A bill that would sharply limit the power of state securities regulators to police and penalize wrongdoing by brokerage firms and their employees was approved by a subcommittee of the House Financial Services Committee yesterday.
It now moves on to debate by the full committee.
The bill, the Securities Fraud Deterrence and Investor Restitution Act of 2003, was introduced in May by Richard H. Baker, Republican of Louisiana. It bars state securities regulators from creating rules for brokerage firms that differ from those established by the Securities and Exchange Commission or self-regulatory organizations like the New York Stock Exchange. If the bill had been law in 2002, for example, it would have prevented Eliot Spitzer, the New York attorney general, from pursuing the changes on Wall Street that resulted from his investigation into analyst conflicts.
An absolute, outright betrayal of the small investor.
Eliot Spitzer, the New York attorney general
If passed, the bill would prevent states from imposing rules on the disclosures that brokerage firms make about the investments they sell. The measure would also prohibit state regulators from instituting conflict of interest requirements on brokerage firms, like those relating to stock analysts that 10 large securities firms agreed to last December when they settled with regulators and paid $1.4 billion in penalties and fines.
The bill, which passed the subcommittee mainly along party lines, appears to be in direct response to Mr. Spitzer's aggressive Wall Street inquiry. Michael DiResto, a spokesman for Mr. Baker, said: "Congressman Baker's concern throughout was when a New York state official began to dabble in national regulatory matters, one state in the midst of their investigation, their criminal findings and their discussions of settlements, would start trying to institute new regulatory structures for financial firms that have national scope."
But some questioned the idea of reducing the enforcement power of state regulators at a time when investor confidence still wobbles.
"It's sweeping pre-emption of the worst sort," said Barbara Roper, director of investor protection at the Consumer Federation of America. "It says that the things the states do on a day-to-day basis to protect investors they can no longer do."
Mr. Spitzer deplored the bill, calling it "an absolute, outright betrayal of the small investor."
As Ms. Roper pointed out, state regulators have for decades been the first to arrive on the scene of an investment crime. They were ahead of federal regulators in shutting down brokerage firms that sold largely worthless penny stocks in the mid-1990's and in alerting investors to the perils of day trading and buying stocks on margin during the market mania of 1999. And the S.E.C. took no action to protect investors from the biases among stock analysts that emerged so graphically last year in documents subpoenaed by Mr. Spitzer from Wall Street.
"We've just been through a period where there's one conflict of interest after another," said Christine A. Bruenn, Maine's securities administrator and president of the North American Securities Administrators Association. "The idea that you would take out your local cop on the beat, your state securities regulators, if someone engages in a conflict of interest, is a giant step backward."
Ms. Bruenn said that if the bill became law, her office would not be able to conduct common activities like requiring that a brokerage firm with a history of problems work under special supervision and provide periodic reports on that supervision. Or, she said, her office could no longer require brokerage firms to provide additional disclosures about an investment to their customers beyond those called for by the S.E.C.
The proposal is similar to the draft of an amendment circulated on Capitol Hill in June 2002 that aimed at reining in state regulators. That amendment, which legislative aides said was backed by Morgan Stanley, stated that no law, rule, regulation, order, administrative action, judgment, consent order or settlement agreement shall be imposed by any state on people subject to S.E.C. rules.
Its proponents hoped to include it in what became the Sarbanes-Oxley Act but it was withdrawn.
Mr. Baker said that his bill was not intended to thwart state regulators but to make sure that the structure of the national securities market cannot be changed by a single administrative official. "I have been a pro-consumer market reformer and what we have done in the bill is create securities transaction stability that is in the consumer's best interests," he said. "Where it can be demonstrated that there is any inhibition in enforcement authority, I will be more than happy to be responsive to those concerns."
Mr. Baker will no longer be in control of the bill when it goes to the full Financial Services Committee, which is led by Michael G. Oxley, an Ohio Republican. It is unclear how the bill will fare there, but Mr. Oxley is well known as a friend of the financial services industry.
Brad Sherman, a California Democrat and a member of the financial services committee, vowed to fight the provision of the bill that weakens state powers.
"Those investment banks that were found to be violating conflict of interest rules should be subject to special prophylactic rules for the future, and this takes that away," he said.
Copyright 2003 The New York Times Company