Investor Protection Act of 2009

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Adminstration draft of the legislation

Link to US Treasury draft of the legislation.

US Treasury overview


Establish Consistent Standards for Broker-Dealers and Investment Advisers: Under current law, different standards apply for broker-dealers and investment advisers – even though many investors rely on the investment advice of broker-dealers in the same manner as an investment adviser. The Administration's legislation would give the SEC authority to require a fiduciary duty for any broker, dealer, or investment adviser who gives investment advice about securities, aligning the standards based on activity, instead of based on legal distinctions that are no longer meaningful. In addition, the SEC would be empowered to examine and ban forms of compensation that encourage financial intermediaries to steer investors into products that are profitable to the intermediary, but are not in the investors' best interest.

Authority to Restrict or Limit Mandatory Arbitration: Although arbitration may be a reasonable option for many consumers to accept after a dispute arises, mandating a particular venue and up-front method of adjudicating disputes – and eliminating access to courts – may unjustifiably undermine investor interests. The Administration's legislation would give the SEC authority to prohibit mandatory arbitration clauses in broker-dealer, municipal securities dealer, and investment advisory agreements.


Authority to Require Disclosure Prior to Purchase of a Fund: Currently most fund disclosures and prospectuses are not required to be delivered to investors until after a transaction is complete. Our legislation would give the SEC authority to regulate the quality and timing of disclosures. For example, the SEC could require a concise summary prospectus and a simple disclosure showing the costs of a fund in a comparative context prior to the completion of a sale.

Consumer Testing of Disclosures and Rules: The Administration's legislation would clarify the SEC's authority to conduct consumer testing and encourage it to do so, in order to create more effective and clearer disclosures and to better assess its rules and programs.


Expand Protections for Whistleblowers: The SEC should gain the authority to establish a fund to pay whistleblowers for information that leads to enforcement actions resulting in significant financial awards. Currently, the SEC has the authority to compensate sources that provide evidence leading to a successful insider trading cases; that authority should be extended to other types of securities law violations. This authority will encourage insiders and others with strong evidence of securities law violations to bring that evidence to the SEC and improve its ability to enforce the securities laws. The Administration supports the creation of this fund using monies that the SEC collects from enforcement actions that are not otherwise distributed to investors.

Harmonize Liability Standards so that the SEC Can Pursue those who Aid and Abet Securities

  • Fraud: The SEC currently has the ability to pursue actions against those who aid and abet securities fraud in cases brought under the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940, but not under the Securities Act of 1933 nor the Investment Company Act of 1940. The Administration's legislation closes this gap to create consistent remedies that the SEC can seek and eliminates significant limitations on the SEC's ability to pursue serious misconduct. The Administration's legislation also clarifies the legal standard for aiding and abetting and makes clear that the SEC can obtain penalties under any of its aiding and abetting provisions.
  • Require Accountability of Securities Professionals throughout the Financial Services Industry: Under current law, an individual barred from being an investment adviser because of serious misconduct could still apply to become a broker-dealer. The Administration's legislation would give the SEC authority to remove regulated persons from all aspects of the securities industry rather than just a specific segment.

Investor Engagement

Establish a Permanent Investor Advisory Committee: The SEC has recently established an Investor Advisory Committee, made up of a diverse group of well-respected investors, to advise on the SEC's regulatory priorities, including issues concerning new products, trading strategies, fee structures, and the effectiveness of disclosure. The Investor Advisory Committee would be made permanent by this legislation.

