NASAALegislativeAgenda forthe113thCongress

March5,2013

NorthAmericanSecuritiesAdministratorsAssociation|www.nasaa.org 1

ExecutiveSummary

TohelpMainStreetinvestorsandthenationrecoverfromtherecessionand financialcrisis,NASAAurgesthe113thCongresstofocusitsoversightandlegislative energiesoneffortstopromotesustainedinvestorconfidenceinU.S.capitalmarkets.

Topromotemarketaccountability,Congressshouldpasslegislationthatwouldincrease thecivilmonetarypenaltiestheSECmayseekbylinkingthesizeofpenaltiestotheamount ofharmandinvestorlosses,andestablishaprivaterightofactionforaidingandabetting violationsofthefederalsecuritieslaws.Inaddition,Congressshouldenactlegislation empoweringstatestoprovideinvestorswithchoicesfordisputeresolution,andincreasing resourcesdevotedtoprotectingolderinvestors.NASAAfurtherurgesCongresstoamend federallawsgoverningsecuritieslitigationtoensurethatallinvestors,especiallythose investingsmallamounts,haveareasonableavenuetoseekrecovery. Topromotegreatertransparencyandsystemicstability,andtoreducemarket volatility,NASAAurgesCongresstoenactlegislationtoincreaseinformationavailableto retailinvestors,includingamendmentoftheSarbanesOxleyActtomakePCAOB disciplinaryproceedingsopentothepublic.NASAAencouragesCongresstocarefully investigateandscrutinizeopaquemarketactivities,includingthoseofdarkpools,hedge fundsandhighfrequencytrading.Inthisregard,Congressshouldleveltheplayingfield amongmarketparticipantstoensurethataccesstoinformationbysophisticatedand speculativeinvestorsdoesnotunfairlydisadvantageorharmretailinvestors. ToensureinvestorprotectionprovisionsofDoddFrankareimplemented,NASAA opposeslegislationthatwouldimposeexcessiveregulatoryanalyticalrequirementson independentfederalagenciesengagedinrulemaking.NASAAappreciatestheimportanceof efficientregulation;however,unreasonableregulatoryrequirementsmayhavethe deleteriouseffectofweakeningvitalfederalinvestorprotections.Billswhichmandate numerousnewcostbenefitanalyses,orwhichvestregulatoryanalyticalauthorityover independentagencyruleswiththeWhiteHouseOfficeofManagementandBudget,could fracturetheSECscapacitytoregulatesecuritiesmarketsandprotecttheinvestingpublic. Toensureallinvestorsareprotectedwhenreceivingindividualizedinvestmentadvice, NASAAopposeslegislationthatwouldauthorizetheSECtodesignateanSROforinvestment advisers.Ratherthanoutsourcingresponsibilityforinvestmentadviseroversight,Congress shouldprovidetheSECwithsufficientresourcestoexamineallfederallyregistered investmentadvisers.Accordingly,NASAAcallsonCongresstoenactlegislationauthorizing theSECsOfficeofComplianceInspectionsandExaminationstocollectuserfeesfromthe investmentadvisersitexamines.NASAAfurtherurgesCongressandtheSECtoexpandthe fiduciarystandardofcarecurrentlyapplicabletoinvestmentadviserstobrokerdealers whoprovidepersonalizedinvestmentadvice. ToprovidethestrongestprotectionforMainStreetinvestors,NASAAurgesCongressto refrainfromanyfurtherpreemptionofstateinvestorprotectionauthority.Moreover,to ensurethatmomandpopinvestorsdonotassumedisproportionateinvestmentrisk,state securitiesregulatorssupportpoliciesthatallowinvestorstoinvestinsmallbusinesses, includingemergingbusinesses,providedtheyunderstandtheriskinvolvedandhavethe financialabilitytoabsorbattendantlosses.

CorePrincipleOne:PromoteSustainedInvestorConfidencebyEnsuringMarketTransparency, EnhancingInvestorEducation,andImposingStrongPenalties CongressShouldStrivetoAchieveMarketTransparencyandLevelthePlayingField forInvestors CongressShouldStrengthenPenaltiesForSecuritiesLawViolations CongressShouldStrengthenPrivateRemediesforVictimsofFraud CongressShouldIncreaseResourcesDedicatedtoProtectingSeniorsandOther VulnerableAmericans CorePrincipleTwo:PoliciesIntendedtoSpurCapitalFormationMustBalancetheNeedto MaintainInvestorProtection CongressMustStrengthenInvestorProtectionsthatWereWeakenedbytheJOBS ActtoMinimizetheActsEnormousPotentialforAbuse CongressShouldMandatetheFilingofFormDinPrivateSecuritiesOfferings ExemptfromRegistrationUnderRule506 CongressShouldAmendtheSecuritiesExchangeActof1934toAllowforaPrivate CivilActionAgainstaPersonthatProvidesSubstantialAssistanceinViolationof SuchAct CorePrincipleThree:SupportStrongandCompleteImplementationofInvestorProtectionsin theDoddFrankActbytheConclusionofthe113thCongress CongressShouldUrgetheSECtoImposeaUniformFiduciaryStandardonFinancial ProfessionalsWhoOfferPersonalizedInvestmentAdvice ImplementationofInvestorProtectionProvisionsintheDoddFrankActMustNot beSubjecttoRedundantRegulatoryAnalysesRequirements CongressShouldTakeStepstoImprovetheFairnessoftheSecuritiesArbitration Process CongressShouldIncreasetheTransparencyofPCAOBDisciplinaryHearingsand RelatedProceedings CorePrincipleFour:RegulationisanInherentlyPublicFunctionthatShouldbePerformedby GovernmentRegulators,notOutsourcedtoanIndustrySelfRegulatoryOrganization CongressShouldAuthorizetheSECtoAssessUserFeestoFundImproved OversightofFederallyRegisteredInvestmentAdvisers NASAAVigorouslyOpposestheCreationofanSROforStateRegulatedInvestment Advisers CorePrincipleFive:StateAuthorityShouldNotBePreempted,andShouldInsteadBeExpanded CongressShouldDefertotheStatesinPrescribingPoliciestoRegulateSmall Offerings,WhichStatesareMostCapableofPolicing StatesMustbePermittedtoPreserveandImprovetheirCapacitytoUndertake CoordinatedActionwhenCircumstancesRequireUniformity

