The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

May 26, 2022


















https://www.brokeandbroker.com/6468/tradezero-sec-meme/
The other day, an SEC press release claimed that a settlement constituted a powerful message. After you read the press release and learn more about the alleged misconduct, there's little power to the so-called message. Frankly, it all comes off as high dudgeon, which, like a powerful message is a bit of hyperbole because, when you think of it, has anything ever been called low dudgeon or just plain old dudgeon -- as if the SEC would admit to sending a tepid message.

ENDORSED BY BILL SINGER,
publisher of the BrokeAndBroker.com Blog and the Securities Industry Commentator

From Stephen A. Kohn, Candidate for 2022 FINRA Small Firm Governor:

THE BULLIES ARE OUT TO GET US . . . And they're doing a good job of it!

I've been in this business for a long, long time; just under four decades. With the exception of a few months at a wire-house, I've always been a small firm guy. And, in all that time, one would think things would change, get better, or at least, stay the same.  But the mantra has NEVER changed, "GET RID OF THE SMALL FIRMS."

And, between the large firms, FINRA and the SEC, the bullies are unrelenting and keep whittling away at our sisters and brothers.

So, where are we? The small firm community is on its death bed.  Biased regulators are trying to engineer us out of existence through overblown rulebooks and biased regulation.  Given that FINRA is a membership organization, one would have hoped for some energetic opposition to the inevitable decline of some of the 90% of FINRA's membership -- look it up, the so-called FINRA Small Firms account for 90%-plus, and dwindling of the total number of member firms.  Where is the voice of the FINRA Board of Governors?  Sadly, it is a whisper if anything at all.  The Board seems beholding to the anti-Small Firm agenda of large firms, FINRA and the SEC.  Almost no Governor appears to have the inclination or the guts to take a stand that offers some relief to the little guys.

I have served you before and now, I need to get back on the Board of Governors, to again be your voice and to finish my work.

I am asking for your petition.  Get me on the ballot in this upcoming BOG election.

I make no promises to change what's been done.

My goal is to stop things from getting worse!

Please click the PandaDoc link below and sign my petition, get me on the ballot and back on the BOG to work for our common survival. 


Let me be your voice.

Stephen Kohn 
(303) 880-4304  Cell Phone

Stephen Kohn has been employed in the financial services industry since 1984. In 1996, he founded FINRA member firm Stephen A. Kohn & Associates, Ltd. ("SAKL")  On January 2, 2020, he passed ownership of SAKL to DMK Advisor Group, Inc. ("DMK"), still a small, Independent broker/dealer, catering to the needs of forty-one independent representatives and their clients, with office locations in five states, registered in forty-one and Puerto Rico.  
 
Stephen holds Series 7, 24, 53, 63, 72, 73, 79 and 99 registrations. He has the honor of having been elected to the FINRA Board of Governors in 2017, representing the Small Broker/Dealer Community.  He was also twice elected to the National Adjudicatory Council ("NAC") in 2009 and 2014. He serves as an Industry Arbitrator and has been elected to the District 3 Committee. 
 
Stephen graduated from C.W. Post College in 1964 with a BA degree. He has the distinction of having served in the United States Coast Guard.
 
Well known to those in the NASD and now FINRA small-firm community as a passionate and persistent advocate for small broker/dealers, who comprise more than 90% of FINRA membership, Stephen continues to speak out on behalf of his industry constituents and colleagues. He intends to remain active in the FINRA reform movement and urges all like-minded industry participants to reach out to him in full confidence concerning any and all matters.  

Former Financial Advisor from Berks County Convicted of Fraud, Money Laundering for Scheme to Steal from Clients (DOJ Release)
https://www.justice.gov/usao-edpa/pr/former-financial-advisor-berks-county-convicted-fraud-money-laundering-scheme-steal
After a trial in the United States District Court for the Eastern District of Pennsylvania, Jason Weigand was convicted on thirty counts involving multiple charges of fraud, money laundering and identity theft. As alleged in part in the DOJ Release:

In October 2017, the defendant was charged by Indictment, which was then superseded several times. Further, while the defendant was out on bail awaiting trial, he committed additional fraud crimes, which resulted in a second indictment. Weigand was ultimately charged with thirty counts involving multiple counts each of wire fraud, mail fraud, bank fraud, interstate transportation of stolen property, unauthorized access to a computer, aggravated identity theft, money laundering, and committing offenses while on bail.

During the nearly 15 years that he served as an investment advisor and proclaimed himself a knowledgeable and reputable source of investment advice, the defendant repeatedly stole money from his clients and went to great lengths to cover up his thefts. Weigand laundered the stolen funds by passing them through a variety of bank accounts, and he even hacked into one client's email account and accessed emails between the client and another investment advisor.

https://www.sec.gov/news/press-release/2022-90
In a Complaint filed in the United States District Court for the Eastern District of Michigan
https://www.sec.gov/litigation/complaints/2022/comp-pr2022-90.pdf, the SEC charged, charges EIA All Weather Alpha Fund I Partners LLC and its sole owner Andrew M. Middlebrooks with violating the antifraud provisions of the federal securities laws; and further charges Middlebrooks with aiding and abetting EIA's violations of the Investment Advisers Act of 1940. EIA All Weather Alpha Fund I, LP, EIA All Weather Fund Partners II, LLC, and Shop Style Shark, LLC were named as Relief Defendants. On May 19, 2022, the Court issued a temporary restraining order against EIA and Middlebrooks and an asset freeze against the defendants and named relief defendants. As alleged in part in the SEC Release:

[F]rom at least mid-2017 to April 2022, EIA and Middlebrooks deceived investors in their hedge fund, EIA All Weather Alpha Fund I, LP, including by making repeated false statements about the fund's performance and total assets; providing falsified investor account statements; misrepresenting that the fund had an auditor; and creating and disseminating a fake audit opinion to investors. The SEC's complaint also alleges that EIA and Middlebrooks misused new investor money to make Ponzi-like payments to other investors in the fund in order to continue to deceive investors into believing that the fund was profitable. According to the complaint, Middlebrooks also misappropriated investor funds for personal use, including for jewelry and credit card payments.

https://www.sec.gov/news/press-release/2022-89
Without admitting or denying the findings in an SEC Order
https://www.sec.gov/litigation/admin/2022/34-94978.pdf, RiverSource Distributors Inc. consented to a finding that it violated Section 11 of the Investment Company Act and the imposition of a Cease-and-Desist order, a Censure and a $5 million civil penalty. Purportedly, this is the SEC's first-ever enforcement proceeding under Section 11 of the Investment Company Act of 1940, which prohibits any principal underwriter from making or causing to be made an offer to exchange the securities of registered unit investment trusts (including variable annuities) unless the terms of the offer have been approved by the SEC or they fall within certain limited exceptions, none of which is applicable to RiverSource. As alleged in part in the SEC Release;

[R]iverSource offered and sold variable annuities to retail investors through an affiliated broker-dealer/investment adviser, Ameriprise Financial Services, LLC. The order finds that certain employees of RiverSource developed and implemented a sales practice that caused exchange offers to be made to holders of variable annuities to switch from one variable annuity to another which had the effect of increasing sales commissions for RiverSource employees, while also increasing RiverSource's variable annuity related revenues. According to the order, these types of transactions increased significantly from 2016 until 2018 when RiverSource's compliance department put a stop to the sales practice abuses.
The proposed amendments seek to categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue. Funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments. Funds claiming to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarize their progress on achieving those impacts. Funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.

Finally, to complement the proposed ESG disclosures in fund prospectuses, annual reports, and adviser brochures, the proposal would require certain ESG reporting on Forms N-CEN and ADV Part 1A, which are forms on which funds and advisers, respectively, report census-type data that inform the Commission's regulatory, enforcement, examination, disclosure review, and policymaking roles.

I am pleased to support today's proposal to bring greater transparency and accountability to sustainable investing. There has been explosive growth in investor interest and demand around such investments, both domestically and internationally.[2] With that increasing demand comes increasing need for consistent, comparable, and reliable information - information to help protect investors from "greenwashing," or exaggerated or false claims about ESG practices. Greenwashing can mislead investors as to the true risks, rewards, and pricing of investment assets.[3]

This goes to the heart of our mission at the SEC, which is to protect investors by promoting transparency and accountability around investment decision-making. Those offering investments must fully and fairly disclose what they are selling, and act consistently with those disclosures. In others words: say what you mean and mean what you say. That is what today's proposal is designed to promote for sustainable investments.

I want to highlight briefly three key areas of the proposal, including those areas where public feedback will be critical.[4] These include how to categorize the various types of funds engaged in ESG investing; whether we have calibrated disclosures sensibly for each category; and finally, the significant question of when and how to require disclosure of greenhouse gas (GHG) emissions.

First, the proposal would categorize funds engaging in ESG investing into two buckets: Integration Funds and ESG-Focused Funds, with a third category that is a subset of ESG-Focused funds to be known as Impact Funds. An Integration Fund would be defined as one that considers one or more ESG factors alongside other non-ESG factors, but generally gives ESG factors no greater prominence than non-ESG factors in its investment selection process.[5] An ESG-Focused Fund, by contrast, would focus on one or more ESG factors as a significant consideration in its investment selection process or as part of its engagement with portfolio companies. Finally, Impact Funds (a subset of ESG-Focused Funds) would be comprised of those with a goal of achieving a specific ESG impact.[6]

Do we have this categorization right? Given that this is the premise upon which we have calibrated disclosure requirements, it's important to get input on whether we have appropriately captured the various iterations of ESG investing.

