The Investor Protections and Improvements to the Regulation of Securities is a United States Act of Congress, which forms Title IX, sections 901 to 991 of the much broader and larger Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010., § 901 Its main purpose is to revise the powers and structure of the Securities and Exchange Commission, credit rating organizations, and the relationships between customers and broker-dealers or investment advisers. This title calls for various studies and reports from the SEC and Government Accountability Office (GAO). This title contains nine subtitles.
Subtitle A – Increasing Investor Protection Subtitle A contains provisions: To prevent regulatory capture within the SEC and increase the influence of investors, the Act creates an Office of the Investor Advocate,, § 915; amending section 4 of the Securities Exchange Act of 1934 () by adding: (g) OFFICE OF THE INVESTOR ADVOCATE. an Investor Advisory Committee composed of 12-22 members of whom serve 4-year terms,, § 911; amending Title I of the Securities Exchange Act of 1934 () by adding Sec 39(a): Investors Advisory Committee and an ombudsman appointed by the Office of the Investor Advocate., § 919D; amending section 4(g) of the Securities Exchange Act of 1934 (as added by section 914) by adding: (8) OMBUDSMAN. The Investor Advisory Committee was actually created in 2009 and therefore predates the passage of the Act, but it is specifically authorized under the Act.Skadden. The Dodd–Frank Act: Commentary and Insights . SEC is specifically authorized to issue "point-of-sale disclosure" rules when retail investors purchase investment products or services; these disclosures include concise information on costs, risks, and conflicts of interest. This authorization follows up the SEC's failure to implement proposed point-of-sale disclosure rules in 2004 and 2005;For the 2005 proposed rule, see Point of Sale Disclosure Requirements and Confirmation Requirements for Transactions in Mutual Funds, College Savings Plans, and Certain Other Securities, and Amendments to the Registration Form for Mutual Funds, via sec.gov These proposed rules generated opposition because they were perceived as burdensome to broker-dealers. For example, they would require oral disclosures for telephone transactions, were not satisfied by cheap internet or email disclosures, and could allow the customer to request disclosures specific to the amount of their investment. In determining the disclosure rules, the Act authorizes the SEC to do "investor testing" and rely on experts to study financial literacy among retail investors., § 912; adding to Section 19 of the Securities Act of 1933 () by adding (e)Evaluation of Rules or Programs
Subtitle A provides authority for the SEC to impose regulations requiring "fiduciary duty" by broker-dealers and investment advisers to their customers. Although the Act does not create such a duty immediately, the Act authorizes the SEC to establish such a standard and requires that the SEC study the standards of care which broker-dealers and investment advisers apply to their customers and report to Congress on the results within 6 months. Under the law, commission and limited product range would not violate the duty and broker-dealers would not have a continuing duty after the investment advice is given., § 913(g); amending section 15 of the Securities Exchange Act of 1934 () by adding at the end: (k) STANDARD OF CONDUCT
Subtitle B – Increasing Regulatory Enforcement and Remedies Subtitle B gives the SEC further powers of enforcement. This includes a "whistleblower bounty program", § 922; The Securities Exchange Act of 1934 () by inserting: SEC. 21F. SECURITIES WHISTLEBLOWER INCENTIVES AND PROTECTION. which is based upon a similar program established by the IRS in 2006; the program allows persons who provide information which leads to a successful SEC enforcement to receive 10 to 30% of the monetary sanctions over $1 million. Section 921 under the title allows the SEC to prohibit pre-dispute mandatory binding arbitration. Section 929I exempts the SEC from disclosing information obtained pursuant to 17(b) of the Securities Exchange Act of 1934 or information "based upon or derived from" such information "obtained by the Commission for use in furtherance of the purposes of this title, including surveillance, risk assessments, or other regulatory and oversight activities" – meaning information derived from examinations. The SEC rejected a Freedom of Information Act request on July 27, 2010 based upon this new law; while the SEC has stated that this legal change is necessary for registrants to comply with the examinations, the provision has been criticized for allowing the SEC to avoid the typical disclosure rules applicable to federal agencies.Prial D. (2010). SEC Says New Financial Regulation Law Exempts it From Public Disclosure . Fox Business News.
