The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

July 13, 2022















https://www.brokeandbroker.com/6553/bousted-atif-leaping/
In today's blog we come upon a convoluted dispute involving an underwriter, two companies, two deals, two agreements, one IPO goes forward, one IPO gets withdrawn, then the IPO'd company acquires the other non-IPO'd company, and . . . omigod, what a mess! Was a success fee earned for one or two or three deals? Did FINRA have to approve all three purported transactions or only two or one? 

The SEC adopted amendments to its proxy voting advice rules. https://www.sec.gov/rules/final/2022/34-95266.pdf As asserted in the SEC Release:

The final amendments rescind two rules applicable to proxy voting advice businesses that the Commission adopted in 2020. Specifically, the final amendments rescind conditions to the availability of two exemptions from the proxy rules' information and filing requirements on which proxy voting advice businesses often rely. Those conditions require that: (1) registrants that are the subject of proxy voting advice have such advice made available to them in a timely manner; and (2) clients of proxy voting advice businesses are provided with a means of becoming aware of any written responses by registrants to proxy voting advice. Institutional investors and other clients of proxy voting advice businesses have continued to express concerns that these conditions could impose increased compliance costs on proxy voting advice businesses and impair the independence and timeliness of their proxy voting advice.

The final amendments also delete the 2020 changes made to the proxy rules' liability provision. Although the 2020 changes were intended to clarify the application of this liability provision to proxy voting advice, they instead created a risk of confusion regarding the application of this provision to proxy voting advice, undermining the goal of the 2020 changes. The final amendments address the confusion while affirming that proxy voting advice generally is subject to liability under the proxy rules.

Finally, the adopting release rescinds guidance that the Commission issued in 2020 to investment advisers regarding their proxy voting obligations.


The free and fair exercise of shareholder voting rights is essential to a well-functioning system of corporate democracy, one that helps ensure that shareholders can exercise appropriate oversight of the companies they own. As shareholders increasingly vote through institutional asset managers, proxy advisors play a unique and important role in informing that process and enabling shareholders to protect their interests and their capital.  

Individual shareholders and individual asset managers generally cannot afford to conduct, on their own, the kind of research proxy advisors provide. It is therefore critically important that the Commission's regulation of proxy advisors does not impede the provision of timely and independent proxy voting advice or otherwise create unnecessary burdens on the exercise of shareholder voting. For that reason, I'm pleased to support today's amendments reconsidering certain aspects of our rules and guidance regarding proxy voting advice.

Specifically, the Commission is rescinding two elements of its 2020 proxy advisor rules that generated significant concerns among investors and other commenters. The first involves mechanisms to enhance management's influence over proxy voting advice by effectively requiring that issuers be given advance access and an opportunity to respond to such advice, and that proxy advisors separately notify their clients of those responses despite the fact that they are publicly filed.[1] The second change rescinds a note to the proxy-related anti-fraud provisions which added examples of misstatements related to proxy voting advice that created uncertainty regarding the scope of liability for such advice.

In addition to eliminating these provisions, the Commission is rescinding certain supplemental guidance for investment advisers that was issued in connection with the 2020 amendments in response to comments that such guidance was unnecessary in light of existing previous guidance, risked increasing uncertainty regarding adviser obligations, and no longer made sense in light of the rescission of related provisions of the 2020 rules.[2] At the same time, the Commission is retaining other elements of its recent regulation of proxy advisors including the guidance issued in 2019 and the provisions of the 2020 rulemaking designed to enhance disclosure regarding conflicts of interest.

The result of the amendments we adopt today will be better tailored and supported rules governing proxy voting advice that better balance the needs of investors and other market participants and better reflect the data we have available to us. On that last point, over the years, the Commission has gathered information regarding the proxy voting system through, for example, the issuance of a 2010 concept release[3] and the convening of a 2018 roundtable,[4] among other mechanisms.[5] This extensive gathering of data and views has identified evidence of a number of areas of concern related to proxy voting and potential reforms in that space. We know, for example, that many shareholders are unable to confirm their shares are voted in accordance with their instructions, a concern that could be addressed through required end-to-end vote confirmations.[6] There are likewise concerns about disclosure of voting information by funds that could be addressed by enhancements to Form N-PX.[7]

There was, however, throughout the information gathering process engaged in by the Commission, an absence of any credible evidence suggesting pervasive, or even moderate, errors in proxy voting advice.[8] In fact, the Commission's analysis has shown that the supposed error rate for proxy voting advice is vanishing to none.[9] Not only was there no clear basis for a rule that increased the involvement of conflicted parties in proxy voting advice, but investors (the supposed beneficiaries of the new rules) stated emphatically that this aspect of the new rules would interfere with, rather than promote, efficient proxy voting by introducing unnecessary cost and delay and increasing the risk of impaired independence.[10]

Today's rulemaking is responsive to those concerns. It is also responsive to the consistent feedback and data the Commission has received regarding proxy voting advice, both historically and in response to the proposal we finalize today.

It is appropriate for the Commission from time to time to evaluate its rules and, where appropriate, make adjustments that reflect our best knowledge and judgment. Sometimes re-evaluations occur after many years, and sometimes after only a short time. In fact, the Commission changed course with respect to rules that had been on the books a very short time in 2018, 2019, and 2020.[11] This is not a new phenomenon. I hope the Commission will continue to re-evaluate rules when it has well-substantiated reason to do so. In addition, I hope the Commission also continues to evaluate the proxy voting system and consider ways to improve its transparency, accuracy, and efficiency, including through consideration of end-to-end vote confirmation and adoption of enhancements to Form N-PX.

Let me conclude by thanking the staff in the Divisions of Corporation Finance, Investment Management, and Economic and Risk Analysis, as well as the Office of the General Counsel for the diligent, thoughtful, and careful work on this release. I'm pleased to support today's amendments. Thank you.

 
[1] The 2020 amendments added a new condition to the availability of an exemption from the information and filing requirements of the proxy rules for proxy voting advice. Specifically, the new condition required that proxy advisors adopt and publicly disclose policies and procedures reasonably designed to ensure that (1) registrants that are the subject of proxy voting advice have such advice made available to them at or prior to the time when such advice is disseminated to the proxy advisor's clients; and (2) proxy advisors provide their clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice by registrants that are the subject of such advice. In addition, the amendments set forth safe harbors for satisfying this new condition, including requirements that the proxy advisor make its advice available to registrants at no charge and that the proxy advisor provide a hyperlink to any registrant response. Moreover, the 2020 adopting release expressly encouraged proxy advisors to provide registrants with advance review of proxy voting advice. See Exemption from Proxy Rules for Proxy Voting Advice, Final Rule, Release No. 34-89372 (July 22, 2020).

[2] See Proxy Voting Advice, Final Rule, Release No. 34-[x], 41, n.161 (July 13, 2022) [Adopting Release].

[3] See Concept Release on the US Proxy System, Release No. 34-62495 (July 14, 2010) [Proxy Concept Release].

[4] See Statement Announcing SEC Staff Roundtable on the Proxy Process (July 30, 2018).

[5] See, e.g., Universal Proxy, Proposed Rule, Release No. 34-79164 (Oct 26, 2016); Reporting of Proxy Votes on Executive Compensation and Other Matters, Proposed Rule (Oct. 8, 2010). Release Nos. 34-63123; see also Recommendation of the SEC Investor Advisory Committee (IAC) Proxy Plumbing (Sept. 5, 2019). 

