WASHINGTON (June 4, 2013) – In a letter to Securities and Exchange Commission (SEC) Chair Mary Jo White, a broad-based coalition of organizations today urged the agency to establish a uniform fiduciary standard for broker-dealers and investment advisers that is at least as strong as the existing standard for investment advisers and asserted vigorous opposition to any rule that would weaken investor protections. The group comprises like-minded organizations advocating for the extension of a client-first fiduciary standard to broker-dealers providing personalized investment advice to retail customers.

The letter outlines the group’s concerns that the SEC’s March Request For Information (RFI) signals that the SEC may be backing away from requiring a fiduciary standard for broker-dealers that is “no less stringent” than the one under which registered investment advisers currently operate.

Section 913 of Dodd-Frank required SEC staff to analyze standards of care applicable to investment advisers and broker-dealers and it recommended that the standard of care should be what is in the best interests of the consumer without regard to business model.

“The assumptions contained in the RFI fail to include key elements of the fiduciary standard such as the obligation to act in the best interest of the customer. If the fiduciary duty is based on the RFI assumptions, it would be weaker than that originally set forth in the Section 913 Study and far less stringent than that currently imposed under the Advisers Act,” stated the group in its jointly signed letter. “If the SEC were to adopt this approach, we fear that it would significantly weaken the fiduciary standard for SEC-registered investment advisers, while adding few new protections for investors who rely on broker-dealers for investment advice. This approach would have negative consequences for investors and is one we would vigorously oppose.”

The organizations signing the letter are: AARP, American Institute of Certified Public Accountants, Certified Financial Planner Board of Standards, Consumer Federation of America, Financial Planning Association, Fund Democracy, Investment Adviser Association, National Association of Personal Financial Advisors and the North American Securities Administrators Association.

Comments from each of the organizations signing the letter:

“Broker-dealers call their sales representatives financial advisers, they market themselves based on the advice they offer, and they encourage investors to rely on them as trusted advisers. It is hardly surprising then that most investors make no distinction between brokers and advisers and that disclosure is ineffective in eliminating that investor confusion. That is presumably a key reason Congress, in drafting Section 913 of the Dodd-Frank Act, specified that any new standard for brokers must be the same as the standard for advisers and no weaker than the existing standard under the Advisers Act. While we remain optimistic that the SEC can craft a regulatory approach that provides much needed strengthened protections for investors – a standard that CFA can support – doing so will require the agency to radically rethink the assumptions in the recently issued request for information and to adopt a far more investor protective approach.”

- Barbara Roper, Director of Investor Protection, Consumer Federation of America

“Older Americans need to know that the people who are helping them save for retirement, as well as those managing their savings throughout retirement, are indeed putting their interests first. It is more than reasonable to have broker-dealers – who are often providing advice to clients – held to the same standard as investment advisers. Extending the fiduciary standard will help protect investors and reduce consumer confusion. We encourage the SEC to stand firm and not retreat from implementing a client-first fiduciary standard.”

- Joyce A. Rogers, Senior Vice President, Government Affairs, AARP

“The SEC has assumed that there will be multiple fiduciary standards that apply to personalized investment advice, which will create more confusion and engender conflicts among, for example, federal laws that apply to broker-dealers and investment advisers. The SEC’s approach will exacerbate the already dysfunctional regulation of personalized investment advice.”

- Mercer Bullard, President and Founder, Fund Democracy

“State securities regulators 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 a fiduciary duty, which should be no less stringent than the standard codified in the Investment Advisers Act. While there may be some debate about the precise parameters of the application of the duty to broker-dealers, it cannot be seriously debated that when enacting Section 913, Congress ever intended to lower the standards currently applicable to investment advisers. The goal was always to raise the standard of conduct of brokers to align with investment advisers. Such an alignment would enhance investor confidence in the financial services industry, the products they are being advised to purchase and the securities markets overall.”

