Potential impacts from the proposed changes to the regulation of the financial industry and the federal securities laws

June 2009



In an effort to protect our clients' current and future interests, the existing rules and regulations in place and any proposed changes which could have an impact on business practices should be recognized and evaluated.  On June 17, 2009, the Treasury Department and the White House released their proposed changes to the regulation of the financial industry entitled, Financial Regulatory Reform: A New Foundation (the "Proposal").  The Proposal could have a dramatic effect on how our clients manage their business and litigation.


Financial Regulatory Reform: A New Foundation


A.  The formation of the Consumer Financial Protection Agency


The creation of the Consumer Financial Protection Agency ("CFPA") has been proposed to assist customers in the financial products and services markets.  The CFPA would provide protection to customers for products other than those already regulated by the U.S. Securities and Exchange Commission ("SEC") or the Commodity Futures Trading Commission.  Specifically, the CFPA would regulate credit, savings and payment products.  Additionally, the Proposal suggests that the CFPA should, among other things, have rule-making authority to regulate unfair, deceptive and abusive acts or practices for the aforementioned products. 


The creation of a CFPA or similar organization could mean additional levels of supervision, regulation and control over the consumer financial services markets.


B.  Expansion of SEC authority to promote transparency in disclosure to investors


The Proposal suggests that federal securities laws be revised to increase the disclosure and timing of disclosure requirements to investors.  Specifically, the Proposal suggests that disclosures such as a Summary Prospectus be provided to investors at the point of sale, instead of with the confirmation after the sale has taken place.  The goal of this proposed change is to improve investor understanding of the product, its costs and risks prior to purchase.


C.  Establishes a fiduciary duty for broker-dealers offering investment advice


Currently broker-dealers are allowed to give "incidental advice" to customers without having any fiduciary responsibility, while investment advisers have a legal fiduciary duty regarding the advice they provide their public customers.  The Proposal suggests that the legal distinction between a broker1 and an investment adviser2 is "no longer meaningful," since investors do not understand the difference, relying on their broker as they would an investment adviser.  As such, the proposal suggests that brokers who offer investment advice should also be bound by the same legal fiduciary duties as investment advisers.


D.  Review of mandatory arbitration clauses in investor contracts


The Proposal suggests review by the SEC of mandatory arbitration clauses in investor contracts, under certain circumstances.  If the SEC determines that the arbitration clauses harm investors because investors are "unable to obtain effective redress of legitimate grievances," the SEC should have the authority to prohibit mandatory arbitration clauses in broker-dealer and investment advisory accounts with retail clients, or make changes to the arbitration process to protect investors' interests.  Additionally, the Proposal contends that while arbitration may be a "reasonable option for many customers to accept after a dispute arises, mandating a particular venue and up-front method of adjudicating disputes – and eliminating access to courts – may unjustifiably undermine investor interests."


The Proposal also suggests that the CFPA should have the authority to ban mandatory arbitration clauses in form contracts, such as mortgage contracts, should it determine that investors are unable to obtain effective redress of legitimate grievances.




These proposed changes to the federal securities laws and financial regulation practices need to be carefully reviewed and considered by our clients, in advance of their implementation, both for the possibility that they may become law, and for the fact that these proposals are indicative of current thoughts in Washington with respect to rules and regulations governing securities matters.  This Proposal will be closely monitored by us, and if these changes are implemented, we are available to assist our clients with practical advice and assistance, to be sure of compliance and complete understanding of their effects.



1) A broker is generally an agent who executes orders on behalf of clients.


2) An investment adviser is a person (or group) who offers or makes investment recommendations to clients for a fee, and/or conducts securities analysis for clients.  These services can be offered through direct management of client assets, or through written publications.

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