SEC's Aguilar on small company SOX exemption

"This week the House Financial Services Committee, in the now somewhat ironically called Investor Protection Act of 2009, added an amendment that would permanently exempt companies with $75 million or less market capitalization from the SOX 404(b) certification requirement, despite the fact that the SEC Chair announced earlier this fall that the current exemption would expire so that investors of these companies would finally receive the protections against accounting fraud that SOX contemplated when it was enacted since 2002. Can anyone seriously argue that post-SOX events have shown that internal controls are not needed for all publicly traded corporations? SEC Commissioner Aguilar addressed the problem eloquently in a recent speech:

"Everyone knows about the Sarbanes-Oxley Act, which contains a set of hard-won reforms made necessary by Enron, WorldCom, and other frauds. One clear lesson learned from those frauds was that many public companies had weak internal controls. The Sarbanes-Oxley Act tackled these problems by requiring the top executives of all public companies to take responsibility for their internal controls, and, importantly, for an independent auditor to come in and examine these controls. In the financial press, this independent audit requirement is referred to as "404(b)," after the section of Sarbanes-Oxley that requires the audit.

The Investor Protection Act of 2009 in its current form would repeal this important requirement of an independent audit for public companies with a market cap under $75 million. Some are describing this repeal of Sarbanes-Oxley as relief for "small businesses." I think people are confused when they hear the words "small business." The companies that would be exempted are not mom and pop neighborhood stores. These are publicly traded companies that offer their shares to all types of investors. And just so you know, this repeal has wide-ranging ramifications and would appear to affect the majority of public companies. Although the SEC generally does not track companies based on market cap, the SEC does have data on companies that generally have $75 million or less in public float, and our staff estimates that over 6,000 public companies may fall under that threshold.

To repeal this part of Sarbanes-Oxley now is to throw away a substantial amount of work done by regulators, companies, and private organizations to make compliance with 404(b) more cost-effective. Since the passage of Sarbanes-Oxley, the SEC has repeatedly deferred smaller public company compliance with the independent internal control audit requirement. During the period of the SEC deferrals, the SEC and the Public Company Accounting Oversight Board (PCAOB) were active in developing rules and guidance to allow 404(b) to be implemented in a manner that would work for both large and small public companies. A central goal of this work focused on making sure that costs for smaller public company were not overly burdensome.

The SEC alone has held roundtables, chartered an advisory committee, and engaged in a number of other regulatory and staff actions targeted at applying 404(b) to smaller public companies, and followed all of that with a staff study which found these efforts made compliance more cost-effective. In addition, private organizations like the Committee of Sponsoring Organizations of the Treadway Commission (COSO) have published guidance on internal control frameworks specifically targeted at smaller public companies. It is particularly ironic that, if 404(b) is undercut now, we will never see the benefits for investors of all the work by the SEC, PCAOB, COSO and others, and the opportunity for smaller public companies to take advantage of the practical lessons learned from companies that are already complying."

SEC may gain pay oversight

Source: SEC May Gain Expanded Powers to Prohibit Broker Pay, Wrongdoers Bloomberg, July 11, 2009

"The U.S. Securities and Exchange Commission would gain power under an Obama administration proposal to ban pay practices at brokerages and investment advisers and prevent individuals from working in the industry.

The Treasury Department sent Congress legislation yesterday that would let the SEC prohibit “sales practices, conflicts of interest and compensation schemes” deemed harmful to investors. The measure lets the agency remove individuals who violate rules from all aspects of the industry, rather than a specific segment such as selling securities or managing money."

Source: Bill would give SEC vast powers to regulate broker compensation Investment News, July 13, 2009

"The Securities and Exchange Commission would gain more authority to make rules governing broker compensation under draft legislation sent by the Department of the Treasury to Capitol Hill Friday.

“The legislation would give the commission clear authority to write rules that ban brokers and advisers from unfair sales and compensation practices,” said John Nester, spokesman for the SEC.

The SEC currently does not have the authority to write rules that ban compensation practices, he said.

The SEC’s rules primarily require that disclosures be made to investors concerning possible conflicts of interest that advisers or brokers may have.

The draft legislation would empower the SEC to “examine and ban forms of compensation that encourage financial intermediaries to steer investors into products that are profitable to the intermediary but are not in the investors’ best interest,” according to a fact sheet issued by the Treasury Department when it released the draft."


Some Key Provisions of Proposed Investor Protection Legislation Securities Law Prof Blog, July 13, 2009

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