Sweeping Changes Looming for Investment Services Industry

On July 21, 2010,  President Obama signed the financial overhaul and reform bill, known as the  “Dodd-Frank Wall Street Reform and Consumer Protection Act,” into law.    Not since the Great Depression has a piece  of legislation contained such sweeping changes to the banking, finance and  securities industries.

Generalized  accounts of the new laws have inundated the news, and pundits have proffered  varied opinions on the scope and breadth of the new financial regulations.    Most of these accounts focus on how the  laws will change the way “too-big-to-fail” financial institutions do business,  and the creation of the Financial Stability Oversight Council – tasked to  oversee those institutions and mitigate the risks they present to the financial  stability of the United States.    Some  attention has also been paid to the SEC’s new authority to regulate the  derivatives markets created by the boom in asset-backed securities.

Less noted are  the sweeping changes to the laws governing brokers, dealers and investment  advisers.    Tucked away inside this  gigantic, 2,300-page bill are sweeping changes to the investment services industry  affecting brokers, dealers, investment advisers, hedge funds and mutual  funds.    These provisions, known as the  “Investor Protections and Securities Reform Act of 2010” or IPSRA, establish an  alphabet soup of new agencies and dramatically increase the authority of the  SEC and self-regulatory organizations such as FINRA to implement changes to the  relationship between investors and their advisers, and to police the investment  services industry.

Changes to the  industry will come in waves over the next two years as the different provisions  of these laws come into effect, and as the SEC passes new regulations in  accordance with the timelines laid out in the legislation.

Two New  Agencies Tasked with Advising, Consulting SEC

Section A of  IPSRA establishes two new agencies that report to the SEC: the Investment  Advisory Committee and the Office of the Investor Advocate.    Each is tasked with advising and consulting  with the SEC on a range of regulatory issues.

The  Investment Advisory Committee is charged with reviewing the regulatory priorities of  the SEC and consulting with the SEC on issues relating to the regulation of  securities products, trading strategies, fee structures and the effectiveness  of disclosures.  The SEC must not only  review the findings and recommendations of the Investment Advisory Committee,  but must also issue a public statement that assesses the findings and  recommendations of the Investment Advisory Committee and discloses any action  the SEC intends to take with respect to the findings and recommendations of the  Investment Advisory Committee.

The Office  of the Investor Advocate is charged with assisting the retail investor in  resolving significant problems they may have with the SEC or self-regulatory  organizations, identifying areas in which investors would benefit from changes  in the regulations of the SEC or rules of self-regulatory organizations, and  proposing legislation or changes to the regulations of the SEC or rules of  self-regulatory organizations.

The new laws  also require the SEC to engage in no fewer than eight new studies – ranging  from studies of the financial literacy of retail investors and enhancing  investment adviser examinations  to the  potential for misuse of certain financial designations within the  industry.    In addition, the SEC must  engage in a massive review of the standards of care applicable to brokers,  dealers, financial advisers, and associated persons.  The SEC must issue reports and  recommendations on these studies within six months to two years (depending on  the study,) and new regulations are sure to follow.

SEC Granted  More Powers

In addition to  the creation of new agencies and the commission of new studies, IPSRA also  contains provisions that provide the SEC with more new power than it has been  granted since the passage of the Securities Exchange Act of 1934, which created  the SEC.   Among its new authorities  after the enactment of this legislation, the SEC now has the authority to  restrict or completely prohibit the use of mandatory arbitration clauses in  agreements between retail investors and broker-dealers.

The  legislation disqualifies felons and other “bad actors” of participating in  Regulation D offerings, and broadens the disclosures that brokers, dealers and  investment advisers must make upon demand of the SEC.    The legislation also increases the enforcement  authority of the SEC, enlarging the definition of “aiding and abetting” a  violation of securities laws and mandating that the SEC establish policies to  prosecute such violators.    It also  provides the SEC with broad authority to compel the production of documents and  require individuals to appear for deposition without regard to the timing,  location or convenience of the subpoenaed party.

Sound  Compliance Advice Critical to Navigating Changes

These are but a few of  the coming changes to the financial services industry over the next several  years.  As members of the financial  services industry, you need counsel that not only understands the general  outline of the laws impacting your industry, but grasps the many nuances, and  can translate that understanding into providing sound compliance advice.

In addition, because many  of the provisions of the law have not taken effect, and because the SEC has not  yet promulgated regulations under its new authority, you need attorneys that  will keep a watchful eye on the coming developments and changes to the rules  and regulations governing the financial services industry.

At Foley & Mansfield, we have the knowledge and  expertise to equip your business to survive the shifting regulatory landscape and navigate the pot-holes and land-mines created by this, the most sweeping  changes to U.S. financial laws since  the Great Depression.

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