TABLEOFCONTENTS

CorePrincipleOne:PromoteSustainedInvestorConfidencebyEnsuring MarketTransparency,EnhancingInvestorEducation,andImposing StrongPenalties

TrustinthefinancialmarketsisoneofAmericasgreatestcompetitiveadvantages, drawingcapitalinvestmenttobusinessesandcreatingarobusteconomicsystemthatis fairtoall.ThefinancialcrisisandnumerousrecentscandalsinvolvingPonzischemes, insidertradingandmarketmanipulationhaveshakeninvestorconfidence.NASAA considersitimperativethatthe113thCongresstakedecisivestepstobolstermarket confidenceandtherebylayafoundationforsustainedeconomicgrowth. CongressShouldStrivetoAchieveMarketTransparencyandLevelthePlaying FieldforInvestors Thestatutoryandregulatoryframeworkfortheoffer,saleandpurchaseof securitiesisdesignedtoenhanceinvestorconfidencethroughfulldisclosure.Informed investorspromoteconfidenceinthemarketthroughdiscerninginvestmentdecisions. Recentyearshaveseentheproliferationofnewandcomplexfinancialproductsin theglobalmarketplace.Asmorecomplicatedsecuritiesproductsenterthemarket, transparencyregardingtheseproductsiscritical,asbothameansofdeterringfraudandas awaytohelpensurethatinvestorsdonotassumeinappropriaterisk.Formarketsto rationallyrespondtothesenewproducts,fulldisclosureandtransparencyareessential. NASAAbelievesthattransparencymakesmarketsmoreefficientandreduces opportunitiesformarketmanipulationandothertypesofinvestorabuse.Accordingly, NASAAwillworkwiththe113thCongresstopromotegreatermarkettransparency. CongressShouldInvestigateandScrutinizeOpaqueMarketActivities, IncludingthoseofDarkPools,HedgeFunds,andHighFrequencyTrading Statesecuritiesregulatorsareconcernedthatadvancesintechnologyandother factorshavemadeitincreasinglypossibleforsophisticatedmarketparticipantshedge funds,darkpools,highfrequencytraders,andotherstoidentifyandexploit informationalasymmetriesinordertomaximizeprofits,oftenattheexpenseofretail investors.Inthewakeofthe2009FlashCrash,theBATSIPOandtheKnightCapitalfat fingerincident,ithasbecomeapparentthatU.S.securitiesmarketsareexperiencing unprecedentedvolatility,whichhasyettobesatisfactorilyexplained. MainStreetinvestorshavetherighttoknowwhatfactorsaredrivingthisvolatility, andwhat,ifanything,financialregulatorsaredoingtoprotectthemfromitspotentially harmfuleffects.Congresshastheauthoritytoinvestigateopaquemarketactors,and NASAAurgesCongresstomakefullandexpeditioususeofthisauthoritytobringgreater transparencytotheseareas.Theinvestingpublicshouldbeabletounderstandthenature ofthisphenomenonandjudgeitsrisk. 4

NASAAurgesthe113thCongresstocarefullyinvestigateandscrutinizeopaque marketactivities.Onemarketphenomenonthatisofparticularconcerntostatesecurities regulatorsisHighFrequencyTrading(HFT),whichreferstotheuseofpowerfulcomputers tobuyandsellenormousamountsofsecuritiesatincrediblyhighspeeds.HFTappearsto havepotentiallydangerousimplicationsforordinarymomandpopinvestors. 1 Inthis regard,Congressgoalshouldbetoleveltheplayingfieldamongmarketparticipantsby ensuringthataccesstoinformationandactivitiesbysophisticatedandspeculative investorsdonotunfairlydisadvantageorharmretailinvestors. CongressShouldStrengthenPenaltiesForSecuritiesLawViolations Theeconomicrecessionandturmoilofthelasthalfdecadewascausedinsignificant measurebyfraudulentfinancialactivity.Widespreadmortgagefraud,unscrupulousfixed incomedepartments,andaccountingfakeryallcontributedtothefinancialmeltdown. Frauddestroystrustinthefinancialsystem,whilefairnessandintegritybuildit. Forenforcementtobeaneffectivedeterrent,theremustbearealriskof punishmentforanybrokeragefirmorbankthatmisleadsinvestorsorotherwise perpetratesfraudandabuse.Scandalsinvolvingsecuritiestransactionsundermineinvestor confidence,whethertheyariseintheformofinsidertrading,misrepresentationsin connectionwithsecuritiesofferings,selfdealingthroughundisclosedrelatedparty transactionsorothermethods.Aggressiveadministrative,civilandcriminalenforcement activitiesincludingeffortstodeterwrongdoing,todisgorgeillgottengainsfrom wrongdoers,and,wherepossible,toproviderestitutionforaggrievedinvestorsisthe onlyprovenantidote. Inthe112thCongress,NASAAsupportedTheStrongerEnforcementofCivil PenaltiesAct, 2 sponsoredbySenatorsJackReed(DRI)andCharlesGrassley(RIA),which wouldhaveincreasedthemonetarypenaltiesinadministrativeandcivilactionsinvolving securitieslawviolations.Italsosubstantiallyraisedthefinancialstakesforrepeat offenders,andlinkedpenaltiestothescopeofharmandassociatedinvestorlosses.Inthe 113thCongress,NASAAwillintensifyitseffortstosecuretheenactmentofthisorsimilar legislation. CongressShouldStrengthenPrivateRemediesforVictimsofFraud Congressionalactiontoextendprivateremediestovictimsofsecuritiesfraudis particularlyurgentinlightofSECChairmanElisseWaltersannouncementonJanuary18, 2013,thattheSECwillsoonproceedwithrulemakingstoimplementtheJumpstartOur BusinessStartupsAct(JOBSAct),whichwilllegalizeequitycrowdfundingandallowthe advertisingofprivateplacements. 3 TheJOBSActwillgreatlyincreasethenumberofsmall investmentsinsmall,privatecompanies.Asaresult,asingleinstanceoffraudmighteasily resultindamagestoalargenumberofpeople.Atthesametime,however,thelossesmay besmallenoughthataprivatelegalactionbyasinglevictimisnoteconomicallyfeasible.

