State securities regulators are gaining ground in their battle to regain authority to oversee private-placement offerings.
Thomas Krebs, assistant director and deputy general counsel to the Financial Crisis Inquiry Commission, last week came out in favor of giving the states oversight authority over private placements. That authority was taken away from the states by the National Securities Market Improvement Act of 1996, which harmonized rules and limited states to enforcing anti-fraud laws.
“I want [the commission] to go back and revisit the National Securities Markets Improvement Act,” Mr. Krebs said, referring to the 10-member congressional panel launched in July to investigate the causes of the financial crisis.
“There's clearly a problem with offerings of securities, particularly those that are unregulated,” said Mr. Krebs, who is a partner in Haskell Slaughter Young & Rediker LLC.
A former director of the Alabama Securities Commission, Mr. Krebs is not the only one in favor of seeing the states' authority over private placements restored.
On Nov. 10, Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, released a draft regulatory reform bill that would restore their power. The committee just recently started working the bill, and the Senate is not likely to vote on its version until next year.
“The Dodd draft is indicative that Congress realizes that NSMIA exposed investors to far more risk in private-placement offerings than Congress ever could have imagined,” said Denise Voigt Crawford, Texas securities commissioner and president of the North American Securities Administrators Association Inc.
Even so, a provision to restore the states' authority over private placements is not in financial-reform legislation scheduled to be voted on this week by the House of Representatives.
“It makes absolutely no difference that it's not in the House bill, because conference is where the rubber meets the road,” Ms. Crawford said in a reference to the House-Senate conference committee, a temporary panel in which final legislation is negotiated before passage.
If the Financial Crisis Inquiry Commission gets behind restoring the states' authority, it could sway the conference committee to do the same, experts said.
“If you look at the Financial Crisis Inquiry Commission's charge, it is sufficiently broad to include restoration of state authority over private placements,” said Manning Warren, a law professor at the University of Louisville School of Law. “That's an avenue [state regulators] could take to advance their cause.”
Mr. Warren has written extensively in favor of restoring state powers over private placements.
State securities regulators have complained that the NSMIA took away too much power from states over such securities, increasing the potential for fraudulent offerings.
To be sure, not everyone is in favor of giving states back their power.
If state authority is restored, issuers of private placements, which include small businesses and hedge funds, could face a return to conflicting requirements among the states, said Alan Parness, chairman of the American Bar Association's Committee on State Regulation of Securities and an attorney at Cadwalader Wickersham & Taft LLP.
Prior to the NSMIA, “if you had an issuer doing a multistate offering, it was a nightmare to police these states,” he said. “The states made it as difficult as possible to comply [with their regulatory requirements], because they were all over the map,” he said.
To deal with that concern, state securities regulators are considering interstate agreements for a uniform method of handling the offerings, said Joseph Borg, director of the Alabama Securities Commission.
“It's in discussion by the state regulators through NASAA,” he said.
E-mail Sara Hansard at [email protected].
