State regulators defend their authority vigorously

State securities regulators are worried that the recent emphasis on making U.S. capital markets more competitive could lead to the pre-emption of their power by federal regulators.
MAR 26, 2007
By WASHINGTON — State securities regulators are worried that the recent emphasis on making U.S. capital markets more competitive could lead to the pre-emption of their power by federal regulators. They made their views clear Thursday at a conference here that was sponsored by the North American Securities Administrators Association Inc. of Washington, rebutting recent reports warning that U.S. markets are losing their competitive edge due to over-burdensome regulations. The “shortsighted reports lead to an appeal to fear that somehow the sky is falling in an attempt to restrict or obstruct state, federal and [self-regulatory organization] regulators who are aggressively protecting investors,” Alabama securities commissioner Joseph Borg told the audience in his opening comments. Rather, U.S. capital markets now face greater competition from other countries where markets have developed and grown in recent years and where native companies have chosen to offer their own securities, argued Mr. Borg, who is NASAA’s president. “We state regulators will continue to vigorously defend our authority to regulate at the state level and to bring enforcement actions seeking appropriate remedies against those firms and those individuals that violate securities laws,” he said. A recommendation from the Committee on Capital Markets Regulation that states be required to drop enforcement actions if there is a parallel investigation being conducted by the Securities and Exchange Commission is “not workable,” Illinois securities director Tanya Solov said during a panel discussion. The SEC wouldn’t be able to deal with the 3,000 complaints state regulators handle annually, and state regulators have some authority, such as the ability to issue subpoenas quickly, that federal officials lack, she said. The committee, which is headed by Glenn Hubbard, a former White House economic adviser, and John Thornton, a former president of The Goldman Sachs Group Inc. of New York, and backed by Henry Paulson, secretary of the Department of the Treasury, comprises a group of industry and academic financial services industry leaders. They issued their report in November. If enacted, another recommendation in the report would give the SEC the final say on any settlements that would lead to “structural industry changes of national importance.” Many firms suggest such settlements to make necessary changes in their operations to correct problems, Ms. Solov said. “Settlement agreements are just that — they’re agreements,” and are important, she said. ‘Narrow intrusion’ The proposals are “a fairly narrow intrusion into [state] authority,” Hal Scott, a professor at Harvard Law School in Cambridge, Mass., who was the committee’s director, said in an interview. “If the states are going to impose a remedy on the industry that affects the entire country, that should be a federal call,” he said. States would be free to pursue enforcement actions in other cases if the SEC didn’t, Mr. Scott added. Advisers are mixed in their assessment of state issues. A report issued this month by the Washington-based U.S. Chamber of Commerce suggested that regulators take a more prudential approach to regulating the industry, similar to the approach banking regulators take, rather than the adversarial approach employed by many securities regulatory agencies. Bob Rockwell, a Sandy, Ore.-based registered representative with Cambridge Investment Research Inc. of Fairfield, Iowa, said in an interview that his state has moved in that direction. The former stockbrokers who examined his firm last year for the state impressed him, he said. In the past, the state used lawyers for brokerage firm exams, Mr. Rockwell said, resulting in “an adversarial relationship instead of understanding that occasionally, you might check the wrong box.” But Craig Limoges, president of Limoges Investment Management PC of Vancouver, Wash., whose fee-only firm recently switched from state to federal registration, thinks that regulators in his state have become more adversarial in recent years. After trying to contact state regulators about a problem he had several years ago, he found that examiners used the information against him in his exam, he said in an interview. “They are no longer a source of cooperative regulation information,” Mr. Limoges said of his state regulatory officials. Both the committee and chamber’s reports “tread very gingerly in the area of states’ rights,” Robert Pozen, chairman of MFS Investment Management of Boston, who worked on both reports, said in an interview. Recommendations made concerning state regulation “are very modest-touch proposals,” he said.

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