Toensurethatvictimsofsecuritiesfraudwillhaverecourse,NASAAurgesthe113th Congresstoexploreamendingfederallawtoensurethatallinvestors,especiallythose investingsmallamounts,haveareasonableavenuetoseekrecovery.Failuretoprovide recoursetodefraudedinvestorsmayhaveachillingeffectonfutureinvestmentinthese offeringsandcapitalraisingeffortsgenerally. WhileNASAAremainscommittedtoensuringthatarbitrationforumsand procedurescreateanevenplayingfield,NASAAalsobelievesthatarbitrationshouldnotbe thesoleforumavailabletoaggrievedinvestors.Aggrievedinvestorsshouldbeabletoseek reliefinanyforumandnotbeforcedintoanexpensivearbitrationthatcouldforeclosethe abilitytoobtainrelief.Accordingly,statesecuritiesregulatorsurgethe113thCongressto takestepstoensurethatprivateremediesforsecuritiesfraudsarestrengthenedand expanded. CongressShouldIncreaseResourcesDedicatedtoProtectingSeniorsand OtherVulnerableAmericans Arobuststatutoryframeworkforinvestorprotectioniscriticaltoprotectingseniors andothervulnerablecitizenswhoareroutinelytargetedbypredatoryconartists. Shockingly,1outof5Americansovertheageof65hasbeenavictimoffinancial exploitation,andtheproblemisgrowing. 4 Tocombatsuchseniorexploitation,thestates havebandedtogethertodevelopinnovativefraudpreventionprogramsandtocooperate closelyonmajorfraudinvestigations.Statesecuritiesregulatorsencouragethe113th Congresstodoitspartbyincreasingresourcesandtoolsdedicatedtoprotectingseniors andothervulnerablecitizens. OneimportantwaythatCongresscanprovidegreaterprotectionforseniorsisby enhancingandrefiningthepenaltiesforthosewhodefraudthem.Inthe111thand112th Congress,NASAAsupportedTheSeniorInvestorProtectionEnhancementAct, 5 which soughttoimposehigherpenaltiesonthosewhotargetseniorswithabusivesalespractices. Inthe113thCongress,NASAAwillcontinuetopushforenactmentofthisimportant legislation. NASAAalsointendstocallonCongresstofundtheSeniorInvestorProtectiongrant programtobeestablishedbytheOfficeofFinancialEducationattheConsumerFinancial ProtectionBureau.Thepurposeofthisprogram,whichwasauthorizedbytheDoddFrank WallStreetReformandConsumerProtectionAct(DoddFrankAct),istoprovidegrantsto statestofundadditionalresources,educationmaterialsandstaffdedicatedtocracking downonmeaninglesstitlesusedbyunscrupulousinvestmentprofessionalstomislead investorsabouttheirexpertiseinseniorfinancialissues.Statesecuritiesregulators stronglysupporteditspassageandwillworktoseethattheannualauthorizationforthese grantsisfundedbyCongress. Finally,inordertoprovidegreaterprotectiontoseniorsandothervulnerable Americans,Congressshouldnotcompromiseinvestorprotectionsinitseffortstoexpand 6

privacyprotectionsforusersofsocialanddigitalmedia.AsCongressconsidersupdating the1986ElectronicCommunicationsPrivacyActtorefineandexpandprivacyprotections forAmericansintheageofsocialmedia,NASAAwillworkwithmembersoftheHouseand SenateJudiciaryCommitteestoensurethatanysuchlegislationdoesnotinadvertently compromiseinvestorprotections,includingtheobligationofsecuritiesfirmstosupervise, record,andmaintainbusinessrelatedcommunicationsasrequiredbyregulators. Securitiesfirmsmustbeabletoaccesssocialanddigitalmediaaccountsinvolvingbusiness communications;otherwise,firmsmaynotbeabletodetectseriousproblemsthatput consumersatrisk,includingmisleadingclaimsbyanemployee;insidertrading,Ponzi schemesandotherfraudulentactivity;andinappropriateconductsuchasthesellingof investmentproductsthatthefirmhasnotapproved.

CorePrincipleTwo:PoliciesIntendedtoSpurCapitalFormationMust BalancetheNeedtoMaintainInvestorProtection
Thefacilitationofaccesstocapitalfornewandsmallbusinessesisaworthygoal. Smallbusinesses,includingstartupswithhighgrowthpotential,continuetohavedifficulty obtainingaccesstocapital,andpolicymakersarejustifiedinexploringnewandinnovative waystohelpthem.However,ifCongresslegislatesinthisarea,itisimperativethatitdoso inacarefulanddeliberatefashionthatbalancesthegoalsofcapitalformationwithinvestor protection. Statesecuritiesregulatorssupporttheideathattheopportunitytoinvestinsmall businesses,includingemergingbusinesses,shouldexistforallinvestorsaslongasthey understandtheriskinvolvedandhavethefinancialabilitytoabsorbattendantlosses. However,smallandemergingbusinesses,bydefinition,carryextremerisk,anditisvery difficultformostretailinvestorstoevaluateorpricethisrisk.Indeed,statisticsshowthat roughly50percentofsmallbusinessesfailwithinthefirstfiveyears. 6 Moreover,within thisriskysectorofsmallbusinessinvestment,startupbusinesseswithoutatrackrecord areparticularlyspeculativeandsubjecttofailure. Ifeffortstopromoteaccesstoinvestmentcapitalforsmallbusinessesaretobe successful,investorsneedtobeconfidentthattheyareprotectedtothefullestextent possiblefromfraudandundisclosedrisk.Suchassuranceencouragesinvestment,andin turn,increasestheavailabilityofinvestmentcapital.Conversely,hastyandillconsidered deregulationofpublicsecuritiesofferings,evenwhenundertakenwiththebestintentions, canhavedevastatingconsequencesforinvestorsandbusinessesalike.Intheabsenceof adequateattentiontoinvestorprotection,policiesthatareintendedtoaidsmallbusinesses byhelpingthemattractcapitalarelikelytohavepreciselytheoppositeeffect. CongressMustStrengthenInvestorProtectionsthatWereWeakenedbythe JOBSActtoMinimizetheActsEnormousPotentialforAbuse The112thCongresspassedtheJOBSActinanefforttomakeiteasierforsmalland emergingcompaniestoraisecapitalandgrow.Indoingso,manyMembersofCongress

