Bates Research - 03-08-17

NASAA’s 2017 Priorities to Congress Hint at Challenges Ahead for State Regulators

The President of the North American Securities Administrators Association (“NASAA”) is supporting the besieged fiduciary duty rule and has advocated for the independence of state securities regulators. In NASAA’s official recommendations to the 115th Congress of the United States, President Mike Rothman urged “Congress and the Administration to promote financial regulatory policies that hold true to our shared responsibility to look out for investors and preserve the integrity of our capital markets.”

The Association’s recommendations, issued on March 2, 2017, set forth legislative priorities consistent with past formulations and with the mission of the organization. The recommendations include the protection of retail investors, the protection of seniors, enhanced collaboration among securities regulators, the protection of the integrity of the security markets and empowering states to improve access to capital for small businesses. In this respect, the agenda is not dissimilar to NASAA’s recommendations to the 114th Congress, in which the Association also recommended expanding and strengthening protections for seniors, promoting investor confidence through effective regulation, promoting a fair and transparent marketplace for retail investors, and facilitating capital formation through federal-state partnerships.

The difference, however, is in the urgency and tone of the newest recommendations, a consequence of longstanding NASAA positions confronting new political realities. Perhaps the strongest headwinds may come up against NASAA recommendations to protect retail investors.  In its new legislative agenda, NASAA maintained its advocacy for the establishment of a fiduciary standard to govern broker-dealer conduct, ensure regulator independence, and maintain private placement market requirements that bar "bad actors.”

Fiduciary Duty

Regarding the fiduciary duty rule, NASAA’s recommendations were unequivocal: “All financial services professionals should act in the best interests of clients. Establishing a fiduciary duty standard governing the conduct of broker-dealers and their agents is crucial for the protection of investors and to enhance investor confidence in the securities markets.”  This runs counter to the Trump administration’s recent executive order calling for a review of the rule and the DOL’s subsequent postponement of its effective date, which we have previously discussed here.

Regulator Independence

As to NASAA’s recommendation to ensure state regulatory independence, the Association posited that “imposing unduly complex and overly burdensome requirements on agency rulemaking through legislation impedes the ability of regulators to address problems in a timely manner” and “any such delay could threaten the well-being of American investors and the integrity of U.S. securities markets.”  In recent interviews, President Rothman promised to fight against efforts to hamstring or intimidate regulatory actions. Michael Canning, Director of Policy for NASAA, was even more direct: “[we have] seen a number of proposals out of Congress that would crimp regulators’ power” he said. These include bills that would “dramatically ratchet up cost/benefit requirements on independent regulatory agencies, such that they would cripple the agencies’ ability to get any rules done.”  Canning continued: “NASAA supports efforts to make regulations more efficient, but not to the extent that the goal is to delay or obstruct legitimate rule-making interests or to diminish the independence of regulators.”

Bad Actors

Regarding the Association’s recommendation that Congress should maintain federal rules that disqualify felons and other “bad actors” from private offerings, NASAA’s language was aggressive: “Congress should not take any steps to weaken provisions of current law that help keep fraud out of the private placement markets, and should explore initiating reforms to improve oversight of the private placement market, including Regulation D, Rule 506 offerings.”  This position is entirely consistent with NASAA’s mission to enforce state securities laws by investigating suspected investment fraud, and, where warranted, pursue enforcement actions. The warning to Congress may represent an apprehension about pending changes that might affect the independence and integrity of that mission.

The remainder of NASAA’s recommendations to Congress appear to strike a balance between collaboration and confrontation. These include promoting:
  • the protection of America's growing senior population by enacting the Senior$afe Act to better protect people aged 65 and over from financial exploitation, by establishing a federal grant program to facilitate “the hiring and training of additional staff to detect, investigate and prosecute cases of such exploitation,” and by directing the Government Accountability Office to evaluate the economic costs of senior financial exploitation;
  • collaboration among securities regulators by requiring at least one member of the SEC Commission to have experience as a state securities regulator, and "encourag[ing] federal regulators to share pertinent information with state regulators regarding shared priorities” such as cybersecurity;
  • protection of the integrity of security markets by adopting policies that improve the oversight of private fund advisers, preserving investor protections enacted in the wake of the 2008 financial crisis and “moderniz[e] privacy protections relating to information stored on internet service providers.” It is interesting to note that here too, NASAA’s recommendation contains a warning urging Congress “not to inadvertently or unjustifiably curtail crucial investigatory authorities used by state regulators and other civil law enforcement agencies.”
  • empowerment of states to improve access to capital for small and emerging businesses. It is worth noting that on February 17, 2017, NASAA and the SEC signed an information-sharing agreement to facilitate intrastate crowdfunding offerings and regional offerings. That memorandum of understanding is intended to facilitate the sharing of information to ensure that new legal exemptions are providing access to capital for small businesses, and to ensure that federal and state securities regulators will be better able to guard against fraud.

The NASAA statement of recommendations for the 115th Congress provides an outline of its legislative priorities. It also reflects a repositioning within a new political environment. By language and tone, the recommendations suggest that NASAA is girding itself for serious challenges ahead.

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