Wednesday, November 19, 2008

NASAA Announces Core Principles for Co-Regulation

The North American Securities Administrators Association, which is the umbrella organization for American state and territorial securities regulators (and which includes Canadian and Mexican regulators), has issued five core principles for strengthening the United States' financial services regulatory structure:

  • 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.
This is the latest in NASAA'a efforts to prove its relevance. Despite the popular misconception here, the U.S. does not have just one securities regulator, but more than 50. The state regulators champion the fact that, for them, investor protection is paramount and in the past have viewed the SEC's emphasis on full, true and plain disclosure with suspicion. They have blocked SEC attempts to ease capital raising by refusing to adopt exemptions from their rules for financings done under SEC rules they considered inadequate.

Although the U.S. Congress has limited the states’ ability to regulate, they have not eliminated it completely. There have been a number of times recently where the states, not the SEC, took the enforcement lead, most notably in prosecuting analysts who were issuing “buy” ratings for stocks they personally believed were bad investments (and, less successfully, going after Richard Grasso of the NYSE for excessive compensation).

The core principles clearly see an important continuing role (albeit “streamlined”) for the state regulators by calling for greater collaboration and communication. The call to close regulatory gaps appears to herald a return to the old days where the states would block federal deregulation attempts.

One area of concern is that principles “complement” rather than replace rules. Normally a regulatory regime is comprised of principles supplemented by guidance or rules supplemented by interpretations. The idea the principles complement rules suggests that a principle could be used to expand enforcement jurisdiction to activities that are not specifically prohibited. This is similar to the ability of Canadian securities commission to take action against activities that are contrary to the public interest, which has been subject to much criticism for vagueness.

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