NASAA President Heath Abshure’s Remarks at NASAA, SEC 19(d) Conference

April 16, 2013
Washington, D.C.

Good morning and welcome. I’m Heath Abshure, Arkansas Securities Commissioner and president of NASAA.

I am pleased to welcome you to the annual 19(d) conference.

Representatives of the SEC and NASAA meet each year in accordance with Section 19(d) of the Securities Act of 1933. Although we do get together more often than that, I’m glad we have this annual opportunity to speak with one another.

State and federal securities regulators have much in common to discuss as we work to together protect investors. For example, we recently completed the successful switch of more than 2,100 mid-sized investment advisers from federal to state oversight.

NASAA hopes to build on that success this year with the new Regulation A+ for offerings under $50 million. Reg. A+ presents us with an opportunity to craft and implement regulations that are reasonable, efficient, and effective. Some of you may know that NASAA is designing a one-stop, state-level filing and review process for these offerings.

We remain hopeful that the framework of the new Reg. A+ exemption will be harmonized with this new state system.

In a few minutes, we will break into working groups to address areas of corporation finance, broker-dealer regulation, investment management, investor education, and enforcement.

Before we do, I’d like to touch upon three areas that you’ll hear more about from us in the breakout sessions: class action relief, arbitration and fiduciary duty.

If you saw our legislative agenda, you know that NASAA is deeply concerned by the erosion in investor confidence caused by the lack of civil recovery options for harmed investors.

The virtual elimination of litigation as a dispute resolution option through mandatory arbitration clauses, coupled with increasing procedural and evidentiary burdens, will have profound effects on investors and their confidence in investment products and markets.

Most troubling is that these remedies are decreasing just as the era of crowdfunding and general solicitation in Regulation D, Rule 506 offerings is about to launch. This presents particular risks to small investors.

I understand Chairman White intends to make JOBS Act rulemaking a priority and that the final rules should be adopted soon. Once that occurs, the number of small investments in small, private companies will greatly increase.

I want to emphasize that, despite our concerns with crowdfunding and increased use of Rule 506, state securities regulators want to see small businesses get the capital they need to grow. But, investment follows trust, and the JOBS Act fails to facilitate this investor trust.

If efforts to promote access to investment capital for small businesses are to be successful, investors need to be confident that they are reasonably protected from fraud and undisclosed risk.

This means that investors must have access to information about the issuer and, where there is wrongdoing, adequate civil recourse. This will facilitate investor trust, which is essential to ensure the availability of investment capital.

By definition, “crowdfunding” encourages large numbers of investors to make relatively small investments. A single instance of crowdfunding fraud or material undisclosed risks might easily result in damages to a large number of people. At the same time, the JOBS Act caps both the amount that individuals can invest in crowdfunded securities and the aggregate amount that may be raised in an offering.

The losses in instances of fraud are unlikely to be sufficient to support a private legal action by a single victim. NASAA believes that investors will not trust a marketplace in which they are unable to protect themselves. Therefore, for crowdfunding to be successful, class action relief must be available to investors who are defrauded in an offering of crowdfunded securities.

Unfortunately, crowdfunding and the expanded use of Regulation D, Rule 506 is set to launch against a backdrop where investor class action recourse is increasingly limited.

Our goals are to advocate against further restrictions to class actions, through both legislative means and appellate litigation. We also will advocate for amendments to federal law to permit private lawsuits for fraud associated with small offerings.

Alongside these limitations on the use of class actions, arbitration has increasingly become the sole forum available to an aggrieved investor. Part of investor protection is ensuring civil remedies for investors, and one size does not always fit all when it comes to remedies.

Arbitration doesn’t make sense for a $10,000 investment, much less a $2,000 investment—which is the size contemplated by the crowdfunding provisions in the JOBS Act.

NASAA remains committed to ensuring that arbitration forums and procedures create an even playing field. But, we also believe that arbitration should not be the sole forum available to aggrieved investors, especially those investing small amounts.

When it comes to addressing disputes that may arise between investors and their broker-dealers, investors should have a choice of arbitration or litigation. Investors should not be forced into the “take it or leave it” scenario they now face with mandatory pre-dispute arbitration clauses in customer agreements with their broker-dealers.

These clauses have become that much more troubling to NASAA in light of the recent decision in the FINRA enforcement proceeding against Schwab. This ruling would essentially allow broker-dealers to prohibit participation in class actions against them by their customers. That’s wrong on the merits and bad public policy.

This is especially true given that Section 921 of the Dodd-Frank Act provided the SEC with rulemaking authority to prohibit or impose conditions on the use of mandatory pre-dispute arbitration agreements. I’d like to take this opportunity to encourage you to exercise this authority.

Finally, last month, the SEC released a request for additional information and data in connection with extending a fiduciary duty to broker-dealers. This is a positive step, but only a first step.

We urge the SEC to exercise its discretion, pursuant to Section 913 of the Dodd-Frank Act, to engage in rulemaking to subject broker-dealers to fiduciary duty, which should be no less stringent than the standard derived from the Investment Advisers Ac.

There may be some debate as to the precise parameters of the application of the duty to broker-dealers but it cannot be seriously debated that when enacting this provision Congress ever intended to lower the standards currently applicable to investment advisers.

The goal was always to align the standard of conduct of brokers with that of investment advisers. Aligning the standard of conduct brokers should abide with investor expectations and therefore will enhance investor confidence in the financial services industry, the products they are being advised to purchase and the securities markets overall.

Now, I am honored to introduce SEC Commissioner Luis Aguilar.

Commissioner Aguilar was appointed by President George W. Bush in 2008 and was reappointed by President Barack Obama in 2011.

On behalf of NASAA, I want to thank Commissioner Aguilar for his unwavering belief that the combined efforts of state and federal regulators are necessary to protect the integrity of the marketplace and to shield consumers from fraud and abuse. We are pleased to have the SEC as our partners in this important mission. Please join me in welcoming SEC Commissioner Luis Aguilar.

 

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