Promote Investor Confidence
Through Effective Regulation
- SEC Examination of Federally Registered Investment Advisers
- Sustained Federal-State Coordination Regarding Cybersecurity Challenges
- Law Enforcement Access to Information Stored on ISPs
- Deterring Fraud With Effective Civil Penalties
Public confidence in the financial markets is one of America’s greatest competitive advantages, drawing capital investment to businesses and creating a robust economic marketplace. Effective regulation of those markets requires sufficient resources, access to information critical to investigations, effective civil penalties, and sustained federal-state coordination. It also requires that regulators maintain sufficient independence to act in the interests of the investing public. We encourage Congress to consider each of these priorities in its agenda for the 114th Congress.
SEC Examination of Federally Registered Investment Advisers
State securities regulators urge Congress to provide sufficient resources to the U.S. Securities and Exchange Commission (SEC) in order to improve the oversight of federally registered investment advisers (IAs). Due to a combination of appropriations shortfalls and growth in the SEC’s responsibilities following the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act and other statutes, approximately 40% of all SEC registered investment advisers have never been examined. During fiscal year 2014, the SEC was able to conduct annual examinations of only 10% of the roughly 11,000 federally registered IAs nationwide. At this rate, a federally registered IA is examined only once every 10 years, which is simply inadequate to detect or credibly deter fraud.
Section 914 of the Dodd-Frank Act directed the SEC to study the options and costs of enhancing IA oversight. The report’s first recommendation was that Congress authorize the SEC to assess “user fees” on IAs it examines and use the revenue derived from such fees to fund additional IA examinations. In November 2013, the SEC’s Investor Advisory Committee (IAC) voted unanimously to adopt a resolution urging the SEC to formally seek Congressional authorization to augment its examination program through revenue derived from user fees.
State securities regulators strongly support the user fee approach recommended by the SEC staff in the agency’s Section 914 report and the recommendation of the IAC. This position is supported by a broad and diverse group of industry associations, consumer and investor advocacy organizations, the SEC’s Investor Advocate, and certain SEC Commissioners. We encourage Congress to address this policy priority in the 114th Congress.
Sustained Federal-State Coordination Regarding Cybersecurity Challenges
State securities regulators regulate almost two-thirds of the investment adviser population, and are focused on ensuring that those firms and their representatives are addressing cybersecurity risks inherent in their business model. As Congress considers or creates new structures to allow information sharing regarding cybersecurity among law enforcement agencies and regulators, and between government and the financial services industry, we strongly urge Congress to include state securities, insurance, and banking regulators in those discussions and in any new framework. Congress should further ensure that states have immediate access to information affecting their jurisdiction, whether maintained by federal regulators or self-regulatory organizations.
Law Enforcement Access to Information Stored on ISPs
State securities regulators appreciate Congress’ bipartisan interest in modernizing privacy protections relating to information stored on Internet service providers (ISPs), but urge Congress not to inadvertently or unjustifiably curtail crucial investigatory authorities utilized by state regulators.
As civil law enforcement agencies, many state securities regulators rely on subpoenas, not warrants, to obtain critical information for their investigations; in fact, many state regulators have no independent authority to obtain a search warrant from a court. Federal legislation that would—in all cases—require a search warrant to access information stored on ISPs would also prevent state securities regulators from accessing such information even under the most urgent and compelling circumstances. Such restrictions would impede states’ ability to conduct civil and criminal cases, thereby harming investors.
We understand that the 114th Congress may consider legislation requiring state governmental entities to obtain a search warrant before accessing the contents of an electronic communication from an ISP. However, we strongly recommend that Congress include a mechanism to enable civil law enforcement agencies, including state securities regulators, to maintain access to such information through subpoenas. SEC Chair Mary Jo White proposed a limited subpoena authority during the 113th Congress, whereby civil law enforcement agencies without the ability to obtain a warrant could maintain access to investigatory information by issuance of subpoenas subject to a heightened evidentiary standard, and we believe that this proposal strikes a sensible balance.
Deterring Fraud With Effective Civil Penalties
Federal securities laws limit the amount of civil penalties that the SEC can impose on an institution or individual. For enforcement to be an effective deterrent, there must be a real risk of punishment. Aggressive administrative, civil and criminal enforcement activities, including efforts to deter wrongdoing, to disgorge ill-gotten gains, and to provide damages and restitution for aggrieved investors, are the only proven remedy.
Hearings in the wake of the financial crisis established that the present statutory limitation on the SEC’s authority to pursue civil penalties significantly ties the hands of the SEC in performing its enforcement duties—a view that SEC Chair Mary Jo White has recently echoed. NASAA supported bipartisan legislation, the Stronger Enforcement of Civil Penalties Act, sponsored by Senators Jack Reed (D-RI) and Charles Grassley (R-IA), in the 113th Congress and will continue to support similar legislation in the 114th Congress. This legislation would increase the monetary penalties in administrative and civil actions involving securities law violations, raise the financial stakes for repeat offenders, and link penalties to the scope of harm and associated investor losses. NASAA also supports extending the time period the SEC has to seek civil penalties for securities law violations from five to ten years, and allowing the SEC to impose tougher consequences for “bad actors”.