Core Principle Five
State Authority Should Not Be Preempted, and Should Instead Be Expanded
- Congress Should Defer to the States in Prescribing Policies to Regulate Small Offerings, Which States are Most Capable of Policing
- States Must be Permitted to Preserve and Improve their Capacity to Undertake Coordinated Action when Circumstances Require Uniformity
As a matter of principle, NASAA ardently believes that Congress should refrain from preempting state law. For most investors, states are far-and-away the most responsive, accessible, and attuned regulators. Congress has recognized the performance and relevance of state securities regulators by expanding state responsibilities for the oversight of investment advisers and ensuring that state financial services regulators had a voice on the Financial Stability Oversight Council. Nevertheless, recent federal legislation has threatened to preempt the authority of the states.
Congress Should Defer to the States in Prescribing Policies to Regulate Small Offerings, Which States are Most Capable of Policing
State regulators are closest to the investing public and understand the complex challenges faced by small businesses seeking to raise capital. State regulators are members of the communities they serve, and see first-hand how the public is optimally served by policies that strike a reasonable balance between the interests of issuers and investors.
Further, it is important to note that the SEC has neither the mandate nor the resources to police small offerings. Federal policies that vest rulemaking responsibilities exclusively with the SEC effectively separate the rulemaking from the enforcement responsibility. From a public policy standpoint, such arrangements are highly inefficient and sometimes dysfunctional.
Prior to the Dodd-Frank Act, consumer protection responsibilities had been spread across various federal banking regulatory agencies, with the Federal Reserve having sole authority to adopt rules to protect consumers from “unfair and deceptive practices,” and individual prudential bank regulators like the Federal Deposit Insurance Corporation and the Comptroller of the Currency having the sole power to enforce those rules. This resulted in rulemakings that did not take into account lessons learned from enforcement actions and enforcement actions that were delayed due to a misunderstanding of regulations.
The bifurcation of rulemaking and enforcement authority that failed to protect consumers at the federal level in the years preceding the 2008 Financial Crisis is no more likely today to succeed in protecting investors from fraud in small offerings. Thus, in areas where state securities regulators are expected to initiate and perform virtually all enforcement activity, Congress also should permit the states to exercise rulemaking authority.
States Must be Permitted to Preserve and Improve their Capacity to Undertake Coordinated Action when Circumstances Require Uniformity
With 52 independent jurisdictions in the U.S. and its territories, states operate with substantial and ever-increasing efficiency, and they have a strong track record of working together in a coordinated manner on a wide range of issues. Advances in technology have resulted in automation of the registration process for individuals and firms, and coordinated reviews for securities registrations and mid-size or regional investment advisory firm examinations are becoming the norm rather than the exception.
Regulatory efforts involving interstate misconduct are routinely coordinated nationally to leverage state resources and reduce the cost and burden to the businesses involved (e.g., in the cases of sales practice violations relating to Auction Rate Securities). The year 2012 saw the highly successful “Switch” of federally covered advisers to state registration. In 2008, NASAA adopted a model rule prohibiting deceptive senior-specific professional designations. Continuing to make progress in this area will be a high priority for state securities regulators as well as NASAA in the 113th Congress, and this progress should not be stultified by the threat of federal preemption.