On March 5, 2013, Heath Abshure, Arkansas Securities Commissioner and President of the North American Securities Administrators Association (NASAA), along with Steve Irwin, NASAA President-Elect and Pennsylvania Banking and Securities Commissioner, outlined an aggressive legislative agenda by which NASAA will seek specific action in the 113th Congress. NASAA is the membership organization for state securities administrators in all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, and the provinces and territories of Canada and Mexico. It speaks as the unified advocate of “Main Street” investor protection that is the historic mission of state securities regulators. The NASAA legislative agenda presented for the 113th Congress comes in the wake of the financial crisis, the Dodd-Frank Act, and most recently, passage of the federal JOBS Act. The JOBS Act in particular has led to concerns among state securities regulators over its weakened investor protection provisions and the potential for abuse it is perceived as creating.

The NASAA legislative agenda for the 113th Congress calls for action guided by five core principles:

  • Promoting sustained investor confidence by ensuring market transparency, enhancing investor education, and imposing strong penalties;
  • Policies intended to spur capital formation must balance the need to maintain investor protection;
  • Completing implementation of investor protections in the Dodd-Frank Act by the conclusion of the 113th Congress;
  • Regulation is an inherently public function that should be performed by government regulators, not outsourced to an industry self-regulatory organization; and
  • State authority should not be pre-empted, and should instead be expanded.

Shaped by these core principles, NASAA has identified specific Congressional actions described below.

To Promote “Market Accountability”

NASAA is calling upon the 113th Congress to pass legislation that would promote trust in the U.S. financial markets and bolster market confidence. Referring not only to the financial crisis, but also to scandals involving Ponzi schemes, insider trading and market manipulation, state securities regulators want to see civil money penalties which the U.S. Securities and Exchange Commission (SEC) may seek from violators of the federal securities laws increased -- linking the size of penalties to the amount of harm and investor losses. They also urge that Congress establish a private right of action against a person that provides substantial assistance in violations of the federal securities laws. Creating a private right of action for aiding and abetting would statutorily overturn a decision of the U.S. Supreme Court several years ago that denied such a private right for want of a statutory basis. The NASAA agenda also calls upon Congress to amend federal laws to ensure that all investors have a reasonable avenue to obtain recovery; to empower states to provide investors with choices for dispute resolution; and to provide more resources devoted to protecting older investors.

To Promote Greater Transparency and Systemic Stability, and to Reduce Market Volatility

With its historic focus on “Main Street” investors, NASAA is calling for Congressional action in several areas, including action that would address the negative impact of dramatic changes in U.S. securities markets brought on by “opaque” market activities, focusing specifically on the emergence of “dark pools,” high frequency trading and the activities of hedge funds. NASAA is calling upon Congress to “level the playing field” for participants in equity markets, and to ensure that access to information by sophisticated, speculative investors does not harm or unfairly disadvantage retail investors. NASAA urges that retail investors have the right to know what factors drive the volatility in U.S. equity markets so as to be able to understand, and judge, the risk it poses, and as part of its action agenda calls upon Congress to investigate “opaque market actors” and to promote greater market transparency.

Complete Implementation Of Dodd-Frank Investor Protection Provisions

Implementation of the Dodd-Frank Act was substantially left to rulemaking by the SEC and other federal agencies. The Act contains more than 90 provisions that require SEC rulemaking, and dozens of other provisions that give the SEC discretionary rulemaking authority. For example, the Act empowers the SEC to expand the fiduciary standard of care currently applicable to investment advisers to broker-dealers that provide investment advice. Although a mandated study was completed, no actual rulemaking has emerged. In other rulemaking areas in the 21/2 years since enactment of Dodd-Frank, NASAA argues that regulatory analytical requirements have delayed and frustrated the ability of regulators to actually promulgate rules. As part of its legislative agenda, NASAA is calling upon the 113th Congress to ensure that dilatory or redundant regulatory analytical requirements are not successfully employed to delay or disrupt full implementation of Dodd-Frank and investor protection laws generally. NASAA will also call upon Congress to encourage the SEC to exercise its specific rulemaking authority under Dodd-Frank to propose or adopt rules prohibiting or conditioning pre-dispute arbitration agreements mandating arbitration of disputes between securities broker-dealers and their customers.