[6] See Proxy Concept Release at 40 ("In the Commission's view, both record owners and beneficial owners should be able to confirm that the votes they cast have been timely received and accurately recorded and included in the tabulation of votes, and issuers should be able to confirm that the votes that they receive from securities intermediaries/proxy advisory firms/proxy service providers on behalf of beneficial owners properly reflect the votes of those beneficial owners. . . . One possible solution may be for all participants in the voting chain to grant to issuers, or their transfer agents or vote tabulators, access to certain information relating to voting records, for the limited purpose of enabling a shareholder or securities intermediary to confirm how a particular shareholder's shares were voted.").

[7] Id. at 49 ("We seek to examine whether Form N-PX should be amended to require disclosure of the actual number of votes cast by funds."); see also Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers, Proposed Rule, Release No. 34-93169 (Sept. 29, 2021) ("To improve the utility of Form N-PX information for investors, we are proposing amendments to enhance the information funds currently report about their proxy votes on Form N-PX and to make that information easier to analyze.").

[8] See Allison Herren Lee, Paying More For Less: Higher Costs for Shareholders, Less Accountability for Management (July 22, 2020)  ("The final rules will still add significant complexity and cost into a system that just isn't broken, as we still have not produced any objective evidence of a problem with proxy advisory firms' voting recommendations. No lawsuits, no enforcement cases, no exam findings, and no objective evidence of material error-in nature or number. Nothing.").

[9] See Adopting Release at 32, n.127 ("[T]he ACCF study identified 50 and 42 instances, respectively, in 2021 and 2020 in which registrants filed supplemental proxy materials to dispute the data or analysis in a PVAB's proxy voting advice, when compared to the 5,565 and 5,350 unique registrants that filed proxy materials with the Commission in 2021 and 2020, respectively . . . that study indicates that only 0.90% of all registrants disputed a PVAB's proxy voting advice in supplemental filings in 2021, which is only a 0.11% increase (i.e., 0.90% versus 0.79%) from 2020. Finally, it is worth noting that these percentages may not reflect the error rates in proxy voting advice, as the fact that a registrant raises a dispute regarding proxy voting advice in a supplemental filing does not necessarily indicate that an error exists in such advice"); see also Recommendation of the SEC Investor Advisory Committee (IAC) Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals (Jan. 24, 2020) ("From over 17,000 shareholder votes over three years, the number of possible factual errors identified by companies themselves in their proxy supplements amounts to 0.3% of proxy statements - and none of those is shown to be material or to have affected the outcome of the related vote.").

[10] See, e.g., Council of Institutional Investors, Leading Investor Group Dismayed by SEC Proxy Advice Rules (Jul. 22,

2020) ("[T]he new rules . . . seem to effectively require investment advisors who vote proxies on behalf of investor clients to consider and evaluate any response from companies to proxy advice before submitting votes. That could cause significant delays in the already constricted proxy voting process. It also could jeopardize the independence of proxy advice as proxy advisory firms may feel pressure to tilt voting recommendations in favor of management more often, to avoid critical comments from companies that could draw out the voting process and expose the firms to costly threats of litigation."); US SIF, US SIF Releases Statement On SEC Vote To Regulate Proxy Advisory Firms (Jul. 22, 2020) ("Today's vote is a blow to the independence of research provided by proxy advisors to investors. The proxy advisor rule shifts power to corporate management and away from investors by allowing corporations to inappropriately influence proxy voting advice and intimidate proxy advisors with the threat of litigation.").

[11] See, e.g., Proposed Rule Amendments and Guidance Addressing Cross-Border Application of Certain Security-Based Swap Requirements, Proposed Rule, Release No. 34-85823 (May 10, 2019) (proposing to amend recently adopted provisions relating to the cross border application of certain security based swap requirements prior to their compliance date in response to "market participants and other commenters [who] have raised concerns regarding possible disruptive effects of the above requirements, suggesting that the  requirements would create significant operational burdens and impose unwarranted costs"); Investment Company Liquidity Disclosure, Proposed Rule, Release No. IC-33046 (Mar. 14, 2018) (proposing to amend recently adopted provisions governing fund liquidity disclosure prior to their compliance date, noting that "we have received letters raising concerns that the public disclosure of a fund's aggregate liquidity classification information on Form N-PORT may not achieve our intended purpose and may confuse and mislead investors" and that "these letters have caused us to question whether the current approach of disclosing aggregate liquidity fund profiles through Form N-PORT is the most accessible or useful way to facilitate public understanding of fund liquidity"). See also Disclosure of Payments by Resource Extraction Issuers, Final Rule, Release No. 34--90679 (Dec. 16, 2020) (reversing course on a host of provisions recently adopted by the Commission, when, by the Commission's own reasoning in the adopting release, such reversals were not necessary under the Congressional Review Act disapproval of the recently adopted rule); Allison Herren Lee, Statement on Rules Governing the Disclosure of Payments by Resource Extraction Issuers (Dec. 16, 2020) ("The adopting release contends that the change in project definition alone would satisfy the CRA. Nevertheless the final rule reverses course on a host of other significant features of the 2016 rule, all of which will reduce transparency. These changes will reduce the number of companies required to disclose, reduce the amount of disclosure, reduce the liability that attaches to the disclosure, and reduce the promptness of the disclosure. At proposal, these changes were premised on Congressional concerns about compliance costs and anti-competitive effects. But since we have abandoned that rationale - and the release reasons these changes are not required to satisfy the CRA - it is not clear that we have any reasonable basis for these additional reversals from the Commission's well-reasoned 2016 position.").

https://www.sec.gov/news/press-release/2022-121
The SEC proposed amendments to Rule 14a-8. 
https://www.sec.gov/rules/proposed/2022/34-95267.pdf In part the SEC Release states that:

The proposed amendments to Rule 14a-8 would revise the following bases for exclusion:
  • Substantial Implementation. The proposed amendments would specify that a proposal may be excluded under this provision if the company has already implemented the "essential elements" of the proposal.
  • Duplication. The proposed amendments would specify that a proposal "substantially duplicates" another proposal previously submitted for the same shareholder meeting if it addresses the same subject matter and seeks the same objective by the same means.
  • Resubmission. The proposed amendments would provide that a proposal constitutes a resubmission if it substantially duplicates another proposal that was previously submitted for the same company's prior shareholder meetings. . . .
Improving the Shareholder Proposal Process: Statement on Proposed Amendments to Rule 14a-8 by SEC Commissioner Allison Herren Lee
https://www.sec.gov/news/statement/lee-statement-proposed-amendments-rule-14a-8-071322

Shareholder proposals represent a key mechanism for shareholders to engage with management, put issues of importance on the proxy ballot, and generally enhance oversight and accountability. Through this process, shareholders have introduced significant improvements in corporate governance including majority vote rules for the election of directors, elimination of staggered board terms, limits on poison pills that serve to entrench management, and requirements for independent board chairs. Indeed shareholder proposals have often been a catalyst for pivotal corporate governance reforms. And shareholder-proponents have been early and leading voices - bellwethers for management - on significant issues such as climate risk, workforce diversity, and political spending disclosure.

For all of these reasons, it is imperative that the substantive bases for excluding shareholder proposals from the ballot are not overbroad and create as balanced, predictable, and efficient a framework as possible.[1] Accordingly, I am pleased to support the amendments we propose to today, which would clarify the framework governing the inclusion or exclusion of shareholder proposals from the proxy ballot, and help ensure proponents have a fair opportunity to put appropriate proposals before their fellow shareholders.

