures for Commission responses to recommendations, as well the Office of the Investor Advocate.

Mr. Brown also briefed the Committee on a meeting in which Committee officers provided an overview of the Investor Advisory Committee to the Senate Banking Committee.

CONSIDERATION OF RECOMMENDATIONS OF THE MARKET STRUCTURE SUBCOMMITTEE REGARDING DECIMALIZATION AND TICK SIZES[4]

Mr. Wallman presented the recommendations (italicized below) from the Market Structure Subcommittee on decimalization and tick sizes and invited comments and questions.

Recommendation 1

The Committee recommends that the Commission not reverse its decimal pricing policy. That includes not engaging in “tests” or “pilot” programs.

Recommendation 2

To the extent that the Commission believes additional steps are needed to promote capital formation and/or enhanced liquidity for smaller capitalization company securities, the Commission should consider alternative approaches. In evaluating its various options, the Commission should consider which approach would best ensure that retail investor protections are not sacrificed while also considering which approach would best enhance capital formation and small cap stock liquidity.

Recommendation 3

Should the Commission nevertheless choose to pursue a pilot program of increasing tick sizes, it should be designed to limit the potential harm to investors and maximize any benefits. Toward that end, any such pilot:

• Should be designed with a tight timeframe and a guaranteed sunset unless benefits are proven to outweigh the costs;

• Should be designed to measure the costs and benefits to investors, with a particular focus on retail investors; and

• Should not focus exclusively on increasing tick size, but should include piloting other changes to encourage appropriate trading, enhance liquidity, or facilitate

Mr. Holmes offered a dissenting opinion and an alternative to Recommendation 1.[5]

Alternative Recommendation 1

The Commission should engage in meaningful and substantial “pilot” programs to determine whether a modified decimal pricing rule and the rules discussed in the Market Structure Subcommittee’s Recommendations #2 and #3 for small-cap public companies will significantly improve the liquidity and reduce the volatility of their stock prices.

After discussion of the recommendations and Mr. Holmes’ alternative recommendation, the Committee approved the recommendations with the following amendments to Recommendation 1.  Mr. Holmes, Ms. Hobson, and Mr. Grundfest voted against the recommendations.

Recommendation 1

The Committee recommends that the Commission not reverse its decimal pricing policy. That includes not engaging in “tests” or “pilot” programs. This recommendation is based on reviews of proposals previously presented or discussed by various parties[6]  that relate primarily to increasing the tick size of a security as quoted on an exchange.  If a sufficiently detailed proposal for a pilot that responds adequately to and addresses the concerns stated in these recommendations is subsequently presented, then the Committee would, of course, review any such proposal at such time and be in a position to reconsider its recommendation against such a pilot. However, we currently know of no such proposal (emphasis added).

LUNCH BREAK [NON-PUBLIC SUBCOMMITTEE SESSIONS]

DISCUSSION OF REBATES AND PAYMENTS FOR ORDER FLOW

David Shillman of the Division of Trading and Markets gave a presentation and answered questions on rebates and payments for order flow.

DISCUSSION OF CROWDFUNDING

The Committee discussed the Commission’s Regulation Crowdfunding proposed rules and areas where the proposal can be strengthened.[7]  Sebastian Gomez Abero of the Division of Corporation Finance answered questions about the proposed rules.

INVESTOR AS PURCHASER SUBCOMMITTEE REPORT

Ms. Roper reported that the Investor as Purchaser Subcommittee intends to prepare a recommendation on the Regulation Crowdfunding proposed rules by the next Committee meeting.  The subcommittee is also discussing whether it wants to make a recommendation on the “Accredited Investor” definition in the Commission’s proposed general solicitation rules.[8]

MARKET STRUCTURE SUBCOMMITTEE REPORT

Mr. Wallman reported that the Market Structure Subcommittee intends to review rebates and payments for order flow issues.  In addition, the subcommittee will focus on alternative approaches to promote capital formation and/or enhanced liquidity for smaller capitalization company securities that do not involve increasing the tick size.

INVESTOR AS OWNER SUBCOMMITTEE REPORT

Ms. Yerger reported that the Investor as Owner Subcommittee had a briefing from Keith Higgins of the Division of Corporation Finance regarding the Division’s priorities for 2014.  The subcommittee intends to prepare a recommendation addressing proxy distribution impartiality by the next Committee meeting.

INVESTOR EDUCATION SUBCOMMITTEE REPORT

Mr. Ganser reported that the Investor Education Subcommittee will work jointly with the Investor as Purchaser Subcommittee on preparing a recommendation on the Regulation Crowdfunding proposed rules by the next Committee meeting.

CLOSING

Mr. Goettsch closed the meeting.

http://www.sec.gov/spotlight/investor-advisory-committee-2012/iac013114-minutes.htm