SEC Seeks Comment on Investor Education

On April 19, the Securities and Exchange Commission published a request for public comment on the effectiveness of existing investor education efforts as part of a review mandated by the Dodd-Frank Act.

Section 917 directs the SEC to conduct a study of retail investors’ financial literacy and submit its findings to Congress by July 21, 2012. Among other things, Section 917 states that the study must identify “the most effective existing private and public efforts to educate investors.”

The Commission is seeking public comment to better understand the details and effectiveness of current programs, and help ensure that the study includes all relevant programs. “We want to know more about what’s out there and what’s working in the world of investor education,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.

The public comment period will remain open for 60 days following publication of the request in the Federal Register.

As part of its investor education effort, the SEC recently upgraded its website devoted exclusively to investor education. The site has been redesigned and expanded with more information about a variety of topics including how to research investments and investment professionals, understand fees, and prepare for life events. The updated also includes materials targeted to such specific groups as members of the military, teachers, and retirees. Videos, interactive quizzes, and additional investor education resources are expected to be added to the website in coming months. (SEC Seeks Public Comment on Effective Investor Education Programs; 2011-93; April 19, 2011.)

I urge readers to submit comments to the SEC emphasizing the importance of investors as owners. Following are my draft comments:

While the SEC is to be congratulated for creating an informative Internet site on investor eduction, so far efforts appear to be focused on avoiding scams, checking out investment advisers, brokers, etc. While this information is very important, it is also important that investors become buy and hold shareowners, since that is a much better strategy than churning. The SEC should encourage investors to think of themselves as shareowners, rather than shareholders.

The SEC education site does have one page devoted to shareholder voting. The site notes:

Registered owners (or record holders) receive a proxy and cast votes directly with the company that issues the shares. Beneficial owners, on the other hand, receive a “voting instruction form” directing their brokerage firm or other financial institution how to vote their shares. The brokerage firm (or bank or custodian) casts your proxy vote with the company after receiving instructions from you.

Unfortunately, the site says nothing about the fact that beneficial owners using a VIF appear to lose all the protections guaranteed by the SEC to record holders casting their votes by proxy. For example, SEC Rule 14a-4(a)(3) states the proxy:

shall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the registrant or by security holders.

However, Broadridge, which processes almost all the VIFs, claims that rule doesn’t apply to VIFs. Therefore, items to be voted don’t have to be titled impartially. In fact, they can be purposefully misleading. See Don’t Let Them Get Away With Stealing Elections.

The SEC should clearly identify all the rights retail shareowners lose when they hold their shares as beneficial owners, rather than as registered owners. If the SEC is going to continue this system of inequality, the reasons for such inequality should be explained as well.

In addition, the SEC education site provides links to Other Resources. However, none of those emphasize the role and responsibilities of investors as owners. I would like the SEC to add links to sites such as:

Section 917(a)(5) of Dodd-Frank requires the study to identify “the most effective existing private and public efforts to educate investors.”

We can now get some advice from free aggregators, such as MoxyVote.comProxy However, it is hard to see these sources growing to the point they can remain viable without additional funding. The SEC could facilitate such development through the use of seed funding from sources such as securities litigation settlements, federal government agency budgets (such as the SEC or the Consumer Financial Protection Agency), and/or fees from corporations.

Similar to the reasoning for proxy distribution fees, since retail investors are the beneficial owners of all corporate stock, it makes sense to levy a small tax on corporations for voting advice that benefits all shareowners. Competition among proxy advisors is important to ensure that we get value for money. Letting retail investors allocate collective funds by vote to competing advisors would ensure loyalty to our interests.

Nonprofit has already developed a prototype to develop and test such a voter funded allocation system. They offer platforms to voter communities at no charge. Each community typically pays its competing advisors (information providers) directly, so no funds need flow to or through, which provides the voting platform, tallies votes, and calculates awards. As part of an initiative to educate investors on voting, the SEC could recommend that a pilot program be launched to pay for retail proxy voting advice.

A previous proposal by Mark Latham indicates that even as little as $1 million per year could produce substantial public benefit by improving the quality of retail investor voting. This could buy some original proxy research, help a few websites gather various available sources of advice, and build a quality reputation system. Such a program could also support other shared benefits for retail investors, including:

  • infrastructure needed for Client Directed Voting, e.g. tagging of voting items in the proxy;
  • investor education.

Further information is available at, including a sample ballot page

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