expressedconcernaboutthedeteriorationoflongstandinginvestorprotections.The 113thCongressshouldtakestepstoenhanceinvestorprotections;otherwise,investors willdistrustthemarket,andtheintenttoincreasecapitalforsmallbusinesseswillbe thwarted. TheremovalofthebanongeneralsolicitationinofferingsconductedunderRule 506,asmandatedinTitleIIoftheJOBSAct,dismantlesanimportantinvestorprotection. NASAAbelievesthateliminationofthebanwarrantsacorrespondingincreaseindollar thresholdsintheaccreditedinvestordefinition,andthatCongressshouldmandatesucha change.Congressalsoshouldensurethatclearguidanceisgiventoissuersregardingthe reasonablestepsthatarenecessarytoverifythatpurchasersareaccreditedinvestors.In addition,aFormDshouldbefiledpriortotheuseofanygeneralsolicitation,and reasonablerestrictionsshouldbeplacedonadvertising,includingperformanceadvertising forprivatefunds. SECrulemakingoncrowdfundingofferings,asauthorizedunderTitleIIIoftheJOBS Act,shouldsimilarlyreflectauniformandbalancedregulatoryapproach.For crowdfundingtobesuccessful,regulationsmustcreateaframeworkthatminimizes unnecessaryburdensonsmallbusinesseswhilesimultaneouslyinsulatinginvestorsfrom fraudandabuse.Giventhepotentialforhugenumbersofunsophisticatedinvestorsto participateincrowdfundedofferings,andinviewoftheanticipatedlackofregulatory oversightthesepublicofferingswillreceive,NASAAbelievesthathighstandardsmustbein placeforissuersandfundingportalsorintermediaries. CongressShouldMandatetheFilingofFormDinPrivateSecuritiesOfferings ExemptfromRegistrationUnderRule506 InSection926oftheDoddFrankAct,Congresssetforthaprocesstodisqualify felonsandotherbadactorsfromconductingprivatesecuritiesofferingsunderRule506 ofRegulationD.Theadoptionofadisqualificationprovisionwouldprovidemuchneeded investorprotectionandwouldnotbedetrimentaltolegitimateissuers.Recidivists rightfullyshouldnotbeallowedtoconductprivatesecuritiesofferingsunderthesafe harborexemptionprovidedbyRule506. NASAAwelcomesthischange,especiallyafterstateregulatorswerepreempted undertheNationalSecuritiesMarketsImprovementAct(NSMIA)in1996fromweeding outrecidivistsfromRule506offerings.InthepostNSMIAera,smallbusinessissuersare usingRule506almostexclusivelyforRegulationDofferings.Althoughproperlyusedby manylegitimateissuers,theexemptionhasbecomeanattractiveoptionforindividuals whowouldotherwisebeprohibitedfromengaginginthesecuritiesbusiness.Today,the exemptionisbeingmisusedtostealmillionsofdollarsfrominvestorsthroughfalseand misleadingrepresentationsinofferingsthatprovidetheappearanceoflegitimacywithout anymeaningfulscrutinyofregulators.NASAAbelievesthatCongressshouldrequiresimilar disqualificationprovisionstoallotherofferingsmadeunderRegulationD.Thiswillassist statesinkeepingrecidivistsfromsellingsecuritiestoresidentsoftheirstates. 8

CongressalsocanprotectinvestorsbyrequiringthefilingofaFormDforeachRule 506offering.Undercurrentfederalsecuritieslaw,filingaFormDwiththeSECandstate securitiesregulatorsisnotaconditiontotheavailabilityoftheRule506exemption.Infact, becausefilingaFormDcurrentlyisnotaconditionofanyRegulationDexemptions,itis hardforregulatorsandthepublictousethefilingornonfilingofaFormDasanindicator ofsecuritieslawcompliance.Thefactthatfilingisnotcurrentlyaconditionofthe exemptionsatthefederallevelalsocreatesconfusionastothenecessityoffilingwiththe SECaswellasthestatesandservesasaroadblocktoenforcementefforts. CongressShouldAmendtheSecuritiesExchangeActof1934toAllowfora PrivateCivilActionAgainstaPersonthatProvidesSubstantialAssistancein ViolationofSuchAct The113thCongressshouldenactTheLiabilityforAidingandAbettingSecurities ViolationsAct. 7 Thisimportantlegislation,firstproposedin2009byformerSenatorArlen Specterandreintroducedin2010byRepresentativeMaxineWaters,wouldamendthe 1934Acttoestablishaprivaterightofactionforaidingandabettingviolationsoffederal securitieslaws. Congressalwayshasrecognizedprivateactionsasameansofachievingtheinvestor protectiongoalsunderlyingsecuritieslaws.Privateactionsaffordvictimsoffraudthebest andoftenonlyhopeofrecoveringtheirlosses,whichgovernmentalenforcementprograms areillequippedtodoonalargescale.Byexposingallpartiesresponsibleforfraud, includingthosewhoprovidesubstantialassistance,suchlegislationwillnotonlyhelpdeter futureviolations,butmayaffordsomerecoverytothosewhohavelosttheirinvestments andoftentheirlifesavings. Courtcaseshaverecentlyseverelyrestrictedaidingandabettingliabilityinprivate actions.Theserestrictionsresultedfromanoverlynarrowinterpretationoftheantifraud provisionssetoutbyCongress.Whereclaimsoffraudliewithinthestatutoryboundaries setbyCongress,thereisnojustificationforsuchanarrowinterpretationthatfurtherlimits theabilityofinvestorstoseekrelief. Allowingprivatelitigantstobringfraudclaimsagainstthosewhohaveaidedand abettedsuchfraudwillensurethatinvestorshavemeaningfulprivateremediesinfederal court.Giventhemarkedriseintheincidenceofcorporatefraudandsecuritieslaw violationsaffectinglargeclassesofinvestors,theneedforapartiallegislativeresponseis apparent.Thebalancehasbeentippedtoofarinfavorofpreventingclaimsratherthan protectinginvestorswhohavesufferedlosses.Legislativeactionallowingfederalreliefis evenmoreimportantinlightofrestrictionsplaceduponstatelawtoprovideanalternative remedy.Inviewofthemassivecorporatefraudthathassurfacedinrecentyears,and becausealternateforumsforaggrievedinvestorsremainlimited,itisespeciallyimportant thatCongressprovidemeaningfulremediestovictimsofsecuritiesfraud.