Second, are the proposed disclosures for each category tailored appropriately to the risks each poses? For instance, an Integration Fund would be required to disclose, in a few sentences, what ESG factors it incorporates and how it incorporates those factors in its decision-making process. By contrast, ESG-Focused and Impact Funds would be required to provide top-line disclosures (in a standardized tabular format) about the fund's ESG strategies, such as whether they track an index, seek to achieve a particular impact, or apply inclusionary or exclusionary screens, and then provide more granular information in the prospectus.[7] And for each ESG strategy a fund pursues, it would provide information on how it incorporates ESG factors into the investment decision process by, for example, explaining how it applies an inclusionary or exclusionary screen, or how an index the fund uses factors in ESG in determining its constituents. And finally, an Impact Fund would disclose even more detailed information, such as how it measures progress towards its stated impact goals.

I welcome input on whether the information required of Integration Funds sufficiently enhances transparency around how ESG is truly being considered in these funds' investment selection processes. I also welcome input as to whether the granularity and types of information provided in the summary table and in the prospectus will facilitate sufficient transparency and comparability.

Third, the proposal would require an ESG-Focused Fund that considers environmental factors to provide aggregated, quantitative GHG emissions data, unless the fund does not in fact consider emissions data in its investment strategy and it specifically discloses that fact to investors.[8] The same quantitative GHG emissions data, however, would not be required for an Integration Fund - even when such fund purports to consider environmental factors (among other non-ESG factors). In that case, an Integration Fund would simply need to describe, in narrative form, if and how it considers the GHG emissions of its portfolio holdings.

Thus, under today's proposal, even if an Integration Fund considers GHG emissions data, it need not disclose that data to its investors. While it may make sense not to require disclosure of emissions data from an Integration Fund that doesn't consider it, it's more difficult to justify permitting funds that do consider GHG emissions data to nevertheless not disclose that data.

I look forward to public comment on this, as well as all other aspects of today's proposal, which represents a significant step forward in bringing transparency and accountability to this rapidly growing space. I'd like to thank the staff in the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of the General Counsel for your commitment to improving the quality and accuracy of fund and adviser-related disclosures.

[1] Originally performed by Jim Henson as Kermit the Frog on Sesame Street and later covered by numerous artists, perhaps most notably the extraordinary Ray Charles. See Ray Charles, It's Not Easy Being Green, YOUTUBE (Tangerine Records released under exclusive license to Exceleteration Music Partners LLC by the Ray Charles Foundation 2021), available at https://www.youtube.com/watch?v=zNwWZvskjq0.

[2] Estimates of size of this market vary widely, but by all accounts the size is quite large and the growth, tremendous. See, e.g., SustainFi, 30 ESG and Sustainable Investing Statistics, available at https://sustainfi.com/articles/investing/esg-statistics/#:~:text=In%20the%20U.S.%2C%20ESG%20fund,from%20the
%20end%20of%202020 (estimating that "[g]lobal ESG fund assets hit roughly $2.7 trillion at the end of last year, with US ESG fund assets accounting for roughly $357 billion of that amount."). Compare U.S. Securities & Exchange Commission, Asset Management Advisory Committee, Recommendations for ESG (July 7, 2021), available at https://www.sec.gov/files/spotlight/amac/recommendations-esg.pdf (noting that "ESG investing has grown significantly in recent years; according to the ICI, 'socially conscious' registered investment products grew from 376 products/$254 billion in assets under management ('AUM') at the end of 2017 to 1,102 products/$1.682 trillion in AUM by the end of June, 2020."); US SIF Comment Letter (June 14, 2021), available at https://www.sec.gov/comments/climate-disclosure/cll12-8916213-245007.pdf (noting that "[s]ince 1995, when the US SIF Foundation first measured the size of the US sustainable investment universe-the pool of assets whose managers consider ESG criteria as part of investment analysis and engagement-at $639 billion, these assets have increased more than 25-fold to $17.1 trillion in 2020, a compound annual growth rate of 14 percent.").

[3] See, e.g., IOSCO, Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management (Nov. 2021), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD688.pdf (discussing global developments and investor protection concerns with respect to greenwashing).

[4] The proposal also includes enhanced disclosure requirements for certain investment advisers that consider ESG factors as part of their advisory business, such as a requirement to describe the ESG factor(s) an investment adviser considers for each significant investment strategy. See Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, Investment Advisers Act No. 6034 (May 25, 2022) ("Proposing Release"), at Section II.B.

[5] See id., at Section II.A.1.

[6] See id.

[7] See id.

[8] Proposing Release, supra note 4, at Section II.A.3(d).

https://www.sec.gov/news/statement/crenshaw-statement-esg-investment-practices-052522
The role of Environmental, Social, and Governance issues - or "ESG" - in investing has undeniably changed over time.[1] Investor demand for products and strategies that take into account ESG factors has increased dramatically over the past decade.[2] And, the asset management industry has responded to meet that demand.[3]

But the products and services offered are as diverse as the ESG nomenclature, with different funds and advisers focusing on different ESG factors, ascribing different import or weight to those factors, and setting different ESG goals (or no goals at all). And, funds and advisers employ diverse approaches to engaging with investee companies on ESG issues, such as using proxy voting, engaging management, or playing a more passive role by relying on ESG indices or third party service providers.

In the absence of a specific disclosure regime, funds and advisers employing ESG practices do not have clear guidance as to what information should be disclosed and in what manner. Additionally, with the spike in investor ESG demand, funds and advisers may be incentivized to overemphasize the role that ESG factors play in their portfolio management decisions. In other words, managers may use "ESG," and loosely defined terms such as "sustainable" and "green," as more marketing tool than investment thesis.[4] Indeed, our Division of Examinations has made such findings in the field, noting in an alert last year that staff were observing, for example: portfolio management practices that differed from client ESG disclosures; misleading claims relating to ESG approaches; and, proxy voting practices that were inconsistent with advisers' stated approaches.[5]

And, with this absence of a cohesive framework, investors are left without accurate, reliable and comparable ESG disclosures that would allow them to: understand how funds and advisers are incorporating ESG factors into investment strategies; substantially differentiate between investment products; and, measure whether funds and advisers are meeting their stated goals.

Today's proposed rule aims to address these problems.

A few general points on the proposal. First, as I noted, the proposal strives to achieve the goals of accuracy, reliability and comparability among the various ESG asset management practices and products. Clear and standardized disclosures allow investors to compare products and accurately price risks and opportunities associated with ESG practices.[6] This favors not only the investor who places a premium on ESG investing, but also potentially the investor who thinks an ESG issue is being overpriced. In other words, transparency around ESG, which is now a mainstream factor in investing, brings benefits to a variety of investors, and not just those who place a social benefit on ESG.

Second, the proposal fits within the Commission's long-standing and well-established framework of requiring disclosure of material information to investors for decision-making. For example, funds have long been required to provide important information about a fund's fundamental characteristics including investment objectives, strategies, risks and governance; and, registered advisers are required to provide key information about their methods of analysis and investment strategies.[7] Today's proposal would fit ably within the existing regime.

Third, the rule is neutral as to the benefits or risks of ESG investing. The Commission's interest is in the reliability and sufficiency of adviser and fund disclosures to investors and in providing a consistent and coherent framework in which investors can make informed investment decisions. In proposing today's rule, the Commission is not weighing in on the advisability of ESG investing, or second-guessing the investment strategies of managers and funds. Rather, the proposal seeks to align investor expectations with manager practices through disclosure. I said it moments ago when we were discussing the Names Rule, but it bears repeating - investors have a right to know what they are investing in.

Turning to the proposed rule itself. Today's proposal would require meaningful specific disclosure regarding ESG strategies in registration statements, the management discussion of fund performance in annual reports, and in adviser brochures, among other changes to certain advisor forms.[8] The level of detail required of any given fund or adviser will depend on the extent to which such manager considers ESG factors in its decision-making.

For "ESG-focused" funds - or those funds that either employ one or more ESG factors as a significant or primary component in their investment process or in their engagement with investee companies (or, funds that markets themselves as such) - we are today proposing certain minimum disclosure requirements. So, for example, a fund that has a stated strategy of achieving a certain ESG impact, would have to provide disclosures in their annual reports that summarize its progress in achieving those impacts in both qualitative and quantitative terms. As another example, if an ESG-focused fund states that it employs a proxy voting strategy, or will seek engagement with an issuer's management as a means to implement its ESG strategy, today's rule would require that fund to disclose information on how it voted ESG issues in proxies, or how it actually engaged management. Finally, ESG-focused funds will have to disclose standardized GHG emission metrics in the Fund's annual reports, giving investors a meaningful metric to compare funds and a tool to potentially meet their own goals.

For "ESG integration" funds - or funds that consider one or more ESG factors among other factors in their investment process - today's proposed rule would require more limited disclosure around how the fund incorporates ESG factors into its investment selection process. To the extent that an integration fund considers GHG emissions of portfolio holdings, such fund must describe how it considers those emissions and what methodologies it employs in measuring those emissions.

Note, however, the proposal does not require standardized quantitative disclosure of GHG emissions from integration funds that consider such emissions in investing, and I hope the public will comment on whether such standard quantitative metrics would be useful and should be required.

