Securities Law Prof Blog

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

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Wednesday, November 11, 2009

Senate Proposed Legislation More Investor Protective than House Version

Senator Dodd, Chair of the Senate Banking Committee, released yesterday a discussion draft of proposed financial reform legislation, entitled Restoring American Financial Stability Act of 2009.Download SenateBankingRegulatoryReformProposal It is a more comprehensive and investor protective reform package than the version recently approved by the House Financial Services Committee, and therefore, we can surmise, is less likely to be passed in its current form.

As one example:  the House proposed legislation contains language that would require the SEC to enact rules to harmonize the regulation of investment advisers and broker-dealers that provide individualized advice to retail customers.  In contrast, the Senate version proposes simply to eliminate the broker-dealer exception from the definition of "investment adviser" in the Investment Advisers Act. Thus, the requirements of the Investment Advisers Act would apply to all broker-dealers and their dealings with all customers.  To deal with the problem of the IAA's prohibition against trading with a customer as a principal without pre-transaction approval, the proposed legislation would give the SEC authority to exempt persons or transactions from this prohibition so long as the adviser provides investors with "adequate protection" against conflicts of interest. 

The Senate legislation would also provide for aiding and abetting liability in private securities fraud actions, unlike the House version.

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