CorePrincipleThree:SupportStrongandCompleteImplementationof InvestorProtectionsintheDoddFrankActbytheConclusionofthe 113thCongress

FullimplementationoftheinvestorprotectionprovisionsintheDoddFrankActis oneofthemostimportantstepsthatthefederalgovernmentcantaketoprotectinvestors andpromoteconfidenceinU.S.capitalmarkets.NASAAurgestheSECandotherfederal agenciestocompletetheActsimplementationpriortotheconclusionofthe113th Congress,inJanuary2015,andtoresisteffortstorepealtheActsreformsorimpedetheir implementation.Specifically,NASAAsupportsprovisionsintheActthatincreasestate regulatoryoversightofinvestmentadvisers;safeguardseniorsfromunqualifiedadvisers; preventsecuritieslawviolatorsfromconductingsecuritiesofferingsunderRegulationD; andauthorizetheSECtomandategreaterchoiceofforumandenhancedremediesfor investors. NASAAalsostronglyadvocatesprovisionsintheActthatempowertheSECto expandthefiduciarystandardofcarecurrentlyapplicabletoinvestmentadvisersto brokerdealers,whoprovideinvestmentadvice,aswellasprovisionsdesignedtomake capitalmarketsmoretransparentbyauthorizingregulatorstoprescribeguidelinesfor certainstructuredproducts,limitspeculativetrading,andrequirethatmostderivativesbe tradedonexchanges.Statesecuritiesregulatorsareparticularlydedicatedtoswift adoptionofpolicyreformsembodiedintheActthatdirectlybenefitretailinvestors. CongressShouldUrgetheSECtoImposeaUniformFiduciaryStandardon FinancialProfessionalsWhoOfferPersonalizedInvestmentAdvice Section913oftheDoddFrankAct(the913Study)directedtheSECtostudy differencesinthestandardsofcarerequiredofbrokerdealersandinvestmentadvisers whoprovidepersonalizedinvestmentadvice.The913Study,whichwascompletedin 2011,foundthatwhileinvestmentadvisersaresubjecttoastrictfiduciarydutystandard, brokerdealersaresubjecttomorelenientstandardsgoverningtheirconduct.Forexample, inmeetingtheirdutyofloyalty,investmentadviserscannotplacetheirowninterestsahead ofthoseoftheirclients.Brokerdealers,however,arenotsubjecttoasimilarconstraint.To remedythisdisparity,theDoddFrankActempoweredtheSECtoharmonizethestandards ofcaretorequirethatallprovidersoffinancialadvicetoinvestorsbetruefiduciaries. Theestablishmentofauniformfiduciarydutystandardgoverningtheconductof brokerdealersandtheiragentsiscrucialfortheprotectionofinvestors.Mostinvestors cannotdistinguishbrokerdealersfrominvestmentadvisers,nordotheyunderstandthe differentlegalstandardsapplicabletoeither.Asaresult,manyinvestorsareunableto makeinformeddecisionsastothebesttypeoffinancialprofessionaltoretain.Afiduciary standardforbrokerdealerswillguaranteethatallfinancialprofessionalsproviding investmentadvicewillactinthebestinterestsoftheirclients,andinturn,enhance investorconfidenceinthefinancialservicesindustryandsecuritiesmarkets. 10

NASAAurgestheSECtopursuethecourserecommendedbythe913Studyto subjectbrokerdealerstothesamefiduciarydutystandardcurrentlyappliedtoinvestment adviserswhenthosebrokersofferpersonalizedinvestmentadvicetoretailinvestorsand othercustomers. ImplementationofInvestorProtectionProvisionsintheDoddFrankActMust NotbeSubjecttoRedundantorDilatoryRegulatoryAnalysesRequirements Inthetwoandahalfyearssinceenactment,oneofthepotentialobstaclesemerging tosuccessfulimplementationoftheDoddFrankActsinvestorprotectionprovisionshas beentheuseofregulatoryanalyticalrequirementstodelayandfrustratetheabilityof regulatorstopromulgaterulesundertheAct. RulemakingprocessestowhichtheSECandotherfederalregulatorsmustadherein implementingtheDoddFrankActaresetforthintheAdministrativeProcedureAct(APA) andotherstatutes. 8 Theseprocessesrequireregulatorsengagedinrulemakingtoperform economicandcostbenefitanalysesoftheirproposedrulesto"determineasbest[asthey] cantheeconomicimplicationsoftherule,andexaminetherelevantdataandarticulatea satisfactoryexplanationforitsaction,includingarationalconnectionbetweenthefacts foundandthechoicesmade. 9 InadditiontosuchmandatesarisingundertheAPA,theSEC hasauniqueadditionalobligationtoconsidertheeffectofaproposedruleuponefficiency, competition,andcapitalformation. 10 Statesecuritiesregulatorsappreciatetheimportanceoftherigorousregulatory analyses(e.g.costbenefitandcosteffectivenessanalyses)towhichindependentagency rulesaresubjected.However,NASAAisconcernedthatmisuseoftheseanalysescould severelyimpedetheabilityofindependentfederalagencies,suchastheSEC,toimplement importantinvestorprotectionsintheDoddFrankAct,aswellasfuturelawsdesignedto protectinvestorsandthepublic. NASAAwasalarmedbytheintroductionofseverallegislativeproposalsinthe112th Congressthatwouldcreatenumerousnewregulatoryanalyticalhurdlesforfederal financialregulatorschargedwithimplementingtheDoddFrankAct.Asdiscussedabove, theireffect,ifenacted,wouldbetoderailimplementationofimportantinvestorprotections bydelayingtheActsrulemakingsindefinitely. The113thCongressmustbevigilantinensuringthatdilatoryorredundant regulatoryanalyticalrequirementsarenotsuccessfullyemployedtodelayordisrupt implementationoftheDoddFrankActandotherimportantinvestorprotectionlaws.To theextentthatsuchanalysesareappropriate,NASAAbelievestheyshouldbeperformed expeditiouslyandbynonpartisanexpertswithintheagencyinwhichCongresshasvested rulemakingauthority. 11