In particular, the Commission proposes today to amend the provisions of Rule 14a-8 permitting exclusion on three different bases: that a proposal (1) has already been substantially implemented; (2) is duplicative of another current proposal, or (3) constitutes a resubmission of a prior proposal that failed to meet resubmission thresholds.

With respect to substantial implementation, the proposed amendment is intended to focus analysis on whether the essential elements of a proposal have been implemented - establishing a more objective and specific standard to enhance certainty for shareholders and companies alike.[2]

With respect to duplication and resubmission, the proposed amendments would align and narrow these bases for exclusion to circumstances where proposals address the same subject matter and seek the same objective by the same means, thereby facilitating the ability of shareholders to put forth various differing approaches to achieving their objectives.[3] Just as management endeavors to be innovative and creative in driving value and seeking solutions, shareholders too can add value by generating ideas for different approaches to an issue.

The proposed amendments are tailored and thoughtful revisions to Rule 14a-8 that, importantly, are carefully informed by the staff's experience applying the rule through the 14a-8 no-action process. Thus, I'm pleased to support this recommendation, and I want to thank staff in the Division of Corporation Finance, the Division of Economic and Risk Analysis, and the Office of the General Counsel for their work on this proposal, which as usual reflects their expertise and attention to detail. Thank you.

[1] See Amendments to Rules on Shareholder Proposals, Release No. 34-40018 (May 21, 1998) (describing revisions to 14a-8 as an effort to make the framework as "fair, predictable, and efficient" as possible).

[2] See Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8, Proposed Rule, Release No. 34-[x] (July 13, 2022) ("We believe that an analysis that focuses on the specific elements of a proposal would provide a reliable indication of whether the actions taken to implement a proposal are sufficiently responsive to the proposal such that it has been substantially implemented. . . We believe that the proposed amendment would facilitate shareholder suffrage, provide a more objective and specific framework for the substantial implementation exclusion, assist the staff in more efficiently reviewing and responding to no‑action requests, and benefit shareholders and companies by promoting more consistent and predictable determinations.") [Adopting Release].

[3] See Adopting Release at 20-21 (describing the proposed amendment to the duplication provision, which is consistent with the proposed approach to the resubmission provision, saying "the proposed amendment would enable the consideration by a company's shareholders of later-received proposals that may be similar to and/or address the same subject matter as an earlier-received proposal but which seek different objectives or offer different means of addressing the same matter.").

In the past, corporate democracy was traditionally exercised in-person at an annual meeting. At these meetings, company shareholders gathered together physically, in a room, to cast their votes on a variety of issues ranging from the election of directors to employee working conditions.[1] Today, with two years of COVID telework and remote technology under our belt, that may seem as antiquated as my parents' landline rotary phone. The majority of shareholders now vote through the grant of proxy in advance of the meeting, electronically. In other words, they fill out a ballot, or someone, like their investment adviser, does so on their behalf through an electronic vote management system.[2] This process, as a whole, is generally referred to as the proxy process and, over time, the corporation's proxy materials have become, as the D.C. Circuit acknowledged, "the forum for shareholder suffrage."[3]

Shareholder voting is one of few avenues for investors to exercise their voices within a corporation.[4] The shareholder vote is a right granted in return for the investor's capital.[5] But it is not unfettered. The right to vote on corporate affairs is limited to certain matters by state corporate law. Further, the right of shareholders to vote is balanced against the authority of the board of directors to make decisions about the management of the enterprise, which the board then delegates to the executive officers.[6] Regulation of the proxy process is a core function of the Commission under the Securities Exchange Act of 1934,[7] and part and parcel of the SEC's responsibilities.

With that in mind, the federal proxy rules were drafted to ensure that state law shareholder rights are accessible and meaningful when those rights are exercised by proxy.[8] In this regard, we must remain constantly vigilant and must continuously evaluate whether the proxy system as it has evolved remains effective in ensuring these shareholder rights.[9] For example, the SEC made an important stride last year by finalizing the universal proxy rule.[10] Now, shareholders may more easily vote for a mix of board candidates, more closely approximating direct shareholder voting at an annual meeting.[11]

This proxy infrastructure seems fairly straightforward and seemingly simply to effect. In practice, however, complexities abound. In line with modern portfolio theory, many shareholders have diversified holdings, with ownership spread across many issuers rather than concentrated in a few individual stocks. The growth of index funds, and of the intermediation of equity holdings through institutional investors, for example, adds layers of complexity very quickly. Each proxy season, these institutional investors vote shares across thousands of issuers on a significant number of matters on behalf of their clients - resulting, some years, in over 7.5 million votes.[12] In order to manage this volume of voting, investors often hire companies, called proxy advisory firms, to help provide research, analysis, recommendations, and logistical support for the matters that appear on a given corporation's proxy. And it's no wonder. Academic research has shown that given such dispersed ownership, monitoring public companies from the outside is difficult, resource-intensive,[13] and the incentives to engage in meaningful oversight for many shareholders are reduced by competing considerations.[14]

But such monitoring and oversight are vital. Notably, shareholder proponents - those putting forward proposals - have used the shareholder proposals submitted in proxy materials to limit mechanisms that insulated boards and management.[15] Through proposals, corporate governance hygiene in the form of board declassification and term limits have become commonplace.[16]

The term corporate democracy and this proxy history are all part of an important and delicate balance. A balance that implicates shareholder rights granted through state laws which are vindicated through a federal scheme, a balance between corporate directors and the owners (shareholders) who have invested their capital into the corporation, and a balance of the practical realities of today's world. Congress entrusted the Commission with authority to promote fair, honest, and informed markets, underpinned by a properly functioning proxy system devised by federal law and regulation - the forum for shareholder suffrage.[17] It is unreasonable to expect shareholders' voices to be heard over a rotary phone. And as we have evolved with our telecommunications devices (most of us anyway), the Commission must evolve with the increasing sophistication, complexity, and intermediation of the securities markets. It is essential for the Commission to re-assess from time to time whether corporate democracy is in balance.

Proxy Voting Advice Adoption

Having conducted that assessment, today we are adopting amendments to the federal proxy rules governing voting advice. This advice, as noted above, is a foundational part of the proxy ecosystem. The steps we take today will help ensure that proxy voting advice remains independent and can flow to the investors who rely on it to inform their voting. Today's release is responsive to feedback from the intended beneficiaries of a rule promulgated in 2020, who have stated, clearly, that changes made at that time would impede both the independence and timeliness of proxy voting advice. The data and evidence gathered by the Commission over the years also indicates that risks posed by the 2020 rule in terms of costs, timeliness, and a sacrifice of independence, quite simply, exceed the benefits of that rule.[18]

Moreover, the 2020 changes sought to ensure the accuracy of proxy voting advice. That goal is a good one. But the Commission's own data show that the amendments implemented to achieve that goal were, in fact, unnecessary. The rate of factual errors in proxy voting advice was vanishingly small, less than two percent.[19] The rule as adopted introduced real and costly risks to address a problem that was marginal, at best. As a result, the Commission is taking important and measured steps today to continue to assess and promote an appropriate balance in corporate democracy and shareholder voting.

I want to thank the commenters for their input, without which, we could not make improvements.

Proposed Amendments to 14a-8

Relatedly, shareholder proposals go to the foundational arrangement of corporations: a separation of ownership and control. Shareholders invest their capital into the corporation, and the board of directors is responsible for managing the affairs of the corporation and deploying that shareholder capital. The board of directors then delegates this authority to officers, such as the CEO and CFO, while retaining responsibility for their oversight.

