The week of July 13, 2009 saw a flurry of activity that may have profound and lasting effects on the regulation of financial markets in the United States. During the week:

  • President Obama unveiled his proposal regarding financial regulatory reform.
  • SEC Chairman Mary L. Schapiro testified before the House Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises regarding "SEC Oversight: Current State and Agenda."
  • The Investors’ Working Group of the Council of Institutional Investors, a high-profile group led by two former chairmen of the SEC, published its own views on how best to reform regulation of the US financial markets.
  • Various administration officials threw their weight behind the president’s proposals, including Treasury Secretary Timothy Geithner, who delivered prepared remarks to the Senate Committee on Banking, Housing and Urban Affairs regarding the president’s proposal.
  • As reported on July 16, 2009 on FOXBusiness.com, there was circulated on Capitol Hill a list of 42 proposed alterations to various federal securities laws that the SEC believes would strengthen regulation of the financial services industry.
  • The president closed the week with further public remarks on "21st Century Financial Regulatory Reform" delivered at the White House on July 18, 2009.

Highlighted below is a brief summary of some of the more notable proposed legislative changes and other reforms and actions. If implemented, these would likely have material effects on the federal securities laws, US securities markets, and companies and individuals subject to regulation by the SEC or other regulatory agencies. Many of the items are included or referenced in the president’s financial regulatory reform proposal. Others have been proposed in one form or another in prior legislative proposals, most recently in H.R. 6513, the Securities Act of 2008, which was passed in the House of Representatives on September 11, 2008 but mired in the Senate Committee on Banking, Housing and Urban Affairs when the 110th Congress ended. Other items are set forth in the Investors’ Working Group proposal, while the remaining items are identified in Chairman Schapiro’s testimony or in the FOXBusiness.com report. At this writing, these items have not been presented to Congress in a single proposed bill or group of related bills, and we believe it is most likely that they will be attached to or incorporated in a variety of bills likely to be introduced during the next several months.

The proposed regulatory reforms now under consideration that will, if enacted or otherwise adopted, directly affect participants in the securities industry, public companies, and their legal counsel and other advisers include:

  • Securities Whistleblower Incentives and Protection – The president’s proposed reforms include provisions to authorize the SEC to pay a bounty to individuals who provide information to the agency leading to the successful enforcement of the federal securities laws and for other purposes. Chairman Schapiro noted in her testimony that the SEC receives 2,000 tips per day and has retained The MITRE Corporation to help it establish a system to more effectively identify valuable leads as well as areas of high risk for compliance examinations. Section 7623(c) of the Internal Revenue Code sets forth whistleblower payments that might be used as a model.
  • Whistleblower Protection Against Retaliation by a Subsidiary of an Issuer – Extend whistleblower protections by amending Sarbanes-Oxley Act Section 806 to make clear that subsidiaries and affiliates of issuers may not retaliate against whistleblowers, eliminating a defense raised successfully by issuers in actions brought by whistleblowers.
  • Beneficial Ownership Reporting – The SEC would like to see amendments: (i) to Section 13(d) of the Securities Exchange Act of 1934 (Exchange Act) to give the SEC the authority to accelerate the deadline for initial Schedule 13D filings; (ii) to Exchange Act Section 16(a)(2)(B) to make the Form 3 beneficial ownership reporting deadline (now the 10th day after an individual becomes an officer, director or 10-percent shareholder) the same as the two business day deadline applicable to the Form 4 reporting of changes in such person’s beneficial ownership of their public company’s stock; and (iii) to delete the requirements in Exchange Act Sections 13(d)(1), 13(d)(2), 13(g)(1), 13(g)(2) and 16(a)(1) to send initial and amended beneficial ownership reports on Schedules 13D and 13G and Section 16(a) reports (Forms 3, 4 and 5) to the issuer and the national securities exchange at which the security is traded.
  • Collateral Bars – Provide that a regulated person who violates the securities laws in one part of the industry – for example, a broker-dealer who misappropriates customer funds – should be barred from access to customer funds in another part of the securities industry. This provision was included in Section 6 of the Securities Act of 2008.
  • Nationwide Service of Subpoenas – Provide that nationwide service of process/subpoenas is available in civil SEC actions filed in federal courts, which is consistent with the SEC’s investigative powers and federal court subpoena power in criminal actions. Passed by the House in Section 19 of the Securities Act of 2008.
  • Expanded Access to Grand Jury Materials – Authorize expanded access to grand jury materials when such information is critical to SEC cooperative investigations (with potential attendant safeguards to ensure that the SEC maintains the confidentiality of the information) similar to access available to banking regulators under Federal Rule of Criminal Procedure 6(e)(3)(iii) and 18 USC §3222.
  • Increased Bases for Accounting and Auditing Regulatory Agency Cooperation – Provide the Public Company Accounting Oversight Board (PCAOB) with authority to share confidential work papers with non-US counterparts by amending Section 105(b)(5) of the Sarbanes-Oxley Act to resolve international conflicts of law issues that have been impairing the PCAOB’s ability to fulfill its statutory obligation to inspect non-US-registered public accounting firms; clarify the application of Section 106 of Sarbanes-Oxley (Production of Foreign Audit Documentation) to expand the scope of audit documentation to be produced; and provide for service of process.
  • Amendment to Right to Financial Privacy Act – Replace Exchange Act Section 21(h) with a general exemption from the Right to Financial Privacy Act, which would authorize the SEC to obtain records from financial institutions in the same manner as it does from other third-party record holders.
  • Clarification to Knowledge Requirement for Aiding and Abetting – Amend aiding and abetting provisions of federal securities statutes to clarify that the knowledge requirement can be satisfied by the recklessness standard.
  • Civil Obstruction of Justice – Authorize the SEC to bring civil actions to obtain civil remedies, including penalties, against persons who obstruct SEC investigations.
  • Aiding and Abetting Under the Securities Act of 1933 and the Investment Company Act – Since 1995, the SEC has had express aiding and abetting authority for violations of the Exchange Act and the rules and regulations thereunder. The SEC seeks the addition of similar provisions for the other securities laws to assist its enforcement program.
  • Authority to Impose Penalties in Aiding and Abetting Actions Under the Investment Advisers Act – Fix a technical anomaly or oversight in the Investment Advisers Act to explicitly allow a US District Court to impose penalties on aiders and abettors in injunctive actions.
  • Authority to Order Penalties in Cease-and-Desist Proceedings – Amend the Securities Act of 1933, the Exchange Act, the Investment Company Act and the Investment Advisers Act to give the SEC uniform authority to seek civil penalties in cease-and-desist proceedings. A similar provision was included in Section 2 of the Securities Act of 2008.
  • Clarification of the SEC’s Authority Over Persons Formerly Associated – Amend numerous provisions of the federal securities laws to make it explicit that the SEC has the authority to bring actions against persons formerly associated with a regulated or supervised entity for misconduct that occurred during that association. A similar provision was included as Section 3 of the Securities Act of 2008.
  • Clarification of Territorial Jurisdiction of the Antifraud Provisions – Clarify US extraterritorial jurisdiction under antifraud provisions of securities laws, overwriting disparate judicial tests by combining both effects and conduct tests. US courts would have jurisdiction over "conduct occurring outside the United States that has a foreseeable substantial effect within the United States."
  • Protection of Certain Privileges – Authorize the SEC to communicate with domestic and non-US securities authorities and law enforcement authorities without potential waiver of any privileges that would otherwise protect information provided or received. A similar provision was included as Section 16 of the Securities Act of 2008.
  • Elimination of Retail Price Maintenance – Repeal Section 22(d) of the Investment Company Act, which prohibits broker-dealers from competing on price when selling fund shares.
  • Illiquid Securities – Authorize the SEC to set illiquid security limits for mutual funds because of the redeemability requirement.
  • Section 205 of the Investment Advisers Act Not Applicable to State-Registered Advisers – Clarify that Section 205 of the Investment Advisers Act (performance fees and advisory contracts) does not apply to state-registered investment advisers. A similar provision was included as Section 13 of the Securities Act of 2008.
  • Recordkeeping by Custodians – Authorize the SEC to require fund and investment adviser custodians to maintain records and inspect them.
  • Elimination of Section 210(c) of the Investment Advisers Act – Eliminate a prohibition on obtaining information about an investment adviser’s clients, including hedge funds.
  • PCAOB Authority to Inspect Auditors of Broker-Dealers – Give PCAOB authority to inspect auditors of broker-dealers. This authority is included in H.R. 1212 introduced by Congressman Paul E. Kanjorski, who chairs the House Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises.
  • Enhanced Authority to Conduct Surveillance and Risk Assessment – Amend the Exchange Act, the Investment Company Act and the Investment Advisers Act to clarify that the SEC has authority to collect information for surveillance or risk assessment purposes and keep information confidential.
  • Correction of an Anomaly in the SEC’s Authority to Examine Investment Companies – Amend Investment Company Act Section 31(b) to give the SEC the same authority to examine all records of registered investment companies that it has had for other registered entities, including broker-dealers and investment advisers, since 1975.
  • Expansion of the SEC’s Streamlined Hiring Authority – Since July 2003, the SEC has had streamlined hiring authority to hire accountants, examiners and economists. The proposal would extend that authority to all agency positions in the competitive service, including industry experts. The Investors’ Working Group report is particularly critical of decreased funding of the operations of the SEC and other agencies over the past few years and recommends stable, long-term funding that, among other things, will enhance regulatory independence and ensure that regulatory agency staffing levels and expertise keep pace with the proliferation of financial products and services.
  • Authorization of Self-Regulatory Organizations (SROs) to Enforce Compliance With Final Disciplinary Sanctions – Amend the Exchange Act to permit stock exchanges and the Financial Industry Regulatory Authority (FINRA) to go to court on their own behalf to enforce compliance with fully litigated disciplinary sanctions, including fines and restitution, rather than rely on the SEC to provide enforcement under Section 21(e)(1). To date, courts have held that SROs lack this authority.
  • Fair Fund Amendment – Amend Sarbanes-Oxley Act Section 308 to authorize the SEC to place penalties in a fair fund for the benefit of victims even in situations in which the SEC has not obtained disgorgement from the defendant (e.g., because the defendant did not benefit from its securities law violation that harmed investors).
  • Control Person Liability – Clarify that the SEC may rely on Exchange Act Section 20(a) to seek to impose joint and several liability on control persons. This would override recent court decisions that held only private parties could rely on Section 20(a).
  • Regulation of Stock Lending – Expand the SEC’s authority to regulate the stock loan market, potentially enhancing market transparency, limiting collateral exposure/risk and governing potential conflicts of interest in the stock loan and stock borrowing process.
  • Equal Treatment of SRO Rules – Amend Exchange Act Section 29(a), which currently voids any condition, stipulation or provision binding any person to waive compliance with any provision of the Exchange Act and any stock exchange rule. The proposed change would apply this requirement to any SRO’s rule instead of just any stock exchange rule.
  • Lost and Stolen Securities Program – Expand the scope of securities that must be reported to the SEC or its designee under the Lost and Stolen Securities Program. A similar provision was included as Section 11 of the Securities Act of 2008.
  • Fingerprinting Personnel – Require the personnel of registered securities information processors, national securities exchanges and national securities associations to be fingerprinted. A similar provision was included as Section 12 of the Securities Act of 2008.