How William Galvin has galvanized the broker-dealer industry

Massachusetts' securities regulator imposes heavy fines as a way to deter illegal conduct

Oct 20, 2013 @ 12:01 am

By Bruce Kelly

William Galvin is a securities regulator for only one state, but you would never know it by the volume of the fines he imposes on the brokerage industry.

Indeed, when it comes to inflicting monetary pain on broker-dealers, the Massachsuetts Securities Division is more on par with the Financial Industry Regulatory Authority Inc., which is the regulator for the broker-dealer industry in all 50 states.

Over the past 12 months, Mr. Galvin has ordered fines against broker-dealers of at least $56 million, according to an InvestmentNews tally.

By comparison, Finra fined its broker-dealer members $78.2 million last year and $68 million in 2011, according to an annual study of Finra sanctions by Sutherland Asbill & Brennan LLP.

Finra has a staff of about 3,000, while Mr. Galvin's office has a workforce of just 26.

“Bill Galvin has been a highly aggressive securities regulator for years,” said Denise Crawford, former securities commissioner of Texas.

“The only reason the world doesn't know his name is because he's not in New York. If he were in New York, he'd be a household name nationally,” she said.

“I think he's one of those rare politicians who really believes in what he does,” she said. “He's got the old-school fire in the belly to right wrongs.”

Whipped into shape

Perhaps more than any other state securities regulator, Mr. Galvin has proved that he is willing to use the power of his office to impose fines to whip the industry into shape.

Last October, he fined Citigroup Global Markets Inc. $2 million for disseminating research to the media improperly. This month, Mr. Galvin hit the Citigroup unit with a fine of $30 million when a research analyst passed along confidential, unpublished research to hedge fund and institutional clients before sending it to other clients.

“The purpose of the penalty is to deter the conduct,” he told The Wall Street Journal. “If $2 million didn't do it, maybe $30 million will.”

Mr. Galvin, 63, has been stalking the securities industry for the Bay State for nearly 20 years. Since he was first elected secretary of the commonwealth in 1994 — the securities division is part of the secretary's office — he has worked on some of the largest settlements in the industry, including auction-rate-securities disputes from 2008 that resulted in hundreds of millions of dollars in fines to firms that bought back billions of dollars of the moribund securities from investors.

If Mr. Galvin's record as an aggressive regulator compares favorably to Finra, it is even more impressive when compared with his peers in other states.

Last year, state securities regulators nationwide levied fines or penalties of more than $115 million, according to Bob Webster, a spokesman for the North American Securities Administrators Association Inc.

In other words, in the past 12 months, penalties and fines by the Massachusetts Securities Division represent an amount close to 50% of the total that states levied against the industry last year.†

Mr. Galvin's legal authority is no greater than other state securities regulators', said Joseph Borg, director of the Alabama Securities Commission. But Mr. Galvin's power and the tenacity of regulators at the Massachusetts Securities Division derive from several factors.

Those include the fact that as state secretary, he is an elected official and is willing to use his bully pulpit to get the attention of the public, Mr. Borg said.

“I wouldn't say it's a lot more power, but he has the office of the secretary of state,” he said.

“And Massachusetts is a center for hedge funds, mutual funds and most of the big [securities] firms. I think he has more resources than most [securities regulators],” Mr. Borg said.

“For Massachusetts, it's kind of their time in the sun. They've been active,” he said.

“And Galvin has put a premium on the securities division. It's certainly high-profile and obviously good press,” Mr. Borg said.

A Democrat, Mr. Galvin entered politics in 1972 as an aide to the governor's council and won his first local election as a state representative in 1975. This month, he ended speculation that he would run for Massachusetts attorney general by announcing that he wasn't interested in that office.

Mr. Galvin this year has gone toe-to-toe with a number of independent broker-dealers. In total, six IBDs, including LPL Financial LLC and Securities America Inc. have agreed to offer $21.6 million in restitution to clients with regard to sales of nontraded real estate investment trusts, and they have paid fines of close to $1.5 million.

In a statement last month, Mr. Galvin said that the state's investigation into REIT sales “showed widespread problems with adherence to the firms' own policies, as well as the state rule that an investor's purchase of REITs cannot be more than 10% of that person's liquid net worth.”

Breeding ground

If IBDs have drawn his wrath, it might be because Mr. Galvin shares a longstanding perception of many state securities regulators that the business model, with far-flung sales forces of independent contractors operating in one- or two-person offices, can be a breeding ground for compliance problems.

Mr. Galvin thinks that the problems are less likely to crop up at wirehouses, where brokers typically work in large offices and have a branch manager standing over their shoulders.

Many IBDs have long allowed representatives to “self-supervise,” though pending changes in securities rules could wipe out the conflict posed by a broker who sells a product to a client and also is in charge of ensuring the suitability of the management of client accounts.

In July, LPL said its brokers no longer will be allowed to supervise themselves.

“I'm only pointing out factually that these folks are both less supervised — which I think is a fact — and also the customer base that [the reps] are primarily looking toward is, in many ways, also less sophisticated,” Mr. Galvin said in an interview last month.

“Structurally, the way that [LPL] and some of these other brokerages are set up, they have a looser supervisory network,” he said.

Such independent reps “are not going to be under the same level of daily scrutiny perhaps as someone working in a particular large brokerage house that has a manager to make sure of compliance. The very nature lends itself to a looser review,” Mr. Galvin said.

“When you have the big firms, and you have a compliance officer and you have management, we rightfully hold them to a higher standard, but they are also in a better position to police themselves and police their agents,” he said. “When you have these folks out there on their own, it's a bigger challenge.”

Dale Brown, chief executive of the Financial Services Institute Inc., a trade group for independent- contractor broker-dealers, declined to be interviewed for this article.

Instead, he sent an e-mail that said compliance at independent broker-dealers is “second to none” and that independent firms have invested in creating a culture of compliance.

'No comment'

Broker-dealer executives and lawyers were extremely reluctant to comment on Mr. Galvin for this article for fear of drawing his office's attention, and potential reprisals.

When asked if he knew he was one of the most widely disliked men in the securities industry, he seemed surprised.

“I didn't know that,” Mr. Galvin said.

He rejected the notion that he is “anti-financial services,” saying that people in the industry are delighted that his office is making sure that everyone is held to the same standard.

“My responsibility goes to the people who elected me and the public,” Mr. Galvin said. “What drives me is the responsibility of making investors whole.”


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