As part of this separation of ownership and control, shareholders have some opportunity, as I mentioned above, to put proposals to a shareholder vote, and include such proposals in company proxy materials alongside the company's own proposals.[20] But, as I also noted, there are limitations to those opportunities. Rules - both procedural and substantive - govern when a proposal can be put on the proverbial ballot, or proxy material, for a vote. When it comes to shareholder proposals on the corporation's proxy materials, these rules come, in large part, in the form of Exchange Act Rule 14a-8, which governs both the ability to submit and include a proposal in the proxy materials and the ability of management to exclude certain proposals.

The benefits of 14a-8 shareholder proposals and the interactions that flow from the process have been many and meaningful.[21] Keeping this avenue of communication and transparency robust, healthy, and effective, for both the shareholder franchise and management, is critical to the balance of corporate democracy, and is an important function of the SEC. But over time, as the Commission has worked year-after-year with issuers and proponents on this framework, proposal after proposal, observers have expressed concern about variation and potential unpredictability in the application of some exclusions.[22] Today's rule seeks to clarify that framework, and in so doing, "facilitate[s] shareholder suffrage and communication between shareholders and the companies they own on important issues."[23] This modernization, in combination with the release language, seeks to provide transparency and predictability in how the principles under certain 14a-8 exclusions are applied and, in turn, help ensure that all proposals that ought to be put to a shareholder vote will be.

I look forward to the reviewing the comment file, to meeting with the relevant stakeholders, and moving forward to continuing to assess and modernize our rules as appropriate.

Thank you to the staff in the Division of Corporation Finance, Division of Economic and Risk Analysis, Office of the General Counsel, and Division of Investment Management. I appreciate the continued engagement with my office and for your constant support of investors and the markets.

[1] See, e.g., Sara Haan, Corporate Governance and the Feminization of Capital, 74 Stan. L. Rev. 515, n. 175 (2022).

[2] See, e.g., Sec. & Exch. Comm'n, Briefing Paper: Roundtable on the Federal Proxy Rules and State Corporation Law (May 7, 2007) [hereinafter Proxy Briefing Paper].

[3] See Concept Release on the U.S. Proxy System (July 14, 2010) (citing Roosevelt v. E.I duPont de Nemours & Co., 958 F.2d 416, 422 (D.C. Cir. 1992)).

[4] Other ways include direct engagement, activist campaigns, and independent proxy campaigns.

[5] Beyond the state law enumeration on matters suitable for shareholder vote, academics and observers have identified practical and structural impediments to shareholder voice within a corporation. See, e.g., J. Robert Brown, The Proxy Rules and Restrictions on Shareholder Voting Rights, 46 Seton Hall L. Rev. 45 (2016) (describing the hurdles and difficulties in using the 14a-8 process); Lisa Fairfax, Making the Corporation Safe for Shareholder Democracy, 69 Ohio St. L. J. 53, 61-78 (2008) (describing how shareholders have overcome certain mechanisms tha previously reduced shareholder voice within a corporation).

[6] See Proxy Briefing Paper.

[7] See Section 14(a) of the Securities Exchange Act of 1934, Exchange Act Rule 14a-8.

[8] See, e.g., Renee Jones, Sec. & Exch. Comm'n, The Shareholder Proposal Rule: A Cornerstone of Corporate Democracy (Mar. 8, 2022).

[9] The system could use updates to keep pace with the changing markets, and the Commission is woefully behind. The proxy plumbing process, though it works, is as up-to-date and tailored to modern needs as my parent's landline, rotary phone! See Caroline Crenshaw, Sec. & Exch. Comm'n, Statement on Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 at n. 27, 28 & accompanying text (Sept. 23, 2020).

[10] SeeUniversal Proxy, Release No. 34-79164 (proposed Oct. 26, 2016) (amending relevant Exchange Act rules to allow for universal proxy cards that include the names of all director candidates, issuer candidates and challengers, allowing shareholders to more practically vote for a mix of issuer and challenger director candidates instead of having to vote either the full issuer slate or full challenger slate). See also SEC Investor Advisory Committee, Recommendations of the Investor Advisory Committee (IAC) Regarding SEC Rulemaking to Explore Universal Proxy Ballots(July 25, 2013) (recommending that the Commission should relax the "bona fide nominee" rule so that proxy contestants can use universal proxy cards); Mary L. Schapiro, Commissioner, Sec. & Exch. Comm'n, Remarks Before the National Investor Relations Institute's Fall Conference(Nov. 6, 1992) (noting that in adopting the bona fide nominee rule, "[t]he Commission chose a partial solution to the problem, opting not for the most simple approach that would permit the inclusion of some management nominees on the dissident's proxy").

[11] See supra note 10.

[12] See Amendments to Exemptions from Proxy Rules for Proxy Voting Advice, Release No. 34-89372 at n.8 (proposed Nov. 5, 2019) (citing Morris Mitler et al., Funds and Proxy Voting: The Mix of Proposals Matters, Investment Company Institute (Nov. 5, 2018) ("For funds, voting proxies is no small job. In the 2017 proxy season, funds cast 7.6 million votes on 25,859 proposals on corporate proxy ballots.")).

[13] See J. Robert Brown, The Evolving Role of Rule 14a-8 in the Corporate Governance Process, 93 Denv. L. Rev. F. 151 (detailing the substantive bases for exclusion under Rule 14a-8, describing many pro-issuer restrictions and limitations, and detailing the hurdles which shareholder proponents have had to overcome); Lucian Bebchuk, The Case for Increasing Shareholder Power,118 Harv. L. R. 833, 851 (2005) (noting the agency costs between management and shareholders in publicly dispersed companies as excessive pay self-dealing, rejection of beneficial acquisition offers, over-investment and engagement in empire-building and agreeing for increased shareholder input on governance arrangements.); John Coffee, Liquidity Versus Control: The Institutional Investor as Corporate Monitor, 91 Colum. L. Rev. 1277, 1281 (1991) (arguing that institutional investors may be "rationally apathetic" when it comes to corporate governance because there is trade-off between liquidity and control so investors that want liquidity hesitate to accept control).

[14] See Coffee, supra note 13.

[15] See, e.g., Kosmas Papadopoulos, ISS Analytics, The Long View: The Role of Shareholder Proposals in Shaping U.S. Corporate Governance (2000-2018), Harv. L. Sch. F. Corp. Gov. (Feb. 6, 2019); Lisa Fairfax, Making the Corporation Safe for Shareholder Democracy, 69 Ohio St. L. J. 53, 61-78 (2008); Lucian Bebchuk, The Myth of the Shareholder Franchise, 93 Va. L. Rev. 675, 688-694 (2013).

[16] See supra note 15.

[17] See Amendments to Exemptions from Proxy Rules for Proxy Voting Advice, Release No. 34-89372 at 6 (proposed Nov. 5, 2019) ("Proxies are the means by which most shareholders of publicly traded companies exercise their right to vote on corporate matters. Congress vested in the Commission the broad authority to oversee the proxy solicitation process when it originally enacted the Exchange Act in 1934. As the securities markets have become increasingly more sophisticated and complex, and the intermediation of share ownership and participation of various market participants has grown in kind, the Commission's interest in ensuring fair, honest and informed markets, underpinned by a properly functioning proxy system, dictates that we regularly assess whether the system is serving investors as it should.")

[18] See, e.g., Concept Release on the U.S. Proxy System (July 14, 2010); Statement Announcing SEC Staff Roundtable on the Proxy Process (July 30, 2018); SEC Investor Advisory Committee, Recommendation Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals (Jan. 24, 2020); Proxy Voting Advice, Release Nos. 34-95266, IA-6068 at n. 127 (adopted July 13, 2022) [hereinafter Adopting Release].

