The Obama administration has proposed legislation to Congress that would establish consistent standards for anybody who provides investment advice.

The SEC would have the authority to require a fiduciary duty for any broker, dealer or investment advisor who gives investment advice about securities, aligning the standards based on activity. In addition, the SEC would be empowered to examine and ban forms of compensation that encourage financial intermediaries to steer investors toward products that are profitable to the intermediary, but not in the investors’ best interest. 

The legislation would give the SEC the authority to prohibit mandatory arbitration clauses in broker-dealer, municipal securities dealer and investment advisory agreements. The SEC would also have the 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. 

The legislation would also clarify the SEC’s authority to conduct consumer testing and encourage the agency to do so, in order to create more effective and clearer disclosures and to better assess its rules and programs.

Also included in the bill are expanded protections for whistleblowers. The SEC would 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 case. That authority would be extended to other types of securities law violations to encourage more 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. 

In addition, the bill would harmonize liability standards so the SEC could 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 Advisors Act of 1940, but not the Securities Act of 1933 nor the Investment Company Act of 1940. The new 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 legislation also clarifies the legal standard for aiding and abetting, and makes it clear that the SEC can obtain penalties under any of its aiding and abetting provisions.

Under current law, an individual who has been barred from acting as an investment advisor because of serious misconduct could still apply to become a broker-dealer. The new legislation would give the SEC the authority to remove regulated persons from all aspects of the securities industry rather than just a specific segment.

The SEC recently established an Investor Advisory Committee, made up of a diverse group of investors, to advise on the SEC’s regulatory priorities, including issues concerning new products, trading strategies, fee structures, and the effectiveness of disclosure. The new legislation would make the Investor Advisory Committee into a permanent fixture.

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