What Is the Investor Protection Act?

The Investor Protection Act is a component of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009 designed to expand the powers of the Securities and Exchange Commission (SEC). The act established a whistleblower reward for reporting financial fraud, increased liability for aiding and abetting, and doubled funding to the SEC over a five-year period. The act was part of regulators' attempt to prevent some of the problems that caused the financial crisis from reoccurring in the future.

Key Takeaways

  • The Investor Protection Act of 2009 was designed to expand the powers of the Securities and Exchange Commission.
  • Part of the Dodd-Frank Act, it was created to prevent some of the problems that caused the financial crisis from reoccurring in the future.
  • The act established a committee to consult with the SEC about regulatory priorities and issues that surround new financial products, fee structures, and trading strategies.
  • Whistleblowers were granted increased protections under the act.

Understanding the Investor Protection Act

Also known as the Investor Protection Act of 2009, the Investor Protection Act established the Investor Advisory Committee to consult with the SEC. The committee meets at regular intervals each year, and advises on topics like regulatory priorities and issues that surround new financial products, fee structures, and trading strategies. It also provides consultation on initiatives to protect investor interest and to promote investor confidence in the market’s integrity by requiring the disclosure of conflicts of interest and risks associated with investment products.

The act also increased safeguards and rights for whistleblowers, who can bring claims against employers between 90 and 180 days after discovering a violation. This included granting the SEC the authority to recommend granting whistleblowers monetary rewards of up to 30% of sanctions that exceed $1 million. The law also established the SEC’s Investor Protection Fund, which awards payments to whistleblowers. The fund also supports investor education initiatives.

Further whistleblower protections offered through the act include prohibitions on employers from demoting, suspending, firing, threatening, or otherwise discriminating against employees or agents who provide information to the SEC or assist in investigations. A whistleblower is authorized to take legal action if such issues take place.

Another key element of the act deals with the regulation of credit rating agencies because of the critical role they play in the market. Because of the rise of conflicts of interest and other problems that arose during the mortgage crisis on the part of these agencies, many banks ended up mismanaging risk, posing a threat to investors. New regulation now requires credit rating agencies to be more accountable and transparent about their practices.

Special Considerations

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009 was created by the Obama administration to improve accountability and transparency in the financial system. The move was in response to the subprime mortgage meltdown that led to the financial crisis of 2008. Dodd-Frank was created to prevent predatory lending and to help consumers understanding the conditions of their debt. The act included a Consumer Financial Protection Agency that would regulate mortgages, auto loans, and credit cards. Additional powers were granted to the SEC that included authorization to gather information, communicate with investors and the public, and launch programs for the protection of investors.

Amendments were also made to prior legislation including the Securities Investor Protection Act of 1970 (SIPA) and the Sarbanes-Oxley Act of 2002. Changes to SIPA include an increase to the minimum assessment paid by Securities Investor Protection Corporation members from a flat $150 per year to 0.02% percent of the member's gross revenues from the securities business. The borrowing limit on U.S. Treasury loans was also increased from $1 billion to $2.5 billion. Amendments to the Sarbanes-Oxley Act added brokers and dealers to the Public Company Accounting Oversight Board’s sphere of oversight.

President Donald Trump signed a partial repeal of the Dodd-Frank Act in May 2018.

In May 2018, President Donald Trump signed a partial repeal of the Dodd-Frank Act into law after the Senate passed a bill to exempt a number of banks from the act's regulation. Trump claimed the law unfairly prejudiced certain institutions, preventing them from lending to different kinds of enterprises including small businesses.