Magazine article Government Finance Review

Congress Eyes Weakening Investor Protections

Magazine article Government Finance Review

Congress Eyes Weakening Investor Protections

Article excerpt

As Congress continues to move its deregulatory agenda through the House and Senate, state and local government investment officers and pension fund managers are paying particular attention to legislation that would overturn or sharply limit some key provisions of federal securities laws that protect public investors and their taxpayers. The Capital Markets Deregulation and Liberalization Act of 1995 (H.R. 2131), introduced by House Subcommittee on Telecommunications and Finance Chairman Jack Fields (R-TX) and seven Republican cosponsors, is broad legislation intended to relax what some see as a burdensome securities regulatory structure. Unfortunately, the passage of such legislation would have just the opposite result by eroding investor confidence, in what are currently the safest financial markets in the world.

Public investors are major market participants. As of the first quarter of 1995, state and local governments held $480 billion of the total U.S. Treasury debt of more than $4.8 trillion, or approximately 17 percent of the federal government securities market not held by foreign investors or federal agencies. Finance officers, entrusted with public funds, take their fiduciary responsibilities seriously.

H.R. 2131 contains several major provisions affecting state and local government investors. If investors of public funds are not able to rely on the information or recommendations of broker-dealers, their ability to make sound decisions will be impaired. Of primary importance to public investors is H.R. 2131's suitability provision, which determines broker-dealer liability for certain practices. By defining an institutional client as one with a portfolio of at least $10 million in securities, the bill would create a new suitability provision applicable to broker-dealer relations with the majority of state and local government investors, which would be considered institutional investors. The bill would amend existing laws to provide that, when dealing with institutional clients, broker-dealers would not be liable for the investment decisions of such investors unless there is a written agreement. This written agreement may hold the broker-dealer responsible if and only if the broker-dealer and investor agree that the recommendation is made on a reasonable belief that it is suitable, based on facts disclosed by the investor as to its financial situation and its other security holdings--that is, its entire portfolio. The written agreement is the only means for holding the broker-dealer liable for unsuitable recommendations.

H.R. 2131 contains other provisions that also are troubling to state and local government investors, but it is this new suitability provision that causes the greatest concern. The bill would effectively repeal provisions of the Government Securities Act Amendments of 1993, whose adoption was supported by Representative Fields. The amendments authorized sales practice rules, including those governing suitability, to be written by the National Association of Securities Dealers, Inc. (NASD), and financial institution regulators. GFOA strongly supported passage of the 1993 amendments, which came about as a result of the egregious sales practices of broker dealers and the losses suffered by state and local communities, as well as savings and loans and thrift institutions.

Congress recognized in 1993, as it should now, that many public investors, although they may have considerable sums of money to invest, have multiple responsibilities in addition to their investment duties. …

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