In the face of a heightening financial crisis, a delegation of state securities regulators has outlined principles and a legislative agenda to rectify the problems leading to the current predicament and to help “Main Street Americans” safeguard their financial security. On January 29, 2009, Fred Joseph, President of the North American Securities Administrators Association (NASAA) and Colorado Securities Commissioner, outlined NASAA’s legislative agenda for the 111th Congress, which is guided by its five Core Principles for Regulatory Reform in Financial Services, released in November 2008.
Summary of NASAA’s proposed legislative agenda:
- Increase State Oversight. Joseph proposed to bolster state authority, urging, among other things, that Congress restore state authority to license independent agents selling certain certificates of deposit; preserve state protection of investors from fraud in banking and securities; and reinstate state regulatory oversight over Rule 506 offerings.
- Increase Regulation of Derivatives and Hedge Funds. Stating that a substantial amount of capital is traded through “esoteric investment instruments on opaque financial markets that are essentially unregistered,” Joseph proposed that Congress increase the transparency of derivative instruments and authorize the regulation of hedge funds.1
- Enhance Conduct Standards. Joseph proposed strengthening the regulation of short sale transactions; prohibiting naked short sales; and updating and strengthening the definition of “accredited investor.” In addition, NASAA desires to apply the fiduciary duty to all financial professionals including broker-dealers.2
- Improve Oversight of SEC and Credit Rating Agencies. Joseph cautioned Congress to review the activities of the SEC, including its proposed “roadmap” for moving from U.S. Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS). Further, NASAA asked that Congress take steps to remove conflicts of interest and increase transparency associated with the credit rating agencies.
- Review Arbitration Process. NASAA requested that Congress remove obstacles for private plaintiffs; and “restore fairness and balance in the securities arbitration system” by, among other things, reviewing processes for evaluating conflicts of interests by panel members, and analyzing the overall efficiency of the arbitration process.
Finally, Joseph articulated NASAA’s top legislative priority as the “protect[ion] of investors by preserving state securities regulatory authority over those who offer investment advice and sell securities to their residents.” Joseph further explained that NASAA’s legislative objectives are consistent with President Obama’s call for “increased responsibility, accountability, and transparency.”
Based on these comments, if NASAA is successful, increased scrutiny by state regulators is likely for financial service firms and representatives. While states generally have rules that are similar to federal rules and those of self-regulatory organizations, each state has its own set of rules, which often have unique requirements that each firm operating in that state needs to abide by.