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PRINCIPLE 1:
Congress must place the interests of investors front-and-center and prioritize measures to protect and empower retail investors.

Congress must pursue meaningful protections and opportunities for investors in the modern securities marketplace, and proactively confront efforts to roll back the rights and protections afforded to the investing public. The securities markets should be regulated such that they operate fairly and meet the needs of all investors, especially retail investors, who may otherwise not be adequately equipped to protect themselves.


Ensure Appropriate Regulation of Private Placement Brokers and Finders.

Fraud and other harms frequently occur where unregistered persons promote unregistered products to retail investors.[i] The SEC’s push to expand the private markets by making private offerings more accessible to retail investors, including the deregulation of private placement brokers, often referred to as “finders,” has increased the need for scrutiny of the role played by the individuals and firms that specialize in these deals.[ii] The registration process for intermediaries serves as an essential gatekeeping function to keep bad actors out of the securities industry and protect investors.[iii] Congress should prohibit the SEC from taking steps to broadly and unilaterally deregulate federal oversight of “finders” and direct the SEC to instead work collaboratively with state securities regulators to explore an appropriately tailored registration framework addressing persons who act as “finders.” Above all, Congress should reject any limitation on state authority over the firms and individuals who engage in these activities.  

Empower Investors by Halting the Proliferation of Forced Arbitration Contracts.

Mandatory or “forced” arbitration contracts impede the basic right of investors and consumers to seek a redress of harms through the U.S. judicial system. Private rights of action play an important role in allowing defrauded investors to pursue compensation for their losses. In fact, shareholder class action lawsuits have historically provided a fair and procedurally protected process that ensures the integrity of securities disclosure standards, as well as the development of the common law governing investors’ rights. Further, this judicial process complements and supplements the work of state securities regulators and the SEC to detect, punish, and deter fraud. Despite this important function, investors’ rights to sue in court have recently been under assault.[iv] Fortunately, the 116th Congress saw the introduction of legislation in the House and Senate aimed at curtailing the use of such arbitration contracts in the securities industry.[v] The 117th Congress must build on this momentum and ultimately enact legislation to empower investors and protect their access to the judicial system as a means of dispute resolution.

Strengthen and Safeguard the Independence of the SEC’s Investor Advocate and Investor Advisory Committee.

 In 2010, Congress enacted legislation to establish, within the SEC, the Office of the Investor Advocate and the Investor Advisory Committee (IAC or Committee). The role of the IAC, according to Congress, is “to assist the SEC by advising and consulting on regulatory priorities.”[vi] Although the SEC already had an advisory committee tasked with similar responsibilities, Congress opted to pass new legislation that replaced the Commission’s existing committee with the IAC in order to provide “a statutory foundation and set congressional prerogatives for the Committee’s composition and function.”[vii]

Given Congress’s direct role in creating the IAC, and the clarity with which Congress spoke in regard to both the Committee’s mandate and composition, Congress should take exception to a series of new guidelines approved by the SEC in August 2020 that undermine the IAC and the intent of Congress. The new guidelines, which give the SEC staff extraordinary influence regarding all appointments to the IAC, interfere with the will of Congress and threaten the independence of the IAC and its ability to offer honest commentary from the investor’s perspective, whether in support or potential critique of the SEC’s policies and priorities.[viii] Moreover, these prescriptive procedures are inconsistent with existing practices and procedures that the Commission uses to identify and appoint members to other advisory committees and marginalize the role of the Office of the Investor Advocate, which traditionally works most closely with the IAC.[ix] The 117th Congress should direct the SEC to repeal or revise its recent guidelines, and take such additional steps as may be necessary to accord the Investor Advocate and the IAC the independence and autonomy that Congress intended.

Ensure Transparency and Accuracy in Broker-Dealer Dispute Resolution.

Today, professionals in the securities industry can seek expungement of customer complaint information and other information from their regulatory records using arbitration proceedings and uncontested civil actions, which shields prior misbehavior from investors, regulators, and potential employers. The 117th Congress should examine this process and consider measures to prevent the removal of this important information from the records of financial professionals. 

Enhance Penalties to Reduce Recidivism in the Securities Markets.

