NASAA President Identifies Deregulation and Preemption of State Regulatory Authority as Significant Factors in Severity of Financial Meltdown

Crawford Testifies Before U.S. Financial Crisis Inquiry Commission;
Offers Series of Recommendations to Strengthen Investor Protection

WASHINGTON, DC (January 14, 2010) – Texas Securities Commissioner and North American Securities Administrators Association (NASAA) President Denise Voigt Crawford today told the Financial Crisis Inquiry Commission that a series of actions by Congress and the courts to preempt the regulatory authority of state securities regulators contributed to the ongoing financial crisis that has caused widespread damage to both the U.S. economy and Main Street investors.

“As the regulators closest to investors, state securities regulators provide an indispensable layer of protection for Main Street investors,” Crawford testified. “Our presence did not contribute to the crisis; rather, the fact that our regulatory and enforcement roles had been eroded was a significant factor in the severity of the financial meltdown.”

Crawford’s testimony came during the first public hearings held by the 10-member bipartisan panel since it was established by Congress to examine the causes of the financial crisis. Her testimony, along with those from other public- and private-sector leaders, will help form the foundation for the Commission’s final report due in December examining the causes of the current financial crisis and offering recommendations to prevent a reoccurrence.

Crawford outlined the aggressive investor protection role of state securities regulators and urged the Commission to consider how this role may be expanded through the restoration of regulatory authority that was preempted since the passage of the National Securities Markets Improvement Act of 1996 (NSMIA).

States have been the undisputed leaders in criminal prosecutions of securities violators “because we believe in serious jail time for securities-related crimes,” Crawford told the Commission. “In the last few years, state securities regulators have been at the forefront of investor protection. Our record demonstrates clearly that we have the will and ability to regulate.”

Crawford urged the panel to look carefully at the deregulatory policies of recent years, which have deepened the current financial crisis. In highlighting the anti-investor impact of NSMIA, which significantly curbed the role of state regulators and enforcers in dealing with securities offerings and professionals, Crawford pointed out that Congress preempted many state regulations and transferred significant enforcement responsibilities from the states to the federal government. “NSMIA also prevented the states from taking preventative actions in areas that we now know to have been substantial contributing factors to the current crisis,” she said.

“State securities regulators are often first to discover and investigate our nation’s largest frauds. When we bring enforcement actions pursuant to these investigations, the penalties states impose are more meaningful and the restitution component is significantly greater,” Crawford said. “In fact, it has been shown that in cases where state and federal regulators work cooperatively, the more aggressive actions of state securities regulators cause a significant increase in the penalty and restitution components of the federal regulator’s enforcement efforts.”

Calls for preemption of state regulatory authority or for more authority for self-regulatory organizations at the expense of state jurisdiction “defy common sense,” Crawford told the commission. “The evidence clearly demonstrates that the state-federal regulatory structure actually works for the investor,” she said. “State involvement drives the performance level of all participants upwards and provides protection against the possibility of regulatory capture.”

Crawford also offered a series of recommendations to enhance the ability of state securities regulators to pursue financial fraud and prosecute the perpetrators of those crimes. These include: restoring state regulatory oversight of all Regulation D Rule 506 offerings; restoring certain provisions of the Glass-Steagall Act; increasing state regulation of investment advisers; establishing a Systemic Risk Council with state financial regulatory participation; deputizing state securities attorneys to leverage talent and resources in all jurisdictions and at the federal level; providing additional resources to uncover and prosecute securities fraud cases; conducting a thorough review of all civil and criminal remedies to ensure that they more effectively deter misconduct; and reexamining and removing the hurdles facing private plaintiffs in private actions.

The complete text of President Crawford’s testimony is available here.

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.

For more information:
Bob Webster, Director of Communications
Leah Szarek, Asst. Manager of Communications and Investor Education

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