Administration proposes investor protections

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Fresh on the heels of new proposals to regulate mortgages and other consumer credit products, the Obama administration on Friday sent Congress proposed legislation designed to head off another Bernard Madoff-style fraud.

The Treasury Department plan would allow the Securities and Exchange Commission to impose more consistent standards and greater accountability for those who provide advice to average investors. It also would require simpler, consumer-friendly disclosures to the buyers of stocks, bonds, mutual funds and other types of financial instruments.

One of the proposal’s more controversial elements would give the SEC authority to pay rewards to whistleblowers whose tips lead to uncovering significant wrongdoing. Money for the rewards would come from fines the SEC levies.

The Obama administration also proposed a clampdown on broker-dealers, companies that can carry out trades on behalf of clients or for their own benefit. Currently, an investment adviser that is barred from practicing for financial misconduct can still become a broker-dealer. The proposed legislation would allow the SEC to bar those found guilty of misconduct from trading securities in any capacity.

The legislation also would declare that broker-dealers have a fiduciary responsibility to investors. Presently, they aren’t explicitly charged with having investors’ best interests at heart.

The Treasury Department’s assistant secretary for financial institutions, Michael Barr, said in a conference call that many of the proposed changes stemmed from failures that allowed Madoff to go undetected for so long. Madoff was sentenced last week to 150 years in prison for carrying out a years-long Ponzi scheme that cost investors $50 billion.

“The SEC is taking some steps under its existing authority already, and in addition to that, today’s (proposed) standards with respect to broker-dealers and investment advisers could have helped in that context, and expanded protection for whistleblowers could have helped in that context potentially,” Barr said.

In a statement, SEC Chairman Mary Schapiro said her agency, whose mission is protecting investors, was on board with the Treasury’s proposals.

“The measures included in the legislative package are consistent with ideas we have publicly promoted. In particular, I believe compensating whistleblowers, strengthening the SEC’s enforcement capabilities and applying tough standards that require financial professionals to put investors first will provide us with needed tools to better safeguard investors,” Schapiro said.

The SEC failed to detect Madoff’s crimes or even to investigate his company, despite its seeming ability to pay generous returns in both good times and bad. As it turned out, Madoff wasn’t investing, but using the money from new clients to pay “dividends” to old ones.

New investor-protection proposals from the Obama administration follow last month’s plans to create a Consumer Financial Protection Agency, which would have broad powers to regulate mortgages, credit cards, payday lenders and a host of other types of credit products extended to consumers.

Both sets of proposals aim to reverse more than a decade of moves away from regulation, which encouraged self-policing by the financial sector.


(c) 2009, McClatchy-Tribune Information Services.