By John M. Jascob, J.D.
The Secretary stated that the presence of both state and federal securities regulators, a complementary regime that has endured for more than 75 years, has been largely responsible for the competitiveness of U.S. capital markets. In the words of one commentator, state securities regulation serves as a "fail safe mechanism," providing the public with an additional source of protection in the event of regulatory failure at another level of government. Galvin noted that state regulators have often been the crucial "first responders" to the major abuses that have occurred in the securities markets over the past ten years, including issues involving auction rate securities, fraud against senior investors, market timing, tainted stock ratings, and day trading. Although the SEC has also been at the forefront on several issues, such as insider trading, the states have consistently been in the vanguard of investor protection on the retail, consumer-facing, business conduct issues, Galvin said.
Galvin expressed concern that any federal regulatory consolidation carried out in response to consolidation in the financial services industry will likely be deregulatory in nature. As such, the Secretary believes, any regulatory consolidation at the federal level should be counterbalanced by an affirmation of the states' securities enforcement powers. The consolidation of the banking, securities, and insurance industries in the wake of the Gramm Leach Bliley Act has intensified many conflicts of interest in those industries, the Secretary observed, resulting in effects on the consumer that have not been adequately addressed at the federal level. For example, Galvin cited how federal regulators were slow to move to correct problems involving the sales of auction rate securities to depository clients by the same financial conglomerates who had underwritten the securities. In Galvin's view, federal regulatory efforts have not kept pace with financial innovation and consolidation over the past ten years. Rather, it has been the states who have fielded calls from investors and provided a strong regulatory response.
Galvin believes that whatever form regulatory consolidation may take at the federal level, it will likely result in fewer cops on the beat, less regulatory competition among regulatory entities, and greater possibilities for "regulatory capture." Additionally, a large, centralized bureaucracy may be unable to respond rapidly and effectively to consumer concerns. Galvin also expressed skepticism that the implementation of a principles-based regime would be anything but deregulatory in nature, given that one of the tenets of a principles-based approach is industry self-policing and two of its central goals involve limiting the number of rules and limiting the number of enforcement actions.
Accordingly, any such deregulatory moves at the federal level must be accompanied by an express recognition and affirmation of the states' central role in securities enforcement, Galvin wrote, in order to ensure adequate protection of both investors and savers. Although acknowledging the benefits of increased cooperation and information sharing between federal and state enforcement authorities, Galvin said that any such cooperation must be promoted in a manner that does not compromise the independence and authority of state securities regulators.