State regulators have an ally in the Obama administration.
State regulators have an ally in the Obama administration.
In the debate over the proper role of state oversight and enforcement — versus the need to have uniform national standards at the federal level — state securities enforcers have suffered a number of setbacks and threats to their powers in recent years.
But the debate now seems to have shifted in favor of the local cops on the beat.
Importantly, the Obama administration's regulatory-reform plan, which was released last month, did not recommend a lessened role for state securities regulators.
That was in sharp contrast to a March 2008 regulatory-reform blueprint from the Department of the Treasury which sought to restrict states' enforcement powers.
State securities regulators “came out quite well” in the Obama plan, said Fred Joseph, Colorado's securities commissioner in Denver and president of the North American Securities Administrators Association Inc. of Washington.
What's more, President Obama in May issued a memorandum directing executive departments and agencies to review regulations that might illegally pre-empt state law and to amend them if necessary.
The memo “was sort of vague, but we really appreciated it,” said Jeff Hurley, policy associate at the National Conference of State Legislatures, a Washington bipartisan organization that represents state lawmakers.
“I think the Obama administration recognizes the important role that states play,” Mr. Joseph said. “If anything, [the Obama administration] has shown deference to what we do.”
The Obama regulatory-reform plan incorporates several items that NASAA has recommended, such as a systemic-risk council of regulators, a fiduciary standard for brokers and a possible end to the brokerage industry's use of mandatory arbitration.
NASAA wants the administration to include state regulators on the systemic-risk council, but the Obama plan would have only federal regulators.
The most controversial part of the Obama plan is the proposed Consumer Financial Protection Agency, which would have jurisdiction over many banking products.
One problem the financial services industry has with the CFPA is that states would be free to set standards that were even tougher.
The Obama plan says the CFPA “would set a floor, not a ceiling, for state laws,” said Scott Talbott, a spokesman for The Financial Services Roundtable in Washington, which represents large, integrated financial services companies. “Our biggest concern is ending up with a patchwork of 50 state regimes.”
NATIONAL STANDARDS
“National standards and rules generally make our markets more efficient and more easily understood by customers,” said Travis Larson, spokesman for the Securities Industry and Financial Markets Association of New York and Washington.
In recent years, industry interests have been successful in restricting state powers.
In 1996, Congress passed the National Securities Markets Improvement Act, which eliminated rulemaking by the states.
But the act preserved states' enforcement powers, and they've stepped into the breach when federal regulators have failed to act, most famously in 2003 when then New York Attorney General Eliot Spitzer spearheaded a $1.4 billion settlement against major securities dealers for publishing false research.
Last year, state regulators led the way in charging brokerage firms for misrepresenting the liquidity of auction rate securities.
A month after the ARS market froze up in February 2008, the Treasury Department floated a blueprint for regulatory reform that would have eliminated much of the states' ability to pursue violations of federal securities laws and state conduct rules.
But now, Mr. Obama wants to protect the states' ability to go after wrongdoers.
“Throughout our history, state and local governments have frequently protected health, safety and the environment more aggressively than has the national government,” he said in his May memo.
Still, with the Obama administration pushing for a new federal risk supervisor and consumer protection agency, “we can't say there's a trend one way or another” regarding state versus federal powers, said the NCSL's Mr. Hurley.
“It's too early to say,” he added, “so we're keeping a watchful eye out” for continued efforts to pre-empt state laws.
E-mail Dan Jamieson at djamieson@investmentnews.com.
