Company Filings More Search Options. Georgia State University — J. Mack Robinson College of Business, Center for the Economic Analysis of Risk CEAR — Department of Finance, CEAR Workshop — Institutional Investors: Control, Liquidity, and Systemic Risks, The Commerce Clu. Thank you for that kind introduction. I am glad to be here at Georgia State University and the J. Mack College of Business. I would like to thank the Center for the Economic Analysis of Risk CEAR and the Department of Finance for sponsoring this workshop.

Before I begin, let me issue the standard disclaimer that the views I express this evening are my own, and do not necessarily reflect the views of the U. Securities and Exchange Commission SEC , my fellow Commissioners, or members of the staff. I am particularly pleased to be at a conference that focuses on the role of institutional investors and their impact on corporate control, market liquidity, and systemic risk. The topic of your conference recognizes the important role played by institutional investors and the great influence they exert in our capital markets.

The role and influence of institutional investors has grown over time. For example, the proportion of U.

Institutional investor ownership is an even more significant factor in the largest corporations: The growth in the proportion of assets managed by institutional investors has been accompanied by a dramatic growth in the market capitalization of U.

Of course, institutional investors are not all the same.

They come in many different forms and with many different characteristics. Among other things, institutional investors have different organizational and governance structures, and are subject to different regulatory requirements. The universe of institutional investors includes mutual funds and ETFs regulated by the SEC, as well as pension funds, insurance companies, and a wide variety of hedge funds and managed accounts, many of which are unregulated. To the contrary, they have a wide variety of distinct goals, strategies, and timeframes for their investments.

As a result, their interaction with, and impact on, the market occurs in many different ways. The growth in assets managed by institutions has also affected, and been affected by, the significant changes in market structure and trading technologies over the past few decades, including the development of the national market system, the proliferation of trading venues — including both dark pools and electronic trading platforms — and the advent of algorithmic and high-speed trading.

These changes — largely driven by the trading of institutional investors — have resulted in huge increases in trading volumes. For example, in , the average daily volume on the NYSE was million shares. Simply stated, institutional investors are dominant market players, but it is difficult to fit them into any particular category.

This poses a challenge for regulators, who must take into account all the many different ways institutional investors operate, and interact, with the capital markets. It is clear, however, that professionally-managed institutions can help ensure that our capital markets function as engines for economic growth.

Institutional investors are known to improve price discovery, increase allocative efficiency, 11 and promote management accountability. They aggregate the capital that businesses need to grow, and provide trading markets with liquidity — the lifeblood of our capital markets.

In doing all this, institutional investors — like all investors — depend on the assurance of a level playing field, access to complete and reliable information, and the ability to exercise their rights as shareowners.

That is why fair and intelligent regulation is necessary for the proper functioning of our capital markets. With that in mind, I would like to discuss two specific regulatory issues of particular interest to institutional investors:. As you well know, disclosure is the foundation of our federal securities laws.

Fair and accurate disclosure has been the central goal of U.

A recent academic paper demonstrates the value of public disclosure in a compelling way. The authors found little evidence that institutions were able to exploit private information to improve investment returns. This is a significant observation for securities regulators and lawmakers. To achieve that goal, the legislation tries to reduce the cost of going public for these companies.

This is an extremely broad swath of the market. Unfortunately, the JOBS Act tries to cut the cost of capital raising by limiting the financial and other information that these companies are required to provide to their investors.

The result could be an adverse impact on capital formation. For example, under the JOBS Act, an emerging growth company only has to provide two years rather than the typical three years of audited financial statements, and the company can omit the selected financial data otherwise required for any earlier period. In addition, these companies may also omit certain compensation-related disclosures. Moreover, in certain cases, the JOBS Act allows emerging growth companies to postpone compliance with new or revised financial accounting standards.

