Wolters Kluwer Law & Business Outlines Investor Protections Under Dodd-Frank Act
Friday, August 6, 2010
Posted by: Boomer Consulting, Inc.
Throughout the massive Dodd-Frank Act, numerous provisions are designed to protect retail investors, generally through the expanded powers – and funding – provided to the Securities and Exchange Commission (SEC), according to Wolters Kluwer Law & Business. Wolters Kluwer Law & Business is a leading provider of research information and software solutions in key specialty areas for legal and business professionals, with products under the CCH and Aspen names (wolterskluwerlb.com).
“The Act modifies, enhances and streamlines the powers and authorities of the SEC to hold securities fraudsters accountable and better protect investors,” said Wolters Kluwer Law & Business Principal Securities Law Analyst James Hamilton, JD, LLM, one of the lead analysts for Wolters Kluwer Law & Business’ Dodd-Frank Wall Street Reform and Consumer Protection Act: Law, Explanation and Analysis.
Specifically, the Dodd-Frank Act includes dozens of amendments to better protect retail investors, including requiring the SEC to conduct a study on fiduciary duty; authorizing the SEC to limit or prohibit mandatory brokerage agreement pre-dispute clauses; establishing an investor advocate within the SEC; expanding whistleblower protections; raising the Securities Investor Protection Corporation’s (SIPC) maximum cash advance amount to better protect investors; and several other expanded SEC powers.
“These are reforms geared at really helping make sure the Main Street investor has confidence that their voice is being heard on Wall Street,” said Wolters Kluwer Law & Business Senior Securities Law Analyst Peter Rasmussen, JD.
Below, Wolters Kluwer Law & Business securities law analysts summarize these provisions most likely to affect retail investors.
Protecting Main Street Investors
Conduct a fiduciary duty study – The Dodd-Frank Act instructs the SEC to conduct a study to evaluate the effectiveness of the existing standards of care for brokers and investment advisers and whether there are regulatory gaps in the protection of retail customers with regard to the standards. After the SEC conducts a study, it may issue new rules requiring every financial intermediary who provides personalized investment advice to retail customers has a fiduciary duty to the investor.
“Lawmakers are concerned that investors do not understand the legal distinctions between broker-dealers and investment advisors and do not realize that the two groups are held to different standards of care,” said Hamilton . “Regulation coming out of the study would likely be designed to create uniform fiduciary standards to ensure that regardless of the intermediary, the rules apply evenly and the consumers’ interest in each instance is put ahead of the intermediary’s interest.”
The SEC is directed to undertake the fiduciary study, and must submit a report on the study to Congress describing its findings and conclusions and recommendations within six months from the enactment of the Dodd-Frank Act.
Restrict mandatory predispute arbitration clauses – Many retail investors may not be aware that brokerage agreements they enter into commonly include a mandatory requirement to use predispute arbitration. The Dodd-Frank Act authorizes the SEC to limit or prohibit the mandatory predispute arbitration clauses so that investors can choose arbitration or the courts.
“Some people argue that the arbitration system favors brokers. However, that may not always be the case and because taking a case to court can be expensive, investors want the right to choose which is the better route for them,” said Rasmussen.
To act on mandatory arbitration provisions, the Commission must determine that any prohibition, condition or limitation is in the public interest and serves to protect investors.
Establish an investor advocate within the SEC – The Dodd-Frank Act includes a financial literacy and underserved investors provision. As part of this, the Act strengthens the ability of the SEC to better represent the interests of retail investors by creating an Office of the Investor Advocate within the SEC. This advocate will assist retail investors in resolving significant problems with the SEC or the self-regulatory organizations (SRO); identify where investors would benefit from changes in SEC or SRO policies; and identify problems that investors have with financial service providers and investment products. The investor advocate will recommend policy changes to the SEC and Congress in the interests of investors.
“This marks the first time that the average investor has a place to go within the SEC to be heard,” said Hamilton.
Expand whistleblower protections – In addition to creating a new Office of the Investor Advocate, the legislation also creates an office to administer the new whistleblower bounty program. Under this provision, the SEC is directed to reward whistleblowers who provide the SEC with information on securities law violations that result in monetary sanctions exceeding $1 million. It also provides additional protections from retaliation for whistleblowers and expands payments of rewards to information that leads to the successful enforcement of any judicial or administrative action brought by the SEC under all provisions of the securities laws. It also amends the whistleblower protections of the Sarbanes-Oxley Act to both parent companies and their subsidiaries and affiliates if their financial information is included in the consolidated financial statements of the parent company.
"These whistleblower changes are extremely significant," said Rasmussen. He noted that employees often risk their livelihoods to bring misconduct allegations, and "the prospect of a large financial reward and expanded safeguards against employer retaliation may encourage more employees with knowledge of unlawful or improper conduct to come forward."
Deadlines for enactment of whistleblower provisions vary, but generally fall within 270 days of enactment of the Dodd-Frank Act.
Raise cash reserve of Securities Investment Protection Corporation (SIPC) – Similar to the role of FDIC when a bank fails, SIPC offers a recourse if a brokerage firm fails owing customers cash and securities that are missing from the customer accounts. Under the new law, SIPC’s maximum cash advance amount is raised to $250,000 to bring the program in line with the protection provided by the FDIC.
“This is a response to resolve an issue made apparent from the Madoff fraud,” said Hamilton. He added that the law also includes other related reforms, such as authorizing the Public Company Accounting Oversight Board (PCAOB) to examine the auditors of broker-dealers and increase the credits line of the U.S. Treasury from $1 billion to $2.5 billion to support the work of SIPC.
Additional SEC investor protections – Several other provisions of the Dodd-Frank Act also will increase investor protections either directly or indirectly. For example, for the first time ever, the over-the-counter derivatives marketplace will be regulated and hedge funds will have to register with the SEC. Additionally, the SEC will have the authority to impose collateral bars on individuals in order to prevent wrongdoers in one sector of the securities industry from entering another sector.
The Dodd-Frank Act also facilitates the ability of the SEC to bring actions against those individuals who aid and abet securities fraud and also provides new authority of the SEC and the Justice Department to bring civil or criminal law enforcement proceedings involving transnational securities frauds.
About Wolters Kluwer Law & Business
Wolters Kluwer Law & Business is a leading provider of research products and software solutions in key specialty areas for legal and business professionals, as well as casebooks and study aids for law students. Its major product lines include Aspen Publishers, CCH, Kluwer Law International and Loislaw. Its markets include law firms, law schools, corporate counsel, health care organizations, and professionals requiring legal and compliance information. Wolters Kluwer Law & Business, a unit of Wolters Kluwer, is based in New York City and Riverwoods, Ill. Wolters Kluwer is a market-leading global information services company.