[19] See SEC Investor Advisory Committee, Recommendation Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals at 5, n. 16 (Jan. 24, 2020) (citing the Commission's own data that managers only filed supplemental proxy statemts claiming errors in proxy advisor reports 1.5% of the time across a three period and over 17,000 proxy statements). See also Adopting Release at n. 127.

[20] Such proposals are typically advisory and non-binding because under the laws of most states, shareholders do not have the power to require the board to take action, and a binding proposal may be excludable under the substantive basis of exclusion that proposals cannot be "improper under state law" or "violate state law." See, e.g., Sanford Lewis, Shareholder Rights Group, Analysis and Recommendations on Shareholder Proposal Decision-Making under the SEC No-Action Process, Harv. L. Sch. F. Corp. Gov. (Jul. 26, 2018); Latham & Watkins, M&A Deal Commentary (Aug. 1, 2006). See also Adrien K. Anderson, The Policy of Determining Significant Policy Under Rule 14a-8(i)(7), 93 Den. L. Rev. F. 183, 183 (2016) ("Shareholders of a publicly traded company have the right under Rule 14a-8 (the Rule) to include their proposals in the company's proxy materials. The presence of thirteen substantive grounds for omitting a proposal, however, limits this authority.").

[21] See supra note 15.

[22] See Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8, Release No. 34 -95267, IC-34647 at n. 35, 18, 27 (proposed July 13, 2022) [hereinafter Proposing Release].

[23] See Proposing Release at 6. More specifically, the release would enhance the shareholder proposal process through amendments to three of the thirteen bases of exclusion that a company may cite to exclude shareholder proposals from its proxy materials. See id at Section II.A-C.

In a FINRA Arbitration Statement of Claim filed in September 2021, customer Claimant Bardavon Health Innovations L.L.C. asserted . . . asserted . . . um, geez, let's just turn to the FINRA Arbitration Award for the "Case Summary":

In the Statement of Claim, Claimant alleged that Respondent charged Claimant for fees for services purportedly performed despite not having performed any services for Claimant and when Respondent was told that its services would probably not be necessary. . .

Okay, lemme see here -- Claimant alleged that Respondent charged service fees. Also, Claimant alleged that Respondent never performed any services warranting the fees. Further, Respondent allegedly told Claimant that its services "probably" wouldn't be necessary. So . . . Respondent charged Claimant for fees for services not provided and which were supposedly not going to be necessary -- or so that's what Claimant alleges.  In fairness to Respondent, let's again turn to the FINRA Arbitration Award for the balance of the "Case Summary":

Unless specifically admitted in the Statement of Answer and Counterclaim, Respondent denied the allegations made in the Statement of Claim and asserted various affirmative defenses. In the Counterclaim, Respondent asserted the following cause of action: breach of contract. The cause of action related to allegations that the engagement letter between Claimant and Respondent was a valid and binding contract, the Respondent performed its obligations under the engagement letter, and Claimant breached the engagement letter by failing to pay fees including an advisory fee and transaction fee. 

In the Statement of Answer to Counterclaim, Claimant denied the allegations made in the Counterclaim and asserted various affirmative defenses 

Moving along here, Claimant sought a Declaratory Judgment:

finding that Respondent's engagement letter is vague, and therefore void and unenforceable; a declaratory judgment finding that Respondent's engagement letter fails to set forth essential terms in definite and certain form, and therefore void and unenforceable; a declaratory judgment finding that Respondent's engagement letter is vague and unenforceable because of frustration of purpose; a declaratory judgment finding that Respondent is not entitled to its claim for excessive fees; a declaratory judgment finding that Respondent is not entitled to its claimed fees; and such other and further relief as the Panel deems just and equitable. 

Summing up Claimant's claims: Respondent wants to get paid for services it said would not be needed and that weren't provided; and, further, the Engagement Letter governing the deal is vague, void, and unenforceable because it lacks "essential terms." Respondent disputed the allegations. At the FINRA Arbitration hearing, Claimant sought a finding of no fee being owed, or, in the alternative, only a $100,000 fee. In contrast, Respondent sought $2,849,999.28.

The Award: The FINRA Arbitration Panel denied Claimant's claims and found Bardavon Health liable to and ordered the company to pay to Respondent Spurrier Capital $1,600,000 in compensatory damages.

https://www.justice.gov/usao-wdnc/pr/durham-nc-man-admits-operating-unlicensed-cryptocurrency-business-and-related-tax
Jayton Gill pled guilty in the United States District Court for the Western District of North Carolina to operating an unlicensed money transmitting business and willful failure to file a tax return. As alleged in part in the DOJ Release:

[F]rom at least 2015 to February 2021, Gill operated an unlicensed money transmitting business involving the exchange of millions of dollars of cash and other monetary instruments for cryptocurrencies such as Bitcoin and Monero. During the relevant time, Gill conducted thousands of transactions involving thousands of Bitcoins. As Gill admitted in court today, he advertised his unlicensed money transmitting business on various public websites and made claims on one such website that he had conducted more than 4,200 transactions with 2,700 different parties. Gill also conducted unlicensed money transactions in person and via the U.S. Postal Service.

Gill further admitted that he failed to file U.S. Individual Income Tax Returns for tax years 2015 through 2019, despite earning significant income from his unlicensed money transmitting business and from investing in cryptocurrency.

https://www.justice.gov/usao-ndoh/pr/four-canadian-nationals-charged-defrauding-us-and-canadian-investors-diamond-scheme
In an Information filed in the United States District Court for the Northern District of Ohio
James Gagliardini, Michael Shumak, Anthony Palazzolo, and Jack Kronis were each charged with one count of wire fraud. As alleged in part in the DOJ Release:

[D]efendants portrayed themselves as employees of Paragon International Wealth Management, Inc., a Canadian investment firm that sold investors diamonds and other jewelry items via unsolicited phone calls to individuals in the United States and Canada. 

It is alleged that from 2013 to 2018, Paragon would purchase lists of potential customers in the U.S. and Canada and made unsolicited telemarketing phone calls to these individuals.  During these phone calls, it is alleged that Paragon representatives persuaded potential investors to make small investments in "pink diamonds," which Paragon claimed would increase in value.  If an individual agreed to invest, court documents state that Paragon would often mail the customer a real pink diamond and a legitimate appraisal certificate as a show of good faith.

According to court records, after some time, Paragon would contact the customer again to persuade them to invest more money using false or misleading information and several fictitious schemes it had concocted.

One scheme is alleged to have involved informing investors that a wealthy international buyer would purchase the investor's diamonds at a significant profit if the investor gave Paragon more money to increase the diamond's physical size.  Another scheme allegedly involved asking investors to give Paragon more money in order to "upgrade" their diamonds and make them more valuable at fabricated diamond auctions.  A third scheme allegedly involved sending customers fraudulent appraisal certificates, which inflated the value of an investor's diamonds they purportedly owned.

https://www.justice.gov/usao-nj/pr/hunterdon-county-man-sentenced-33-months-prison-producing-phony-massage-therapy-training
Naresh Rane, 68, pled guilty in the United States District Court for the District of New Jersey to knowingly and intentionally using and causing the use of facilities in interstate commerce to promote, manage, establish, carry on, and facilitate the business of prostitution, and he was sentenced to 33 months in prison plus three years of supervised release. As alleged in the DOJ Release::

Rane owned and operated Axiom Healthcare Academy, which purported to provide classes in massage therapy training. Rane held himself out as a businessman who, for a fee that ranged from $1,000 to $2,600, could provide massage therapy training certificates to anyone who wished to obtain a massage license without the required training. Rane was also willing to provide phony transcripts listing classes and grades.

