Written Statement of the
North American Securities Administrators Association
Senate Committee on Banking,
Housing and Urban Affairs
Regarding Financial Services Regulatory Relief Legislation
This statement is submitted on behalf of the North American Securities Administrators Association (NASAA).
State securities regulation predates the creation of the Securities and Exchange Commission and the NASD by almost two decades and has protected Main Street investors from fraud for nearly 100 years. State securities regulators are responsible for licensing firms and investment professionals, registering certain securities offerings, examining broker-dealers and investment advisers, providing investor education, and most importantly, enforcing our states’ securities laws.
The role of state securities regulators has become increasingly important as growing numbers of Americans rely on the securities markets to prepare for their financial futures, such as a secure and dignified retirement or sending their children to college. While securities markets are global, most Americans still rely on local investment representatives in their home states when investing their funds. State securities regulators currently oversee the representatives that operate in their states.
NASAA appreciates this opportunity to provide information to the Committee on your latest regulatory relief initiative. We commend the Committee for striving to make our financial services sector even more efficient, and for being attentive to the concerns of those who wish to ensure that efficiency does not undermine the system of investor protection that has made the U.S. markets the fairest in the world.
The majority of the provisions under consideration for inclusion in a regulatory relief bill do not directly impact state securities regulation, and we expect that the functional regulators for those issues will offer direct comment. However, there is one provision in the House version of the Financial Services Regulatory Relief Act that affects the ability of state securities regulators to license certain individuals in our states who are selling non-traditional deposit products. At one time, most CDs were fully FDIC insured and paid a fixed interest rate until they reached maturity. But, like many other products in today’s markets, CDs have become more complex. Investors may now choose among variable rate CDs, jumbo CDs, callable CDs and CDs with other special features. These CDs pose significantly greater risks to investors.
Accordingly, NASAA suggests fine-tuning the Section 209 “Selling and Offering of Deposit Products” language that is contained in H.R. 3505, the Financial Services Regulatory Relief Act of 2005. By adding the phrase “fixed rate fully FDIC insured,” as shown below, Congress can preserve the licensing authority of state securities regulators over independent agents who sell unconventional and risky deposit products. This in turn will help protect investors who traditionally have come to expect that CDs are generally a fixed rate product that are all fully FDIC insured and who would not otherwise invest in a risky CD.
We recognize that the current language in Section 209 represents an effort to balance regulatory relief with investor protection, but, the market has continued to evolve and the language we are now seeking helps to address new issues that have emerged. Independent contractors, not employees of thrifts are selling jumbo deposit products and market-based CDs. These products can exceed the limits of FDIC insurance and are more complex and riskier than traditional products. Because of the potential risk to investors, we believe that states should retain the right to require these independent contractors or agents to become licensed with their state securities regulator in order to sell these unconventional products.
The preemptive language of Section 209 raises a number of concerns. In order to protect investors, current federal and state laws allow states to regulate individuals who offer or sell securities, even if those securities are deposit products. At the same time, Congress and the states generally recognize that licensing exemptions are appropriate under certain circumstances – where for example, deposit products are sold by a bank through its employees. Our concern lies with non-bank employees, often referred to as “independent agents” of the bank.
These are individuals who do not have the employee affiliation with the thrift, do not necessarily have adequate training, and do not fall under the supervision of the thrift. The problem is exacerbated because many investors assume that a salesperson representing a financial institution is an employee, fully backed by the institution. Yet this is not the case, and these independent agents need oversight if they are going to offer the more complex and riskier deposit products. NASAA’s proposed amendment to Section 209 would help make that oversight available, without disturbing the licensing exemption for bank employees selling deposit products.
Section 209, as written, would increase the potential of fraudulent sales of deposit products to investors. Any person, regardless of training, knowledge of investment products and risks, or disciplinary background, could sell deposit products such as jumbo or market-based CDs. NASAA has consistently listed unregistered individuals as one of the top ten scams in the country. And history shows that abuses can and do occur in the sale of CDs. The types of misconduct we see include the sale of bogus CDs; the use of CDs in bait and switch schemes; and misrepresentations and omissions regarding the rate of return on the CD, the duration of the investment, and its liquidity.
Licensing is an important aspect of investor protection, conferring many benefits. Licensing requirements enable states to insist upon a minimum level of education and expertise among those who sell investment products. Those requirements also enable state securities regulators to verify that a salesperson does not have a disciplinary history of fraud or misconduct. And, a licensing framework provides for the supervision of agents, disclosure of commissions, suitability requirements, complaint reporting and other benefits. Any cost of licensing is certainly outweighed by the positive return to investors. In short, Section 209 undermines the need to monitor individuals who are taking people’s investment funds to the public.
Our proposed change in Section 209 is in keeping with well-established legal principles governing the regulation of CDs. The overarching principle that has emerged from the federal and state courts is this: regulating CDs as securities is necessary and appropriate if those CDs pose risks to investors and if those risks are not adequately addressed by other regulatory regimes. Thus, in Marine Bank v. Weaver, 455 U.S. 551 (1982), the Supreme Court held that it was unnecessary to subject fixed-rate, insured CDs to regulation as securities because investors were abundantly protected under federal banking laws and, through FDIC insurance, were “virtually guaranteed payment in full.” Id. at 558-59. By the same token, however, where CDs pose risks that other laws do not address, the courts will invoke securities regulation to ensure that investors are adequately protected. Our proposed change in Section 209 simply codifies this principle: unless CDs are fixed-rate and fully-insured, states will retain their authority to impose licensing requirements on those who sell them, for the benefit of the investing public.
NASAA’s suggested language to Section 209 is underlined below:
SEC. 209. SELLING AND OFFERING OF DEPOSIT PRODUCTS.
Section 15(h) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(h)) is amended by adding at the end the following new paragraph:
(4) SELLING AND OFFERING OF DEPOSIT PRODUCTS- No law, rule, regulation, or order, or other administrative action of any State or political subdivision thereof shall directly or indirectly require any individual who is an agent of 1 Federal savings association (as such term is defined in section 2(5) of the Home Owners’ Loan Act (12 U.S.C. 1462(5)) in selling or offering fixed rate fully FDIC insured deposit (as such term is defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813(l)) products issued by such association to qualify or register as a broker, dealer, associated person of a broker, or associated person of a dealer, or to qualify or register in any other similar status or capacity, if the individual does not—
- (A) accept deposits or make withdrawals on behalf of any customer of the association;
- (B) offer or sell a deposit product as an agent for another entity that is not subject to supervision and examination by a Federal banking agency (as defined in section 3(z) of the Federal Deposit Insurance Act (12 U.S.C. 1813(z)), the National Credit Union Administration, or any officer, agency, or other entity of any State which has primary regulatory authority over State banks, State savings associations, or State credit unions;
- C) offer or sell a deposit product that is not a fixed rate fully FDIC insured deposit (as defined in section 3(m) of the Federal Deposit Insurance Act (12 U.S.C. 1813(m)));
- (D) offer or sell a deposit product which contains a feature that makes it callable at the option of such Federal savings association; or
- (E) create a secondary market with respect to a deposit product or otherwise add enhancements or features to such product independent of those offered by the association.’.
March 1, 2006