Finally, the proposed rule would also enhance regulatory reporting and require certain disclosures to be in structured data language, which will allow for better data analysis and industry trend reporting in the future.

The proposed rule takes a meaningful step toward giving investors the transparency they need to understand how funds and advisers are using ESG factors in their investment decisions, and to reign in marketing practices of exaggerating the use of ESG to attract business, and I am pleased today to support it. I look forward to hearing from the public on this proposal.

***

I would finally, once again, like to thank our staff from the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of the General Counsel for their tremendous work on this proposed rule. The final proposal reflects your careful consideration and steadfast efforts, and is a testament to your continued commitment, for which I am ever grateful. So, thank you. And, once again, I would like to extend my gratitude to the Chair and his staff for their leadership on this, and the other many rules that we have proposed.

[1] Proposed Rule, Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social and Governance Investment Practices, Rel. No. IA-6034 at 12-13 (May 25, 2022) (hereinafter the Proposed Release).

[2] See, e.g., id. at 7 and n.2 (citing U.S. Sustainable Investing Forum, The Report on U.S. Sustainable and Impact Investing Trends (Nov. 16, 2020)), and at 12-13 (noting the results of one survey indicating 42% of institutional investors say they consider ESG factors in investment decision making, and another survey of professional fund selectors and institutional investors noting that 75% and 77% respectively believe consideration of ESG factors is integral to investment decision making). See also PRI Annual Report 2021 (noting "[R]esponsible investment is no longer seen as a fringe topic, but is now a mainstream investment issue. Indeed, the PRI now has 3826 signatories (3404 investors and 422 service providers), representing collective assets under management of just over US$121 trillion as of 31 March 2021." And, "PRI's global signatory base represents more than half the world's institutional assets."); Edward Herilhy and Martin Lipton, Annual Meetings and Activism in the Era of ESG and TSR (harvard.edu) (May 19, 2022) (noting major asset managers have with increasing frequency been supporting activists on ESG issues); BlackRock 2020 CEO and Chairman's annual letter ("[C]limate change is almost invariably the top issue that clients around the world raise with BlackRock."); The Law and Economics of Environmental, Social, and Governance Investing by a Fiduciary (harvard.edu) (citing Goldman Sachs piece, "ESG investing, once a sideline practice, has gone decisively mainstream.").

[3] See, e.g., The Division of Examinations Review of ESG Investing (April 9, 2021) ("In response to investor demand, investment advisers and funds have expanded their various approaches to ESG investing and increased the number of product offerings across multiple asset classes."); U.S. Securities & Exchange Commission, Asset Management Advisory Committee, Recommendations for ESG (July 7, 2021) ("ESG investing has grown significantly in recent years; according to the ICI, 'socially conscious' registered investment products grew from 376 products/$254 billion in assets under management ('AUM') at the end of 2017 to 1,102 products/$1.682 trillion in AUM by the end of June, 2020."); Boffo, Riccardo and Patalano, Robert, "ESG Investing: Practices, Progress and Challenges", OECD, (2020) (noting that the "amount of professionally managed portfolios that have integrated key elements of ESG assessments exceeds USD 17.5 trillion globally, by some measures").

[4] See, e.g., Rajna Gibson Brandon, Simon Glossner, Philipp Krueger, Pedro Matos, and Tom Steffen, Do Responsible Investors Invest Responsibly (Rev. Feb 2022).

[5] The Division of Examinations Review of ESG Investing (April 9, 2021).

[6] See, e.g., Marco Ceccarelli, Simon Glossner, Mikael Homanen, Catering Through Transparency: Voluntary ESG Disclosure by Asset Managers and Fund Flows at 1 (May 2022).

[7] See, e.g., Proposed Release at 8 n.5, 17; Investment Company Act ("ICA") Release No. 23064 (Mar. 13, 1998) (Form N-1A amendments focusing on prospectus disclosure); ICA Release No. 13436 (Aug. 12, 1983) (adopting Form N-1A); Investment Adviser Act ("IAA") Release No. 3060 (July 29, 2010) (amending the Form ADV Part 2 "brochure" including disclosure on investment strategy); see generally 15 U.S.C. 80b-6 (imposing a fiduciary duty on investment advisers to provide full and fair disclosure of all material facts relating to the advisory relationship and imposing antifraud liability).

[8] Proposed Release at 20.
Thank you, Mr. Chair. A key impetus for today's rulemaking[1] is a legitimate concern about the practice of greenwashing by investment advisers and investment companies. This concern is real because advisers can mint money by calling their products and services "green" without doing anything special to justify that label. Only days ago, we settled an enforcement proceeding in which we alleged that an adviser said one thing about ESG and did another.[2] Yet while enforcement proceedings of this sort illustrate the problem, they also show that we already have a solution: when we see advisers that do not accurately characterize their ESG practices, we can enforce the laws and rules that already apply.[3] A new rule to address greenwashing, therefore, should not be a high priority.

In any event, this proposed rule misses the mark.

I could have supported a proposal to require advisers and funds to answer three questions about their ESG products and services:
  1. If you offer products or services you label as some formulation of "E," "S," or "G," what does the label mean with respect to each such product or service?
  2. What do you do to make your product or service line up with E, S, or G, as you have defined it for that product or service?
  3. For each such product or service, what-if any-is the cost to investors, including in terms of forgone financial returns of pursuing E, S, or G objectives alongside of or instead of financial objectives?

This proposal touches on some of these questions,[4] but embodies a fundamentally different approach. It avoids explicitly defining E, S, and G, yet implicitly uses disclosure requirements to induce substantive changes in funds' and advisers' ESG practices. Investors will pick up the tab for our latest ESG exploits without seeing much benefit.

The Commission seems to have assumed that today's investor is driven by concern for environmental, social, and governance matters, not an anachronistic desire to earn returns on her hard-earned money. So the SEC comes to the aid of the ESG-minded investor with a purportedly "consistent, comparable, and decision-useful regulatory framework for ESG advisory services and investment companies to inform and protect investors while facilitating further innovation in this evolving area of the asset management industry."[5] Regardless of what one generally thinks of the SEC mandating hyper-specific ESG disclosures, the proposals we are voting on today will fail of their purpose because they are not so much built on sand as they float on a cloud of smoke, false promises, and internal contradiction.

E, S, and G cannot be adequately defined, nor will they be, should the proposal eventually find its way into the Code of Federal Regulations. All you will learn from the proposed definitions is that "E" stands for environmental, "S" stands for social, and "G" for governance, but I suspect that you already knew that. The cool kids already have moved on to "EESG"-Employees, Environmental, Social, and Governance. We better amend that proposal before it goes out the door lest a fund or adviser that prioritizes human capital issues despairs of being able legally to offer an ESG fund. Our refusal to define ESG is, of course, wholly understandable. Can you imagine an issue that would not fit within the ambit of at least one of those letters, based on someone's reading? Take, for example, the recent suggestion by some analysts that investments in defense stocks be added to the European Union's Social Taxonomy.[6] Imagine trying to conjure up a definition that not only met the universe of current understanding, but was flexible enough to grow to meet the hour-by-hour expansion of just what makes up E, S, and G.

From a regulatory perspective, the implications of this nod to reality make today's proposals incapable of enforcement on a practical level. How precisely do we envision determining whether a fund has incorporated "ESG factors" into its investment selection process when we have not defined just what those factors are? "I'll know it when I see it" is not a practice currently recognized in administrative law. The application of the rules to advisers is also awkwardly ambiguous. The proposal would require, for example, "an adviser to provide a description of the ESG factor or factors it considers for each significant investment strategy or method of analysis for which the adviser considers any ESG factors."[7] The broad sweep of this requirement will affect even advisers who do not consider themselves ESG advisers. Given the ambiguity and breadth of the proposed requirements, the planned one-year compliance date[8] for funds and advisers to get their Es, Ss, and Gs in order is laughably short.

In an attempt to generate comparable metrics, the proposal does get specific in some places. The specificity of these metrics is as problematic as the ambiguity around ESG. The proposed amendments, for example, generally would require that environmentally-focused funds disclose two separate greenhouse gas ("GHG") emission metrics: one describing a fund portfolio's carbon footprint, and the other the extent to which the fund is exposed to carbon-intensive companies.[9] The latter is the fund's weighted average carbon intensity, also known-I say without comment-as "WACI."

This attempt to provide verifiable data that will allow investors to compare greenhouse gas exposure across funds does not survive close inspection. For some companies, the data will be available, albeit not reliable, if we adopt the climate rule for public companies.[10] If portfolio companies do not provide disclosures, the proposal would require the fund to cobble data together as best it can. The fund would be required to make a good faith effort to estimate each portfolio company's Scope 1 and Scope 2 emissions, along with providing data sources and a brief explanation as to how it reached its conclusions.[11] Formulating these estimates is about picking and choosing among a selection of data points and models, which is another way of saying that these estimates will differ from fund to fund. Rather than get a uniform range of emission statistics, investors concerned with greenhouse gas numbers will have to do a separate assessment of each fund's process for making up those numbers. So much for consistency and comparability.