- A. Heath Abshure, President, NASAA

“Fairness is at the heart of the debate surrounding the need for a fiduciary standard. Whether saving for retirement or their children’s college education, American investors should get advice that is best for them and not their financial adviser. And an adviser’s duty to an investor should not depend on who is regulating that adviser. We urge the SEC to stay true to Congress’ intent in Dodd-Frank and give American investors what they deserve – investment advice from an adviser who has a fiduciary duty to act in their best interests at all times. ”

- Kevin R. Keller, CAE, Chief Executive Officer, CFP Board

“The Commission’s RFI does not appear to incorporate the most crucial aspect of fiduciary duty – that the overarching duty to act in the client’s best interest is an ever-present overlay to all of the other duties, rules, and assumptions discussed in the RFI. Indeed, the RFI seems to contemplate simply adding disclosure requirements to existing broker-dealer rules and labeling the result a fiduciary standard. We would oppose such an approach as watering down the Advisers Act fiduciary standard.”

- David G. Tittsworth, Executive Director, Investment Adviser Association

“Relying on disclosures to sidestep working in the best interest of the client is inconsistent with the Advisers Act of 1940 and would weaken the existing fiduciary standard for registered investment advisers. Full disclosure plays an important part of the fiduciary relationship between an adviser and client, but it does not replace loyalty, ongoing duty of care, or managing conflicts or avoiding them where possible. We would strongly oppose a standard where disclosure displaces principles based advice.”

- Lauren Locker, CFP®, National Chair, NAPFA

“Requiring a fiduciary standard of broker-dealers doesn’t mean they need to stop earning commissions or providing services to middle class clients. Rather, it means that they need to put their clients’ interests first by, among other things, fully disclosing and appropriately managing conflicts of interest. Financial planners, who have voluntarily embraced the fiduciary standard, have demonstrated that it can be applied successfully across business models for the benefit of both clients and advisors.”

- Michael Branham, CFP®, President, Financial Planning Association

“Investors cannot be put in a position of trying to determine when their advisers are required to work in their best interest and when they are not. We urge the SEC to establish a fiduciary standard for broker-dealers giving investment advice that truly protects investors by requiring a continuing duty, as currently exists for investment advisers, to put the investors’ interests first.”

- Barry C. Melancon, CPA, CGMA, President and CEO, AICPA

For More Information:

Bob Webster | Director of Communications, NASAA
202-737-0900

Download: NASAA IA Switch Report

WASHINGTON (May 20, 2013) – The North American Securities Administrators Association (NASAA) today released a report documenting the successful completion of the transfer of mid-sized investment advisers from federal to state oversight as called for by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“This report details the history of the IA switch and the accomplishments of NASAA members and staff to ensure that the largest coordinated regulatory event between the states and the SEC was accomplished successfully,” said Heath Abshure, NASAA President and Arkansas Securities Commissioner.

The report is available on the NASAA website, here.

The Switch stemmed from Section 410 of the Dodd-Frank Act, which raised the assets under management threshold for state regulation of investment advisers from $25 million to $100 million. The implementation of the Switch took place over the course of nearly three years following the passage of the Dodd-Frank Act, leveraging the capabilities of state securities regulators in overseeing investment advisers. 

“The regulatory transfer of more than 2,100 investment advisers from federal to state oversight was one of the most significant achievements in NASAA’s history,” Abshure said,.

Currently, states oversee approximately 17,350 investment adviser firms with assets under management of about $269 billion, while the SEC has regulatory responsibility for about 10,540 investment adviser firms.

“The Switch represents a good example of how state and federal securities regulators can and do collaborate, and I commend both state securities administrators and staff, and the staff of the Securities and Exchange Commission for working together to provide investors with stronger investment adviser oversight,” Abshure said.

For More Information:
Bob Webster | Director of Communications
202-737-0900
 

— NASAA —

WASHINGTON (May 8, 2013) – The North American Securities Administrators Association today filed an amicus brief supporting FINRA’s efforts to overturn a decision by a FINRA hearing panel that allowed Charles Schwab & Company to prevent its customers from participating in class-action lawsuits.

“Charles Schwab’s attempt to unilaterally alter its account agreements to include the class action waiver is an obvious attempt by the firm to insulate itself from liability to its own clients,” said Heath Abshure, NASAA President and Arkansas Securities Commissioner. “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.”

NASAA’s amicus brief was filed with FINRA’s National Adjudicatory Council (NAC), the national committee that reviews initial decisions rendered in FINRA disciplinary and membership proceedings. The Public Investors Arbitration Bar Association (PIABA) filed a related amicus today. A similar brief was filed jointly today by AARP, the National Consumer Law Center and Public Justice supporting FINRA’s efforts to overturn the hearing panel’s decision.

