Posted in: Capitol Hill | SEC |
After a year of deliberations, the House finally passed their bill granting more financial regulatory powers to the SEC. The Boston Globe called it “the most dramatic overhaul of US financial regulations since the Great Depression.”
Included in this bill is the Investor Protection Act, which should be of the most interest to investors. While other areas of the bill address consumer protection, plus credit card and mortgage rates, the IPA would expand the SEC’s reach over financial firms and brokers.
In the New York Times, Peter Henning blogged that the Investor Protection Act “will change the regulatory and investigatory landscape for the SEC. Included below is his rundown of some of the major provisions of the IPA, and the entire entry can be found here:
Broker-Dealer Fiduciary Duty: The responsibilities of brokers to their customers does not involve the same level of protection as that imposed on investment advisers, who have a fiduciary duty to put the customer’s interest first. What this means is that a stockbroker can recommend investments to a customer without a concern that the broker also receives a benefit from the transaction, such as commissions from a mutual fund company whose shares are recommended. The Investor Protection Act would alter the relationship between brokers and their customer by imposing the higher fiduciary duty standard when personalized investment advice is given. The S.E.C. must adopt rules that require a broker or investment adviser “to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.” The S.E.C. pushed for this change, and the securities industry has acknowledged the current reality that is hostile to brokers by supporting the higher fiduciary standard.
Bounty Hunting: Congress seems to have fallen in love with awarding bounties to whistle-blowers as a means to encourage enforcement of the law, having recently expanded the False Claims Act to cover firms receiving government bailout money. The Investor Protection Act would allow the S.E.C. to award up to 30 percent of any monetary sanctions exceeding $1 million imposed as a result of a successful securities fraud enforcement action based on a whistle-blower’s tip. This provision will encourage employees of companies to inform the S.E.C. of suspected wrongdoing, perhaps avoiding internal reporting systems in favor of seeking a bounty. If nothing else, encouraging whistle-blowers can be expected to result in more securities fraud investigations of companies and financial firms.
Speeding Up Investigations: The S.E.C.’s Enforcement Division is not always known for its speed in concluding investigations by either filing civil charges or dropping the case, sometimes allowing investigations to drag on for years. A new provision of the securities laws would impose a 180-day limit after a potential defendant files a “Wells Submission,” which is a voluntary statement to the S.E.C. by a person or company under investigation regarding why the conduct did not violate the securities laws. Cases have been known to linger for more than a year after the Wells Submission, particularly when there is staff turnover that causes an investigation to fall through the cracks. The new time limit will require some action by the Enforcement Division once the case reaches the Wells Submission stage, which can give those involved in the case some idea when the investigatory phase will end.
The first on the list is perhaps the most important aspect of the entire bill, which was approved by the House on Friday. This establishes a universal fiduciary duty that applies to financial advisers, brokers, and anyone who solicits financial advice—they are now all held accountable for conflicts of interest or poor customer service.
The speeding up of investigations is also important to investors, because it could mean quicker recovery of damages. These SEC investigations typically last months or years before a decision is made. Time is of value to victims of broker fraud who are looking for a resolution.
As mentioned before on this blog, any news regarding the SEC’s Investor Protection Act should be met with a wait-and-see approach.
Will the “bounty” offering for whistleblowers lead to more securities fraud investigations, or will it distract investigators with frivolous allegations? Will sped-up investigations lead to quicker outcomes for defrauded investors, or will it simply mean investigators have less time to prove a broker’s guilt?
Time will tell whether this bill truly helps investors, and reprimands bad brokers.
