Shortly before Jack Herstein gave his inaugural address as president of the North American Securities Administrators Association Inc. last week, a House subcommittee concluded a hearing about draft legislation that would authorize one or more self-regulatory organizations for investment advisers.
The proposal alarmed NASAA members, who asserted that it could threaten their authority to review advisers. Under the Dodd-Frank financial reform legislation, their purview will expand by June 2012 to include all advisers with less than $100 million in assets under management. Currently, they oversee advisers with less than $25 million in AUM. Approximately 3,200 more advisers would come under their jurisdiction.
Beyond protecting their turf, state regulators are opposed to an SRO — and have particular fears about the Financial Industry Regulatory Authority Inc. — because of what they contend is a lack of accountability, transparency and oversight.
During the hearing before the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises, the SRO bill's sponsor, Rep. Spencer Bachus, R-Ala., and Finra chief executive Richard G. Ketchum tried to assuage the state officials' worries.
“We do not want to ignore the state role,” Mr. Bachus, chairman of the Financial Services Committee, said at the hearing. “It is very important. There would have to be some protection for state regulations.”
Mr. Ketchum said: “State rules and regulations are critical to investor protection. Never in our wildest imagination would we ever imagine a situation where Finra rules would pre-empt state regulations.”
While these statements were being made in Washington, Mr. Herstein, assistant director of the Nebraska Department of Banking and Finance, was preparing to address NASAA's annual conference in Wichita. Kan., the state that implemented the first securities law 100 years ago.
After his remarks, Mr. Herstein talked with
InvestmentNews.
IN: What is the biggest challenge facing state regulators?
Mr. Herstein: To keep our states' statutory authority. That is the most important concern. There are several bills out there that right now possibly may try to pre-empt certain aspects of states' regulatory authority, and my goal is to preserve exactly what we have today.
IN: How confident are you that you can accomplish that?
Mr. Herstein: I am very confident. We have 50 states working together and we also have a lot of other friends from both parties out there that know and support state regulation. And you've got that old saying, “We are the only local cop on the beat.” If a small mom-and-pop investor got defrauded without us helping them out, where else would they go?
IN: Did the statements of Mr. Bachus and Mr. Ketchum reassure you?
Mr. Herstein: It's nice to be told that. However, for reassurances, states would actually like to see it in bill form. If something does happen with the SRO model, if they do fix some of the potential flaws in the model, and the state authority is going to stay in place as is ... that would be great.
IN: What fixes would address your concerns about accountability, transparency and conflicts of interest?
Mr. Herstein: Let's go with accountability. All the states [have] open-record laws. We have to produce records when they are requested. Finra does not have to produce those type of records. Conflicts of interest — the issue there is where you have a member organization basically reviewing or examining member organizations.
IN: Do you have any sense of what congressional sentiment is on the SRO bill?
Mr. Herstein: I really do not. Rep. Bachus introduced the bill. He wants to see an SRO. I'm not sure [whether] other members of his party are on board. And I don't know how the other side, the Democratic side, feels about it.
IN: Do you have any idea where Senate Banking Committee Chairman Tim Johnson, D-S.D., is on an SRO?
Mr. Herstein: Nobody has approached us about a bill on the Senate side.
IN: What is the state of NASAA's relationship with Finra?
Mr. Herstein: I think our relationship has been improving. I know that in the last year, Dave Massey [whom he replaced as NASAA president] put together a Finra-SRO liaison committee that meets with Finra representatives to discuss various issues that are of concern to both parties. I believe the cooperation has been going forward from both sides. And I hope to build on what Dave has accomplished, because, as I've said in my speech, Finra will be there. Finra's not going away. The SRO model is there — for good or for bad. We need some open, frank dialogue between Finra and NASAA to resolve some of our differences.
IN: Do states have the resources to examine the extra advisers you will receive?
Mr. Herstein: We have been working on that for the last year ... putting together models for risk assessments. As for the examinations, I know that some states have tighter budgets than others [and] cannot hire additional staff. But a lot of states are adding staff. The states have all signed a memorandum to help each other. If a state is lacking in support to fill examinations, other states will help out.
IN: Are states going to be ready to take on these 3,200 advisers as they move over by June?
Mr. Herstein: I believe we will be ready, yes. We've been doing this for over a year now. I would say the majority are ready now.
Email Mark Schoeff Jr. at [email protected]
