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Core Principle One

Promote Sustained Investor Confidence by Ensuring Market Transparency, Enhancing Investor Education, and Imposing Strong Penalties

  • Congress Should Strive to Achieve Market Transparency and Level the Playing Field for Investors
  • Congress Should Investigate and Scrutinize Opaque Market Activities, Including those of “Dark Pools,” Hedge Funds, and High-Frequency Trading
  • Congress Should Strengthen Penalties For Securities Law Violations
  • Congress Should Strengthen Private Remedies for Victims of Fraud
  • Congress Should Increase Resources Dedicated to Protecting Seniors and Other Vulnerable Americans

Trust in the financial markets is one of America’s greatest competitive advantages, drawing capital investment to businesses and creating a robust economic system that is fair to all. The financial crisis and numerous recent scandals involving Ponzi schemes, insider trading and market manipulation have shaken investor confidence. NASAA considers it imperative that the 113th Congress take decisive steps to bolster market confidence and thereby lay a foundation for sustained economic growth.

Congress Should Strive to Achieve Market Transparency and Level the Playing Field for Investors

The statutory and regulatory framework for the offer, sale and purchase of securities is designed to enhance investor confidence through full disclosure. Informed investors promote confidence in the market through discerning investment decisions.

Recent years have seen the proliferation of new and complex financial products in the global marketplace. As more complicated securities products enter the market, transparency regarding these products is critical, as both a means of deterring fraud and as a way to help ensure that investors do not assume inappropriate risk. For markets to rationally respond to these new products, full disclosure and transparency are essential.

NASAA believes that transparency makes markets more efficient and reduces opportunities for market manipulation and other types of investor abuse. Accordingly, NASAA will work with the 113th Congress to promote greater market transparency.

Congress Should Investigate and Scrutinize Opaque Market Activities, Including those of “Dark Pools,” Hedge Funds, and High-Frequency Trading

State securities regulators are concerned that advances in technology and other factors have made it increasingly possible for sophisticated market participants—hedge funds, dark pools, high-frequency traders, and others—to identify and exploit informational asymmetries in order to maximize profits, often at the expense of retail investors. In the wake of the 2010 “Flash Crash,” the BATS IPO and the Knight Capital “fat finger” incident, it has become apparent that U.S. securities markets are experiencing unprecedented volatility, which has yet to be satisfactorily explained.

Main Street investors have the right to know what factors are driving this volatility, and what, if anything, financial regulators are doing to protect them from its potentially harmful effects. Congress has the authority to investigate opaque market actors, and NASAA urges Congress to make full and expeditious use of this authority to bring greater transparency to these areas. The investing public should be able to understand the nature of this phenomenon and judge its risk.

NASAA urges the 113th Congress to carefully investigate and scrutinize opaque market activities. One market phenomenon that is of particular concern to state securities regulators is High-Frequency Trading (HFT), which refers to the use of powerful computers to buy and sell enormous amounts of securities at incredibly high speeds. HFT appears to have potentially dangerous implications for ordinary “mom and pop” investors. In this regard, Congress’ goal should be to level the playing field among market participants by ensuring that access to information and activities by sophisticated and speculative investors do not unfairly disadvantage or harm retail investors.

Congress Should Strengthen Penalties For Securities Law Violations

The economic recession and turmoil of the last half-decade was caused in significant measure by fraudulent financial activity. Widespread mortgage fraud, unscrupulous fixed-income departments, and accounting fakery all contributed to the financial meltdown. Fraud destroys trust in the financial system, while fairness and integrity build it.

For enforcement to be an effective deterrent, there must be a real risk of punishment for any brokerage firm or bank that misleads investors or otherwise perpetrates fraud and abuse. Scandals involving securities transactions undermine investor confidence, whether they arise in the form of insider trading, misrepresentations in connection with securities offerings, self-dealing through undisclosed related party transactions or other methods. Aggressive administrative, civil and criminal enforcement activities—including efforts to deter wrongdoing, to disgorge ill-gotten gains from wrongdoers, and, where possible, to provide restitution for aggrieved investors—is the only proven antidote.