Between November 2013 and March 2014, Rane provided 10 fraudulent massage therapy training certificates and transcripts to a former Westwood, New Jersey, councilman who then gave them to prostitutes working in different massage parlors located in Union, Passaic, Hudson and Middlesex counties. Rane admitted today that he knew the documents he was producing and selling were used to disguise prostitution activities as legitimate massage services.  

Bill Singer's Comment: Lemme see if I got this -- about a decade ago in late 2013 to early 2014, Rane provided 10 fraudulent certificates to a politician, who, in turn, gave them to prostitutes. Slow forward a decade and we got a 68-year-old Rane going away for 33 months -- for that? I doubt that customers of so-called "massage parlors" are expecting a lot of legitimate massaging behind the curtains;  and, frankly, they're probably paying for a happy ending rather than a massage. Second, does Rane's role in this crime argue for just shy of three years in prison? By way of a reference point, consider:

https://www.justice.gov/usao-dc/pr/maryland-man-sentenced-prison-offenses-committed-during-jan-6-capitol-breach

            WASHINGTON - A Maryland man was sentenced today to 33 months in prison for assaulting law enforcement officers and obstructing an official proceeding during the breach of the U.S. Capitol on Jan. 6, 2021. His and others' actions disrupted a joint session of the U.S. Congress convened to ascertain and count the electoral votes related to the presidential election.

            Matthew Ryan Miller, 23, of Cooksville, Maryland, was sentenced in the District of Columbia.

            According to court documents, as a mob gathered on the West side of the U.S. Capitol on Jan. 6, Miller threw a full beer can in the direction of the Capitol building and police protecting it. At the time, he was draped in a Confederate flag. Miller then used a section of temporary barriers as a ladder to scale the walls of the west side of the plaza.  He also assisted other rioters in scaling the walls and other architectural obstacles. Miller and others then moved to the Lower West Terrace and close to the tunnel area leading into the building. Miller waved his hand, and said multiple times, "Come on," as the mob chanted "Heave! Ho!" and rocked back and forth in pushing towards the tunnel entrance that law enforcement officers were attempting to secure. Multiple times, Miller put up his fingers and yelled, "one, two, three, push!" From this position, he also threw batteries towards the Lower West Terrace tunnel, where police were guarding the entrance to the Capitol building. Then, at about 4:55 p.m., and at his closest position to the tunnel, Miller used a fire extinguisher to spray directly into the tunnel onto police officers; several officers were impacted by this assault.

            Miller was arrested on Jan. 25, 2021, in Cooksville, Maryland. He pleaded guilty on Feb. 9, 2022, to obstruction of an official proceeding and assaulting, resisting, or impeding officers. Following his prison term, Miller will be placed on 24 months of supervised release. He also must pay $2,000 in restitution. . . .

https://www.justice.gov/usao-sdin/pr/clarksville-man-sentenced-over-three-years-federal-prison-bilking-investors-out-over-14
Anthony Todd Leonard, 55, pled guilty in the United States District Court for the Southern District of Indiana to wire fraud and money laundering offenses, and he was sentenced to 40 months in prison plus three years of supervised release. As alleged in part in the DOJ Release:

[F]rom 2013 through 2019, Leonard sought out and obtained investors in his companies that purportedly focused on the development of educational software products, including nurseVersity LLC, Versity Edu, Versity Inc, VersityU, and Bridge-It Learning (collectively, the "Versity companies"). The products included nurseVersity software designed to assist nursing students in passing their board examinations; ptVersity, software designed to assist physical therapy students; and Bridge-It Learning, software designed to help students in the education system.

Leonard made material misrepresentations to induce investors to not only invest in his companies, but to also continue providing money once they were involved. These misrepresentations included providing inflated sales figures and other metrics; providing false bank statements and business financial documents to investors; and misrepresenting qualifications, medical history, and company personnel issues to secure additional funds.

As a result of these misrepresentations, investors paid, and continued to pay Leonard for purported ownership interests, loans, other rights to his companies, and for other business reasons, leading to losses of over $1.4 million. Leonard admitted to law enforcement that he misrepresented the amount of revenue his companies generated, and that his companies never actually made the money he represented to investors.

Most of the funds received from these investors were used by Leonard and his wife for their personal enrichment, such as the purchase of a large parcel of land in New Albany, Ind. with a lake house, the construction of a new residence on that parcel, expensive dinners, trips, and other expenses unrelated to the Versity companies and products.  Property obtained by Leonard with stolen investor funds was seized by the government and will be forfeited.  

https://www.justice.gov/usao-wdwa/pr/former-battle-ground-washington-bank-branch-manager-charged-stealing-over-1-million
In a Complaint filed in the United States District Court for the Western District of Washtington
https://www.justice.gov/usao-wdwa/press-release/file/1518696/download former Wells Fargo branch manager Brian Davie was charged with Bank Fraud and Aggravated Identify Theft. As alleged in part in the DOJ Release:

Davie worked for Wells Fargo in Battle Ground from March of 2014 until he was fired in June 2019. According to the criminal complaint, Davie used his position as a manager at the branch to conduct unauthorized transactions. Davie had access to customer files containing information about bank account balances, as well as examples of customer signatures. Davie allegedly used this knowledge to forge signatures on cashier's checks, withdrawal slips and other bank forms. Davie allegedly hid his criminal activity by repeatedly exchanging cashier's checks until they were small enough to cash without triggering banking reporting requirements.

The complaint alleges that Davie continued undetected because he stole from  elderly customers who might be less likely to closely monitor their account balances. Some of Davie's victims had dementia, or had limited English skills and did not understand banking transactions. In at least one case, Davie failed to file the paperwork to install a victim's relative as a co-signer on the victim's accounts.  That failure prevented the relative from being able to monitor the account and detect the fraudulent transactions.

Davie deposited some of the stolen money in an account he created in the name of a relative's business. He made some of the cashier's checks payable to that relative or to the business account he created. Much of the money was withdrawn as cash.

Wells Fargo reimbursed victims for their losses.

https://www.sec.gov/litigation/litreleases/2022/lr25441.htm
The United States District Court for the Eastern District of new York entered a Consent Judgment against attorney Shimon Rosenfeld enjoining him from future violations of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The Final Consent Judgement ordered Rosenfeld to pay $5,997,525 in digorgement plus prejudgment interest of $1,104,353.84, which is deemed satisfied by the payment of restitution and forfeiture ordered in the parallel criminal action, in which Rosenfeld was sentenced to 6 months in prison plus three years of supervised release, and ordered to pay $6,787,525 in restitution and $4 million in forfeiture. As alleged in part in the SEC Release:

[B]etween May 2014 and March 2018, Rosenfeld solicited investors by promising them that he would pool their funds to purchase and then resell real estate for a profit, which he would then split with the investors. According to the complaint, the investors provided Rosenfeld with approximately $7 million for the proposed real estate transactions. The complaint alleges that, contrary to what Rosenfeld told investors, he never used investor funds to purchase any real estate. Instead, Rosenfeld allegedly misappropriated the investor funds and used them to trade securities in his own personal brokerage account. According to the complaint, while Rosenfeld returned approximately $1 million to investors, his undisclosed and unsuccessful securities trading resulted in the loss of the remaining $6 million of investor funds.

https://www.sec.gov/news/statement/schock-statement-single-stock-levered-and-or-inverse-etfs-071122

Today and in the coming weeks, a new type of complex exchange-traded product will become available to investors in the U.S.: single-stock levered and/or inverse exchange-traded funds. For years, the Office of Investor Education and Advocacy, staff in other Divisions and Offices, and a number of Commissioners have warned that complex products present several risks to investors. These new products are no exception, as they provide levered and/or inverse exposure to a single security, which can present risks for investors.

