The President of the North American Securities Administrators Association, in testimony before the Financial Crisis Inquiry Commission last week, continued to blast the SEC and FINRA for dropping the ball. Denise Voigt Crawford said there is an “oversight gap” resulting from Congress stripping away substantial state regulatory oversight of brokers and advisors when it enacted the National Securities Markets Improvements Act in 1996. She urged Congress to return to the states all of the authority taken away by that law. If Congress acted on her request, the states would once-again have concurrent authority with the SEC over large investment advisers, like Bernie Madoff. She also urged Congress to return to the states power to oversee private placement offerings.
Under legislation currently being considered in Congress, state regulators would reclaim jurisdiction over advisory firms managing less than $100 million. That means the states would oversee an additional 4,000 advisory firms. They currently regulate firms managing $35 million or less.
In what has become an annual ritual, Ms. Crawford was forced to defend the mere existence of state regulators against those who claim they add no value. “Our presence did not contribute to the crisis,” she said. “Rather, the fact that our regulatory and enforcement roles had been eroded was a significant factor in the severity of the financial meltdown.”
She pointed out that the same people who call for eliminating the state cops on the beat are the same ones that thought that market participants would correct bad behavior to protect their own interests. “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.”
Ms. Crawford also pointed out, correctly, that states were at the forefront of major enforcement cases such as those that claimed conflicts of interest among research analysts on Wall Street and the recent auction-rate securities debacle.
The FCIC is scheduled to issue a report to Congress in December on what caused the financial meltdown.
FINRA responded defensively but illogically. 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.” Mr. Schloss conveniently ignores the fact that the states were hampered in the Madoff and Stanford cases because they have no examining authority over such large firms. The truth is that state securities officiers have been at the forefront of virtually every major enforcement initiative over the past twenty years while FINRA is routinely a “Johnny come lately” to such actions.