For enforcement to be effective as a deterrent, the costs to violators must be meaningful as a punishment. Federal securities laws currently limit the civil penalties that the SEC may impose on an institution or individual that violates federal securities laws.[x] NASAA supports, and Congress should pursue, legislation to establish a new, fourth tier of monetary penalties for recidivists who have been held criminally or civilly liable for securities fraud within the preceding five years.[xi]


NOTES:

[i] “[O]fferings linked to SEC enforcement actions more likely involved an unregistered intermediary or a recidivist, or solicited from unsophisticated investors.” See Rachita Gullapalli, Misconduct and Fraud in Unregistered Offerings: An Empirical Analysis of Select SEC Enforcement Actions, SEC Division of Economic and Risk Analysis (Aug. 2020), available at https://www.sec.gov/files/Misconduct%20And%20Fraud%20In%20Unregistered%20Offerings.pdf.

[ii] See NASAA Outlines Opposition to SEC’s Proposed Federal Broker-Dealer Exemption for Private Placement Finders, NASAA News Release (Nov. 13, 2020), available at https://www.nasaa.org/56150/nasaa-outlines-opposition-to-secs-proposed-federal-broker-dealer-exemption-for-private-placement-finders/?qoid=current-headlines

[iii] There is a well-documented relationship between private offerings sold by brokers and an elevated risk of fraud, and a disproportionate percentage of persons acting as brokers in the private offering marketplace are brokers with red flags in their record. For example, based on a 2018 analysis performed by the Wall Street Journal, one in eight brokers marketing private placements in the past decade had three or more red flags on their records, such as an investor complaint, regulatory action, criminal charge, or firing, compared to one in fifty for active brokers. Furthermore, brokers selling private placements are six times more likely than the average broker to have at least one reported regulatory action against them. See Jean Eaglesham and Coulter Jones, A Private Market Deal Gone Bad: Sketchy Brokers, Bilked Seniors and a Cosmetologist, The Wall Street Journal (May 7, 2018).

[iv] For instance, the Delaware Supreme Court held on March 18, 2020 in Salzberg, et al. v. Sciabacucchi that the exclusive federal-forum provisions (FFPs) in certificates of incorporation for three Delaware corporations were not facially invalid. The decision provides Delaware-incorporated defendants that have adopted FFPs with grounds to seek dismissal when sued in state court for violations of the Securities Act of 1933. Likely counteracting the jurisdictional implications of the US Supreme Court’s decision in Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund (2018), the 2020 decision may result in a decrease in the number of Securities Act claims brought in state court, along with a decrease in the bifurcation of federal securities actions. The extent to which other state courts will follow remains to be seen.

[v] The Investor Choice Act of 2019, S.2992 / H.R.5336, 116th Congress (2019).

[vi] See The Restoring American Financial Stability Act Of 2010, 111 S. Rpt. 176 (Apr. 30, 2010) at 103, available at https://www.congress.gov/111/crpt/srpt176/CRPT-111srpt176.pdf.

[vii] Id. at 104.

[viii] As SEC Commissioner Allison Herren Lee observed during the SEC open meeting held to approve new nominating procedures for the IAC: “we are singling out the IAC, which has at times been critical of the Commission, and subjecting it to a process unlike that for any other committee. The new process marginalizes participation by the office best situated to handle the process—the Office of the Investor Advocate—and restricts functional membership categories in a way that fails to prioritize the most pressing needs of investors.” See SEC Commissioner Allison Herren Lee, Statement on the Investor Advisory Committee Nominating Process (Aug. 5, 2020), available at https://www.sec.gov/news/public-statement/lee-statement-investor-advisory-committee-nominating-process 

[ix] For example, though the SEC’s new guidelines preclude the SEC’s Investor Advocate from exercising significant influence over the appointment of IAC members, the SEC’s Advocate for Small Business Capital Formation is currently allowed to “select nominees for the Small Business Capital Formation Advisory Committee.” Id.

[x] Specifically, under existing law, the SEC can only penalize individual violators a maximum of $181,000 and institutions $905,000 per offense.

[xi] For example, NASAA strongly supports the Strengthening Fraud Protection Provisions for SEC Enforcement Act, or H.R.3701 (116th Congress), which would update and strengthen the SEC’s authority to impose civil penalties for securities law violations, including by directly linking such penalties to the scope of harm and associated investor losses, increasing the statutory limits on monetary penalties, and increasing the cap for repeat securities law violators.  Separately, NASAA also supports legislation that would allow the SEC to in some cases assess these penalties through administrative action, not just in federal court.