We also are proposing to impose a prescriptive "nag rule" on ESG-Focused funds. The proposal defines an ESG-Focused Fund as a fund that "focuses on one or more ESG factors by using them as a significant or main consideration (1) in selecting investments or (2) in its engagement strategy with the companies in which it invests."[12] Conducting a few earnest meetings during which ESG issues are raised will not do; to count for purposes of the rule, such engagements must be "part of an ongoing dialogue with the issuer regarding this goal."[13] More to the point, an ESG-Focused fund that implements its investment strategy via "ESG engagement meetings," not only must advocate "for one or more specific ESG goals to be accomplished over a given time period," the progress toward achieving those goals must be "measurable."[14]

Rather than allow funds to determine what constitutes meaningful interaction with issuers, we are proposing a system that is prescriptive almost to the point of parody. One substantive meeting might be better than five short interactions, but the rule values quantity over quality because the former can be reduced to numbers. If you think I am exaggerating, here is language directly from the release meant to clarify expectations:

[F]unds may hold meetings with certain issuers on an infrequent or ad hoc basis rather than as a significant part of their strategy, and may incorrectly believe that such infrequent or ad hoc engagement would be sufficient for them to claim that engagement is a part of their strategy.[15]

Funds are admonished to:

include[] in their compliance policies and procedures a requirement that employees memorialize the discussion of ESG issues, for example by creating and preserving meeting agendas and contemporaneous notes of engagements relating to ESG issues to assure accurate reporting on the number of engagements, as we propose to define it.[16]

I will be interested to see what commenters say on the matter. Among other things, would such a rule set a precedent for SEC micromanagement of asset management?

Why do we feel compelled to propose such sweeping and prescriptive new rules when we can and do use existing rules to hold funds and advisers to account? Part of the answer seems to be yet another instance of a troubling trend of not-so-subtle coercion through disclosure mandates. Recent proposals, including this one, introduce new pressure points that activists-or stakeholders as some prefer to call them-can use to strong-arm uncooperative companies into instituting policies more conducive to the activists' agendas or punish companies that fail to fall in line.

I pointed out this coercive trend in my opposition to last September's proposed Form N-PX amendments governing disclosure of fund votes.[17] This proposal would intensify the pressure on funds to vote and to do so in a particular way. For example, it would require a fund to disclose "the percentage of ESG-related voting matters during the reporting period for which the Fund voted in furtherance of the initiative."[18] Consider the following deforestation-focused fund example:

During the reporting period, the fund was eligible to vote on 100 voting matters that would have limited deforestation. If the fund voted in favor of 75 of those matters, then the fund would report that it voted in furtherance of limiting deforestation 75% of the time during the reporting period.[19]

This type of requirement pressures funds to vote for ESG matters even if the fund has real concerns about the particulars of an initiative. Questioning the wisdom of any initiative labeled ESG is hard enough as it is. This proposal would only make it harder. We may end up with companies implementing policies that are neither good for the environment nor for investors.

The proposal's coercion is not limited to proxy voting. What will the practical implications be for an ESG-Focused fund for which issuer engagement is not now a strategy? Under the proposal such a fund would have to declare that it has no intention of engaging with portfolio companies on ESG matters. A fund that does engage with portfolio companies would be required to disclose the number or percentage of issuers with whom the fund held such meetings during the reporting period. These proposed requirements are designed to manufacture activism by funds on ESG issues.

The proposal also requires all "ESG-Focused Funds" that indicate that they consider environmental factors to disclose the carbon metrics I mentioned earlier unless they affirmatively state that they do not consider issuers' GHG emissions as part of their investment strategy.[20] Environmental funds are not monolithic, and a fund that focuses water quality or biodiversity might not otherwise track greenhouse gas emissions. The proposal suggests that it really should.

Forcing ESG-Focused funds to make good faith estimates of a portfolio company's greenhouse gas emissions, when they cannot get such data from "non-reporting portfolio companies," will in turn play a coercive role. This time the coercion will be on companies to disclose greenhouse gas emissions so that funds will invest in them without the burden of greenhouse gas guessing (and subsequent enforcement second-guessing). If demand for greenhouse gas disclosures is becoming the norm, let the standards and expectations develop organically; let investors shape industry practice through their investing decisions, not through regulatory mandates about what investors ought to be considering.

Our markets are dynamic and equipped in ways we can never duplicate when it comes to the efficient dissemination of information. This proposal would displace the market's efficient signaling mechanisms with value-laden regulatory nudges. I have little faith that that change will lead to more efficient capital allocation or greater investor wealth accumulation.

The proposal reflects countless hours of careful work to translate the Commission's policy objectives into regulatory text and to craft a robust set of questions to accompany it. That task was not easy. So I will end my remarks by thanking the hardworking men and women of the Divisions of Investment Management and Economic and Risk Analysis, the Offices of the Chief Accountant, and General Counsel, and others at the Commission for rising to the challenge. I will also thank in advance the many commenters who will take the time to provide us with their thoughts and insights, which will inform how I vote should there be an adopting release.

[1] See Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices (May 25, 2022), [_____________] [hereinafter Proposal].

[2] See Press Release, SEC, SEC Charges BNY Mellon Investment Adviser for Misstatements and Omissions Concerning ESG Considerations (May 23, 2022) https://www.sec.gov/news/press-release/2022-86 (announcing settled charges against an adviser for "misstatements and omissions about Environmental, Social, and Governance (ESG) considerations in making investment decisions for certain mutual funds that it managed").

[3] See, e.g., Proposal, supra note 1, at 166-68 ("reaffirm[ing] existing obligations under the compliance rules when adviser and funds incorporate ESG factors" and discussing "current regulations seek to prevent false or misleading advertisements by advisers").

[4] Proposal, supra note 1, at 35 (The proposal, for example, would require funds and advisers to explain "the relationship between the impact the fund is seeking to achieve and financial returns" and to disclose, if true, that financial returns are secondary to achieving the stated impact or that achieving the fund's stated impact is intended to enhance financial returns. See proposed Item 7 of Form N-1A [17 CFR 274.11A]).

[5] See Proposal, supra note 1, at 1.

[6] See, e.g., Julien Ponthus, When defence stocks become an unlikely ESG play, Reuters (Mar. 2, 2022), https://www.reuters.com/markets/stocks/live-markets-when-defence-stocks-become-an-unlikely-esg-play-2022-03-02/ (quoting analysts "We believe defence is likely to be increasingly seen as a necessity that facilitates ESG as an enterprise, as well as maintaining peace, stability and other social goods . . . . Recent events in Europe, we think, will significantly increase the likelihood of defense's inclusion in the EU's Social Taxonomy'.");Brooke Sutherland, Defense Stocks Search for Their Place in the ESG Universe, Bloomberg (Mar. 25, 2022), https://www.bloomberg.com/opinion/articles/2022-03-25/industrial-strength-defense-stocks-search-for-their-place-in-the-esg-universe-l16s9bcq.

[7] See Proposal, supra note 1, at 129.

[8] See Proposal, supra note 1, at 168.

[9] See Proposal, supra note 1, at 88.

[10] For my comments on that proposal, see Hester M. Peirce, Commissioner, SEC, We are Not the Securities and Environment Commission - At Least Not Yet (Mar. 21, 2022), https://www.sec.gov/news/statement/peirce-climate-disclosure-20220321.

[11] See Proposal, supra note 1, at 106.

[12] See Proposal, supra note 1, at 33 (emphasis added).

[13] See Proposal, supra note 1, at 84.

[14] See Proposal, supra note 1, at 81.

[15] See Proposal, supra note 1, at 62.

[16] See Proposal, supra note 1, at 82.

[17] See Hester M. Peirce, Commissioner, SEC, Statement on Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers (Sep. 29, 2021), https://www.sec.gov/news/public-statement/peirce-open-meeting-2021-09-29#_ftnref2.

[18] See Proposal, supra note 1, at 77-78.

[19] See Proposal, supra note 1, at 78 n.109.

[20] See Proposal, supra note 1, at 88.

https://www.sec.gov/news/press-release/2022-91
The SEC proposed amendments to enhance and modernize the Investment Company Act "Names Rule" https://www.sec.gov/rules/proposed/2022/ic-34593.pdf to address fund names that are likely to mislead investors about a fund's investments and risks. As alleged in part in the SEC Release:

The Names Rule currently requires registered investment companies whose names suggest a focus in a particular type of investment (among other areas) to adopt a policy to invest at least 80 percent of the value of their assets in those investments (an "80 percent investment policy"). The proposed amendments would enhance the rule's protections by requiring more funds to adopt an 80 percent investment policy. Specifically, the proposed amendments would extend the requirement to any fund name with terms suggesting that the fund focuses in investments that have (or whose issuers have) particular characteristics. This would include fund names with terms such as "growth" or "value" or terms indicating that the fund's investment decisions incorporate one or more environmental, social, or governance factors. The amendments also would limit temporary departures from the 80 percent investment requirement and clarify the rule's treatment of derivative investments.

Today, the Commission draws on more than two decades of experience analyzing fund names and considering how certain names may mislead investors about a fund's investment focus, potentially resulting in misallocations of capital. Today's proposal would modernize the existing "Names Rule" in light of current fund practices, enhance consistency of the rule's application across funds, and provide key safeguards for investors.[1] Fund names, as with any type of branding, provide a critical means by which sponsors market their funds and convey information to investors, and today's proposal recognizes that investors may often rely on fund names in deciding where to invest their savings. I'm pleased to support today's proposal which would bring meaningful improvements in aligning investor expectations and understanding with a fund's actual focus and the strategies it pursues.

