NEW YORK, June 17 (Reuters) - The proposed U.S. financial regulatory overhaul could lead to more enforcement cases brought against stock brokers and others who run afoul of the sweeping new rules, legal experts said on Wednesday.
Experts in securities law say they see a large increase in powers given to the U.S. Securities and Exchange Commission under President Obama’s plan, which is designed to prevent a repeat of the current global financial upheaval.
The plan, which must be put into proposed legislation and sent to Congress for action, would give the SEC more authority to regulate financial products like credit default swaps and other complex trading instruments. With more areas under its umbrella, the agency’s enforcement arm would have more avenues to investigate and unearth possible wrongdoing, experts say.
“The SEC regulates a world that has certain boundaries, and you are dramatically increasing the world that they regulate,” said Bruce Baird, chair of the white-collar defense and investigations practice group at law firm Covington & Burling LLP in Washington.
“If you have a bigger world, you’re going to have more violations.”
Regulators already have been under pressure to boost efforts to fight corporate wrongdoing, with the SEC facing heat from investors and lawmakers for repeatedly failing to follow up on warnings over the years that money manager Bernard Madoff was running a massive swindle.
Madoff was arrested last December after his two sons said he confessed his long-running scam to them.
The SEC can bring civil lawsuits against people for violating securities laws, including cases involving insider trading or market manipulation. If violations of securities laws are deemed willful, prosecutors can also seek criminal charges.
Expanding the SEC’s powers may make the agency even more aggressive in its enforcement efforts, said Peter Henning, a professor at Wayne State University Law School in Michigan and a former lawyer at the SEC and the Department of Justice.
“With the expansion of the federal regulation of the marketplace, we will see more enforcement actions,” he said. “That’s not necessarily a good thing by the way. You can be too aggressive. Every technical violation doesn’t require an enforcement action.”
One area where the SEC is poised to get new power under the proposed overhaul would be in requiring that broker-dealers have a fiduciary duty to their clients — just like investment advisers do.
Such a change would place a higher standard on brokers’ conduct that requires they always act in the customer’s best interests when recommending products.
Under the rule change, brokers could be charged with securities fraud if they omit information deemed critical for investors, said Steven Feldman, a partner in the white-collar defense practice at law firm Herrick in New York.
“That is a perfect example of raising the bar of behavior for a particular industry,” he said. “If you raise that bar and people don’t comport with the new rules, it certainly will generate more litigation. If people continue to play by the old rules, they will be subject to civil and criminal proceedings.”
Legal experts say they do not expect an increase in cases immediately, because regulators first need to get the expanded authority and then figure out how to use it.
“Enforcement cases are a lagging indicator,” Henning said. “They take time to develop.” (Reporting by Martha Graybow; Editing by Richard Chang)