CongressShouldTakeStepstoImprovetheFairnessoftheSecurities ArbitrationProcess Everyyearthousandsofinvestorsfilecomplaintsagainsttheirstockbrokers. Almosteverybrokerdealerpresentlyincludesintheircustomeragreementsamandatory predisputearbitrationprovisionthatforcesthoseinvestorstosubmitalldisputesthat theymayhavewiththebrokeragefirmoritsassociatedpersonstomandatoryarbitration. Ifcasesarenotsettled,theonlyalternativeisarbitration.Forallpracticalpurposes,the onlyarbitrationforumavailabletoinvestorsisoneadministeredbytheFinancialIndustry RegulatoryAuthority(FINRA). Section921oftheDoddFrankActprovidedtheSECwithrulemakingauthorityto prohibitorimposeconditionsontheuseofmandatorypredisputearbitrationagreements ifitdeterminesitisintheinterestofthepublicorinvestors.Pursuanttothisprovision, CongressshouldencouragetheSECtoexerciseitsauthoritytoproposeoradoptrules prohibitingorconditioningpredisputeagreementsmandatingarbitration. Inrecentyears,statesalsohaveseentheemergenceofmandatorypredispute arbitrationclausesincontractsbetweenstateregisteredinvestmentadvisersandtheir clients,despitethefiduciarydutyimposeduponinvestmentadvisers.Inthe113th Congress,NASAAwillseeklegislationempoweringstateregulatorstocurtailtheuseof suchclausesandtotakethestepsnecessarytoprovideinvestorswithachoicefordispute resolution. CongressShouldIncreasetheTransparencyofPCAOBDisciplinaryHearings andRelatedProceedings NASAAcallsonthe113thCongresstopassThePCAOBEnforcementTransparency Act, 11 whichwouldmakepublicthedisciplinaryproceedingsinitiatedbythePublic CompanyAccountingOversightBoard(PCAOB)accountingfirmsandindividualauditors. ThePCAOBwasestablishedbyCongresstooverseeauditorswhosereportsarefiled withtheSECinordertoprotectinvestorsandfurtherthepublicinterestinthepreparation ofinformative,fairandindependentauditreportsonthefinancialstatementsofpublic companies.Adjudicatoryproceedingstodeterminewhetheranauditororauditfirmshould besanctionedforviolatingapplicablerulesorstandardsareanimportantcomponentof thePCAOBsoversightauthority.However,unlikethedisciplinaryproceedingsofother, comparableregulators,thePCAOBscasesarenonpublicuntiltheyareappealedtothe SEC.ThenonpublicnatureofPCAOBdisciplinaryproceedingshasseriousadverse consequencesfortheinvestingpublic,auditcommittees,theauditingprofession,the PCAOBandotherinterestedparties.Congressshouldremedythissituationbyamending theSarbanesOxleyActsothatthePCAOBdisciplinaryproceedingswillbeopentothe public.

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CorePrincipleFour:RegulationofInvestmentAdvisersisanInherently PublicFunctionthatShouldbePerformedbyGovernmentRegulators, notOutsourcedtoanIndustrySelfRegulatoryOrganization

SincethepassageofNSMIAin1996andtheDoddFrankActin2010,thedivisionof federalandstateregulatoryresponsibilityoverinvestmentadvisershasbeenclearly delineatedaccordingtotheamountofinvestorsassetsundermanagement.NSMIA bifurcatedregulatoryresponsibilitybetweenthestates,whichweregivenauthorityto overseeinvestmentadviserswithupto$25millioninassets,andtheSEC,whichoversaw allotherinvestmentadvisers.In2010,theDoddFrankActacknowledgedtheimportant andsuccessfulrolestatesplayininvestmentadviserregulationandincreasedthestates regulatoryresponsibilitybytransferringtothemoversightofmidsizedinvestment advisersthosewithassetsundermanagementbetween$25millionand$100million. Fromtheperspectiveofstatessecuritiesregulators,thisdivisionofstateandfederal regulatoryresponsibilityforinvestmentadvisershasworkedverywell.Stateshaverobust anddynamicregulatoryoversightprograms.States,unliketheSEC,regulateboth investmentadvisersandinvestmentadviserrepresentatives.Almosteverystateperforms onsiteexaminations,onaroutineandforcausebasis,oftenusingsophisticated examinationmodules.Andthemajorityofstatesconductexaminationsonaverageatleast onceeveryfouryears. 12 Incontrasttothestatesexperienceregulatingsmallandmidsizedinvestment advisers,inthepostNSMIAera,theSEChasstruggledtoadequatelyexaminethelarge federallyregisteredinvestmentadviserfirmsforwhichitisresponsible.Theproblemsthat existwiththeSECsoversightoffederallyregisteredinvestmentadvisershavebeen characterizedasaregulatorygap.NASAArecognizesthatthisgapplacesinvestorsatrisk, andstronglybelievesthatCongressshouldaddressitbyprovidingtheSECwiththe resourcestodothejob,oramechanismtogaintheseresources,andnotoutsourcethe responsibilitytoanindustryfundedselfregulatoryorganization(SRO).NASAAurgesthe 113thCongresstorejectproposalstoestablishadditionalSROs,andinsteadtoenable federalregulatorswiththeresourcestheyneedtoeffectivelymonitorthefirmsand representativesundertheirjurisdiction. NASAAVigorouslyOpposestheCreationofanSROforStateRegulated InvestmentAdvisers Whenitcomestotheregulationofinvestmentadvisers,governmentregulators havedecadesofexperiencethatisunmatchedbyanyotherauthorityorentity.NASAAsees littlebenefitinconstructingandimposinganewlayerofbureaucracy,withitsattendant, welldocumentedexpenses.Thegoalistostrengtheninvestorprotectionbyimprovingthe oversightofSECregulatedinvestmentadvisers,andthebestwaytodothisistoadequately fundfederalregulators.