This exemption may result in inconsistent accounting rules, damage financial transparency, and make it difficult for investors to compare the merits of investing in emerging growth companies against other investment options. Adding to these concerns, emerging growth companies are also exempted from the outside audit of internal controls required by the Sarbanes-Oxley Act, and from future rules that the Public Company Accounting Oversight Board PCAOB may issue with respect to certain auditor reporting requirements.

Institutional Investors and Stock Market Liquidity: Trends and Relationships by Marshall E. Blume, Donald B. Keim :: SSRN

Failure to comply with those standards makes the financial statement audit less informative, and could potentially reduce the reliability of financial information available to investors. In that regard, there is good data to suggest that independent attestation of internal controls actually promotes good financial reporting.

The study concluded that financial reporting is more reliable when the auditor is involved with the assessment of internal controls.

In particular, the study observed that auditor testing resulted in disclosure of control deficiencies that were not previously disclosed by management, and that companies that relied solely on management certifying their own internal controls were more likely to restate their financial statements.

The benefits of auditor attestation are also confirmed by other commenters, including the Council of Institutional Investors, the Center for Audit Quality, and the AICPA.

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Given the number of studies indicating the positive impact to capital formation when investors have access to useful and reliable information, it is troubling that disclosures are being scaled-back. Reducing the quality of information is simply unproductive. Regrettably, there continues to be efforts to lobby for limiting disclosure requirements, on the claim that reducing the amount of required disclosures will lower the cost of capital raising. In my view, that would be penny-wise and pound-foolish, as money raised for inefficient uses does not in the long-term create jobs or help the economy grow.

The goal should be capital formation, not just capital raising. Proponents of less disclosure lose sight of the fact that capital raising is not the same as capital formation. True capital formation requires that the capital raised be invested in productive assets — like a factory, store, or new technology — or otherwise used to make a business more productive.

The more productive those assets are, the greater the capital formation from the investment — and, importantly, the more jobs created.

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So, what can be done? Institutional investors, as well as members of the academic community, can play a valuable role in this debate, by monitoring the performance of emerging growth companies that elect to provide limited disclosure and determining if real capital formation is being helped or hurt. Your insights into the impact of these rules would be invaluable. Institutional investors also have an important role in monitoring corporate governance issues.

In recent years, these issues have included, among others, majority voting, splitting the Chairman and CEO roles, and focusing on the quality and diversity of Boards of Directors, as well as compensation structures and concerns about the runaway growth in executive pay.

Reportedly, management wants these investors to oppose a shareholder proposal which seeks to separate the CEO and board chairman role at the bank.

The supporters of the proposal are also taking their arguments directly to institutional investors, including meeting with funds that are substantial shareholders in J. Campaigns like these — which are becoming more and more common — underscore the tremendous importance of institutional investors and the influence that they can have.

The experience also underscores the potential impact of shareholder proposals on corporate governance matters. It has been reported that companies received over shareholder resolutions this proxy season. After all, it is often their votes that can make the difference. Clearly, institutional investors have a great deal of power in our capital markets.

The one indispensable fact to remember is that behind all institutional investors and their portfolio managers are millions of American workers, savers, policy holders, retirees, and other individual investors, who rely on those they entrust with their monies to provide for a safe and secure retirement, to help them save for a home or college education, and to participate in the American dream.

Too often, public company management and other issuers — represented by their lawyers, investment bankers, and industry groups — dominate the regulatory discussion. Institutional investors need to exercise their collective influence to improve the ongoing dialogue. We need to hear their views on the benefits of transparency through disclosure, corporate governance, appropriate compensation structures and amounts, and other important issues.

That call to action is also applicable to those academicians and researchers who have salient information on the roles of institutional investors and how their actions impact corporate America and the economy.

As an SEC Commissioner, I also would be particularly interested in how SEC rules affect — and are affected by — the behavior of institutional investors. The SEC needs to hear from all credible voices that can add value to the ongoing public dialogue on the issues facing the capital markets today.

