STATES SHOULD CUSTOMIZE AND ENHANCE AS NEEDED

January 29, 2009

The Honorable [First Name] [Last Name]

[Office Number]

Washington, DC [Zip Code]

Dear [Congressman/Senator] [Last Name]:

As the state securities regulator responsible for protecting investors in [state], I would like to share with you a pro-investor legislative agenda proposed by the North American Securities Administrators Association (NASAA)[1], of which I am a member. This agenda is aimed at strengthening investor protection, restoring state authority in certain areas, and providing greater transparency and accountability for those on Wall Street and in government who share responsibility for the prosperity and safety of investors.

With so much at stake, NASAA’s top legislative priority is to protect investors by preserving [state’s] securities regulatory authority over those who offer investment advice and sell securities to residents of [state]. This agenda also features several additional pro-investor issues that the 111th Congress should consider in order to strengthen investor confidence in our nation’s financial markets and their regulators.

These legislative proposals are framed in terms of NASAA’s five “Core Principles for Regulatory Reform,” which highlight the fundamental reforms that must be made to address the underlying causes of our ongoing financial crisis.

1. Preserve state/federal collaboration while continuing to streamline the regulatory system where appropriate.

2. Close regulatory gaps by subjecting all financial products and markets to regulation.

3. Strengthen standards of conduct, and use “principles” to complement rules, not replace them.

4. Improve oversight through better risk assessment and interagency communication.

5. Toughen enforcement and shore up private remedies.

Implementing those changes will require a broad range of actions, both legislative and regulatory, but at the heart of the Core Principles is a call for decisive Congressional action.

I am supportive of NASAA’s legislative agenda, which offers specific legislative reforms at the federal level that will help achieve those objectives and preserve and promote investor protection.

The [state securities division] is committed to working with NASAA, the Obama Administration and the 111th Congress to ensure that the nation’s financial services regulatory regime undergoes the important changes that are necessary to enhance Main Street investor protection, which state securities regulators have provided for nearly 100 years.

The current financial and economic crisis confirms that we need more effective, not less regulation in financial services. NASAA’s legislative agenda create a structure that ensures our successful state/federal system of regulation is preserved, which is a crucial element that must remain in a new 21st century regulatory structure.

Enclosed you will find additional details on NASAA’s pro-investor legislative agenda. Please do not hesitate to contact me at [Phone #] or Deborah House, NASAA’s Director of Policy at 202-737-0900, ext. 102 if we may provide additional information. We look forward to working with you on this and other important securities related matters during the 111th Congress.

Sincerely,

Enclosure


Preamble: The Need for Reform

Since 1919, the members of North American Securities Administrators Association (NASAA) have been on the front lines of investor protection through their licensing, registration, examination, enforcement, and investor education activities. In keeping with this long tradition, our agenda focuses on the legislative changes that are most relevant to the millions of Main Street Americans who look to Wall Street, regulators, and lawmakers to help them build and safeguard their financial security.

At this critical time in the nation’s history, it is imperative that the system of financial services regulation be improved to better protect investors, markets and the economy as a whole. Main Street investors deserve a regulatory structure that is collaborative, efficient, comprehensive, and strong. With so much at stake for the United States’ economy, NASAA’s top legislative priority is to protect investors by preserving state securities regulatory authority over those who offer investment advice and sell securities to their residents. NASAA’s legislative agenda also features several additional pro-investor issues that should be considered by the 111th Congress in order to strengthen investor confidence in our nation’s financial markets and their regulators.

This year, we are framing our legislative proposals in terms of five “Core Principles for Regulatory Reform.” We released those principles on November 19, 2008, to highlight the fundamental reforms that must be made to address the underlying causes of our ongoing financial crisis. Implementing those changes will require a broad range of actions, both legislative and regulatory, but at the heart of the Core Principles is a call for decisive Congressional action. After summarizing and explaining each core principle, we offer specific legislative reforms at the federal level that will help achieve those objectives and preserve and promote investor protection. NASAA is committed to working with the Obama Administration and the 111th Congress to ensure that the nation’s financial services regulatory regime undergoes the important changes that are necessary to enhance Main Street investor protection, which state securities regulators have provided for nearly 100 years.

Background: NASAA’s Core Principles for Regulatory Reform

The economic crisis painfully demonstrates that our system of financial services regulation must be strengthened and improved to better protect our investors, our markets, and our economy as a whole. To serve all of these vital interests, Congress, 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.

NASAA believes policymakers can achieve these objectives by applying five core principles of regulatory reform:

2. Preserve state/federal collaboration while continuing to streamline the regulatory system where appropriate.

6. Close regulatory gaps by subjecting all financial products and markets to regulation.

7. Strengthen standards of conduct, and use “principles” to complement rules, not replace them.

8. Improve oversight through better risk assessment and interagency communication.

9. Toughen enforcement and shore up private remedies.

Legislative Proposals: Congressional Action

That Will Advance the Core Principles

Within the general framework of the Core Principles, NASAA offers a number of specific proposals that will help preserve the best features of our regulatory system, while instituting new measures that are necessary to adequately protect the investing public and our markets as a whole. In the following section, we explain each core principle in more detail and then outline the legislative action that will help achieve the goals embodied in the principles.

Core Principle One: Preserve State/Federal Collaboration While Continuing to Streamline the Regulatory System Where Appropriate. 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. Here are the legislative proposals that will advance our first Core Principle.