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TheexistingsecuritiesindustrySROmodelastypifiedbyFINRAalsolacks accountabilityandisrepletewithconflictsofinterest.Evenwherethereisanindependent BoardofDirectors,SROsremainorganizationsbuiltonthepremiseofselfruleandare,asa matteroffirstprinciple,accountabletotheirmembers,nottheinvestingpublic.Indeed,the Section914oftheDoddFrankActstudy(the914Study)underscoredthispointwhenit notedthatanSROcontainingindustryrepresentativesinitsgovernancestructurecould haveanelevatedvulnerabilitytoindustrycapture. 13 Nomatterhowmanysafeguardsare instituted,anSROlacksaccountabilityandhassubstantialandinherentconflictsofinterest thatgovernmentalregulatorsdonot. SROsalsoaremorecostlyandinefficientthandirectgovernmentoversight.For example,theestablishmentofanSROforinvestmentadviserswouldcreateaduplicative regulatorystructure,withtheSECbeingresponsiblefortheoversightoftheSRO,andthe SROinturnbeingresponsiblefortheoversightofinvestmentadvisers.Thus,establishing anSROwilllikelybemoreexpensive,bothinitiallyandoverthelongterm,thanfundinga morerobustSECtooverseetheindustry.Indeed,accordingtoanindependentanalysis performedin2011bytheBostonConsultingGroup,thestartupcostsofanSROfor investmentadvisersalonewouldbesufficienttofundanenhancedSECexamination programforanentireyear. 14 Finally,asidefromstructuralconcernsraisedbylegislationestablishinganSROfor investmentadvisers,moststateregisteredinvestmentadvisersaresmallbusinesses employingonlyafewpeople.Themajorityoftheirclientsarenotwealthyindividualsor institutions,buthardworkingAmericanstryingtoplanforretirementortheirchildrens education.Statesecuritiesregulatorsareextremelyconcernedabouttheimpactthat legislationrequiringinvestmentadviserstojoinanSROwouldhaveonstateregistered investmentadvisersandtheirclients.Inshort,anylegislationthatwouldrequiresmalland midsizedinvestmentadviserstojoinanSROhastheveryrealpotentialtobeajobkiller. CongressShouldAuthorizetheSECtoAssessUserFeestoFundImproved OversightofFederallyRegisteredInvestmentAdvisers StatesecuritiesregulatorscontinuetobelievethatbestwayforCongresstoimprove theoversightoffederallyregisteredinvestmentadvisersistoprovidetheSECwiththe resourcesitneedstodothejob.Unfortunately,theSECstilllacksthenecessaryfundingto adequatelyoverseetheinvestmentadvisersitregulates. Recognizingcurrentpoliticalrealities,NASAAbelievesthatthemostefficaciousway forCongresstoimprovetheoversightoffederallyregisteredinvestmentadvisersisto enactlegislationauthorizingtheSECsOfficeofComplianceInspectionsandExaminations (OCIE)tocollectuserfeesfromtheinvestmentadvisersitexamines.Therevenuederived fromsuchuserfees,whichwouldnotcomeatanycosttotaxpayers,couldthenbeusedby OCIEtofundadditionalexaminationsoffederallyregisteredinvestmentadvisers.

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CorePrincipleFive:StateAuthorityShouldNotBePreempted,and ShouldInsteadbeExpanded

Asamatterofefficiencyandcost,authorizingtheSECtofundenhancedoversightof federallyregisteredinvestmentadvisersthroughtheimpositionofuserfeesalsomakes moresensethanestablishinganewSROforinvestmentadvisers.Specifically,imposing userfeeswouldbealessexpensiveoptionbecausetheSECwouldnothavetospend significantresourcesinoverseeinganSRO.Indeed,the914Studyacknowledgedthehigh costsofcoordinationbetweentheSECstaffandanSROwhichmightinclude,forexample, notonlydirectcostslikeadditionalmanagementcostsrequiredtooverseetheSROs effectiveness,butalsoothercoststhatareevenmoredifficulttoquantify. 15 The914Studysconclusionhasbeenechoedbyinvestmentadviserfirmsand validatedbyindependentanalyses.Forexample,thestudyconductedbytheBoston ConsultingGroup,referencedabove,foundthatestablishinganSROforinvestment adviserswouldlikelycostatleasttwiceasmuchasfundinganenhancedSECexamination program. 16 ThesamestudyfoundthatthestartupcostsofanSROalone($200310 million)couldfundanenhancedSECexaminationprogramforanentireyear($240270 million). 17 Inthe112thCongress,NASAAwaspleasedtosupportTheInvestmentAdviser ExaminationImprovementAct, 18 sponsoredbyRep.MaxineWaters(DCA),whichwould haveauthorizedtheSECtoassessuserfeesoninvestmentadviserstofundanexpansionof itsadviserexaminations.Asrevenuefromtheuserfeescontemplatedbythebillwould havebeenavailabletotheSEConlytofundadditionalexaminationsofinvestmentadvisers, andnottosubsidizeotherfunctionsoftheCommission,theproposedbillwouldhavebeen highlycosteffectivenotonlyfromtheperspectiveofthegovernment,butalsofromthatof theinvestmentadviserindustry.Inthe113thCongress,statesecuritiesregulatorswill continuetostronglysupportandadvocatefortheenactmentofTheInvestmentAdviser ExaminationImprovementActorsimilarlegislation.

