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Due Diligence

NASAA Asks Conferees to Get Tough On Investor Protection

As Senate and House committee members entered the final stretch of negotiations over Wall Street reform legislation, NASAA, the organization of state securities regulators, delivered a letter to Conferees this afternoon urging them to adopt tougher rules on investor protection in the bill. The text of the letter is below.

Dear Conferee:

State securities regulators are profoundly disappointed that the Senate conferees approved a Title IX counteroffer that includes two provisions that seriously weaken investor protections in a bill purportedly written to strengthen them. I urge you to reject the Senate fiduciary duty study/rulemaking language and the amendment to exempt certain hybrid annuity products from securities regulation.

Fiduciary Duty. Instead of the strongest possible fiduciary duty for every financial intermediary providing investment advice, the “compromise” study in the Senate offer has been modified to lessen the chances that investors will ever realize the benefits of a fiduciary duty, the single most important investor protection in the reform package. For the following reasons, NASAA must strongly oppose it.

  • The study is nothing more than a delay tactic and should be rejected outright.
  • It is wasteful of the SEC’s resources in that it requires the agency to review and study issues that have already been repeatedly studied.
  • If the study remains in place, it should be significantly streamlined so as to avoid needless repetition of prior studies. Further, if there must be a study, it should be required to be conducted on a fully-cooperative basis by both governmental regulators, the SEC and the states, in order to maximize resources and insure its completion within the one-year time frame.

To make matters worse, the rulemaking language proposed by the Senate fails to achieve the original goal of both the Senate Banking Committee and the House Financial Services Committee to impose the Investment Advisers Act fiduciary duty on broker-dealers when providing personalized investment advice to retail customers about securities. Our specific opposition to the Senate rulemaking language includes the following:

  • The two year rulemaking provision would mean that it could be three years before the SEC even undertakes an attempt to implement a rule to address the study findings. Further, and as more fully discussed below, the conditions imposed by this amendment on any such rulemaking process are so arduous that it is highly doubtful that a rule of any kind would be promulgated.
  • The new rulemaking language would not result in a fiduciary duty for broker-dealers providing investment advice. The House language authorizing the SEC to adopt rules imposing the full Investment Advisers Act fiduciary duty on brokers when they give personalized advice about securities to retail investors has been removed. It has been replaced by language authorizing the SEC to adopt rules requiring brokers to act in their customers’ “best interests” which is far short of the fiduciary duty.
  • That weakened authority provided to the SEC is subject to such burdensome conditions and limitations that it is unlikely ever to be exercised. Before the SEC could even adopt a rule it would have to complete the study required above and then, as part of the rulemaking, show that no other approach could address the findings of the study. These draconian conditions would make any rule promulgated by the Commission subject to a legal challenge the agency would be unlikely to win.
  • The provisions requiring the SEC to harmonize enforcement of the standard, so that it is applied equally to brokers and advisers, have also been deleted.

Equity Indexed Annuities. The Senate conferees also approved an amendment to preempt securities regulation of equity-indexed annuities and future hybrid products that have both securities and insurance features. State securities regulators have actively pursued enforcement cases involving sales practice abuses of agents selling equity indexed annuities. These state enforcement actions are in danger of being preempted by the Harkin amendment and investors, especially seniors, would be left without the protection of vigorous securities enforcement activity.

The problems associated with the marketing of indexed annuities are a matter of record in countless news articles, government warnings, regulatory enforcement actions, and lawsuits filed by innumerable investors seeking damages for the unsuitable and fraudulent sale of indexed annuities. It was these problems that led the SEC to adopt Rule 151A after a fair and open rulemaking process.

The best way to ensure adequate investor protections in the sale of equity indexed annuities is to allow the SEC to exercise its appropriate authority over these products. State securities regulators urge you to reject this amendment as it has no place in a bill intended to strengthen investor protections.

In closing, we are extremely dissatisfied that the provisions in the Investor Protection title continue to be weakened. We urge you to reverse this trend, reject the Senate counteroffer and insist on strong protections for our nation’s investors.


Denise Voigt Crawford

NASAA President

Texas Securities Commissioner

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