Investment and Securities Industry

Traditional pensions largely have been replaced with 401(k)s and other retirement plans in which employees contribute to individual accounts. As a result, stocks and other investments have become a critical component of an individual’s retirement assets. This gives individual investors greater control over their retirement. However, it places greater responsibility on them to make appropriate investment choices. More than ever, investors need objective advice and information. They also need safeguards against abusive practices.

As the number of first-time investors grows and more people face greater decision-making responsibility, the need for expert advice and automatic mechanisms that help to guide better choices increases. So does the potential for investor abuse or fraud. The variety and increasing complexity of investment products can be intimidating and confusing. Yet, account statements and written materials are often indecipherable. In addition, investors often lack objective advice and information. These materials often fail to disclose key information to help investors assess the risk and cost of investment products. In addition, conflicts of interest remain a problem. Industry practices in areas such as broker compensation, mutual fund governance, and audit, accounting, and reporting standards have created actual or potential conflicts of interest. This makes it more difficult for investors to obtain objective advice and information. It can allow financial industry professionals to profit at their expense.

Rapid growth in investment activity has severely taxed the resources of the Securities and Exchange Commission and state securities regulators.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 increased the amount that prompts the Security and Exchange Commission (SEC) registration of an investment advisor from $25 million to $100 million in assets under management. As a result, there are now more than 17,000 state-registered investment advisors and over 13,000 investment advisors registered with the SEC.

The National Securities Markets Improvements Act of 1996 preempts many state securities requirements but maintains states’ ability to address fraudulent activities that elude federal law enforcement.

In 2020, the National Association of Insurance Commissioners (NAIC) adopted a revised model rule on annuities and suitability, in line with the SEC’s Regulation Best Interest (Reg BI). This rule establishes a “best interest” standard but remains short of a fiduciary standard. New York has established standards that are stronger than the NAIC model. Other states are considering doing so. The previous model was adopted in nearly every state.

The Financial Industry Regulatory Authority, the securities industry’s self-regulatory body, also has rules governing recommendations of investment products, including variable annuities.

States play an important role in securities regulation, particularly with respect to addressing fraudulent activities. The Uniform Securities Act is a model law to advance consistency among states, clarify state and federal regulation, and increase the efficiency of regulation and enforcement activities.

Speculative asset classes: Without regulatory supervision, it is much easier to sell to general investors risky assets that promise high returns but often result in substantial losses. As experience with some cryptocurrencies has shown, unregulated assets may be mismanaged, inaccurately described, or even fraudulent. Even if only certain types of unregulated assets or the platforms on which they are traded are abusive, it can be very difficult for general investors to tell the difference.

A related concern is the use of virtual assets to facilitate fraud. Cryptocurrency ATMs are a particular concern. Although these machines can be used for legitimate purposes, they also present significant risks for scams and fraud (see also Scams and Fraud). Criminals exploit these machines due to their speed and often untraceable nature. For example, they may instruct victims to withdraw cash from their bank accounts and deposit it into a crypto ATM to purchase virtual currency to send to criminals. According to the Federal Reserve, crypto ATMs facilitated at least $35 million in fraudulent transactions in 2022.