Watch Out. Reform Is on the Way

State securities regulators participated in the North American Securities Administrators Association’s (NASAA) financial services regulatory reform roundtable in Washington December 11 and gave their views on what types of regulatory reforms the new Administration and Congress should embrace. Lubin, Maryland Securities Commissioner, agrees that the financial services firms that caused the financial crisis failed to put their customers’ interests first. This, she said, must change. Any broker or advisor who deals with customers “must have a fiduciary responsibility,” she said. Firms have to “stop dodging the fiduciary obligation” they have.

President-elect Obama has called for a “strong set of financial regulation,” Lubin pointed out, and it’s time for the regulatory turf lines to vanish. “People have to behave more responsibly,” she said, adding that “it’s time for all of us–[members of the] industry and regulators–to take the highest road we can” and open the lines of communication.

Joe Borg, Alabama Securities Commission Director, agreed that one of the most effective ways to avert further crises going forward is to create “a horizontal cooperation among the regulators without turf battles.” There’s a “lack of government standards on information sharing among federal and state regulators,” he said. There must be “robust information exchange” among regulators.

Denise Voigt Crawford, Texas Securities Commissioner and NASAA President-elect, warned the new Administration and Congress against reverting to “a one-size-fits-all regulatory structure.” She said “different regulators bring different strengths and ideas,” and stressed that state securities regulators are an “early warning system” because they often recognize problems in the investing world more quickly than regulators in Washington. “And since we’re local,” Crawford argued, “investors tend to have more confidence that we’ll get something done.”

NASAA has formally stated that its five core principles for regulatory reform in financial services must include: preserving the system of state/federal collaboration while streamlining where possible; toughen enforcement and shore up private remedies; improve oversight through better risk assessment and interagency communication; close regulatory gaps by subjecting all financial products and markets to regulation; and strengthen standards of conduct and use “principles” to complement rules, not replace them.

There are many variables to consider when debating how the new regulatory landscape should take shape. Campos argued during his speech at the Summit on December 2 that he believes the banking regulators should be consolidated as there are “too many” of them. However, the new Administration needs to “give a blessing” that there are two types of regulation–prudential regulation for banks which ensure safety and soundness and “keep panic from occurring,” and a regulator for fraud deterrence and enforcement, for which the Securities and Exchange Commission is best suited. “It has been a big subject of debate whether there should be two types of regulation,” Campos said. “It is necessary to keep these two systems.”

As for regulation of RIAs and broker/dealers, Campos said he would encourage a new SEC Chairman to impose “a common set of rules” for both, saying it was a “historical anomaly” that there are two sets of rules for RIAs and B/Ds. However, he acknowledged that erasing that anomaly and forging one set of rules is “easier said than done.” But in the current climate of change that we’re in, one set of rules may not be inconceivable.