You should speak out, and hold the SEC accountable to act on behalf of investors. I look forward to hearing what you have to say. Blume and Donald B. Keim, Working Paper, Institutional Investors and Stock Market Liquidity: Trends and Relationships, The Wharton School, University of Pennsylvania Aug. Trends in Asset Allocation and Portfolio Composition November.

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Investment Company Institute, Investment Company Fact Book, available at http: Buy-side firms, like asset managers, buy financial products and services; while sell-side firms, like broker-dealers and investment banks, create and sell those products and services. When viewed in these simple terms, institutional investors are generally considered to be on the buy-side. However, mutual fund and asset management companies can also act like sell-siders when they market their own pooled-vehicles, whether directly or through broker-dealers.

Gode And Shyam Sunder, What Makes Markets Allocationally Efficient? Douglas and George E. Bates, The Federal Securities Act of , Yale Law Journal, Vol. The Importance of Firm Fundamentals , Journal of Financial and Quantitative Analysis, Vol. Chemmanur, Gang Hu and Jiekun Huang, The Role of Institutional Investors in Initial Public Offerings, The Review of Financial Studies, Vol 23, No. In those cases where an investor is trading on the basis of insider information that is, material non-public information obtained in violation of a duty , law enforcement and regulatory authorities should investigate and, where warranted, take appropriate enforcement action.

There is extensive literature on the ability of institutional investors to exploit private information and on the costs and benefits of monitoring by institutional investors. A substantive review of such research is beyond the scope of these remarks. Turner before the Senate Committee on Banking, Housing, and Urban Affairs on Spurring Job Growth Through Capital Formation While Protecting Investors, Part II March 6, , at 12, citing Audit Analytics, available at, http: Spencer Bachus, Chairman, and the Hon.

Barney Frank, Ranking Member, Committee on Financial Services, U. House of Representatives November 29, , available at http: Melancon, AICPA, to Chairman Bachus, Ranking Member Frank, and the Hon. Scott Garrett, Chairman, and the Hon. Maxine Waters, Ranking Member, Subcommittee on Capital Markets and Government Sponsored Enterprises, U. House of Representatives October 4, , available at http: Growth of Employment and Gross Fixed Capital Formation in Developed Countries, — Institutional Shareholder Services Inc.

See, also, Council of Institutional Investors, Say on Pay: Identifying Investor Concerns September , available at http: I look forward to reviewing the results of research in this area, after economists have had an opportunity to study the effects of such provisions.

Levin, supra , note 27, at p. Such disclosure should not be difficult or burdensome to provide. Mutual funds and closed-end investment companies are already required to provide a subset of this information at the fund level, pursuant to Rule 30b under the Investment Company Act, and Exchange Act Section 14A d expressly permits duplicative disclosures to be omitted.

In accordance with the Congressional mandate, the Commission proposed a rule to facilitate investment manager reporting of say-on-pay votes. Morgan Will Lobby for Dimon, The Wall Street Journal April , , B1. Key Shareholder Proposals, posted in The Harvard Law School Forum on Corporate Governance and Financial Regulation, http: President Roosevelt died the next day. STAY CONNECTED 1 Twitter 2 Facebook 3 RSS 4 YouTube 5 Flickr 6 LinkedIn 7 Pinterest 8 Email Updates.

Securities and Exchange Commission. Power and Responsibility Commissioner Luis A. Role Played by Institutional Investors The topic of your conference recognizes the important role played by institutional investors and the great influence they exert in our capital markets. With that in mind, I would like to discuss two specific regulatory issues of particular interest to institutional investors: The Importance of Reliable Information — How the JOBS Act Affects Institutional Investors As you well know, disclosure is the foundation of our federal securities laws.

Empowering Investors to Exercise Rights as Shareowners Institutional investors also have an important role in monitoring corporate governance issues. Conclusion Clearly, institutional investors have a great deal of power in our capital markets. Thank you for the opportunity to speak with you this evening.