The Investment Company Act prohibits a fund from adopting, as part of its name or title, words that are materially deceptive or misleading.[2] In 2001, the Commission adopted the Names Rule, which requires, among other things, that a fund with a name that suggests a focus on a particular type of investment, industry, country or geographic region, must invest at least 80% of its assets consistent with that suggested focus.[3] The 80% policy is intended to "help reduce confusion when an investor selects an investment company for specific investment needs and asset allocation goals."[4]

Twenty years of experience with the original Names Rule, however, has brought a myriad of interpretive questions raising critical investor protection concerns. Most significantly, the current rule draws a distinction between terms describing an investment "focus" - such as stocks, government bonds, utilities, or health care, or a geographic focus such as Japan or Latin America - on the one hand, and terms describing an investment "strategy" - such as "growth" or "value" - on the other.[5] If you find yourself a bit confused about the difference between "focus" and "strategy," you are not alone. In fact, experience has shown that when it comes to fund names, this distinction often elevates form over substance. That is, fund names suggesting a strategy may be just as likely to create reasonable investor expectations about the fund's investment focus. And importantly, the distinction can create an incentive for funds to use names that create these reasonable expectations but still avoid application of the 80% policy. The proposal would eliminate this distinction to ensure that investors receive the benefits of the rule whenever a fund's name suggests that the fund concentrates in investments with particular characteristics.[6]

What's more, funds that are required to adopt and implement the 80% policy will also be required to disclose in their prospectus the precise meaning of the terms used in their name - a meaning which must be consistent with plain English or industry established usage - and the criteria used to select investments that the terms describe.

The proposal is also especially prudent and timely given the tremendous investor demand for sustainable investments. In recent years, we've seen a proliferation of funds using terms such as "ESG," "sustainable," or "green" in their names, and it's important to protect against overstatement or exaggeration of the extent to which these concepts factor into a fund's investment choices.[7] Thus, the proposed rule would deem it materially deceptive or misleading for a fund to use ESG terminology in its name if it gives no greater weight or prioritization to ESG factors than to other investment factors. The choice of if or how to incorporate or prioritize ESG is up to the funds; but what the names convey to investors must be consistent with those choices.

In sum, the proposal quite sensibly seeks to align the branding of funds with the reasonable expectations of investors. It is well thought-out and carefully crafted thanks to the expertise and hard work of the staff in the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of the General Counsel. And, in addition to IM's rulemaking staff, I want to specifically express appreciation to the Disclosure Review staff for their contributions to this rulemaking; their experience assessing fund disclosures and applying the Names Rule in practice was invaluable in identifying areas where improvements are needed. I'm happy to support today's proposal, and I look forward to reviewing the public's comments.

[1] Investment Company Names, Investment Company Act Release No. 34593 (May 25, 2022) ("Proposing Release"). In 2020, the Commission issued a request for comment on a framework for addressing misleading fund names. See Request for Comments on Fund Names, Investment Company Act Release No. 33809 (Mar. 2, 2020) [85 FR 13221 (Mar. 6, 2020)], available at https://www.sec.gov/rules/other/2020/ic-33809.pdf.

[2] 15 U.S.C. 80a-34(d).

[3] Investment Company Act Release No. 24828 (Jan. 17, 2001) [66 FR 8509 (Feb. 1, 2001)] ("Names Rule Adopting Release''), available at https://www.sec.gov/rules/final/ic-24828.htm.

[4] See id., at Section I.

[5] Names Rule Adopting Release, supra note 3, at nn.42-43 and accompanying text (noting that "the rule does not apply to fund names that incorporate terms such as 'growth' and 'value' that connote types of investment strategies as opposed to types of investments.").

[6] The proposed rule would also specify the circumstances under which a fund may deviate from its 80% investment policy and the time frames in which it must bring its investments back into compliance. See Proposing Release, supra note 1, at Section II.A.2.

[7] See Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, Investment Advisers Act No. 6034 (May 25, 2022), at text accompanying nn.16-18 and 245-47 (noting that "the share of funds with names suggesting an ESG focused strategy were about 3 percent of the total number of mutual funds and ETFs").

As the saying goes - you should mean what you say, and say what you mean.  In some ways, this simple refrain summarizes the backbone of our disclosure regime and the impetus behind the Names Rule and today's proposed amendments to that rule. 

As the adopting release notes:  "A fund's name is often the first piece of fund information investors see and, while investors should go beyond the name itself and look closely at the fund's underlying disclosures, a fund's name can have a significant impact on their investment decisions."[1]

Whether consciously or unconsciously, a thing's name forms our expectations.  If you go to an ice cream truck on a hot summer day, and order a chocolate ice cream cone, you have a certain expectation of what you are going to get.  It will be cold; it will be sweet; it will probably be brown in color.  There may be variations of what the exact ingredients are, where they come from, or the exact measurements.  But we, the ice cream-consuming public, have a general idea of what we are going to get.

The same is true today of certain types of funds.  A "Growth Fund" brings with it an industry expectation of the types of investments that fund will make - investments in companies, (often emerging companies) seeking above-average growth through capital appreciation and reinvestment, with little or no expectation of dividends.[2]  As the adopting release notes, the word "Growth" appears in approximately 8.2% of fund names, and I suspect that investors in those Growth Funds have a certain expectation about what they are investing in.[3]  Likewise, a name can also bring an expectation about what a fund is not investing in.  Here, I suspect investors who put their money into a "Cat and Dog" fund are generally not expecting to be invested in guinea pigs and gerbils.  

Today's proposed rule is a step in the right direction in bringing market practices in line with investor expectations.[4]  It does so in a number of ways.  For example,

  • Most prominently, where a fund's name suggests a certain investment focus - such as "growth," "value" or by reference to one or more ESG factors - that fund must adopt a policy requiring that 80% of the value of its assets be invested in a manner consistent with that fund's name.  The funds captured by the proposed amendment today would join other types of funds required to adopt an 80% policy, including funds whose names indicate a focus in a particular type of investment, a particular industry, or a particular geographic focus.[5]  The rule also lays out when a fund can temporarily deviate from the 80% policy, and the parameters for coming back in line with the policy "as soon as reasonably practicable," usually with a maximum departure of 30 days. 
  • The proposal requires that naming conventions that suggest an investment focus be in Plain English or in line with established industry use,[6] and that fund prospectuses define the terms used in its name. 
  • The proposed rule would add a new provision making clear that compliance with the Names Rule is no safe harbor against fraud.  Thus, a fund name can be materially misleading even if the fund technically complies with the Names Rule.[7] 
  • Further, the proposed amendment clarifies that it would be materially misleading for a fund to use an ESG factor in its name, if that factor does not play a central role in the fund's investment strategy. 

The proposed rule also gives clarity to funds and managers by providing, for example, rules around the treatment of derivatives and by updating the provisions on notice, reporting and recordkeeping requirements, among other changes. 

The Names Rule has not been amended since its adoption in 2001.[8]  The industry has changed significantly in two decades.  The amount of money in registered investment companies has tripled; ETFs, alternative strategy funds, and indexed products have become commonplace in the portfolios of everyday investors; ESG and sustainable investing has taken a prominence previously unseen; and thematic investing, such as by reference to block chain or cybersecurity is growing.[9]  The need for clarity in the funds industry is more important than ever. 

***

"What is in a name?" Juliet famously asked in Shakespeare's Romeo & Juliet.  "A rose by any other name would smell as sweet."[10]  That is of course true, and perhaps even a poetically perfect line.  But in the world of investing - the world of retirement accounts, college savings accounts, and accounts for buying your first home - there is simply quite a lot riding on a name.  Here it is fair for investors to expect clarity, consistency and forthright naming conventions.  Simply put, investors should know what they are investing in.  Today's proposed rule is a step in the right direction of bringing market practices in-line with investor expectations. 

I want to conclude by thanking all of the industry participants who wrote letters and contributed comments to the RFC put out by the Commission in 2020.  Your participation in our process is integral in helping my staff, staff in the Division of Investment Management, and me better understand industry practices and how we can improve our regulations to protect and serve investors.  And, now that we have a proposal, I again encourage all industry participants to do just that again - participate!  Please provide feedback on this proposal.

I also want to thank Chair Gensler and his staff for their leadership on today's important proposed amendment.  Finally, and perhaps most importantly, I want to thank the staff in the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of General Counsel, who have worked tirelessly in drafting and editing not only today's proposed rule, but many others over the past months.  I think the quality of today's proposed rule reflects the high caliber of work ethic, professionalism and dedication of the staff, and we are very fortunate for your ongoing commitment to the agency and our mission.  Thank you.

 
[1] Investment Company Names, Investment Company Act Release No. IC-34593 at 5-6 (proposed May 25, 2022) [hereinafter the Proposed Release].  "Funds" as referred to herein, as well as in the Proposed Release refers to registered investment companies and business development companies.  Id. at 5, n. 1.

[2] Indeed, Oxford's dictionary defines a growth fund as "a mutual fund that invests primarily in stocks that are expected to increase in capital value rather than yield high income."  Oxford Languages, Oxford University Press (2022).

[3] Proposed Release at 119. 

[4] Section 35(d) of the Investment Company Act prohibits a registered investment company from using a name that the Commission finds materially misleading or deceptive.  Congress authorized the Commission to define by rule, regulation or order, what names would be materially deceptive or misleading.  15 U.S.C. 80a-34(d). 