NASAA argued that the FINRA hearing panel erred by refusing to enforce FINRA rules prohibiting the use of class action waivers in customer agreements. “In doing so, the hearing panel ignored FINRA’s statutorily duty to enforce the organization’s rules, relied on an erroneous application of the Federal Arbitration Act, and placed investors in imminent harm by precluding their ability to seek redress for small dollar claims,” NASAA’s brief said.

“Our interest in this case stems from our strong belief that investors should be free to join with other investors through the representative class action process to resolve claims that are too costly to bring independently,” Abshure said. “The hearing panel’s decision deprives investors of this choice through an erroneous application of the Federal Arbitration Act and should therefore be reversed.”

NASAA’s brief is available on the NASAA website here.

Separately, on May 3, 2013, NASAA wrote to SEC Chair Mary Jo White urging her to use the authority granted to the agency in Section 921 of the Dodd-Frank Act to prohibit or impose limits on the use of mandatory arbitration clauses in broker-dealer and investment adviser customer contracts. In the letter, Abshure wrote that “it is essential” for the SEC to act given the recent decision by Schwab to expand its forced arbitration contracts to require that investors waive their right to participate in class actions.

For More Information:
Bob Webster | Director of Communications
202-737-0900

Financial Service Providers

Whether you are just starting a retirement fund or need additional help with growing and managing your money, you may benefit from selecting an investment services professional. Finding a person who is knowledgeable, affordable, and trustworthy may be a challenging process. This advisory provides basic information on three types of financial services professionals and their obligations to you as a client: broker-dealer agents, investment adviser representatives, and financial planners. An individual professional can hold any of these three credentials or titles, among others.

Broker-Dealer Agents

Investment adviser representatives give advice about securities and other investment products and provide ongoing management of investments based on clients’
objectives.

Generally, the term investment adviser refers to a firm rather than an individual; an individual in a firm is known as an investment adviser representative. In some instances, an investment adviser is operated by only one person and, in this case, the individual is both the investment adviser and the investment adviser representative. With the distinction sometimes difficult to discern, investment adviser representatives are often commonly referred to as investment advisers.

Investment advisers may be referred to by a variety of titles, among others: investment manager, investment counsel, asset manager, wealth manager, or portfolio manager.

Clients may grant their advisers discretionary authority to make decisions about investments without prior approval. Investment advisers have a fiduciary responsibility to
put clients’ interests ahead of their own when providing investment advice. Because investment advisers give continuous comprehensive investment advice, they are considered to be acting in a fiduciary role; by contrast a broker who serves clients on a transactional basis is not considered to be a fiduciary.

Investment advisers typically charge a flat rate or an asset-based fee. The compensation structure must be disclosed to the client.

Financial Planners

Financial planners design an overall plan for their clients to save, invest, and manage their money. Planners who provide specific investment advice— such as recommending particular financial products or investments—must be registered or licensed as investment adviser representatives and are subject to a fiduciary duty.

The fee structures charged by financial planners vary greatly and are dependent on whether they are licensed or registered. Financial planners may charge hourly, flat,
or asset-based fees, or they could earn commissions based upon the purchase of recommended products.

Checking Out Your Potential Financial Service Provider

Whether you choose a broker, investment adviser, or financial planner, make sure you verify the person’s registration or license, background, and employment history by contacting your state or provincial securities regulator.

Every broker and investment adviser must be properly registered or licensed. Each is assigned a unique identification number by the Central Registration Depository (CRD), a nationwide database jointly maintained by state securities regulators and the Financial Industry Regulatory Authority (FINRA). This CRD number corresponds to the associated individual’s information, including employment history, certifications, licenses, registrations, and disciplinary actions.

Background information is available through your state securities regulator. Contact information is available here. In addition, you may obtain information regarding a broker or investment adviser through FINRA’s BrokerCheck database, available here or through the SEC’s Investment Adviser Public Disclosure
website, available here. 

Financial planners may be certified by the Certified Financial Planner Board of Standards, Inc. (CFP Board). A certified financial planner’s background can be checked
through a database maintained by the CFP Board.

Questions to Ask:

• What services do you offer?
• What licenses, registrations, qualifications, and experience do you have to offer these services?
• Are you a broker, investment adviser, financial planner or any combination thereof?
• Can you provide me with your CRD number, and, if not, why not?
• Are you required to always act in my best interest?
• Do you have any potential conflicts of interest when providing me with investment advice?
• How are you paid? Explain commissions or fees you may charge.