Importantly, section 921I amends SEC Act of 1934 and the Investment Company Act of 1940 to allow the Securities Exchange Commission to not disclose records or information that have been obtained for uses such as "surveillance, risk assessments, or other regulatory and oversight activities" except it may not withhold information from judicial or congressional inquiry., § 929I. PROTECTING CONFIDENTIALITY OF MATERIALS SUBMITTED TO THE COMMISSION; (a) SECURITIES EXCHANGE ACT OF 1934.—Section 24 of the Securities Exchange Act of 1934 (15 U.S.C. 78x) is amended— (1) in subsection (d), by striking subsection (e) and inserting subsection (f); (2) by redesignating subsection (e) as subsection (f); and (3) by inserting after subsection (d) the following: (e) RECORDS OBTAINED FROM REGISTERED PERSONS The effective result of this change is that the US Freedom of Information Act no longer applies to the SEC; the SEC can refuse to supply documents it deems as being part of its regulatory and oversight activities. Previously, the SEC used a narrower existing exemption for trade secrets when refusing Freedom of Information Requests.Scannell, Kara "SEC Gets FOIA Foil in Financial Law" Wall Street Journal, July 31, 2010, p B3
Subtitle C – Improvements to the Regulation of Credit Rating Agencies
Recognizing credit ratings issued by credit rating agencies, including nationally recognized statistical rating organizations (NRSROs), are matters of national public interest, that credit rating agencies are critical "gatekeepers" in the debt market central to capital formation, investor confidence, and the efficient performance of the United States economy, Congress expanded regulation of credit rating agencies., § 931(1)
Subtitle C cites findings of conflicts of interest and inaccuracies during the recent financial crisis contributed significantly to the mismanagement of risks by financial institutions and investors which in turn adversely impacted the health of the United States economy as factors necessitating increased accountability and transparency by credit rating agencies., § 931(5)
Subtitle C mandates the creation by the SEC of an Office of Credit Ratings (OCR) to provide oversight over NRSROs and enhanced regulation of such entities., § 932(p)
Enhanced regulations of nationally recognized statistical rating organizations (NRSROs) include: NRSROs are required to establish, maintain, enforce and document an effective internal control structure governing the implementation of and adherence to policies, procedures, and methodologies for determining credit ratings. Submit to the OCR an annual internal control report. Adhere to rules established by the Commission to prevent sales and marketing considerations from influencing the ratings issued by a NRSRO. Policies and procedures with regard to (1) certain employment transitions to avoid conflicts of interest, (2) the processing of complaints regarding NRSRO noncompliance, and (3) notification to users of identified significant errors are required. Compensation of the compliance officer may not be linked to the financial performance of the NRSRO. The duty to report to appropriate authorities credible allegations of unlawful conduct by issuers of securities. The consideration of credible information about an issuer from sources other than the issuer or underwriter which is potentially significant to a rating decision. The Act establishes corporate governance, organizational, and management of conflict of interest guidelines. A minimum of 2 independent directors is required.
Subtitle C grants authority to the Commission to temporarily suspend or permanently revoke the registration of an NRSRO with respect to a particular class or subclass of securities if after notice and hearing the NRSRO lacks the resources to produce credit ratings with integrity., § 932 Additional key provisions of the Act are: The Commission shall prescribe rules with respect to credit rating procedures and methodologies. OCR is required to conduct an examination of each NRSRO at least annually and shall produce a public inspection report. To facilitate transparency of credit ratings performance, the Commission shall require NRSROs to publicly disclose information on initial and revised credit ratings issued, including the credit rating methodology utilized and data relied on, to enable users to evaluate NRSROs.
In addition, Subtitle C requires the SEC to conduct a study on strengthening NRSRO independence and recommends the SEC utilize its rulemaking authority to establish guidelines to prevent improper conflicts of interest arising from the performance of services unrelated to the issuance of credit ratings such as consulting, advisory, and other services., § 939C The Act requires the Comptroller General of the United States to conduct a study on alternative business models for compensating NRSROs, § 939E
Subtitle D – Improvements to the Asset-Backed Securitization Process In Subtitle D, the term "Asset-Backed Security" is defined as a fixed-income or other security collateralized by any type of self-liquidating financial asset, such as a loan, lease, mortgage, that allows the owner of the Asset-Backed Security to receive payments that depend on the cash flow of the (ex.) loan. For regulation purposes, Asset-Backed Securities are described as including (but not limited to):, § 941; amending section 3(a) of the Securities Exchange Act of 1934 () by adding: (77) ASSET-BACKED SECURITY collateralized mortgage obligation collateralized debt obligation collateralized bond obligation collateralized debt obligation of asset-backed securities collateralized debt obligation of collateralized debt obligations For regulation purposes, Asset-Backed Securities do not include securities issued by a finance subsidiary to its parent company or company controlled by the parent company. Within nine months of enactment, rules and regulations are to be issued regarding requiring any securitizer to retain an economic interest in a portion of the credit risk. Regulations for assets that are:, § 941; amending section 3(a) of the Securities Exchange Act of 1934 () by adding: (15G) Credit Risk Retention Residential in Nature – are jointly prescribed by the SEC, the Secretary of Housing and Urban Development, and the Federal Housing Finance Agency In General – the Federal Banking agencies and the SEC
Specifically, securitizers are: prohibited from hedging or transferring the credit risk it is required to retain with respect to the assets required to retain not less than 5% of the credit risk for an asset that is not a qualified residential mortgage, for commercial mortgages or other types of assets, regulations may provide for retention of less than 5% of the credit risk, provided that there is also disclosure