Holding a levered and/or inverse single-stock ETF is not the same as holding the underlying stock, a traditional ETF, or even a non-single stock levered and/or inverse ETF. It is riskier for several reasons. Importantly, like many other complex exchange-traded products, levered and/or inverse single-stock ETFs aim to provide returns over extremely short time periods (in some cases even a single day). New risks may emerge for investors who hold these products for longer than that. Investors should be aware that if they were to hold these funds for longer than a day, the performance of these funds may differ significantly from the levered and/or inverse performance of the underlying stock during the same period of time.

Additionally, unlike traditional ETFs, or even other levered and/or inverse ETFs, these levered and/or inverse single-stock ETFs track the price of a single stock rather than an index, eliminating the benefits of diversification. Because levered single-stock ETFs in particular amplify the effect of price movements of the underlying individual stocks, investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself.

Though these products will be listed and traded on an exchange, they are not right for every investor. Levered and/or inverse single-stock ETFs pose risks that are unique and complex. We encourage all investors to consider these risks carefully before deciding to invest in levered and/or inverse single-stock ETFs.

Bill Singer's Comment: I'm not sure that there is anything more idiotic than calling a "single stock" ETF a "complex exchange-traded product." I might not take as much exception if this newfangled ETF was called an asinine idea for moron investors, but that's just my thought on the product. Of course, how could you not love the prospect of a leveraged or inverse single-stock ETF? What's next? Perhaps a single-stock-triple-leveraged ETF pegged to a single-stablecoin-triple-leveraged ETF keyed to Elon Musk's Twitter feed and all rolled into a managed ETN? If anyone wants to run with that idea at least consider paying me royalties, okay?

https://www.sec.gov/news/statement/crenshaw-single-stock-etfs-20220711

Last year, Commissioner Lee and I called for improvements to the regulatory framework for complex exchange-traded products to address concerns about investor protection and potential risks to the financial system.[1]  A new type of complex product will arrive on the market shortly: so-called "single-stock ETFs."  These newly engineered offerings provide leveraged, inverse or other complex exposure to one single security rather than the typical portfolio of multiple, more diversified securities.  While I have expressed concern about leveraged and inverse ETFs before, I worry that these single-stock ETFs pose yet another, perhaps greater, risk for investors and the markets.

In 2019, the Commission adopted Rule 6c-11 under the Investment Company Act of 1940.[2]  In combination with changes to the listing standards at stock exchanges, that rule created a framework that allowed exchange-traded funds (ETFs) meeting certain criteria to come directly to market without first obtaining permission, through what is called an exemptive order, from the SEC.[3]

Nowhere in Rule 6c-11 is there a discussion of single-stock ETFs; there is no indication that the rule contemplated such products.  However, single-stock ETFs are nonetheless coming to market under the auspices of that rule.  And, in addition to presenting a high level of risk by virtue of their leveraged and inverse exposure to a single stock, these ETFs[4] rebalance on a daily basis, like most existing leveraged and inverse ETFs.  The daily rebalancing and effects of compounding may cause returns to diverge quite substantially from the performance of the, in this case, one underlying stock, especially if these products are held over multiple days or more.[5] 

In other words, investors' returns over a longer period of time might be significantly lower than they would expect based on the performance of the underlying stock.  These effects are likely to be especially pronounced in volatile markets.  And as Commissioner Lee and I previously noted, in addition to presenting significant investor protection issues,[6] in periods of market stress or volatility, leveraged and inverse products can act in unexpected ways and potentially contribute to broader systemic risks.[7]

Because of the features of these products and their associated risks, it would likely be challenging for an investment professional to recommend such a product to a retail investor while also honoring his or her fiduciary obligations or obligations under Regulation Best Interest.[8] However, retail investors can and do access leveraged and inverse exchange-traded products through self-directed trading.  While investors can gain similar upside and downside exposures to an equity security through the use of options and other derivatives, single-stock ETFs are likely to be uniquely accessible and convenient for self-directed retail investors, in particular.

As I have noted before, a comprehensive and consistent approach to the review of complex exchange-traded products is long overdue.  I appreciate that the Chair has expressed a willingness to work on these issues,[9] and I am encouraged by the steps FINRA has taken toward updating its complex products framework.[10]  However, I am disappointed that, months after Commissioner Lee and I called for improvements to the rules for complex exchange-traded products, we have not updated our regulatory framework to better address the risks these products pose to investors and the markets. Further, with respect to single-stock ETFs in particular, I am disappointed that the Commission has thus far failed to make use of the tools it does have, such as rulemaking under the Investment Company Act of 1940 and/or the Securities Exchange Act of 1934, to grapple with the question of whether these products are appropriate in the public interest and consistent with the protection of investors.  I strongly encourage my colleagues to consider rulemaking in this case.

As with other complex exchange-traded products, single-stock ETFs may be useful to certain investors who understand their unique features.  However, they are risky products for investors and potentially for the markets, as well.  The arrival and proliferation of these products on the market underscores the importance of addressing the investor protection concerns and market risks that these and other exchange-traded products can entail.

[1] Commissioner Allison Herren Lee and Commissioner Caroline Crenshaw, Statement on Complex Exchange-Traded Products (Oct. 4, 2021).

[2] Exchange-Traded Funds, Release Nos. 33-10695; IC-33646 (December 23, 2019). See also Use of Derivatives by Registered Investment Companies and Business Development Companies, Release No. IC-34084, (Oct. 28, 2020) (amending Rule 6c-11 to allow leveraged and inverse ETFs that satisfy the rule's conditions to operate without an exemptive order).

[3] Exchange-Traded Funds, Release Nos. 33-10695; IC-33646 (December 23, 2019). Prior to the passage of Rule 6c-11, exchange-traded funds had to meet certain listing criteria established by rules at the relevant exchanges. Single-stock ETFs would not have satisfied the criteria established by those rules, and therefore could not have come directly to market. However, after the passage of Rule 6c-11, the exchanges established generic listing standards for ETFs that are permitted to operate in reliance on Rule 6c-11.  See, e.g., NYSE Arca, Inc.; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 2, to Adopt NYSE Arca Rule 5.2-E(j)(8) Governing the Listing and Trading of Exchange Traded Fund Shares, Release No. 34-88625 (April 13, 2020).  Other exchanges made similar rule changes.

[4] Single-stock ETFs have been introduced in certain other jurisdictions. However, those jurisdictions have different regulatory frameworks and markets.

[5] See Office of Investor Education and Advocacy, Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors (Aug. 1, 2009).  The Commission's Office of Investor Education and Advocacy has received complaints from investors expressing concerns that, while certain leveraged/inverse products may have operated in accordance with their terms, the pricing and trading dynamics of these products during periods of market volatility was not consistent with investor expectations.

