More than ever, state securities regulators face the threat of a diminished role in overseeing the financial services industry.
More than ever, state securities regulators face the threat of a diminished role in overseeing the financial services industry. As Congress weighs the idea of creating a new systemic-risk regulator that would be charged with overseeing broad risks to the financial system, it is up to Fred Joseph, 56, as president of the North American Securities Administrators Association Inc. of Washington, to ensure that state regulators don't see their role as watchdogs of the industry reduced.
About 200 state regulators were in Washington last week for the annual NASAA Public Policy Conference. At the meeting, House Capital Markets Subcommittee Chairman Paul Kanjorski, D-Pa., warned the group that Congress is “going to have to invade some of the legislation that has been reserved to the states” as it takes up financial services regulatory reform.
His comments struck a chord of fear with many state regulators, who worry that they will be overshadowed as the federal government takes on more powers over the financial services industry.
“We would like a more moderated approach and a proper perspective on where state regulators fit into the new proposed regulatory-reform plan,” said Alabama Securities Commissioner Joseph Borg, whose office is in Birmingham.
“Our continual message with Fred leading the charge has been: We are the troops on the ground when it comes to seeing what the problems are, whether it's stockbrokers or mortgage bankers. All politics is local,” Mr. Borg said.
Mr. Joseph also serves as Colorado's securities commissioner.
Q. Isn't regulating systemic risk beyond the purview of state regulators?
A. Not necessarily. They're talking about systemic risk being [regulated] by one monolithic regulator. Most mentioned is the Federal Reserve Board or maybe a new entity that would supposedly be able to look at all the risk that's out there. Because this regulator will be all-knowing, all-seeing, they'd be able to prevent something from happening again. A council of regulators, state and federal, would still be needed, because each of them knows their respective areas. More eyes to look at it would be better.
Q. Wouldn't this council of regulatory agencies with different agendas make systemic-risk regulation unworkable?
A. It's not different from the Federal Reserve Board and the [Securities and Exchange Commission]. They have numerous commissioners, or board members. They come up with decisions. I have my own securities board and banking board in Colorado. That's the way decisions are made. How could one regulator be an expert in everything? I have a great deal of respect for the Fed, but I feel concerned about their independence and the effect of being an over-regulator. I'm concerned about them being able to deal with monetary policy if they're concerned about all this other stuff.
Q. Are you afraid of being overshadowed by the federal government?
A. We'll always be needed because we are closest to mom and pop and grandma and Main Street America. I think there's always going to be a role for us, no matter what. If you look at it in terms of value-added, I think we have a lot to add to the equation, even at the federal level. I truly believe all knowledge doesn't necessarily emanate out of D.C. We're out in the field actually seeing this stuff happening. Sometimes I think being here [in Washington] is a little bit insulated.
Q. You may not be worried about being overshadowed, but don't you think being overshadowed is a big concern among many of your fellow state regulators?
A. It could be. It depends on how it would all be structured. But I don't sit up at night losing sleep over it. Be-cause I think we serve a very vital function. We're on a mission from God.
Q. Do you think state regulators would have uncovered the fraud going on at Bernard Madoff's firm?
A. Investors in a Ponzi scheme believe [that] until it goes bad, the regulator really isn't welcome. I have schemes that I uncover, and the investor still believes the perpetrator, and they think I'm the bad guy. It's hard to uncover all fraud.
Q. Why are so many state regulators opposed to the idea of having investment advisers regulated by the Financial Industry Regulatory Authority [Inc. of New York and Washington]?
A. Some of my colleagues have trouble with the idea of self-regulatory organizations.
Q. Do you think Finra would hold advisers to a strong fiduciary standard of care that your group would advocate?
A. Finra isn't relevant to the equation. We're just saying because there's such a blurring [of regulations governing advisers] for the betterment of the investor, everyone should have the same heightened standard of care.
Q. SEC Chairman Mary Schapiro has talked about having a uniform standard of care, which is what the brokerage industry has called for. What are you concerns about that?
A. The concern is, they [would] lower the fiduciary-duty standard. I don't know what that really means. A uniform standard — is that suitability stuff, is it sales practice stuff?
Q. What do you think of the idea of having the Certified Financial Planner Board of Standards [Inc. in Washington] regulate financial planners?
A. I'm not opposed to having more examiners out there.
Q. If brokers are held to be fiduciaries as investment advisers are, do you think that would get in the way of their making principal trades?
A. If the product is best for investors, it's not an issue — if it meets their goals, their investment needs. If the product is right for the customer, I don't know that I see an issue. You're going to sell what you're going to sell.
E-mail Sara Hansard at shansard@investmentnews.com.
