NASAA Outlines Core Principles for Regulatory Reform in Financial Services

WASHINGTON, D.C. November 19, 2008 — The North American Securities Administrators Association today released five core principles to help guide the ongoing policy debate over the changes necessary to strengthen the nation’s financial services regulatory structure.

“Our system of financial services regulation must be improved to better protect our investors, our markets and our economy as a whole,” said NASAA President and Colorado Securities Commissioner Fred Joseph. “To serve all of these vital interests, Congress and the Administration, working together with federal and state regulators, as well as self-regulatory organizations, should take steps to ensure that our new approach is strong, comprehensive, collaborative and efficient.”

Joseph said policymakers can achieve these objectives by applying five core principles of regulatory reform.

  • Preserve the system of state/federal collaboration while streamlining where possible.
  • Close regulatory gaps by subjecting all financial products and markets to regulation.
  • Strengthen standards of conduct, and use “principles” to complement rules, not replace them.
  • Improve oversight through better risk assessment and interagency communication.
  • Toughen enforcement and shore up private remedies.

“NASAA is committed to working with the incoming Congress and Administration as the new financial services regulatory structure unfolds,” Joseph said. “We will continue to advocate our position that any change to this structure should not come at the expense of Main Street investor protection, which state securities regulators have provided for nearly 100 years.”

Joseph also announced that NASAA will host a Regulatory Reform Roundtable next month in Washington, D.C. where NASAA members will discuss the Core Principles and present specific recommendations for future reforms. Details of the Roundtable, which will be open to the public, will be announced soon and will be available on the NASAA website.

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.


NASAA’S CORE PRINCIPLES
FOR REGULATORY REFORM
IN FINANCIAL SERVICES

Our system of financial services regulation must be improved to better protect our investors, our markets, and our economy as a whole. To serve all of these vital interests, Congress and the Administration, working together with federal regulators, state regulators, and self-regulatory organizations, should take steps to ensure that our new approach is strong, comprehensive, collaborative, and efficient. We can achieve these objectives by applying five core principles for regulatory reform.

PRESERVE OUR SYSTEM OF STATE/FEDERAL COLLABORATION WHILE STREAMLINING WHERE POSSIBLE.
Regulating our financial markets is an enormous challenge, one that can only be met through the combined efforts of state and federal regulators, working together to protect the integrity of the marketplace and to shield consumers from fraud and abuse. We must resist attempts to weaken this collaborative system. State securities regulators, for example, must not be preempted or marginalized as mere advisers to federal authorities. Particularly in the areas of enforcement, licensing, and compliance examinations, state regulators provide indispensable consumer protections. At the same time, we should look for opportunities within this collaborative framework to make regulation more streamlined and efficient.

CLOSE REGULATORY GAPS BY SUBJECTING ALL FINANCIAL PRODUCTS AND MARKETS TO REGULATION.
An enormous amount of capital is traded through esoteric investment instruments on opaque financial markets that are essentially unregulated. Our system must be more comprehensive and transparent, so that all financial markets, instruments, and participants—from derivatives to hedge funds—are subject to effective regulation through licensing, oversight, and enforcement.

STRENGTHEN STANDARDS OF CONDUCT, AND USE “PRINCIPLES” TO COMPLEMENT RULES, NOT REPLACE THEM.
We should strengthen the standards of conduct that apply in all financial sectors. In the area of securities regulation, for example, we should impose the fiduciary duty—in addition to existing standards—on all securities professionals who dispense investment advice, including broker-dealers. We should strengthen shareholder rights, and in every sector, we need to revisit our accounting standards and capital requirements to ensure transparency and solvency. We must also recognize that a “principles-based” approach to regulation is no substitute for a clear and strong system of prescriptive rules. Broadly framed standards of conduct can serve as helpful guides for industry as well as useful enforcement tools for regulators, but standing alone, they leave too much room for abuse.

IMPROVE OVERSIGHT THROUGH BETTER RISK ASSESSMENT AND INTERAGENCY COMMUNICATION.
We should enhance our ability to manage risk in all financial markets. The keys to this reform are better detection, communication, and intervention. These improvements are best achieved not by creating a new federal regulator, but rather by improving the tools and methods that existing agencies have at their disposal for identifying and limiting risk. In addition, to facilitate communication and coordination, the President’s Working Group on Financial Markets should be expanded to include representatives from the state agencies that regulate banking, insurance, and securities.

TOUGHEN ENFORCEMENT AND SHORE UP PRIVATE REMEDIES.
Enforcement is one of the most effective tools for deterring lawless behavior in our markets, but for years, it has received far less support than it deserves. We should toughen punishments for those who violate the law and increase enforcement budgets for state and federal regulators, including the SEC. In addition, we must remember that the private rights and remedies of injured consumers are an essential complement to government enforcement efforts aimed at deterring fraud. The pendulum has swung too far in the direction of limiting private rights of action, and now Congress should legislatively reverse some of the Supreme Court’s most ill-conceived and anti-consumer decisions.

For more information:
Bob Webster, Director of Communications
202-737-0900

2008 Headlines, Newsroom