The Obama Administration, through the Treasury, has submitted to Congress proposed legislation that is intended to clarify and strengthen the SEC’s authority in several areas of the federal securities laws. The proposed legislation is designed to implement several recommendations made in the Treasury’s June 2009 White Paper on financial regulatory reform (as discussed in the June 23, 2009 Alert).
Consistent Standards for Broker-Dealer and Investment Adviser Conduct towards Clients. Consistent with the White Paper’s recommendations, the proposed legislation would address the issue of harmonizing investment adviser and broker-dealer regulation by giving the SEC broad authority to promulgate rules establishing that brokers, dealers and investment advisers providing investment advice shall act solely in the interest of the customer or client without regard to any interest of the broker, dealer or investment adviser. The proposed legislation would also require the SEC to take steps to facilitate the provision of clear disclosures to investors about the scope of their relationship with their investment professionals and to examine and, if necessary, promulgate rules prohibiting sales practices, conflicts of interest, and compensation schemes for financial intermediaries (including brokers, dealers and investment advisers) that it deems contrary to the public interest and interest of investors.
Mandatory Arbitration. The proposed legislation would give the SEC authority to prohibit or impose conditions or limitations on the use of mandatory arbitration clauses for clients of any broker, dealer, municipal securities dealer or investment adviser if the SEC finds such prohibition, imposition or limitation to be in the public interest and for the protection of investors. The proposed legislation does not reflect the White Paper’s recommendation that prior to exercising that authority the SEC conduct a study on whether mandatory arbitration negatively affects the resolution of legitimate investor complaints and should be limited or modified.
Pre-Sale Disclosures for Investment Company Sales. The proposed legislation would authorize the SEC to promulgate rules designating the information that must precede the sale of registered investment company shares. This provision implements the White Paper’s recommendation to require the delivery of adequate information to allow investors to make informed decisions but falls short of the White Paper’s recommendation that these disclosures include a summary prospectus.
Consumer Testing of Disclosure and Rules. Consistent with the White Paper, the proposed legislation would make express the SEC’s authority to engage in consumer testing, including engaging in temporary or experimental programs, to evaluate its rules and programs and for considering, adopting, or engaging in rules or programs under the major federal securities laws. This element of the proposed legislation would confirm and codify the authority that the SEC has increasingly exercised in various recent initiatives such as the summary prospectus and the proposed point of sale disclosures.
Expanded Whistleblower Protections. The proposed legislation gives the SEC the authority to establish a whistleblower fund that pays for information leading to enforcement actions that result in significant financial rewards. It would also give the SEC the authority to reward non‑governmental and certain non-criminal whistleblowers who provide original information to the SEC in an action that yields monetary sanctions exceeding $1 million. Any reward and its amount would be discretionary on the SEC’s part, with the amount not to exceed 30% of the monetary sanction. The proposed legislation establishes an SEC investor protection fund within the Treasury that could be used to fund the program as well as investor education initiatives designed to help investors protect themselves against securities law violators.
The proposed legislation would establish a cause of action for whistleblowers seeking redress for harassment or discrimination experienced because of their whistleblowing activities, with relief to include reinstatement, twice the amount of back pay, and litigation costs. Under the proposed legislation, information provided to the SEC by the whistleblower would remain confidential and privileged until it is required to be disclosed to the defendant in a proceeding brought by the SEC or the enumerated government entities with which the SEC could share the information without compromising its confidential or privileged nature.
Liability Standards/Aiding and Abetting. The proposed legislation codifies and harmonizes aiding and abetting causes of action under the federal securities laws. The SEC currently may bring actions against persons who aid and abet securities laws violations under the 1934 Act and Advisers Act. The proposed legislation would provide specific authority to bring similar actions under the 1933 Act and the 1940 Act. In so doing, the proposed legislation clarifies the legal standard for such cases as one in which a person has knowingly or recklessly aided or abetted a violation under those statutes. In addition, the proposed legislation clarifies that the SEC can obtain penalties under these provisions.
Collateral Bars. The proposed legislation would expand the scope of the collateral bar sanction currently available to the SEC to cover a broader range of sectors of the securities industry namely, investment advisers, broker-dealers municipal securities dealers, transfers agents and nationally recognized statistical rating organizations.Investor Advisory Committee. The proposed legislation would make permanent the SEC’s newly created Investment Advisory Committee (“IAC”), which at its first meeting on July 27, 2009 discussed certain of the issues raised by the proposed legislation, including establishing a consistent fiduciary duty standard for investment professionals and mutual fund point of sale disclosures. The new legislation codifies the establishment, appointment process and stated purpose of the committee which is to advise and consult the SEC on (1) regulatory priorities and issues regarding new products, trading strategies, fee structures and the effectiveness of disclosures; (2) initiatives to protect investor interests; and (3) initiatives to promote investor confidence in the integrity of the marketplace. The proposed legislation would require the IAC to meet a minimum of at least twice yearly and more, if needed, at the behest of the SEC.