Ten legislative and regulatory developments advisers need to know

By Liz Skinner

December 7, 2011

1. State regulators said they’ll help coordinate reviews (see story) among states for some midsize investment advisers who must switch to state oversight from Securities and Exchange Commission registration as prescribed by the Dodd-Frank financial reforms measure. The program will be available for advisers now registered with the SEC who must register with four to 14 states, the North American Securities Administrators Association Inc. said. All advisers managing between $25 million and $100 million in assets must switch to state registration by next June, unless they are registered in 15 or more states; those advisers can remain under the SEC. A program manager will act as a facilitator in coordinating the state reviews, hoping to avoid having recommendations from one state contradict guidance from another state. Authority to approve applications, however, remains with each state. The coordinated review form needed to participate in the free service can be found at NASAA’s IA Switch Resource Center website (view site here).

2. A financial transactions tax introduced by Democrats in the House and Senate in early November would place a 0.03% levy on trades in stocks, bonds and other securities. Not surprisingly, it is being fought by the securities industry. S 1787 (click here): introduced by Sen. Tom Harkin, D-Iowa, and HR 3313 (click here), from Rep. Peter DeFazio, D-Ore., would hurt investment firms and their clients, including retirees, when the tax is passed along through fees in 401(k) plans, according to the Securities Industry and Financial Markets Association. While the tax could raise $353 billion over a decade, another major goal of the legislation is to curb high-frequency trading, its sponsors said. The bills have 15 cosponsors in the House and two in the Senate.

3. The House approved several bills in November by overwhelming bipartisan margins to help small businesses raise money and ease Securities and Exchange Commission registration rules. HR 2930 (click here) would allow start-up firms to pool up to $1 million through online “crowd-funding” in individual investments of $10,000 or 10% of an investor’s income, whichever is less. The House crowd-funding bill was endorsed by the Obama administration. The North American Securities Administrators Association opposes the proposals (view here) out of concern the crowd-funding measure would to lead to speculative, risky offerings that could cost small investors heavy losses. HR 1070 (view here): would increase to $50 million from $5 million the amount of debt small businesses could issue publicly without having to go through the full SEC registration process. In the Senate, a related bill, S. 1791 (Read here, would cap individual investments at $1,000.

4. Securities and Exchange Commission Chairman Mary Schapiro said her staff is nearly done writing new rules for the $2.6 trillion money market fund industry after two years of suggesting that more needs to be done to prevent a run on the funds. After considering at least eight different approaches and receiving extensive comments on the issue (view here) over the past year, the commission in the next couple months will release a plan to change the structure of the funds to make them less vulnerable to runs. It may require money market funds to maintain a capital buffer to draw on during emergencies, she said. The SEC hasn’t entirely ruled out forcing funds to move to a floating net asset value, a step that industry officials strongly oppose. Concern stems from September 2008 when Lehman Brothers Holdings Inc. collapsed and the Reserve Primary Fund, which held debt instruments issued by the investment bank, “broke the buck,” or fell below $1 a share. Investors withdrew $310 billion from prime money market funds, and the federal government had to step in and provide a guarantee. The SEC already instituted limited changes to money funds in February 2010. The money funds regulations appear to be up for resolution before the 12(b)-1 fee issue (read here) is finalized.

5. Proposals to prohibit members of Congress and its staff from trading stocks or commodities based on nonpublic information related to their Capitol Hill work are hot following a Nov. 13 “60 Minutes” segment pointing out that members of Congress seem to subvert insider trading rules. The issue has come up before but never gathered much support. The main bill introduced by Rep. Tim Walz, D-Minn., HR 1148 (read here), went from having nine co-sponsors before the “60 Minutes” story aired, to more than 130 now. Mr. Walz’ Stop Trading on Congressional Knowledge, or STOCK, Act would ban trading by members or employees of Congress based on nonpublic information and require them to report all securities transactions of $1,000 or more. Two measures with similar goals also have been introduced in the Senate since the segment aired, S 1871 (read here), and S 1903 (read here). The Financial Planning Association and the Financial Services Institute Inc. said they are considering whether to lend support to any of the proposals after receiving comments from members expressing disappointment that such activity wasn’t already explicitly illegal.

To view the remainder of the list click here.