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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Thursday, November 5, 2009

House Financial Services Committee Passes Investor Protection Legislation

The House Financial Services Committee voted (41-28) on Nov. 4 to recommend the Investor Protection Act of 2009(Download H.R.3817) that has a variety of measures intended to improve  investor protection and increase investor confidence. Here is the Committtee's Press Release.

The bill contains two provisions of particular interest to retail investors.

First, the Act requires the SEC to establish a uniform "fiduciary duty" for broker, dealers and investment advisers providing personalized investment advice to retail customers.  The proposed language does this in a somewhat convoluted manner.  Section 103 amends the Securities Exchange Act and requires the SEC to promulgate rules that the standard of conduct for these brokers and dealers shall be the same as the standard of conduct for investment advisers.  In turn, the Investment Advisers Act would be amended to require the SEC to promulgate rules to provide that the standards of conduct for all such brokers, dealers and investment advisers shall be "to act in the best interest of the customer" without regard to the financial or other interest of the advice provider.

The proposed legislation would also require the SEC to "harmonize," to the extent possible, enforcement and remedy regulations applicable to brokers, dealers and investment advisers.

Second, section 201 of the proposed legislation gives the SEC the authority to prohibit or limit agreements that require customers of brokers, dealers, and investment advisers to arbitrate disputes "arising under the Federal securities laws or the rules of an SRO" if the SEC finds that it would be in the public interest and for the protection of investors.  Notice that, under this language, agreements to arbitrate disputes arising under state law are not explicitly prohibited.  Since many customers' disputes are negligence or breach of fiduciary duty claims arising under state law (since federal securities fraud requires scienter and federal courts do not recognize a private claim under SRO rules), adoption of this legislation may revive the complications that existed pre-McMahon, where federal claims could be brought in court while state claims arising under the same facts would go to arbitration. 

The proposed legislation contains a number of other provisions of large and small import, including an increase in the agency's funding.  It is reported in the press that a bipartisan amendment was added to the bill, to exempt permanently businesses valued at $75 million or less from the SOX 404(b) attestation requirement.  The SEC had exempted these firms from the requirement, but the exemption is scheduled to expire in 2011.

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