State regulator says SEC dropped the ball on private placements

Don’t blame state regulators for the financial crisis; blame those who took power away from state regulators.

That was the message today from the president of the North American Securities Administrators Association, who testified today to the Financial Crisis Inquiry Commission.

“Our presence did not contribute to the crisis. Rather, the fact that our regulatory and enforcement roles had been eroded was a significant factor in the severity of the financial meltdown,” Texas Securities Commissioner Denise Voigt Crawford said today in prepared testimony.

The FCIC heard testimony today from regulators on the causes of the financial crisis. The commission is to issue a report to Congress in December on what caused the financial meltdown.

Ms. Crawford urged Congress to return powers to state securities regulators which were stripped from them under the National Securities Markets Improvement Act of 1996. Specifically, she believes that state securities cops should be granted greater authority over private-placement offerings. The Texas regulator also blamed the legislation for an “oversight gap” of investment advisers. The act turned over regulation of advisers that manage more than $25 million to the Securities and Exchange Commission, which examines the firms infrequently.

Under financial-reform legislation being considered in Congress, state regulators would get jurisdiction over advisory firms managing less than $100 million, which would move about 4,000 advisory firms to state regulation.

Ms. Crawford was critical of the SEC and the Financial Industry Regulatory Authority Inc. “The naivete behind the view that markets are always self-correcting now seems apparent,” she said. “But clearly, reliance by the investing public on federal securities regulators, self-regulatory organizations and `gatekeepers’ in the years preceding the crisis and in its midst to detect and prevent even the most egregious of frauds and deceit was equally naive.”

The comments did not sit well with officials at Finra. “Finra has taken many steps in the wake of recent scandals to improve its fraud detection capabilities, including the creation of the Office of Fraud Detection and Market Intelligence, ” Finra executive vice president Howard Schloss, said. ” It would be nice if Mrs. Crawford would stop pointing fingers at other regulators, and be equally introspective about the performance of state regulators in the wake of the Madoff, Stanford and the dozens of other frauds that have happened in states all over the country.”

The SEC also weighed in on Ms. Crawford’s comments to the panel. A spokesperson for the agency noted that “Chairman Schapiro provided the Commission with a detailed analysis of the underpinnings of the financial crisis and the comprehensive steps taken by the SEC since she became Chairman.”

But Ms. Crawford claimed the SEC has failed to detect abuses and failed to take appropriate action despite “red flags” where similar conduct by a broker-dealer would invite SEC disciplinary action.

“Far from monitoring the securities markets and securities industry in order to detect and terminate abusive and illegal practices, the SEC was often prompted into action only after state regulators had unearthed them,” she said.

Ms. Crawford referred to cases brought against research analysts for conflicts of interest at major Wall Street firms in the early 2000s by then New York Attorney General Eliot L. Spitzer, as well as cases first brought by state regulators in 2008 involving the auction rate securities markets.

Ms. Crawford also called for restoring provisions of the Depression-era Glass-Steagall Act of 1933 that prohibited banks, brokerage firms and insurers from engaging in each other’s business. “Since the repeal of Glass-Steagall through the enactment of the Gramm-Leach-Bliley Act of 1999, we have seen an excessive risk-taking culture emerge within institutions with federally insured deposits,” she said.

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