Core Principle Three
Support Strong and Complete Implementation of Investor Protections in the Dodd-Frank Act by the Conclusion of the 113th Congress
- Congress Should Urge the SEC to Impose a Uniform Fiduciary Standard on Financial Professionals Who Offer Personalized Investment Advice
- Implementation of Investor Protection Provisions in the Dodd-Frank Act Must Not be Subject to Redundant or Dilatory Regulatory Analyses Requirements
- Congress Should Take Steps to Improve the Fairness of the Securities Arbitration Process
- Congress Should Increase the Transparency of PCAOB Disciplinary Hearings and Related Proceedings
Full implementation of the investor protection provisions in the Dodd–Frank Act is one of the most important steps that the federal government can take to protect investors and promote confidence in U.S. capital markets. NASAA urges the SEC and other federal agencies to complete the Act’s implementation prior to the conclusion of the 113th Congress, in January 2015, and to resist efforts to repeal the Act’s reforms or impede their implementation. Specifically, NASAA supports provisions in the Act that increase state regulatory oversight of investment advisers; safeguard seniors from unqualified advisers; prevent securities law violators from conducting securities offerings under Regulation D; and authorize the SEC to mandate greater choice of forum and enhanced remedies for investors.
NASAA also strongly advocates provisions in the Act that empower the SEC to expand the fiduciary standard of care currently applicable to investment advisers to broker-dealers, who provide investment advice, as well as provisions designed to make capital markets more transparent by authorizing regulators to prescribe guidelines for certain structured products, limit speculative trading, and require that most derivatives be traded on exchanges. State securities regulators are particularly dedicated to swift adoption of policy reforms embodied in the Act that directly benefit retail investors.
Congress Should Urge the SEC to Impose a Uniform Fiduciary Standard on Financial Professionals Who Offer Personalized Investment Advice
Section 913 of the Dodd-Frank Act (the 913 Study) directed the SEC to study differences in the standards of care required of broker-dealers and investment advisers who provide personalized investment advice. The 913 Study, which was completed in 2011, found that while investment advisers are subject to a strict “fiduciary duty” standard, broker-dealers are subject to more lenient standards governing their conduct. For example, in meeting their duty of loyalty, investment advisers cannot place their own interests ahead of those of their clients. Broker-dealers, however, are not subject to a similar constraint. To remedy this disparity, the Dodd-Frank Act empowered the SEC to harmonize the standards of care to require that all providers of financial advice to investors be true fiduciaries.
The establishment of a uniform fiduciary duty standard governing the conduct of broker-dealers and their agents is crucial for the protection of investors. Most investors cannot distinguish broker-dealers from investment advisers, nor do they understand the different legal standards applicable to either. As a result, many investors are unable to make informed decisions as to the best type of financial professional to retain. A fiduciary standard for broker-dealers will guarantee that all financial professionals providing investment advice will act in the best interests of their clients, and in turn, enhance investor confidence in the financial services industry and securities markets.
NASAA urges the SEC to pursue the course recommended by the 913 Study to subject broker-dealers to the same fiduciary duty standard currently applied to investment advisers when those brokers offer personalized investment advice to retail investors and other customers.
Implementation of Investor Protection Provisions in the Dodd-Frank Act Must Not be Subject to Redundant or Dilatory Regulatory Analyses Requirements
In the two-and-a-half years since enactment, one of the potential obstacles emerging to successful implementation of the Dodd-Frank Act’s investor protection provisions has been the use of regulatory analytical requirements to delay and frustrate the ability of regulators to promulgate rules under the Act.
Rulemaking processes to which the SEC and other federal regulators must adhere in implementing the Dodd-Frank Act are set forth in the Administrative Procedure Act (APA) and other statutes. These processes require regulators engaged in rulemaking to perform economic and cost-benefit analyses of their proposed rules to “determine as best [as they] can the economic implications of the rule,” and “examine the relevant data and articulate a satisfactory explanation for its action, including a rational connection between the facts found and the choices made.” In addition to such mandates arising under the APA, the SEC has a unique additional obligation to consider the effect of a proposed rule upon “efficiency, competition, and capital formation.”
State securities regulators appreciate the importance of the rigorous regulatory analyses (e.g. cost-benefit and cost-effectiveness analyses) to which independent agency rules are subjected. However, NASAA is concerned that misuse of these analyses could severely impede the ability of independent federal agencies, such as the SEC, to implement important investor protections in the Dodd-Frank Act, as well as future laws designed to protect investors and the public.
NASAA was alarmed by the introduction of several legislative proposals in the 112th Congress that would create numerous new regulatory analytical hurdles for federal financial regulators charged with implementing the Dodd-Frank Act. As discussed above, their effect, if enacted, would be to derail implementation of important investor protections by delaying the Act’s rulemakings indefinitely.
The 113th Congress must be vigilant in ensuring that dilatory or redundant regulatory analytical requirements are not successfully employed to delay or disrupt implementation of the Dodd-Frank Act and other important investor protection laws. To the extent that such analyses are appropriate, NASAA believes they should be performed expeditiously and by non-partisan experts within the agency in which Congress has vested rulemaking authority.
Congress Should Take Steps to Improve the Fairness of the Securities Arbitration Process
Every year thousands of investors file complaints against their stockbrokers. Almost every broker-dealer presently includes in their customer agreements a mandatory pre-dispute arbitration provision that forces those investors to submit all disputes that they may have with the brokerage firm or its associated persons to mandatory arbitration. If cases are not settled, the only alternative is arbitration. For all practical purposes, the only arbitration forum available to investors is one administered by the Financial Industry Regulatory Authority (FINRA).
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 if it determines it is in the interest of the public or investors. Pursuant to this provision, Congress should encourage the SEC to exercise its authority to propose or adopt rules prohibiting or conditioning pre-dispute agreements mandating arbitration.
In recent years, states also have seen the emergence of mandatory pre-dispute arbitration clauses in contracts between state-registered investment advisers and their clients, despite the fiduciary duty imposed upon investment advisers. In the 113th Congress, NASAA will seek legislation empowering state regulators to curtail the use of such clauses and to take the steps necessary to provide investors with a choice for dispute resolution.
Congress Should Increase the Transparency of PCAOB Disciplinary Hearings and Related Proceedings
NASAA calls on the 113th Congress to pass The PCAOB Enforcement Transparency Act, which would make public the disciplinary proceedings initiated by the Public Company Accounting Oversight Board (PCAOB) accounting firms and individual auditors.
The PCAOB was established by Congress to oversee auditors whose reports are filed with the SEC in order to protect investors and further the public interest in the preparation of informative, fair and independent audit reports on the financial statements of public companies. Adjudicatory proceedings to determine whether an auditor or audit firm should be sanctioned for violating applicable rules or standards are an important component of the PCAOB’s oversight authority. However, unlike the disciplinary proceedings of other, comparable regulators, the PCAOB’s cases are non-public until they are appealed to the SEC. The nonpublic nature of PCAOB disciplinary proceedings has serious adverse consequences for the investing public, audit committees, the auditing profession, the PCAOB and other interested parties. Congress should remedy this situation by amending the Sarbanes-Oxley Act so that the PCAOB disciplinary proceedings will be open to the public.