In the 112th Congress, NASAA supported The Stronger Enforcement of Civil Penalties Act, sponsored by Senators Jack Reed (D-RI) and Charles Grassley (R-IA), which would have increased the monetary penalties in administrative and civil actions involving securities law violations. It also substantially raised the financial stakes for repeat offenders, and linked penalties to the scope of harm and associated investor losses. In the 113th Congress, NASAA will intensify its efforts to secure the enactment of this or similar legislation.

Congress Should Strengthen Private Remedies for Victims of Fraud

Congressional action to extend private remedies to victims of securities fraud is particularly urgent in light of SEC Chairman Elisse Walter’s announcement on January 18, 2013, that the SEC will soon proceed with rulemakings to implement the Jumpstart Our Business Startups Act (JOBS Act), which will legalize equity “crowdfunding” and allow the advertising of private placements. The JOBS Act will greatly increase the number of small investments in small, private companies. As a result, a single instance of fraud might easily result in damages to a large number of people. At the same time, however, the losses may be small enough that a private legal action by a single victim is not economically feasible.

To ensure that victims of securities fraud will have recourse, NASAA urges the 113th Congress to explore amending federal law to ensure that all investors, especially those investing small amounts, have a reasonable avenue to seek recovery. Failure to provide recourse to defrauded investors may have a chilling effect on future investment in these offerings and capital raising efforts generally.

While NASAA remains committed to ensuring that arbitration forums and procedures create an even playing field, NASAA also believes that arbitration should not be the sole forum available to aggrieved investors. Aggrieved investors should be able to seek relief in any forum and not be forced into an expensive arbitration that could foreclose the ability to obtain relief. Accordingly, state securities regulators urge the 113th Congress to take steps to ensure that private remedies for securities frauds are strengthened and expanded.

Congress Should Increase Resources Dedicated to Protecting Seniors and Other Vulnerable Americans 

A robust statutory framework for investor protection is critical to protecting seniors and other vulnerable citizens who are routinely targeted by predatory con artists. Shockingly, 1 out of 5 Americans over the age of 65 has been a victim of financial exploitation, and the problem is growing. To combat such senior exploitation, the states have banded together to develop innovative fraud prevention programs and to cooperate closely on major fraud investigations. State securities regulators encourage the 113th Congress to do its part by increasing resources and tools dedicated to protecting seniors and other vulnerable citizens.

One important way that Congress can provide greater protection for seniors is by enhancing and refining the penalties for those who defraud them. In the 111th and 112th Congress, NASAA supported The Senior Investor Protection Enhancement Act, which sought to impose higher penalties on those who target seniors with abusive sales practices. In the 113th Congress, NASAA will continue to push for enactment of this important legislation.

NASAA also intends to call on Congress to fund the Senior Investor Protection grant program to be established by the Office of Financial Education at the Consumer Financial Protection Bureau. The purpose of this program, which was authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), is to provide grants to states to fund additional resources, education materials and staff dedicated to cracking down on meaningless titles used by unscrupulous investment professionals to mislead investors about their expertise in senior financial issues. State securities regulators strongly supported its passage and will work to see that the annual authorization for these grants is funded by Congress.

Finally, in order to provide greater protection to seniors and other vulnerable Americans, Congress should not compromise investor protections in its efforts to expand privacy protections for users of social and digital media. As Congress considers updating the 1986 Electronic Communications Privacy Act to refine and expand privacy protections for Americans in the age of social media, NASAA will work with members of the House and Senate Judiciary Committees to ensure that any such legislation does not inadvertently compromise investor protections, including the obligation of securities firms to supervise, record, and maintain business-related communications as required by regulators. Securities firms must be able to access social and digital media accounts involving business communications; otherwise, firms may not be able to detect serious problems that put consumers at risk, including misleading claims by an employee; insider trading, Ponzi schemes and other fraudulent activity; and inappropriate conduct such as the selling of investment products that the firm has not approved.

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