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Tuesday, November 30, 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act: Title IX, Investor Protection

Mark Jickling
Specialist in Financial Economics

Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) contains 10 subtitles and 113 separate sections amending federal securities laws intended to improve investor protection. The range of Title IX’s provisions is very broad: some sections will bring significant changes to the securities business, while others are little more than technical clarifications of the Securities and Exchange Commission’s (SEC’s) authority. This report provides brief summaries of those provisions that create new SEC authority, that were controversial during the legislative process, or that appear likely to have far-reaching consequences.

Some of the most noteworthy sections of Title IX address issues viewed as central to the financial crisis that erupted in 2007. These include 
  • enhanced regulation of credit rating agencies, whose triple-A ratings of “toxic” mortgage-backed bonds set the stage for panic;
  • more stringent regulation of asset-backed securities, including a “skin in the game” requirement that issuers of such securities retain some of the risk; and 
  • a number of provisions relating to executive compensation, including authority to prohibit pay structures that create inappropriate risk in financial institutions. 
Another driving force behind Title IX was the Bernard Madoff Ponzi scheme, which repeated SEC examinations and investigations failed to detect. Many sections seek to improve the SEC’s performance, including 
  • creation of an Investor Advocate and Investor Advisory Committee within the SEC; 
  • establishment of a whistleblower program to produce tips about securities fraud;
  • various measures to improve SEC management, including a wide-ranging outside consultant study and various Government Accountability Office audits; and 
  • more budget flexibility and authorization for higher appropriations levels. 
Another group of provisions addresses the rights of investors and shareholders: 
  • the SEC may impose a fiduciary duty on broker-dealers who give investment advice, similar to the duty that already applies to investment advisers; 
  • municipal financial advisors must register with the SEC, and a majority of the Municipal Securities Rulemaking Board must be independent of the industry; and 
  • new disclosures and shareholder votes relating to executive compensation and corporate performance and governance, including SEC authority to allow certain shareholders to nominate candidates for the board of directors. 
Because of the diversity of these and other provisions, it is difficult to characterize the scope and thrust of Title IX in its entirety. Some observers, however, describe it as the most significant change to securities law since the enactment of the original federal statutes in the 1930s.

Date of Report: November 24, 2010
Number of Pages: 22
Order Number: R41503
Price: $29.95

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