Ensure All Investors Are Protected When Receiving Individualized Investment Advice

The Dodd-Frank Act significantly increased the states’ regulatory role in regard to investment advisers by transferring to the states oversight of small and midsized advisers. The states have since executed effective regulatory oversight programs, while at the same time NASAA contends that the SEC has struggled to adequately examine the large, federally registered investment advisers, creating a “regulatory gap.” NASAA is calling upon the 113th Congress to address that gap by providing the SEC with the resources needed to do the job, or a mechanism to gain these resources. Congress should, for example, authorize the SEC to assess “user fees to fund improved oversight of federal covered advisers,” the NASAA contends.

NASAA has aggressively advocated against the creation of a self-regulatory organization for state-regulated investment advisers, and will continue to urge the 113th Congress to reject proposals to establish a self-regulatory organization by which to “outsource” regulatory responsibility. It instead calls upon Congress to enable federal regulators with the resources they need to effectively monitor the firms and adviser representatives under their jurisdiction.

Provide The Strongest Protection To “Main Street” Investors

State securities regulators are often referred to as “the cops on the beat,” protecting “Main Street” investors from fraud and abuse. In the 113th Congress, NASAA will call for legislation to enhance the ability of states to protect investors specifically in regard to small securities offerings. State securities regulators have voiced concerns that “mom and pop” investors may assume disproportionate risks in small and emerging business investments, yet should be permitted to make those investments provided they understand the risk involved and have the financial resources to absorb any losses. In this context, state regulators have voiced concerns that “crowdfunding” to be permitted under the JOBS Act presents a substantial risk of fraud. Indeed, the No. 1 “new threat” to investors identified by NASAA in 2012 was crowdfunding and internet offers, and the NASAA legislative agenda calls upon Congress to pass legislation to permit reasonable civil recovery for fraud associated with crowdfunding and small offerings generally.

To that end, NASAA will also call upon Congress to defer to the states in prescribing policies to regulate small offerings, empowering the states to exercise not only the enforcement powers they now have, but also to exercise rulemaking authority for the regulation of small securities offerings that is currently exercised by federal regulators under a bifurcated rulemaking and enforcement structure that has made overall regulation inefficient and sometimes dysfunctional. Moreover, NASAA will call upon Congress to refrain from any further pre-emption of state investor protection authority, and in particular, to support continuing progress and demonstrated success of coordinated state action when circumstances require uniformity.

Looking Ahead

NASAA’s 113th Congress legislative agenda on behalf of state securities regulators follows the September 2012 announced determination to protect and expand state jurisdiction and influence in balancing investor protection and capital formation (Calfee FirstAlert, September 19, 2012). “We get aggressive,” declared NASAA’s President at the time, and the initiatives announced on March 5, 2013, are all that. However, the reality of the 113th Congress may simply be that there is little appetite, and even less bipartisan sense of need, to undertake any meaningful regulatory structural changes beyond what has yet to be fully implemented under the Dodd-Frank Act and the JOBS Act. As to the JOBS Act, for example, the NASAA agenda calls upon Congress to deal with deterioration of investor protections to come with “crowdfunding” and the elimination of the ban on general advertising and solicitation in certain private offerings, but in both cases mandated rulemaking by the SEC has not yet happened and there is no accurate prediction of when rules may be in place.

Prospects for meaningful Congressional response in 2013 aside, the announced NASAA legislative agenda plainly evidences the newly aggressive effort by state securities regulators to heighten their profile and ensure full participation not only in shaping the future of the dual federal/state regulatory structure in the United States, but even more importantly, in developing the substance of regulation on a national scale based on “core principles” that transcend jurisdictional divides.