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.