Yesterday, the SEC began its rulemaking process under the Dodd-Frank Walls Street Reform and Consumer Protection Act of 2010 ( the Act) by announcing an open rulemaking process and requesting comments to assist in the agency’s study of the obligations of broker-dealers and investment advisors. And, in a speech at the United States Chamber of Commerce, SEC Chairman Mary Shapiro outlined key areas of current SEC regulatory focus under the Act.
Public companies, regulated entities and other interested constituencies should take proactive steps to participate in the comment process for rulemaking and studies that affect them.
In an expansion of the SEC’s normal rulemaking process, the SEC announced that it would seek public comment on rules required by the Act before the agency actually proposes those rules rather than seek comment only after it publishes its proposals. To facilitate the process, the SEC has created a series of email links tied to different sections of the Act so that the public can send comments to the agency. The agency is establishing the links in groups based on the timing of the required rulemaking beginning with the rules having the shortest time for implementation. The SEC will publish all submitted comments. The link to these comment mailboxes is here. To read the SEC’s press release announcing this new process click here.
In addition, the SEC has stated that its staff will try to meet with interested parties. Parties requesting a meeting must provide, prior to the meeting, an agenda of discussion topics, which will become public after the meeting. The SEC staff will attempt to meet with parties who have varying viewpoints and, depending on the number of meeting requests, may have to limit meetings with those who are likely to have similar positions on the rules. The staff will also limit multiple meetings with the same parties.
Broker Dealer/Investment Advisor Duty of Care Comment Request
As required by the Act, the SEC is studying (a) whether the current standards of care for brokers, dealers and investment advisors is effective as those standards related to retail customers (a natural person receiving personalized investment advice about securities); and (b) whether there are any gaps in the current legal and regulatory duty of care standards. The results of the SEC’s study is due on January 21, 2011 (six months post enactment).
Yesterday, the SEC requested public comment on these issues, including topics (a) and (b) above as well as comment on 12 other related topics, each of which is designed to help the SEC assess whether retail customers understand the current standards of care and whether a change in the current regulatory environment would benefit retail customers with improved protection from fraud while allowing for continued access to the full range of product and services currently offered. The SEC’s comment request specifically focuses on whether the fiduciary standard of care applicable to investment advisors should also apply to broker dealers. Chairman Shapiro has publicly stated that she favors a uniform fiduciary standard of care. She also noted that helpful comments will recognize “the primary and central importance of investor protection, but offer suggestions on implementing fair and flexible regulation. . .while preserving brokers’ ability to offer a full spectrum of services.”
Comments are due 30 days from publication of the comment request in the Federal Register. To read the full request for comment click here.
Current SEC Regulatory Focus under the Act
In addressing the Center for Capital Markets Competitiveness at the US Chamber of Commerce, Chairman Shapiro highlighted five current areas of SEC regulatory focus under the Act:
OTC derivatives: The SEC and CFTC have already started their joint rulemaking process, particularly relating to the definition of key terms such as “swap,” “security-based swap” and “mixed swap.” The agencies will work together closely to avoid regulatory gaps and to insure that new derivative products do not fall into any regulatory gaps.
Fiduciary duty: Chairman Shapiro announced the comment request regarding the duty of care for brokers and investment advisors, noting her support for a uniform fiduciary standard. She noted that after the study on the topic is complete, the SEC will have authority to write rules that would create a uniform standard of care and that the Act “requires that this standard be ‘no less stringent’ than the standard applicable to investment advisors."
Hedge funds: The SEC is already working on hedge fund regulation with UK regulators and emphasized the need for registration, reporting and recordkeeping by hedge funds and other private funds.
Corporate disclosure: The SEC will adopt many rules, with a particular focus on executive compensation. Key areas include say-on-pay advisory votes, shareholder input on golden parachutes, shareholder nomination of directors, enhanced disclosure on CEO compensation as compared to employee compensation, enhanced disclosure on the relationship between corporate performance and executive compensation and other similar areas. New rules will address compensation committee independence standards and board conflict of interest standards. New rules will require corporate clawback policies.
To read our Corporate Governance Alert on the provisions of the Act addressing these and related issues, please click here.
Credit Rating Agencies: The SEC will address internal controls and procedures, conflicts of interest and analyst training. In addition, new rules will require more transparency into the process and methodologies used by credit rating agencies. The SEC will also explore whether to establish an entity which would create a system to assign ratings of structured finance products rather than allowing the product’s issuer, sponsor or underwriter to select the rating agency.
Those affected by these and other aspects of the Act should act promptly to ensure that their views are heard. The SEC has opened up the process, and if you wait for the publication of proposed rules you risk losing the opportunity to have the most effective impact on these significant rulemaking initiatives.
For further information on participating in the SEC rulemaking process, contact your DLA Piper lawyer or:
Deborah R. Meshulam
Chair, Securities Enforcement
Diane Holt Frankle
Chair, Public Company and Corporate Governance
Marjorie Sybul Adams
Chair, Capital Markets
Partner, Corporate and Securities
Of Counsel, Public Company and Corporate Governance
To read our overview of the Titles of the Dodd-Frank Act and the coming deadlines, please click here.