[6] Commissioner Allison Herren Lee and Commissioner Caroline Crenshaw, Statement on Complex Exchange-Traded Products (Oct. 4, 2021) (describing investor protection concerns). See also Jay Clayton, Dalia Blass, William Hinman, Brett Redfearn, Joint Statement Regarding Complex Financial Products and Retail Investors (October 28, 2020) ("[L]everaged/inverse products and other complex products may present investor protection issues-particularly for retail investors who may not fully appreciate the particular characteristics or risks of such investments, including the risks that holding such products may pose to their investment goals.")

[7] See, e.g., Luke Kawa, Bloomberg, The Day The VIX Doubled: Tales of "Volmageddon" (Feb. 6, 2019).

[8] As the Commission stated at the time of Regulation Best Interest's adoption, leveraged and inverse exchange-traded products are "highly complex financial instruments" and the fact that they reset daily means such products are unlikely to be "suitable for, and as a consequence also not in the best interest of, retail customers who plan to hold them for longer than one trading session, particularly in volatile markets." Regulation Best Interest: The Broker-Dealer Standard of Conduct, Release No. 34-86031 (June 5, 2019) at 263-264.  The Commission explained further that these products are unlikely to be in the best interest of a retail investor absent an identified, short-term, customer-specific trading objective. Id. at 264. 

[9] Chair Gary Gensler, Statement on Complex Exchange-Traded Products (Oct. 4, 2021).

[10] See FINRA, Regulatory Notice 22-08: FINRA Reminds Members of Their Sales Practice Obligations for Complex Products and Options and Solicits Comment on Effective Practices and Rule Enhancements (Mar. 8, 2022).

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95247; Whistleblower Award Proc. File No. 2022-63)
https://www.sec.gov/rules/other/2022/34-95247.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:

[T]he CRS concluded that Enforcement staff had already opened the investigation that led to the Covered Action approximately four years before Claimant submitted his/her information, and that Claimant's information was otherwise vague, insubstantial, and did not warrant any further investigative efforts by the staff. The CRS also determined that the staff did not use any information from Claimant's submission. 

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95222; Whistleblower Award Proc. File No. 2022-62)
https://www.sec.gov/rules/other/2022/34-95222.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:

[T]he CRS concluded that Claimant's information did not either (1) cause the Commission to (a) commence an examination, open or reopen an investigation, or inquire into different conduct as part of a current Commission examination or investigation, and (b) thereafter bring an action based, in whole or in part, on conduct that was the subject of claimant's information, pursuant to Rule 21F-4(c)(1); or (2) significantly contribute to the success of a Commission judicial or administrative enforcement action under Rule 21F-4(c)(2) of the Exchange Act. The CRS determined that the investigation that led to the Covered Action was opened and pursued as a result of referrals from another regulatory agency (the "Other Agency"). The CRS also determined that Claimant's information did not significantly contribute to the Covered Action and consisted primarily of publicly available information, information already known to the staff, or information that was otherwise vague and unsubstantiated. 

The CRS also concluded that Claimant did not qualify for an award because Claimant's information was provided before July 21, 2010, the date of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), and thus did not constitute original information within the meaning of Section 21F(b)(l) of the Exchange Act and Rules 21F-3(a)(2) and 21F-4(b)(1)(iv) thereunder. The CRS determined that Claimant's whistleblower application was based on emails sent to the Commission and other agencies beginning in Redacted The record before the CRS demonstrated that Claimant's information provided to the Commission after July 21, 2010 was already known to the staff, publicly available, or contained general or vague allegations of wrongdoing that were unsubstantiated and did not lead to the success of the Covered Action under Rule 21F-4(c)(2) of the Exchange Act.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95221; Whistleblower Award Proc. File No. 2022-61)
https://www.sec.gov/rules/other/2022/34-95221.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:

[R]ule 21F-9(a) requires a whistleblower to submit information through the Commission's online Tips, Complaint, or Referral ("TCR") portal, or by mailing or faxing a Form TCR to the Commission's Office of the Whistleblower. Claimant's whistleblower application stated that Claimant submitted information to the Commission by email on or about Redacted but Claimant did not cite to any specific TCR submission. The CRS concluded that Claimant did not submit any information pursuant to these procedures until Redacted 

The CRS also concluded that Claimant did not qualify for an award because Claimant did not provide information to the Commission that led to the successful enforcement of the Covered Action. The CRS concluded that none of the information submitted by Claimant either (1) caused the Commission to (a) commence an examination, open or reopen an investigation, or inquire into different conduct as part of a current Commission examination or investigation, and (b) thereafter bring an action based, in whole or in part, on conduct that was the subject of claimant's information, pursuant to Rule 21F-4(c)(1); or (2) significantly contributed to the success of a Commission judicial or administrative enforcement action under Rule 21F-4(c)(2) of the Exchange Act. The record demonstrated that Enforcement staff opened the investigation that led to the Covered Action (the "Investigation") on Redacted based upon a source other than the Claimant, that Claimant submitted his/her Form TCR almost three years after the Investigation was opened, and that staff responsible for the Investigation confirmed that Claimant's information was not used in the Investigation or the resulting litigated enforcement action in any way.

https://www.finra.org/sites/default/files/2022-07/kausar-awc-2022073741702.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Harris Kausar submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Harris Kausar was a non-registered fingerprint ("NRF") person in 2020 and then sought to become registered in 2021 with Barclays Capital Inc. In accordance with the terms of the AWC, FINRA imposed upon Kausar a Bar from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Kausar took the FINRA Series 79 Investment Banking Representative Exam on December 26, 2021. Kausar had been provided an accommodation to take the exam online rather than in person. Prior to beginning the examination, Kausar attested that he had read and would abide by the FINRA Rules of Conduct. These rules require candidates taking online examinations to store all personal items outside the room in which they take the exam, and prohibit any use, attempted use, or access to personal items, including electronic devices or phones to access the internet during the examination. During the examination, Kausar accessed the internet, including online forums, to assist with answering examination questions. Therefore, Kausar violated FINRA Rules 1210.05 and 2010

https://www.finra.org/sites/default/files/2022-07/autiero-awc-2022073741701.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Brandon Autiero submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Brandon Autiero was first registered in 2021 with Equitable Advisors, LLC. In accordance with the terms of the AWC, FINRA imposed upon Autiero a Bar from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Autiero took the FINRA Series 7 examination on March 18, 2021, the NASAA Series 66 examination on June 15, 2021, July 21, 2021, and September 8, 2021, and the NASAA Series 63 examination on September 27, 2021. In each instance, Autiero had been provided an accommodation to take the examination online rather than in person. Prior to beginning each examination, Autiero attested that he had read and would abide by the relevant Rules of Conduct. These rules require candidates taking online examinations to store all personal items outside the room in which they take the exam, and prohibit any use, attempted use, or access to personal items, including electronic devices or phones to access the internet during the examination. During each qualification examination, Autiero accessed the internet, including online forums, to assist with answering examination questions. Therefore, Autiero violated FINRA Rules 1210.05 and 2010 while taking the Series 7 exam and FINRA Rule 2010 while taking the Series 66 and Series 63 exams.

https://www.brokeandbroker.com/6552/regulate-or-aggrieved-fcra/
In today's Guest Blog, anonymous author "Regulated or Aggrieved" notes the discrepancy between the data privacy required under the Federal Credit Reporting Act ("FCRA") and the relative lack of privacy of the Central Registration Depository ("CRD") data of hundreds of thousands of industry associated persons. The author wonders why CRD and FINRA accumulate and preserve their data in a manner that does not seem to conform to the letter of the FCRA law (or its spirit). Further, the author points to Regulation S-P, which protects brokerage customers' data, and asks why such a framework doesn't apply to the industry's employees.

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