[5] See Investment Company Names, Investment Company Act Release No. 24828 (Jan. 17, 2001).

[6] Plain English requirements can be found in many places in the securities laws, intending to make the statements of issuers and registrants more accessible to all investors.  See, e.g., 17 C.F.R. 240.13a-20 (requiring all reports filed under Section 13(a) of the Securities Exchange Act of 1934 to be "presented in a clear, concise and understandable manner.")  The SEC, like industry participants, has Plain English obligations as well.  See The Plain Writing Act of 2010, P.L. 111-274.

[7] Funds and managers are subject to Investment Company Act Section 35(d) and the antifraud provisions of the securities laws. See, e.g., 15 U.S.C. 77q(a); 17 CFR 240.10b-5(b); 17 CFR 230.156; and 17 CFR 275.206(4)-8.

[8] See Investment Company Names, Investment Company Act Release No. 24828 (Jan. 17, 2001).

[9] Proposed Release at 12-13, nn.21-22 (noting developments and listing comment letters). 

[10] William Shakespeare, Romeo & Juliet, Act 2, Scene 2.

https://www.sec.gov/news/statement/peirce-fund-names-statement-052522

Thank you, Mr. Chair, and thank you to the staff in the Divisions of Investment Management and Economic and Risk Analysis, and the Office of the General Counsel, and to others at the Commission who worked on this proposal. Thank you for meeting demanding deadlines under considerable pressure and for fielding my many questions with unwavering professionalism. Despite my admiration for the effort that went into this initiative and my appreciation for some of the motivating concerns, I cannot support today's proposed amendments to the Names Rule.

A fund's name helps investors cut through the jungle of investment company options available to them. It only does so, however, if it accurately describes the fund. Section 35(d) of the Investment Company Act, which outlaws "deceptive or misleading names,"[1] and the Names Rule, which the Commission adopted in 2001, recognize the outsized role a fund's name plays in the investment selection process.[2] Of course, even a perfectly fitting name carries only a bit of information about a fund, and we must encourage investors to look beyond names to fund disclosure documents.

In the twenty-one years since the Names Rule's inception, much has changed in the mutual fund industry and the way investors consume information. Revisiting Rule 35d-1 to see if it is performing for investors as designed and, if not, issuing additional guidance or even amending the rule makes sense. Hence, the Commission's March 2020 request for comment on the rule.[3] I therefore was hoping to be able to support the proposal to amend to the Names Rule. The proposed amendments, however, may create more fog than they dissipate and may place unnecessary constraints on fund managers. Accordingly, I cannot support it.

I have several concerns. First, the application of the 80% investment policy requirement to names suggesting that a fund focuses on investments with "particular characteristics," most prominently, those associated with ESG, will rely on subjective judgments. Given the breadth of terms such as ESG, growth, and value, how will industry implement the rule and how will we enforce it without engaging in Monday morning asset managing? The inability to draw discernible boundaries around a centrally important term renders creative enforcement actions based on second-guessing in hindsight almost inevitable. Applying the Names Rule to investment strategies, which is essentially what the proposal would do, may have the detrimental effect of forcing homogeneity in the way funds are managed. A better approach-one that many commenters in response to the Request for Comment suggested-would be to require better disclosure in the fund prospectus about the strategies managers use.

Second, the proposal would unduly constrain advisers' ability to make decisions that are best for the funds they manage. To address concerns prompted by fund names becoming less indicative of fund investments over time, the proposal describes particular circumstances when a fund may be outside the 80% investment parameters, as well as proposing strict time frames for a fund to return to compliance. The proposal would put a strict 30-day time limit on temporary departures from the 80% rule. The release acknowledges that some fund investors might prefer a bit of give on the 30-day limit to allow managers room to minimize or avoid loss. The consequence of this intentionally inflexible approach may include inducing portfolio managers to make undesirable investments in order to remain in compliance with the rule or forcing funds to shut down in times of even relatively short-lived market stress. Would a fund with an emphasis on emerging markets in central Europe have been able to get right with this rule 30 days following Russia's invasion of Ukraine? The rule also requires that a fund with multiple elements of focus in its name must have investments in all the elements, which again unnecessarily constrains decision-making. Such a requirement encourages more generic names so that managers can preserve flexibility in their portfolio management, but more generic names are less informative for investors.

Third, the outright prohibition on integration funds' use of ESG in their names could result in substantive changes in the way some funds are managed. The proposal would deem integration funds incorporating ESG terminology in their names as per se materially deceptive or misleading. Integration funds are funds for which ESG factors are considered alongside, but have no more significance than, non-ESG factors in the fund's investment decisions. So, putting this proposal together with the accompanying ESG disclosure proposal-spoiler alert-generates a puzzling result: integration funds would have heightened disclosure obligations, but would be unable to use their name to signal to investors that they are integrating ESG. Some advisers may choose to convert their integration funds into ESG-focused funds, which will decrease options for investors. Or an adviser might try to run from ESG to avoid the heightened disclosure requirements.

Finally, the proposed one-year implementation period is too short given the number of funds that may have to make adjustments in their portfolios or change their names.

I look forward to hearing what commenters have to say on these and other issues, including the treatment of derivatives for purposes of calculating adherence to the 80% test and the shareholder notice requirements.

I will conclude by once more thanking Commission staff for their efforts. In addition, I want to thank commenters who responded to our Request for Comment. I look forward to hearing from commenters on whether the proposal strikes the right balance in ensuring that fund names accurately represent fund holdings without unnecessarily constraining fund managers' options.

[1] Section 35(d) provides: (d) DECEPTIVE OR MISLEADING NAMES.-It shall be unlawful for any registered investment company to adopt as a part of the name or title of such company, or of any securities of which it is the issuer, any word or words that the Commission finds are materially deceptive or misleading. The Commission is authorized, by rule, regulation, or order, to define such names or titles as are materially deceptive or misleading.

[2] See Investment Company Names, Investment Company Act Release No. 24828 (Jan. 17, 2001) (to be codified at 17 C.F.R. pt. 270).

[3] See Request for Comments on Fund Names, Investment Company Act Release No. 33809, 85 Fed. Reg. 13221 (Mar. 6, 2020), https://www.sec.gov/rules/other/2020/ic-33809.pdf.

The Nasdaq Stock Market LLC, et al., Petitioners, v. Securities and Exchange Commission, Respondent (Opinion, United States Court of Appeals for the District of Columbia Circuit, No. 21-1100 / March 24, 2022)
https://www.cadc.uscourts.gov/internet/opinions.nsf/
F6450AF20E3C34AC8525884C004E0670/$file/21-1100-1947763.pdf
As set forth in the Court's Syllabus:

ROGERS, Circuit Judge: In 2020, the Securities and Exchange Commission revised its decades-old regulation concerning securities market data, which had become largely obsolete in the face of transformative technological advances. Petitioners, securities exchanges that also develop and sell proprietary securities market data products using the data generated by trades on their respective platforms, challenged the new Market Data Infrastructure Rule as arbitrary and capricious and contrary to the goals and policies of the Securities Exchange Act. The Rule, however, clearly represents a reasonable balancing of the objectives Congress directed the Commission to address in a complex and technical area based on the record before the Commission. Accordingly, the court denies the petitions. 

https://www.finra.org/sites/default/files/fda_documents/2021072595001
%20John%20M.%20Derbin%2C%20Jr.%20CRD%203183322%20AWC%20lp.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, John M. Derbin submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that John M. Derbin entered the industry in 1999, and by 2018, he was registered with LifeMark Securities Corp.  In accordance with the terms of the AWC, FINRA imposed upon Blakely Page a $2,500 fine and a 10-business-day suspension from associating with any FINRA member in all capacities.  As alleged in part in the AWC:

Derbin's customer, a public school teacher, wanted to transfer her retirement plan from one fund provider to another. On August 27, 2021, Derbin attempted a three-way telephone call with the existing fund; provider, the customer and himself for the sole purpose of determining the type of retirement account the customer had. 

The customer, however, did not answer Derbin's attempted three-way call. On the ensuing call between Derbin and the fund provider, Derbin identified himself as the customer. He provided the fund provider with the customer's date of birth, social security number, maiden name, and account number to convince the fund provider that he was the customer. He then asked the fund provider to tell him what type of retirement plan the customer owned. The fund provider did not provide this information, and instead requested a call back number from Derbin, which Derbin declined to provide. The fund provider refused to provide Derbin with the information and alerted LifeMark. When LifeMark confronted Derbin, Derbin twice falsely stated that he believed the customer was on the line when the call was made to the fund provider. 

By impersonating a customer, Derbin violated FINRA Rule 2010.  


https://www.brokeandbroker.com/6457/finra-leggett-audit/

On February 18, 2022, FINRA announced that it had hired a law firm to conduct an independent review of how FINRA Dispute Resolution Services complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge. Three months have passed. Not a sound. Not a peep. On the other hand, brick by brick, a lovely stonewall seems to be getting built. 

February 18, 2022 FINRA Press Release

Ninety-four days ago, FINRA published: "FINRA Hires Firm to Conduct Independent Review of Arbitrator Selection Process" (FINRA Press Release / February 18, 2022)
https://www.finra.org/media-center/newsreleases/2022/finra-hires-firm-conduct-independent-review-arbitrator-selection. The February 18th FINRA Press Release stated in part that:

FINRA announced today that it has hired the Lowenstein Sandler law firm to conduct an independent review of how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge.

