Congress Urged to Not Weaken State Securities Regulation
January 14, 2010
A leading state securities regulator will tell the Financial Crisis Inquiry Commission (FCIC) Thursday that impending financial regulatory reform could “provide political cover for legislation curbing the reach of state regulators.”
Texas Securities Commissioner and North American Securities Administrators Association (NASAA) President Denise Voigt Crawford will testify that state securities regulators have been ahead of the Securities and Exchange Commission (SEC) in unearthing a number of high-profile cases, including abusive trading involving market timing in mutual funds, the auction rate securities (ARS) scandal and the Enron investigation.
State securities regulators have also been tougher than federal regulators, she said: “Ironically, in its own enforcement activities, the SEC has not met the standard of conduct that it requires of the broker-dealer firms it regulates,” she said, explaining that on numerous occasions, the SEC has failed to detect abuses or take appropriate action despite the appearance of “red flags,” where conduct by a broker-dealer would invite SEC disciplinary action.
As an example, Crawford cited the 2002 investigation by the New York Securities Bureau, which found that, from 1999 to 2001, Merrill Lynch did not publish a single “reduce” or “sell” recommendation on any stock in its Internet group, and concluded that Merrill’s research analysts were not giving impartial advice to their customers.
Two weeks after the announcement, the SEC announced that it was making an inquiry into practices of research analysts at Merrill, she said, adding that “It did not appear that the SEC took any action in the scandal until an announcement by a state securities regulator prompted the act.”
“Far from monitoring the securities markets and securities industry …the SEC was often prompted into action only after state regulators had unearthed” improper conduct, she said.
Crawford had harsh words for the U.S. Treasury Department’s “Blueprint for Modernized Financial Regulatory Structure,” released in 2008. “The Blueprint’s assault on state enforcement was straightforward,” she said, by focusing narrowly on state enforcement of antifraud rules rather than rulemaking and oversight.
“Thankfully, this misguided proposal, which was supported by the securities industry, did not become law,” she said.
Faced with weakened federal oversight, state regulators have increasingly played a more aggressive role in prosecuting systemic securities fraud, she said: “As the regulators closest to investors, state securities regulators provide an indispensable layer of protection for Main Street investors.”
Her recommendations to the panel include restoring provisions of the Glass-Steagall Act, increasing state oversight of investment advisers, beefed-up securities prosecutions, and re-examining and removing hurdles facing private plaintiffs.
Specifically, she recommended that state securities regulators be given responsibility for examining oversight of all investment advisers with under $100 million in assets, up from $25 million currently. Closing such an “oversight gap” could result in more thorough state examinations, uncovering a greater number of violations and resulting in more prosecutions. It would likely require investment advisers with assets under $100 million to devote greater resources to preparing for state examinations.
The 10-member FCIC, established by Congress to examine the causes of the financial crisis, is holding its first public hearings January 13 and 14.
