NASAA Says Reg-D Is Second Biggest Investor Protection Concern

In a media conference call Tuesday morning, NASAA President Denise Voigt Crawford outlined the biggest investor protection issues in Wall Street reform legislation supported by NASAA. Investor protection is one of the issues legislators plan to vote on during Tuesday’s conference session.

In a media conference call Tuesday morning, NASAA President Denise Voigt Crawford outlined the biggest investor protection provisions in Wall Street reform legislation that are supported by NASAA. Investor protection is one of the issues legislators plan to vote on during Tuesday’s conference session.

After extending fiduciary duty to brokers (House section 7103), Crawford said the second most important provision is preventing recidivist violators of the law from conducting private placement offerings under Reg-D (Senate section 412), raising the bar for accredited investors (Senate section 916), increasing state oversight for investment advisors (Senate section 410), including a state presence on the Financial Stability Oversight Council (House Section 1001), and ending mandatory arbitration for investors (House section 7201).

With a tight deadline on finalization of Wall Street reform, and 2,000 pages to get through, it may be difficult for legislators to address all of these provisions in the reconciliation process, but if they are not addressed now, they could be considered either by Congress or by regulators at some later date.

2. Reg-D: A provision to prevent recidivist violators of the law from conducting private placement offers under Reg-D exemptions only exists in the Senate bill. Private placement offerings generally are not reviewed by the SEC and state regulators are currently pre-empted from reviewing them. “This wouldn’t hamper small businesses who use Reg-D to raise capital,” said Crawford. It would simply protect investors from crooks.

Separately, the Senate bill would also raise the bar for accredited investors, by excluding investors’ primary residences from the $100 million net worth required for them to qualify. It would also give the SEC the authority to review the current standard and make the necessary adjustments to make sure investors are protected.

3. State vs. Federal: NASAA also supports language in the Senate bill that would raise the threshold for federal versus state regulation to $100 million from $25 million today, bringing an 4,000 additional RIAs under state jurisdiction.

“The SEC has said that it’s unable to examine the 4,000 RIAs in the $25 million to $100 million range,” said Crawford. “Because the SEC has reported that there are 3,000 SEC registered RIA firms that have never been examined. Somebody’s got to do that work.” The SEC generally focuses its regulatory efforts on the larger RIA firms, so many or most of those 3,000 firms likely fall in the $25 million to $100 million gap, she said.

The House bill differs (section 7418) in that it has added language to allow RIAs registered with 5 or more states to maintain their registration with the SEC. “This could result in really large numbers of investment advisors currently registered with 3 or 4 states to avoid state oversight by registering with one or two more states,” she said. In spite of state budget shortfalls, Crawford said state regulators are ready to step up and accept the additional responsibility, that they would coordinate their efforts, and that anything would be better than no regulation. “It’s more cost effective for us to go out and examine these firms than it would be for Washington-based SEC.”

4. Financial Stability Oversight Council: NASAA supports the House approach to the Financial Stability Oversight Council, which would include a state securities, banking and insurance regulator as nonvoting members of the council. “This would formalize regulatory cooperation among federal and state regulators,” said Crawford. “The Senate provision does not include state financial regulators on the council. Sometimes there’s an inside the beltway mentality that works against a holistic regulatory approach. Problems of the last two years could have been avoided if there were more direct communication between state and federal regulators. I’m disappointed we wouldn’t be able to vote, but it’s important for us to be at the table.

5. Mandatory arbitration: NASAA also supports the house provision contained in section 7201 that provides the SEC with the authority to conduct a rulemaking that gives investors the right to choose whether arbitration is the proper course of action for this situation. Both bills, House and Senate, give the SEC the authority to conduct rulemaking on mandatory arbitration if the SEC finds it in the public interest, but Senate section 921 adds language that gives the SEC authority to reaffirm the use of mandatory pre-dispute arbitration, Crawford said.

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