Bates Research - 03-28-19

NASAA Update: Legislative Agenda, President Provides Testimony on Regulation Best Interest

The North American Securities Administrators Association (NASAA) has been in the public eye this month as state regulators (i) issued a set of federal legislative priorities and (ii) provided written testimony to the U.S. House Financial Services Committee concerning the need for greater clarity on the SEC proposed Regulation Best Interest.

In previous posts (see here, and here) Bates Group has emphasized the importance of state players to many of the key regulatory and enforcement issues being debated in Congress and before federal agencies. We noted that when taking office as NASAA president in September 2018, Vermont commissioner of financial regulation Michael Pieciak (pictured above) acknowledged that the top priority of its members—“head and shoulders” above all others—is “to fight preemption and preserve our [state] authority.” As if to underscore that point, in his written statement submitted to Congress last week, Mr. Pieciak recited “recently compiled enforcement statistics showing that in 2017 alone, state securities regulators conducted nearly 4,790 investigations, leading to more than 2,000 enforcement actions, including 255 criminal actions.” More specifically, he reported that NASAA members undertook “150 enforcement actions involving broker-dealer agents, 187 actions involving investment adviser representatives, 120 involving broker-dealer firms, and 190 involving investment adviser firms.”

In this article, we look at NASAA’s 2019 legislative and regulatory priorities and summarize Mr. Pieciak’s latest take on the SEC’s efforts to find an acceptable compromise on broker standards of conduct.

NASAA Sets its 2019 Legislative Agenda

The NASAA 2019 legislative agenda reflects the dual oversight by the federal government and the states over similar financial market issues. The agenda is organized under four principles: (i) putting investors first, (ii) ensuring integrity of the markets by combatting fraud, (iii) promoting capital formation and market transparency and (iv) reaffirming the rights and protections of investors in the modern securities marketplace. When it comes to many of the policy prescriptions, these categories often overlap.

More Protection for Main Street Investors

To protect main street investors, NASAA advocates for "enhanced standards of conduct for broker-dealers," encouraging more rigorous oversight and regulation of new financial technologies (such as cryptocurrencies and ICOs), and for more attention to be paid to intergenerational investor issues (including senior financial exploitation and millennial investor education).

Strengthening State Regulators to Fight Fraud

With respect to fighting fraud, NASAA supports solutions that maintain the enforcement independence of state securities regulators, including enhancing remedies (such as eliminating the five-year statute of limitations on certain disgorgement actions) and beefing up civil penalties; providing state security regulators access to Suspicious Activity Report filings (SARs) and ensuring effective oversight of private placement brokers and finders (including refraining from taking any action that could limit state oversight).

Promoting Capital Formation

On encouraging capital formation, NASAA asserts that its members are positioned to “provide a level of accessibility to small businesses and investors that is unavailable from any federal regulators.” As a result, the state regulators support legislation that would (i) direct the SEC to coordinate with the states more closely in order to unify or harmonize federal and state exemptions and (ii) ensure that state regulators have the information needed to police the private offering marketplace to discourage fraud and protect retail investors (primarily through amendments to strengthen Rule D filings). Other NASAA priorities include supporting efforts to exempt merger and acquisition brokers from federal registration requirements and to limit adjustments to federal crowdfunding laws. Finally, NASAA wants Congress to modernize the definition of accredited investor “to more accurately measure investor sophistication and improve regulatory oversight.”

Rebalancing the Power Relationship in Arbitration

Regarding further empowerment and protections for investors in today’s marketplace, NASAA takes the position that “broker-dealers enjoy powerful advantages over retail investors in dispute resolution.” As a consequence, NASAA advocates for improving the dispute resolution process by banning the use of mandatory pre-dispute agreements by broker-dealers and investment advisers that limit investors’ ability to pursue recourse in any forum. Also recommended are stronger provisions to “make harmed investors whole” by requiring broker dealers to pay arbitration awards, and by safeguarding shareholder rights by imposing limits on “dual-class shares” and increasing the oversight of proxy advisers.

NASAA Continues to Press for Improvements on SEC Regulation Best Interest

In his written remarks to the now-Democratic-controlled U.S. House Committee on Financial Services, NASAA President Michael Pieciak restated the history of NASAA’s involvement in enhancing broker standards of care (having supported in the past, for example, the move to impose a fiduciary standard on brokers recommending to investors securities or investment strategies). In his submitted testimony, Mr. Pieciak reaffirmed NASAA’s longstanding position in support of raising the "standard of care" to "reflect the evolution of how financial advice is delivered to customers." He argued that the standard of care must go beyond the adoption of a "conflicts disclosure regime," and must require brokers to fully serve the best interests of the investor. In previously submitted comments on the SEC’s Best Interest Rule, NASAA recommended clear definitions of the new standard, application of the standard to all investors, and including "cost" as a required factor when explaining recommendations.

Mr. Pieciak’s written submission to the Finance Committee primarily concerned proposed interpretive guidance that would accompany the new regulation. He warned that, as written, the guidance sends “conflicting messages” about what is permissible under the proposed rule, which undermines the goal “to develop a standard that eliminates and mitigates conflicts such that investors receive the maximum benefit of their investments.”

Specifically, Mr. Pieciak recommended that any guidance must address specific conduct: that sales contests are inconsistent with the standard; revenue-sharing arrangements between brokers and product manufacturers must be carefully examined; that broker-dealers must not be allowed to give certain customers preferential treatment; that broker-dealers should not be allowed to meet their "best interest" obligations by "recommending securities from a limited menu of products without any comparison whatsoever;" and that “nothing should be permitted to limit an investor's recovery rights under the new standard.”

Mr. Pieciak communicated NASAA’s position that any guidance should make clear that “self-serving incentives and conflicts are prohibited,” and that “investors must be steered toward products that serve their best interest, which will most often be the best-performing, cost-effective products.” He emphasized that “the SEC should close any misinterpretation that could allow the industry to continue business-as-usual and yet [still] comply with the rule.” Such an outcome, he said, would undermine the rulemaking.”


NASAA’s legislative agenda and Mr. Pieciak’s remarks reflect assertive positions on proposed regulation and robust enforcement, as well as a strong defense of state jurisdictional interests. NASAA members remain significant players in the ultimate resolution of many key issues as state regulators continue to push alternative solutions in the absence of federal final action. Bates will continue to keep you apprised of both state and federal developments.


Get Bates Group News and Alerts in your Inbox

Sign Up Now

Contact Bates Group

Bates Group is with you every step of the way. Contact us today for more information on how our End-to-End Solutions can help your firm.

Contact Bates Group