A Pro-Investor Legislative Agenda For the 110th Congress

News Conference Opening Statement

Joseph P. Borg
Director, Alabama Securities Commission
President, North American Securities Administrators Association

January 25, 2007
National Press Club
Washington, D.C. 

Good morning and thank you for joining us. I’m Joe Borg, President of the North American Securities Administrators Association (or NASAA), and Director of the Alabama Securities Commission.

Today, we are here to discuss NASAA’s pro-investor legislative agenda for the 110th Congress. Before I being my remarks, I’d like to thank Delaware Securities Commissioner Jim Ropp, who chairs NASAA’s Federal Legislation Committee, and NASAA Director of Policy Debbie House, for their efforts not only in bringing our legislative agenda to fruition, but also for their expert guidance regarding the federal legislative process.

Also before we look ahead to the 110th Congress, I want to acknowledge the positive and constructive relationship state securities regulators have enjoyed with legislators on both sides of the aisle during this past session of Congress.

In particular, I’d like to thank Sen. Richard Shelby, a fellow Alabamian, for his strong leadership on the Senate Banking Committee and for highlighting the important role of state securities regulators; Sen. Herb Kohl of Wisconsin, for his guidance on the Senate Special Committee on Aging to spotlight the growing need for the protection of senior investors; and Rep. Spencer Bachus, another Alabamian by the way, for his leadership of the House Financial Institutions Subcommittee.

A few moments ago Russ Iuculano, NASAA’s Executive Director, said a new breeze is blowing through Washington. And I know many of you have been busy following the start-up of a new Congress.

In our continuing efforts to protect investors and preserve investor confidence in our markets, we look forward to building upon our momentum as we work with the new leadership of the 110th Congress, especially Senate Banking Committee Chairman Christopher Dodd, House Financial Services Committee Chairman Barney Frank and House Capital Markets Subcommittee Chairman Paul Kanjorski.

We share many common interests with these distinguished leaders and we are eager to assist in their efforts to ensure that America’s investors prosper in a regulatory environment that provides the strongest of investor protections.

Protecting investors and punishing those who would victimize investors with abusive sales practices are fundamental roles of government, be it federal, state, or provincial. NASAA members are dedicated to pursuing those firms and individuals who have violated the securities laws within our jurisdictions.

The legislative agenda we are announcing today advances this legacy of investor protection and remembers well the recent lessons of what happens when investors lose confidence in our markets. The items in NASAA’s agenda fall into five broad categories:

Preserving the authority of state regulators to protect investors, and evaluating the negative effects of preemption of certain state laws;
Strengthening the mechanisms currently in place that provide redress to investors for wrongdoing by industry participants;
Maintaining federal laws designed to insure corporate accountability and shareholder confidence;
Promoting sound and effective regulatory initiatives; and,
Improving the scope and breadth of investor education efforts.
Or complete legislative agenda is in your packets and in order to allow more time for your questions, I’d like to use the next few minutes to discuss in depth three key areas of our agenda:

Peserving the regulatory authority of state securities regulators;
Retoring fairness and balance in the securities arbitration system, and
Encouraging hedge fund transparency and pension protection.
NASAA supports a strong and effective regulatory structure for capital markets and to do so requires the preservation of the authority of state securities regulators, the local cops on the securities beat.

Accordingly, the cornerstone of our legislative agenda remains our vigilance in fighting short-sighted attempts, such as the Committee on Capital Markets Regulation’s recent Interim Report, to neutralize state regulators who are aggressively protecting investors.

We share Chairman Dodd’s belief that “While we have an obligation to ensure that our legal and regulatory system helps to foster growth and promotes innovation, we must not damage the fundamental rights and protections that underpin the investor confidence critical to the success of our capital markets.”

And I also think the New York Times got it right in yesterday’s editorial responding to the McKinsey Report that “while common-sense changes are needed, the rights of shareholders and the stability of our markets cannot be trampled in the headlong rush for competitive advantages.”

The international competitiveness of our capital markets is, of course, important to maintaining America’s economic leadership in the world. But rolling back a system of regulation that has vigorously protected U.S. investors for decades could have profound and costly consequences if it went too far. History does repeat itself when its lessons are forgotten or ignored.

NASAA strongly believes that there must be continued cooperation and shared efforts among state, federal, and industry regulators. NASAA jurisdictions have excellent relationships with fellow regulators, which we believe are vital to effective and efficient regulation. Just last year, for example, we had a great cooperative effort with the SEC and NASD in a joint national initiative to protect Baby Boomers and seniors from investment fraud and sales of unsuitable securities. These synergies serve as building blocks for other cooperative efforts. We look forward to working with the SEC, the SROs and industry as we together study the various regulatory schemes affecting both broker-dealers and investment advisers.

The complementary state-federal-industry regulatory relationship has a proven record of serving investors well. In light of the consolidation of the NASD and the NYSE Regulation, the need for strong state securities regulatory authority is heightened. With more than 100 million investors – including growing numbers of Baby Boomers – relying on our securities markets to meet their financial goals – and on regulators to keep those markets well-policed – we must ensure that this successful and cooperative regulatory relationship remains as strong as possible. NASAA will always carefully consider legislative initiatives designed to facilitate and strengthen this cooperation.