"We take this matter very seriously. FINRA recognizes the importance of maintaining trust in the system and is committed to ensuring the DRS arbitration forum is operated in a fair and neutral manner," said FINRA President and CEO Robert Cook. "In keeping with that commitment, FINRA's Audit Committee has engaged an independent, outside party to review how the arbitrator selection process was carried out in this case, and to determine whether any improvements to the process may be warranted. FINRA will make the results of this review public."

February 22, 2022 BrokeAndBroker.com Blog

In response to FINRA's February 18th Press Release, I published: "Cynical FINRA Press Release Lacks Urgency In Response To Arbitration Fiasco" (BrokeAndBroker.com Blog / February 22, 2022)
https://www.brokeandbroker.com/6302/finra-leggett-audit/ In my article, I offered this rebuke:

[W]hat one would have expected from FINRA's Audit Committee would have been a explicit order -- a clear-cut demand -- that the Lowenstein law firm immediately initiate an investigation into the "arbitrator selection process," and not just limited to "this matter" (Leggett) as is stated in the Release by both FINRA's CEO and the Audit Committee's Chair. At a minimum, Audit Committee Chair Drummond should have promised that all stops will be pulled out to complete said investigation and to submit a FINAL REPORT to the Audit Committee within no more than 90 days. Chair Drummond should have made it clear that he will move heaven and earth and make all financial resources available to Lowenstein in a palpable attempt to purge even a hint of conflict from FINRA's arbitration selection process. Instead, we get tepid. We get trust. We get looking forward. We get coming months.

FINRA's Regulatory Deadlines

As to my suggested deadline for the issuance of a final investigative report "within no more than 90 days," today is now 94 days after the publication of FINRA's announced hiring of a law firm to conduct an independent review. Is 90 days too short a period of time -- is it too arbitrary a deadline? Keep in mind that an ample record has already been developed during the underlying FINRA arbitration proceeding and at the state court. Moreover, FINRA narrowed the scope of the investigation to how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge. The law firm hired by FINRA has a very focused question to investigate involving the selection of arbitrators in one arbitration. Consider these deadlines imposed by FINRA upon Respondents enmeshed in the self-regulator's disciplinary process:

  • FINRA Code of Procedure Rule 9264: Motion for Summary Disposition provides that "All pre-hearing motions for summary disposition and supporting papers shall be filed at least 21 days before the time set for the hearing, or at such earlier time as ordered by the Hearing Officer. "

  • FINRA Code of Procedure Rule 9215: Answer to Complaint provides that a Respondent named in a FINRA Disciplinary Complaint "shall serve an answer to the complaint on all other Parties within 25 days after service of the complaint on such Respondent . . ." 

  • FINRA Code of Procedure Rule 9311: Appeal by Any Party; Cross-Appeal  provides that a "Respondent or the Department of Enforcement may file a written notice of appeal within 25 days after service of a decision." 

  • FINRA Code of Procedure Rule 9222: Extensions of Time, Postponements, and Adjournments, which states in pertinent part that "Postponements, adjournments, or extensions of time for filing papers shall not exceed 28 days unless the Hearing Officer states on the record or provides by written order the reasons a longer period is necessary." 

  • FINRA Code of Procedure Rule 9312: Review Proceeding Initiated By Adjudicatory Council  provides that a Hearing Panel Decision "shall be subject to a call for review within 45 days after the date of service of the decision. . ."
Compared to the FINRA deadlines cited above, requiring the submission of a final investigative report to the FINRA Audit Committee within no more than 90 days isn't unfair or unreasonable. To the contrary, it's nearly three times longer than deadlines that FINRA imposes upon Respondents in its regulatory proceedings, and twice as long as the period of time during which the NAC can call a Hearing Panel Decision for review. Sort of the old what's good for the goose is good for the gander, no?

Yet, here we are: May 23, 2022 -- 94 days after FINRA's February 18, 2022, Press Release. 

Not a sound. 

Not a peep. 

Heaven is unmoved. 

Earth remains in its orbit. 

Our trust was misplaced. 

We still look forward at nothing. 

The coming months keep coming.

= = = = =

FINRA has not been having a fun time in recent weeks when it comes to the purported integrity of its arbitration forum: 

Court Finds FINRA Arbitration Process Not Fundamentally Fair (BrokeAndBroker.com Blog / February 4, 2022)
http://www.brokeandbroker.com/6265/finra-wells-fargo-arbitration/

Brian Leggett and Bryson Holdings, LLC, Claimants, v. Wells Fargo Clearing Services, LLC and Jay Windsor Pickett III, Respondents (FINRA Arbitration Award / 17-01077 / July 31, 2019)
https://www.finra.org/sites/default/files/aao_documents/17-01077.pdf

Brian Leggett and Bryson Holdings, LLC, Petitioners, v. Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors, LLC and Jay Windsor Pickett III, Respondents (Memorandum of Law in Support of Petitioners' Motion to Vacate Arbitration Award, Superior Court of Fulton County, Georgia, 2019CV328949)
https://brokeandbroker.com/PDF/LeggettMotVacFultonCo191030.pdf

Brian Leggett and Bryson Holdings, LLC, Petitioners, v. Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors, LLC and Jay Windsor Pickett III, Respondents (Order Granting Motion to Vacate Arbitration Award and Denying Cross Motion to Confirm Arbitration Award, Superior Court of Fulton County, Georgia, 2019CV328949)
https://brokeandbroker.com/PDF/LeggettOrderFultonCo220125.pdf

Federal Court Can't Find Any Basis For FINRA Arbitration Decision In HSBC Managing Director Case (BrokeAndBroker.com Blog / February 10, 2022)
http://www.brokeandbroker.com/6280/finra-gross-expungement/

In the Matter of the Arbitration Between Adam Gross, Claimant, v. HSBC Securities (USA) Inc., Respondent (FINRA Arbitration Award 21-00392 / September 3, 2021) https://www.finra.org/sites/default/files/aao_documents/21-00392.pdf

Adam Gross, Plaintiff, v. HSBC, Defendant (Complaint, United States District Court for the Southern District of New York, 21-CV-08636 / October 21, 2021)
https://brokeandbroker.com/PDF/GrossSDNYComp211021.pdf

Adam Gross, Petitioner, v. HSBC, Respondent (Order and Opinion, SDNY, 21-CV-08636 / February 8, 2022)
https://brokeandbroker.com/PDF/GrossSDNYOrdOp.pdf

In response to a firestorm of criticism and rumblings from Congress about its arbitration process and forum, FINRA hired what it says is an independent outside law firm to conduct a review. Rather than stand in the way of FINRA's self-serving press, let me offer it to you in full bloom:

https://www.finra.org/media-center/newsreleases/2022/finra-hires-firm-conduct-independent-review-arbitrator-selection

WASHINGTON-FINRA announced today that it has hired the Lowenstein Sandler law firm to conduct an independent review of how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge.

"We take this matter very seriously. FINRA recognizes the importance of maintaining trust in the system and is committed to ensuring the DRS arbitration forum is operated in a fair and neutral manner," said FINRA President and CEO Robert Cook. "In keeping with that commitment, FINRA's Audit Committee has engaged an independent, outside party to review how the arbitrator selection process was carried out in this case, and to determine whether any improvements to the process may be warranted. FINRA will make the results of this review public."

Christopher Gerold, a partner in Lowenstein's Securities Litigation and Corporate Investigations & Integrity Practice Groups, will lead the independent review and report the firm's findings directly to the Audit Committee of FINRA's Board of Governors. Prior to joining Lowenstein in January, Gerold was Chief of the New Jersey Bureau of Securities from 2017-2021 and served as President of the North American Securities Administrators Association.

"We trust Lowenstein's ability to carry out an independent review of the arbitrator selection process administered in this matter and look forward to receiving their findings in the coming months," said Lance Drummond, FINRA Governor and Chair of the Audit Committee.

DRS administers an arbitration forum to assist in the resolution of disputes involving investors, securities firms and their registered employees. Although securities firms and investment advisers often include mandatory arbitration clauses in their customer account agreements, FINRA rules do not require this practice. The arbitration forum operates in accordance with rules that have been approved by the SEC, after a finding that the rules are in the public interest. The SEC regularly examines DRS's operations.

About FINRA
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry-brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.

So, lemme see here: FINRA's Audit Committee has engaged an independent, outside law firm to review how the arbitrator selection process was carried out in this case, and to determine whether any improvements to the process may be warranted. FINRA will make the results of this review public. As set forth in part in  FINRA's By-Laws Article IX: Committees:
 
Audit Committee
Sec. 5.  (a) The Board shall appoint an Audit Committee. The Audit Committee shall consist of four or five Governors, none of whom shall be officers or employees of the Corporation. The Audit Committee shall include at least two Public Governors. A Public Governor shall serve as Chair of the Committee. An Audit Committee member shall hold office for a term of one year. . . .