Asamatterofprinciple,NASAAardentlybelievesthatCongressshouldrefrainfrom preemptingstatelaw.Formostinvestors,statesarefarandawaythemostresponsive, accessible,andattunedregulators.Congresshasrecognizedtheperformanceandrelevance ofstatesecuritiesregulatorsbyexpandingstateresponsibilitiesfortheoversightof investmentadvisersandensuringthatstatefinancialservicesregulatorshadavoiceonthe FinancialStabilityOversightCouncil.Nevertheless,recentfederallegislationhas threatenedtopreempttheauthorityofthestates. 19 CongressShouldDefertotheStatesinPrescribingPoliciestoRegulateSmall Offerings,WhichStatesareMostCapableofPolicing Stateregulatorsareclosesttotheinvestingpublicandunderstandthecomplex challengesfacedbysmallbusinessesseekingtoraisecapital.Stateregulatorsaremembers

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ofthecommunitiestheyserve,andseefirsthandhowthepublicisoptimallyservedby policiesthatstrikeareasonablebalancebetweentheinterestsofissuersandinvestors. Further,itisimportanttonotethattheSEChasneitherthemandatenorthe resourcestopolicesmallofferings.Federalpoliciesthatvestrulemakingresponsibilities exclusivelywiththeSECeffectivelyseparatetherulemakingfromtheenforcement responsibility.Fromapublicpolicystandpoint,sucharrangementsarehighlyinefficient andsometimesdysfunctional. PriortotheDoddFrankAct,consumerprotectionresponsibilitieshadbeenspread acrossvariousfederalbankingregulatoryagencies,withtheFederalReservehavingsole authoritytoadoptrulestoprotectconsumersfromunfairanddeceptivepractices,and individualprudentialbankregulatorsliketheFederalDepositInsuranceCorporationand theComptrolleroftheCurrencyhavingthesolepowertoenforcethoserules.Thisresulted inrulemakingsthatdidnottakeintoaccountlessonslearnedfromenforcementactions andenforcementactionsthatweredelayedduetoamisunderstandingofregulations. Thebifurcationofrulemakingandenforcementauthoritythatfailedtoprotect consumersatthefederallevelintheyearsprecedingthe2008FinancialCrisisisnomore likelytodaytosucceedinprotectinginvestorsfromfraudinsmallofferings.Thus,inareas wherestatesecuritiesregulatorsareexpectedtoinitiateandperformvirtuallyall enforcementactivity,Congressalsoshouldpermitthestatestoexerciserulemaking authority. StatesMustbePermittedtoPreserveandImprovetheirCapacitytoUndertake CoordinatedActionwhenCircumstancesRequireUniformity With52independentjurisdictionsintheU.S.anditsterritories,statesoperatewith substantialandeverincreasingefficiency,andtheyhaveastrongtrackrecordofworking togetherinacoordinatedmanneronawiderangeofissues.Advancesintechnologyhave resultedinautomationoftheregistrationprocessforindividualsandfirms,and coordinatedreviewsforsecuritiesregistrationsandmidsizeorregionalinvestment advisoryfirmexaminationsarebecomingthenormratherthantheexception. Regulatoryeffortsinvolvinginterstatemisconductareroutinelycoordinated nationallytoleveragestateresourcesandreducethecostandburdentothebusinesses involved(e.g.,inthecasesofsalespracticeviolationsrelatingtoAuctionRateSecurities). Theyear2012sawthehighlysuccessfulSwitchoffederallycoveredadviserstostate registration.In2008,NASAAadoptedamodelruleprohibitingdeceptiveseniorspecific professionaldesignations.Continuingtomakeprogressinthisareawillbeahighpriority forstatesecuritiesregulatorsaswellasNASAAinthe113thCongress,andthisprogress shouldnotbestultifiedbythethreatoffederalpreemption. 16

AndrewG.Haldane,DirectorofFinancialStabilityattheBankofEngland.PatienceandFinance (September2,2010),availableat http://www.bankofengland.co.uk/publications/Documents/speeches/2010/speech445.pdf. 2 S. 3416 in the 112th Congress. 3 OnJanuary18thSECChairmanElisseWalterinformedmembersoftheSECsInvestorAdvisory Committeethattheagencyismovingforwardin2013withtherulemakingmandatedundertheJOBSAct. 4 NationalCenteronElderAbuse.Factsheet:ElderAbusePrevalenceandIncidence(2008),available athttp://www.ncea.aoa.gov/main_site/pdf/publication/FinalStatistics050331.pdf. 5 H.R. 774 in the 112th Congress. 6 U.S.SmallBusinessAdministration,OfficeofAdvocacy,FrequentlyaskedQuestions,2011, availableathttp://www.sba.gov/sites/default/files/sbfaq.pdf. 7 H.R. 5042 in the 111th Congress. 8 TheNationalEnvironmentalProtectionAct(NEPA),theRegulatoryFlexibilityAct(RFA),the CongressionalReviewAct(CRA),andthePaperworkReductionAct(PRA)setforthadditionalprocedures thatfederalagenciesmustfollowpriortofinalizingarule. 9 MotorVehicleMfrs.AssnofU.S.,Inc.v.StateFarmMut.Auto.Ins.Co.,463U.S.29,43(1983). 10 15U.S.C.78c(f),78w(a)(2),80a2(c). 11 S. 1907 in the 112th Congress. 12 StateInvestmentAdviserRegulationFactSheet(July,2011).Thereferenceddocumentwasprepared byNASAAonthebasisofJune2012surveydataanddiscussionswithstatesecuritiesregulators. 13 StaffoftheDivisionofInvestmentManagementoftheU.S.SecuritiesandExchangeCommission, StudyonEnhancingInvestmentAdviserExaminations(Jan.19,2011)(Section914Report). 14 TheBostonConsultingGroup.InvestmentAdviserOversight:EconomicAnalysisofOptions(December, 2011),availableat http://www.cfp.net/downloads/BCG_Investment_Adviser_Oversight_Economic_Analysis.pdf. 15 StaffoftheDivisionofInvestmentManagementoftheU.S.SecuritiesandExchangeCommission, StudyonEnhancingInvestmentAdviserExaminations(Jan.19,2011)(Section914Report). 16 TheBostonConsultingGroup.InvestmentAdviserOversight:EconomicAnalysisofOptions(December, 2011),availableat http://www.cfp.net/downloads/BCG_Investment_Adviser_Oversight_Economic_Analysis.pdf 17 Id.at5. 18 H.R. 6204 in the 112th Congress. 19 Severalbillsintroducedinthe112thCongresssoughttopreemptstatesecuritiesregulators,including mostprominentlytheJOBSAct.

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