Along this line, it is important to note that the Gramm-Leach-Bliley Act (GLBA) affirmatively preserves the authority of the Securities and Exchange Commission and state securities regulators to investigate and bring enforcement actions with respect to fraud and deceit or unlawful conduct by any person when the activities are conducted in a functionally regulated subsidiary of a depository institution. Clearly, Congress understood weakening the authority of state regulators in this area would be harmful to investors.

We believe also Congress should undertake a review of recent activities by both the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) for compliance with federal law. Specifically, these two agencies have in one instance promulgated rules and in another issued an opinion letter with sweeping preemption provisions, which have been upheld in several federal court decisions.

Congress should consider adopting legislation that disapproves of such activity by a few federal regulators and that expressly preserves the authority of state regulators to protect consumers from fraud and abuse in the banking and securities sectors.

On a related issue, the scope of “covered securities” in Section 18(b) of the Securities Act of 1933 has expanded since the National Securities Markets Improvement Act of 1996 (NSMIA) was enacted, even though the definition has technically remained the same. More issuers are using Rule 506 and the listing standards on some of the exchanges are deteriorating, so that more securities fall within the “covered security” definition and are being offered to the public with little or no scrutiny.

Rule 506 of Regulation D offerings are provided the special status of private placements and are exempt from federal and state securities registration laws. As a result of this special status, there is no regulatory review of the 506 offerings at either the federal or state level. Thus, for example, NSMIA has preempted the states from prohibiting Regulation D offerings even where the promoters or broker-dealers have a criminal or disciplinary history.

In light of the growing popularity of the offering and the expansive reading of the exemption given by certain courts, NASAA believes the time has come for Congress to reinstate state regulatory oversight of Regulation D offerings.

Turning to arbitration, every year, thousands of investors file complaints against their stock brokers. If these disputes aren’t settled, investors are left with only one avenue to pursue their claims – arbitration – and for all practical purposes only one arbitration forum. This system, which is administered by an affiliate of the NASD, should be examined to ensure it is fair and transparent to all.

In 2003, NASAA formed an Arbitration Project Group, chaired by Massachusetts Securities Director Bryan Lantagne, to study the securities arbitration system to determine if changes are necessary to enhance justice for investors.

State securities regulators believe Congress should review the manner in which arbitrations are conducted to determine: if there is sufficient disclosure of potential conflicts by panel members; if selection, qualification, and composition of the panels is fair to the parties; whether the arbitrators receive adequate training; if explanations of awards are sufficient; if the system is fast and economical for investors; and if the entire arbitration process should be optional, not mandatory, for investors.

NASAA has offered, and continues to offer, our willingness to work with all interested parties in reviewing the arbitration system and its processes.

Finally, let’s turn to hedge funds. With over 8,000 hedge funds in existence and assets in excess of $1 trillion, the fact that this industry remains, for the most part, unregulated is worrisome for investors and the U.S. markets in general. NASAA supports efforts to regulate hedge funds in a manner that will provide greater transparency to investors while not overburdening the hedge fund industry.

State securities regulators also want to ensure that public pension plan monies are not subject to undue risk through investment in unregulated pooled vehicles. ERISA rules make hedge funds and their managers “trustees” if more than 25 percent of the fund’s assets are pension assets. The Pension Protection Act of 2006 removed public pension funds from the 25 percent calculation. We question the wisdom of this change and believe this is an issue that should be closely monitored.

On a related issue, since 1982 the SEC has required individuals (“accredited investors”) investing in hedge funds to have either a minimum net worth of $1 million (including the value of their home) or an income of $200,000 individually or $300,000 with a spouse. NASAA has repeatedly encouraged the Commission to increase these requirements to keep pace with inflation and a sustained growth in wealth and income.

Recently, the SEC engaged in rulemaking to change the “accredited investor” definition by requiring hedge fund investors to meet this original standard, and, in addition, to have a minimum of $2.5 million in certain types of investments, excluding their primary residence. While NASAA will be commenting on the proposed rulemaking, we strongly believe that the accredited investor standard should be expanded to all related applications, such as rule 506 offerings, rather than limited to investments just in hedge funds.

Raising the individual investor standard to be an accredited investor would provide greater protection for investors and would aid state regulators in enforcement activities by ensuring that those individuals who may be undertaking a “higher risk” are in fact “accredited.”

In order to insure that those representing themselves as “accredited investors” do in fact meet the definition, NASAA suggests implementing, either by rule or by statute, a requirement that industry participants be required to clearly verify a potential investor’s representation that he or she meets the financial guidelines.

Before taking your questions, I’d like to give a very brief overview of the remaining items on our legislative agenda. During the 110th Congress, we will actively support efforts t

Maintain the strong investor provisions of the Sarbanes-Oxley Act, recognizing that regulatory requirements for small firms may require some modification;
Define equity-indexed annuities as securities;
Uphold the role of states in data security breach protection;
Increase sanctions for crimes against senior citizens; and
Advance and increase financial education efforts.
Taken together, our agenda clearly revolves around doing what’s right for investors. This has always been our priority and we will not waver in this regard. We look forward to working with members of Congress and fellow regulators to ensure that investors have all the protection they deserve and that our capital markets remain the most effective and efficient in the world.

And now, I’ll be glad to take your questions. Thank you.

January 25, 2007

Newsroom, Speeches