Last week, the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, approved a key piece of legislation intended to protect investors, the Investor Protection Act (H.R. 3817). As we reported in our October 6, 2009 post, “Rep. Kanjorski Releases Legislative Discussion Drafts,” the Committee has been considering three key pieces of financial oversight reform legislation, including H.R. 3817. As we described in our earlier post, this bill would:
strengthen the SEC’s powers to, as the name suggests, protect investors by providing “dozens of new enforcement powers and regulatory authorities,” doubling the agency’s funding over a five year period, and making it easier for the SEC to collaborate with its counterpart agencies in other countries. More controversially, the proposed legislation also creates protections and financial incentives for whistleblowers to bring wrongdoing to the attention of regulators, up to 30% of the amount of sanctions ultimately imposed on the wrongdoers.
In a press release, the Committee summarized the bill as reforming the following areas:
- Protecting Investors and Righting Wrongs. The financial crisis exposed the perils of deregulation. The Investor Protection Act will right these wrongs by reforming the Securities and Exchange Commission (SEC) to strengthen its powers, better protect investors, and efficiently and effectively regulate our securities markets.
- Comprehensive Securities Review and Reorganization. The failures to detect the Madoff and Stanford Financial frauds demonstrate deep deficiencies in our existing securities regulatory structure. An expeditious, independent, comprehensive study of the entire securities industry by a high caliber body will identify reforms and force the SEC and other entities to put in place further improvements designed to ensure superior investor protection.
- Enhanced SEC Enforcement Powers and Funding. By doubling the authorized funding for the SEC over 5 years and providing dozens of new enforcement powers and regulatory authorities, the SEC will be able to enhance its enforcement programs and gain the tools needed to better protect investors and police today’s markets.
- Fiduciary Duty. Every financial intermediary who provides advice will have a fiduciary duty toward their customers. Through a harmonized standard, broker-dealers and investment advisers will have to put customers’ interests first.
- Whistleblower Bounties. A whistleblower bounty program will create incentives to identify wrongdoing in our securities markets and reward individuals whose tips lead to successful enforcement actions. With a bounty program, we will effectively have more cops on the beat in our securities markets.
- Ending Mandatory Arbitration. Because mandatory arbitration has limited the ability of defrauded investors to seek redress, the SEC will gain the power to bar these clauses in customer contracts.
- Closing Loopholes and Fixing Faulty Laws. The Madoff fraud revealed that the Public Company Accounting Oversight Board lacked the powers it needed to examine the auditors of broker-dealers. The $65 billion Ponzi scheme also exposed faults in the Securities Investor Protection Act, the law that returns money to the customers of insolvent fraudulent broker-dealers. The Investor Protection Act closes these loopholes and fixes these shortcomings.
H.R. 3817 will now move forward to a vote of the full House.
The full text of the Investor Protection Act (H.R. 3817) as passed by the Committee is available at: http://lawprofessors.typepad.com/files/h.r.3817.mht
The House Finance Committee's press release is available at: http://www.house.gov/apps/list/press/financialsvcs_dem/pressipa_100409.shtml