Corporate & Securities Law

By Jim Hamilton

Financial Reform Legislation Should Give SEC Collateral Bar Power

Both the House (HR 4173) and Senate (S 3217) versions of financial reform legislation contain provisions authorizing the SEC to impose collateral bars. Thus, it appears highly likely that the bill that emerges from the House-Senate conference on the legislation will contain this enhanced power for the Commission.

Currently, a securities professional barred from being an investment adviser for serious misconduct could still participate in the industry as a broker-dealer. Noting that improved sanctions would better enable the SEC to enforce the federal securities laws, the Obama Administration sought authority for the SEC to impose collateral bars against regulated persons across all aspects of the industry rather than in a specific segment of the industry. The interrelationship among the securities activities under the SEC?s jurisdiction, the similar grounds for exclusion from each, and the SEC?s overarching responsibility to regulate these activities support the imposition of collateral bars.

Thus, the legislation authorizes the SEC to impose collateral bars against regulated persons. The Commission would have the authority to bar a regulated person who violates the securities laws in one part of the industry, such as a broker-dealer who misappropriates customer funds, from access to customer funds in another part of the securities industry, for example, an investment adviser. By expressly empowering the SEC to impose broad prophylactic relief in one action in the first instance, this provision would enable the SEC to more effectively protect investors and the markets while more efficiently using SEC resources. Collateral bars will be available under the Exchange Act and the Investment Advisers Act.

Thus, the SEC would be authorized to bar a regulated person who violates the securities laws in one part of the industry, for example a broker-dealer who misappropriates customer funds, from access to customer funds in another part of the securities industry such as an investment adviser. By expressly empowering the SEC to impose broad prophylactic relief in one action in the first instance, the legislation enables the SEC to more effectively protect investors and the markets while more efficiently using SEC resources.

Full post as published by Jim Hamilton's World of Securities Regulation on April 29, 2010 (boomark / email).