February 9, 2011

NASAA's Legislative Blueprint for Investor Protection

The North American Securities Administrators Association (NASAA) recently outlined its legislative blueprint for the new Congress. I want to highlight two priorities of interest to investment advisers: the continuing need for strong governmental regulation of investment advisers, and extending the fiduciary duty standard of care to broker-dealers who provide personalized investment advice about securities to retail customers.

I encourage you to read our agenda and also to visit our new Dodd-Frank Implementation website to keep up with the latest activity from NASAA as this important investor protection law works its way through the legislative and regulatory process.

Our recommendations are designed to ensure that the investor protections included in the Dodd-Frank Act are not weakened or delayed by funding constraints.

In order to ensure the strong implementation of the Dodd-Frank Act, Congress must be willing to refuse to undermine the new Dodd-Frank regulatory authority, either directly through legislative repeals or indirectly through a lack of appropriate funding or delayed execution. Specifically, we have urged Congress to fund the SEC at a minimum at the $1.3 billion level authorized by Dodd-Frank to carry out the functions, powers and duties of the Commission for FY 2011.

Reserve Regulation for Regulators

The importance of appropriate funding was underscored by the SEC’s staff report on enhancing investment adviser examinations. The SEC staff recommended that Congress consider three approaches to address what it called “capacity constraints” facing its IA examination program. The approaches include user fees on SEC-registered IAs and two variations involving self-regulatory organizations.

In its analysis of these options, the report highlights the advantages of the first alternative – user fees – and notes the drawbacks of outsourcing IA regulation to an industry SRO, concerns shared by NASAA and others.

Our legislative agenda calls for Congress to reserve regulation for regulators, to reject proposals to establish additional self-regulatory organizations, and to provide federal and state regulators with the resources they need to effectively monitor the firms and representatives under their jurisdiction.

Investment adviser oversight always has been a partnership between state and federal regulators, both of which are directly accountable to the investing public. Congress recognized the strong record of the states in this area when it enacted Section 410 of Dodd-Frank to expand state authority to include a larger percentage of the IA population, freeing the SEC to focus its resources on larger firms.

With the debate over IA regulation now shifting back to Congress, NASAA will continue its efforts to promote a legislative approach that allows investment adviser oversight to remain under governmental authority. We believe this approach is in the best interest of protecting investors, and could be the least burdensome and least expensive for the investment advisers.

Fiduciary Duty

Another of our legislative priorities spotlights an issue long overdue for change: the different standards of care for those who provide investment advice about securities to retail customers.

The SEC staff study on the obligations of brokers, dealers and investment advisers recommended that when broker-dealers and insurance brokers provide personalized investment advice about securities to their customers, they need to put their client’s interests first.

State securities regulators applaud this recommendation and urge the SEC to act without delay to apply the fiduciary duty to all financial professionals who give personalized investment advice regarding securities – broker-dealers and investment advisers alike.

In doing so, the SEC can enhance investor protection, eliminate confusion and promote regulatory fairness by establishing conduct standards according to the nature of the services provided, not the licensing status of the provider.

I commend the SEC staff for its excellent work and look forward to assisting the Commission as it develops the staff recommendation of a uniform fiduciary standard that is “no less stringent than that currently applied to investment advisers.”

The Fight Isn’t Over

The tough legislative battles over Dodd-Frank did not end when President Obama signed the bill into law last summer.

NASAA is concerned that recent developments on Capitol Hill threaten to derail, or at least delay, some of the Act’s important investor protections. For example, on the first day of the legislative session, Rep. Michele Bachmann (R-MN) introduced H.R. 87, a bill that would repeal the entire Dodd-Frank Act. Other members of Congress are threatening to “throttle” Dodd-Frank reforms by slowing the funding process.

We are encouraged by a memo issued by Senate Banking Committee Chairman Tim Johnson to his Committee members indicating support for the effective and timely implementation of the Dodd-Frank Act.

On behalf of our members and Main Street investors throughout the United States, I urge all members of Congress to continue their commitment to investors by considering our blueprint to maintain a strong system of state and federal securities regulation to provide investors with the protection they deserve.

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