1. Support a Strong State Regulatory Structure for Capital Markets.


State regulation is an essential component of our current regulatory structure and it must be preserved. In the area of securities regulation, the states have a century-long track record of investor protection. They bring experience, resources, and passion to the job of licensing professionals, conducting examinations, and bringing enforcement actions – both civil and criminal – against those who prey on our nation’s citizens. The states also serve as a local resource that investors can turn to for help when they have been exploited. State regulators also play a key role in educating investors in communities across the country about the perils of investment fraud. The first priority for regulatory reform, then, is for Congress to preserve the role of the states in financial services regulation.

2. Restore the Authority of State Securities Regulators in Certain Areas.

Since 1996, there has been a steady stream of regulatory, judicial, and legislative initiatives designed to preempt state securities regulation. In addition to preserving state regulatory authority for the benefit of consumers, NASAA believes the time has come for Congress to reverse some of these ill-advised actions.

A. OTS Preemption – The Office of Thrift Supervision issued an Opinion Letter dated October 25, 2004, arguing that the Home Owners’ Loan Act preempts the application of state licensing requirements under state securities laws to independent agents selling certificate of deposits (“CDs”), including Jumbo CDs exceeding FDIC insurance limits. Licensing is an important aspect of investor protection that enables states to insist upon a minimum level of education and expertise among those who sell investment products. Those requirements also permit state securities regulators to verify that a salesperson does not have a disciplinary history of fraud or misconduct.

Congress should adopt legislation such as H.R. 1996, the Federalism in Banking Act, introduced by Congressman Luis Gutierrez (D-IL), which expressly preserves the authority of state regulators to protect consumers from fraud and abuse in the banking and securities sectors. The legislation should be drafted to ensure that licensing requirements under state securities laws may be applied to independent agents who sell CDs.

B. OCC Preemption – In 2003, the Office of the Comptroller of the Currency (“OCC”) finalized rules that preempted state consumer protection laws and law enforcement remedies, thus vesting all authority over national banks and their subsidiaries in the OCC. The Gramm-Leach-Bliley Act affirmatively preserves the authority of the SEC and state securities regulators to investigate and bring enforcement actions with respect to fraud and deceit or unlawful conduct by any person when the activities are conducted in a functionally regulated subsidiary of a depository institution. Clearly, Congress understood that weakening the authority of state regulators in this area would be harmful to investors.

Here too, legislation such as H.R. 1996 is vitally important to ensure that state investor and consumer protection laws are applicable in the banking and securities sectors.

C. 506 D Offerings – With the passage of the National Securities Markets Improvement Act of 1996 (“NSMIA”), Congress substantially limited the authority of the states to register certain types of securities, including stocks traded on national exchanges, mutual fund shares, and variable annuities. While these limitations may have promoted uniformity and efficiency in our national markets, Congress imposed other limitations on state authority that were unwarranted. A prime example is in the area of private offerings under Rule 506 of Regulation D. Even though these securities do not share the essential characteristics of the other national securities offerings addressed in NSMIA, Congress nevertheless precluded the states from subjecting them to regulatory review. These offerings also enjoy an exemption from registration under federal securities law, so they receive virtually no regulatory scrutiny. Thus, for example, NSMIA has preempted the states from prohibiting Regulation D offerings even where the promoters or broker-dealers have a criminal or disciplinary history. Some courts have even held that offerings made under the guise of Rule 506 are immune from scrutiny under state law, regardless of whether they actually comply with the requirements of the rule. As a result, Rule 506 offerings have become the favorite vehicle under Regulation D, and many of them are fraudulent.

Although Congress preserved the states’ authority to take enforcement actions for fraud in the offer and sale of all “covered” securities, including Rule 506 offerings, this power is no substitute for a state’s ability to scrutinize offerings for signs of potential abuse and to ensure that disclosure is adequate before harm is done to investors. In light of the growing popularity of Rule 506 offerings and the expansive reading of the exemption given by certain courts, NASAA believes the time has come for Congress to reinstate state regulatory oversight of all Rule 506 offerings by repealing Subsection 18(b)4(D) of the Securities Act of 1933.

3. Advance and Increase Financial Education Efforts.

NASAA urges Congress to fund programs to cultivate financial education partnerships among federal, state, and nonprofit entities and encourage dialogue among these groups, such as the newly created President’s Advisory Council on Financial Literacy, and the National Financial Education Network of the U.S. Treasury Department’s Financial Literacy Education Commission (FLEC). NASAA continues to support Congressional efforts to designate April as Financial Literacy month and encourages events such as Financial Literacy Day on Capitol Hill.

The securities regulators that form the NASAA membership are firmly committed to promoting and supporting financial literacy, and are firmly committed to delivering investor education for all consumers. We believe we have an ongoing obligation to help our constituents develop the knowledge they need to avoid the perils of fraud and abuse in the financial markets. It remains our fundamental belief that financial education is the first and best defense against financial fraud, abuse, and exploitation.

State securities agencies are leaders in grassroots investor outreach and education, and they look for opportunities to join forces with other members of the financial education community who also share a commitment to investor protection. NASAA members use a variety of methods to bring financial education to investors of all ages. One such initiative is the youth-oriented online “FSI: Fraud Scene Investigator” program. Another example is a new effort to educate pre-retirees and members of the “Sandwich Generation” who are responsible for the financial care and support of both their dependent children and elderly family members. NASAA also has joined with AARP to sponsor a “Free Lunch Monitor” program to help seniors fight investment fraud.

Core Principle Two: 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. Here are the legislative proposals that will advance our second Core Principle.

4. Increase Transparency of Derivative Instruments.

The lack of regulation governing the over-the-counter derivatives market is a regulatory gap that Congress must close. The hands-off approach to these financial instruments can be traced largely to the Commodity Futures Modernization Act, passed by Congress in 2000, which specifically exempted swaps from regulatory oversight. This lack of oversight was a contributing cause of the financial crisis and must be addressed.