The FINRA Audit Committee is appointed by the FINRA Board of Governors. Of course, I have long argued that FINRA's Board is a gerrymandered disgrace that is, at times, lackluster and lackadaisical; so, y'know, I'm just not all that encouraged to learn that a law firm hired by a committee appointed by FINRA's Board is likely to further any overdue Wall Street reforms. Why did it take a scathing Decision in Brian Leggett and Bryson Holdings, LLC, Petitioners, v. Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors, LLC and Jay Windsor Pickett III, Respondents (Superior Court of Fulton County, Georgia, 2019CV328949 / January 25, 2022) to prompt FINRA's somnolent Audit Committee on February 18, 2022, to investigate festering rumors about FINRA's arbitration forum?  According to FINRA's Standing Committee webpage, the current Audit Committee comprises
https://www.finra.org/about/governance/standing-committees#ac:

https://www.finra.org/about/governance/finra-board-governors/lance-drummond

Jack B. Ehnes 
https://www.finra.org/about/governance/finra-board-governors/jack-ehnes

https://www.finra.org/about/governance/finra-board-governors/christopher-flint

Linde Murphy
https://www.finra.org/about/governance/finra-board-governors/linde-murphy

Eileen K. Murray
https://www.finra.org/about/governance/finra-board-governors/eileen-murray

And just where, exactly, were those five Audit Committee members the last few years when allegations of improprieties about FINRA's arbitration process were swirling around? 

Notably, FINRA's Chairman of the Board, Eileen K. Murray, is one of the five members of the Audit Committee -- not exactly a disinterested person with a likely burning desire to unearth embarrassing revelations about the self-regulatory-organization that she helms. As to the other sitting Audit Committee members, I see one is "retired," one is listed as a "former" CEO, and two are employed by FINRA member firms --  that's the composition of a robust, independent Audit Committee? Among the more disconcerting disclosures among the various Audit Committee's members' bios are multiple roles on other Boards, as if sitting on FINRA's Board of Governors -- and particularly that Board's Audit Committee -- should not require an exclusive service given that the organization is engaged in regulating the financial services community. 

As to that rousing call to action set out in the FINRA's February 18th Press Release , it was described by the Chair of FINRA's Audit Committee Lance Drummond (whose professional standing is preliminarily set forth on the FINRA website as Public Governor /Retired /Governor Since 2018 / Committees: Audit Committee (Chair), Conflicts Committee, Executive Committee, Management Compensation Committee): 

"We trust Lowenstein's ability to carry out an independent review of the arbitrator selection process administered in this matter and look forward to receiving their findings in the coming months," said Lance Drummond, FINRA Governor and Chair of the Audit Committee.

Seriously Chair Drummond?  That's your direction? You "look forward to receiving their findings in the coming months?" You're merely looking forward -- as in hopeful and desirous but not much more? In the coming months as in maybe six or more or ten or eleven? And, no, I didn't miss the cynical attempt to confine the investigation to "this matter," as in the Leggett arbitration rather than allow the so-called independent, outside law firm free rein to consider the troubling issues raised by the court, no matter where that might take the investigators.

The February 18th FINRA Press Release is a clumsy effort to manage a public relations nightmare. Painfully, lacking in the Press Release is any sense of urgency. What I would have expected -- what industry reform advocates demand -- is accountability on a fast track. For starters, the Audit Committee should not merely express a desultory desire for some kind of findings in "coming months," but underscore the mission-critical aspect of this blot on FINRA's reputation. No, you don't get to go to the old delay-of-game playbook and select the option of a report in a few months and then grant an extension and then deliberate on the recommendations and then publish a sanitized report to the public for extended comment and then undertake a reconciliation effort and then publish a proposed rule and then extend all of that nonsense to a point where FINRA's Chair, and CEO, and all sitting Board members have long-since retired and left the mess to another generation of wannabe self-regulators.

Sadly, the February 18th FINRA Press Release engages in a bit of legerdemain by giving the impression that the desired outcome of the Lowenstein law firm's investigation is some sweeping reform of FINRA's belabored arbitration process; however, that's not what the release actually says:

FINRA announced today that it has hired the Lowenstein Sandler law firm to conduct an independent review of how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge.

My guess is that we need to read that opening paragraph in the Press Release very, very literally. The Lowenstein law firm was hired to conduct a review limited to the arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge -- as in Leggett and only Leggett. What one would have expected from FINRA's Audit Committee would have been a explicit order -- a clear-cut demand -- that the Lowenstein law firm immediately initiate an investigation into the "arbitrator selection process," and not just limited to "this matter" (Leggett) as is stated in the Release by both FINRA's CEO and the Audit Committee's Chair. At a minimum, Audit Committee Chair Drummond should have promised that all stops will be pulled out to complete said investigation and to submit a FINAL REPORT to the Audit Committee within no more than 90 days. Chair Drummond should have made it clear that he will move heaven and earth and make all financial resources available to Lowenstein in a palpable attempt to purge even a hint of conflict from FINRA's arbitration selection process. Instead, we get tepid. We get trust. We get looking forward. We get coming months.


Federal Register Volume 64, Number 198 (Thursday, October 14, 1999)]
[Notices]
[Pages 55793-55796]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26793]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41971; File No. SR-NASD-99-21]

Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the National Association of Securities Dealers, Inc. To 
Create a Dispute Resolution Subsidiary

September 30, 1999.
    On April 26, 1999, the National Association of Securities Dealers, 
Inc. ("NASD'' or "Association''), through its wholly owned regulatory 
subsidiary, NASD Regulation, Inc. ("NASD Regulation''), submitted to 
the Securities and Exchange Commission ("Commission''), pursuant to 
section 19(b)(1) of the Securities Exchange Act of 1934 ("Act'') 1 
and Rule 19b-4 thereunder,2 a proposed rule change to create a 
dispute resolution subsidiary. The proposed rule change was published 
for comment in the Federal Register on June 17, 1999.3 The Commission 
received one comment letter on the proposal from the Securities 
Industry Association ("SIA'').4 This order approves the proposal.
---------------------------------------------------------------------------

    1 15 U.S.C. 78s(b)(1).
    2 17 CFR 240.19b-4.
    3 See Securities Exchange Act Release No. 41510 (June 10, 
1999), 64 FR 32575.
    4 Letter from Stephen G. Sneeringer, Chairman of the 
Arbitration Committee, SIA, to Jonathan G. Katz, Secretary, 
Commission, dated July 8, 1999 ("SIA Letter'').
---------------------------------------------------------------------------

I. Description of the Proposal

    The Association is proposing (i) to create a dispute resolution 
subsidiary, NASD Dispute Resolution, Inc. ("NASD Dispute 
Resolution''), to handle dispute resolution programs; (ii) to adopt by-
laws for the subsidiary; and (iii) to make conforming amendments to the 
Plan of Allocation and Delegation of Functions by NASD to Subsidiaries 
("Delegation Plan''), the NASD Regulation By-Laws, and the Rules of 
the Association.

A. Background

    The Association's arbitration and mediation programs were operated 
by the NASD Arbitration Department until 1996, when those functions 
were moved to NASD Regulation following a corporate reorganization. 
This reorganization in part grew out of recommendations of a Select 
Committee formed by the NASD and made up of individuals with 
significant experience in the securities industry and NASD governance 
("the Rudman Committee'').5 The Rudman Committee reviewed the 
Association's arbitration and mediation programs from December 1994 
through August 1995. The Rudman Report was issued in September 1995.
---------------------------------------------------------------------------

    5 Report of the NASD Select Committee on Structure and 
Governance to the NASD Board of Governors (September 1995) ("Rudman 
Report'').
---------------------------------------------------------------------------

    In September 1994, the NASD established the Arbitration Policy Task 
Force, headed by David S. Ruder, former Chairman of the SEC ("the 
Ruder Task Force''), to study NASD arbitration and recommend 
improvements. The Ruder Task Force, composed of eight persons with 
various backgrounds in the area of securities arbitration, met from the 
Fall of 1994 to January 1996, when its Report was issued.6
---------------------------------------------------------------------------

    6 Report of the Arbitration Policy Task force to the Board of 
Governors National Association of Securities Dealers, Inc. (January 
1996) ("Ruder Report'').
---------------------------------------------------------------------------

    Both the Rudman Committee and the Ruder Task Force made 
recommendations that affected the arbitration program. The Rudman 
Committee recommended that the NASD reorganize as a parent corporation 
with two relatively autonomous and strong operating subsidiaries, 
independent of one another. The resulting enterprise would consist of 
NASD, Inc., as parent, The Nasdaq Stock Market, Inc. ("Nasdaq'') as

[[Page 55794]]

one subsidiary to operate Nasdaq, and a new subsidiary, NASD 
Regulation, Inc., to regulate the broker-dealer members of the NASD.7 
The Ruder Report recommended that the dispute resolution program be 
housed either in the parent or in NASD Regulation.8 The Arbitration 
Department was placed in NASD Regulation in early 1996 based on the 
recommendation of the Rudman Committee,9 and the name of the 
department was changed to the Office of Dispute Resolution ("ODR'') 
shortly thereafter, to reflect the full range of dispute resolution 
mechanisms.
---------------------------------------------------------------------------

    7 Rudman Report at R-8.
    8 Ruder Report at 151-52.
    9 Rudman Report at R-8.
. . .

You notice the dates referenced in the above SEC Order? The Ruder Task Force and the Rudman Select Committee started their work in 1994. We got 1995 reports. We got 1996 reviews. Then we got more reports and recommendations and proposals. It was only in 1999, however, that the Ruder/Rudman work actually coalesced into the above SEC Order. If that's the course upon which FINRA has now embarked per the Lowenstein law firm's investigation, it may take until 2027 before anything of substance manifests. Which, like I noted above, may be the whole plan. Certainly, FINRA's Board of Governors doesn't give a damn.

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