These questions are not exhaustive, and the answers will likely raise additional questions you will want answered before you decide to entrust the professional with your
money. You may want to ask for the answers in writing. Be suspicious if your investment services provider:

• Refuses to provide you with his or her CRD number.
• Cannot explain to you how a proposed financial product is intended to make money.
• Suggests that you take out a mortgage or reverse mortgage on your home in order to invest.
• Recommends that you cash out current holdings (such as life insurance or retirement accounts) to fund other investments.
• Ignores your financial objectives.
• Pressures you to invest today or tells you to keep the investment secret.

Download this Informed Investor Advisory
Posted: April, 2013 

WASHINGTON, D.C. (April 30, 2013) – In recognition of Financial Literacy Month, the North American Securities Administrators Association (NASAA) today reminded investors of the importance of understanding the distinctions between the various types of financial professionals.

“Whether you are just starting a retirement fund or need additional help with growing and managing your money, you may benefit from selecting an investment services professional. It pays to understand the differences between a broker-dealer agent, an investment adviser representative, and a financial planner. Each serves a distinct role in helping with your financial future,” said Heath Abshure, NASAA president and Arkansas Securities Commissioner.

To help investors understand these differences, NASAA has issued an investor advisory providing basic information on these types of financial services professionals and their obligations to investors.

For example, Abshure noted that anyone licensed as an investment advisor must, by law, act as a fiduciary and put the interests of his or her clients ahead of their own.

“With so many brokers and salesmen calling themselves ‘financial advisers,’ or ‘investment consultants,’ it is easy to see how investors might assume these individuals are licensed investment advisors,” Abshure said. “That’s one reason why NASAA continues to call on federal securities regulators to require all financial professionals providing investment advice to retail investors to be held to a high fiduciary standard.”

The investor advisory also provides questions to ask your financial professional and warning signs to watch for. The advisory is part of NASAA’s Informed Investor series.

For More Information:
Bob Webster | Director of Communications
202-737-0900

“State securities regulators strongly support Congressional efforts to improve the oversight of federally registered investment advisers by acting on a recommendation of the Dodd-Frank Act and establishing a dedicated funding mechanism to ensure the that SEC’s Office of Compliance, Inspections, and Examination’s resources are aligned with its examination responsibilities.

“State securities regulators and the investment adviser industry agree that authorizing the SEC to collect ‘user fees’ from the investment advisers it examines is the most effective and efficient way to provide for more robust oversight of federally registered investment advisers.

“NASAA commends Representatives Waters and Delaney for their leadership in this area, and hopes that other members of Congress who have been vocal in their support of policies to strengthen investor protection will lend their support to the Waters-Delaney bill.

“Revenue from the user fees contemplated by the Waters-Delaney bill would be available to the SEC only to fund additional examinations of investment advisers, and not to subsidize other functions of the Commission. The proposed bill is highly cost-effective not only from the perspective of the government, but also from that of the investment adviser industry.

“As a matter of efficiency and cost, authorizing the SEC’s Office of Compliance, Inspections, and Examinations to fund enhanced oversight of federally registered investment advisers through user fees makes more sense than establishing a new SRO for investment advisers.

“The Waters-Delaney bill, which is supported by the investment adviser industry, and by investor protection advocates, answers the Dodd-Frank Act’s call for enhanced oversight of federally registered investment advisers and avoids doing so at taxpayers’ expense.”

Download: NASAA Letter of Support for Investment Adviser Examination Improvement Act of 2013

For More Information:
Bob Webster | Director of Communications
202-737-0900

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.

The proposed rules would update various provisions of the investment adviser rules, including the rules regarding financial reporting requirements, custody, books and records, and unethical practices. The proposed amendments would add new rule sections addressing proxy voting, advisory contracts, and compliance procedures and practices, and would create exemptions from registration for certain private fund advisers and venture capital fund advisers. Many of these changes would make Washington’s rules consistent with current federal law and NASAA model rules.

Click here for a copy of the Proposed Rulemaking (Form CR-102) and here for the text of the proposed amendments, which were filed with the Office of the Code Reviser on March 20, 2013. The Form CR-102 will be published on April 3, 2013 (WSR Issue # 13-07-082). Additional information may be found in the Memo to interested parties – Investment Adviser Rulemaking CR-102.