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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Speech to NASAA Annual Conference


Chairman William H. Donaldson

U.S. Securities and Exchange Commission

September 14, 2003

Good morning. Thank you for inviting me to join you today. It's a pleasure to be here.

Chris (Bruenn), I know this conference marks the end of your very effective - and busy - tenure as President of NASAA. I also know you've worked closely with the Commission staff, particularly during the research analyst investigation and global settlement. They greatly appreciated your intelligence, dedication, and candor. I'm pleased that your and my tenures overlapped, and I'm sure the State of Maine will be pleased to have you back full-time.

Today I'd like to talk about one of the most important issues facing state and federal securities regulators - how we can cooperate, coordinate our activities, and effectively navigate our overlapping responsibilities, while remaining true to the regulatory structure needed to maximize investor protections, promote market integrity, and avoid the pitfalls of redundancy. Before I begin, let me note that the views I express are my own and do not necessarily reflect the views of the Commission.

The backdrop to my remarks is a subject with which you are all surely familiar: the supposed clash, reported by the press and other commentators, between federal and state securities regulators over our respective roles in policing the nation's securities markets. This is a subject which understandably has consumed the financial media. Turf wars and tensions always make better copy than peace and harmony. I for one think there's less here than meets the eye. Unfortunately, the public dialogue has sown some confusion. I wouldn't be surprised if some investors, watching the reported tussle, have been left wondering: "If state and federal regulators are fighting amongst themselves, who's looking out for me?"

The fact is that everyone in this room is committed to rooting out fraud and corruption in our markets and otherwise protecting investors. Our precise roles in achieving this goal is a subject that warrants careful thought, and at times, debate. Yet just as some tasks never end - like painting the Golden Gate Bridge - it's unlikely we will ever reach a point where we decide, once and for all, the perfect balance between federal and state activities. What's important is that we continue working toward the same goal, and that we maintain our commitment to cooperating with each other to promote market integrity and investor protection, and avoid costly redundancy and overlap.


Today's debates are in fact part of a tradition that reaches back nearly a century. Years before the idea to create the SEC evolved, states began implementing anti-fraud statutes in response to the growing prevalence of overvalued, speculative, and fraudulent securities. The claims of securities promoters and brokers were routinely so outlandish that one state legislator reportedly complained that "some securities swindlers were so barefaced that they 'would sell building lots in the blue sky.'" Indeed, as SEC historian Joel Seligman has pointed out, by the time the first federal securities statute was adopted, in 1933, every state but Nevada had enacted "blue sky" laws aimed at strengthening investor protections.

You might find it hard to believe, but in the 1920s and 1930s there was widespread demand from the states for the federal government to assume a role in policing the markets. State securities officials widely supported the concept of a federal securities statute because of the states' inability to prevent sales of fraudulent securities across state lines. In the early 1920s, a member of Congress polled officials in the 38 states that then had blue sky laws for their views on a proposed federal securities law. All but one supported the proposal. In House committee hearings preceding adoption of what's now known as the Securities Act of 1933, it was reported that one state securities regulator noted that 90% of the securities law violations in his state were conducted across state lines.

In the aftermath of the 1929 market crash, the Senate Banking Committee convened hearings in 1932, which carried Congress and the country the remaining distance to full-scale support of federal regulation of the securities markets. Ultimately, federal lawmakers concluded that federal enforcement authority should be brought to bear on the problem of securities fraud. But Congress did not want to remove the state cops from the local securities beat. Indeed, our lawmakers included explicit provisions preserving existing state authority to regulate intrastate activities in the 1933 and 1934 Acts. Congress's goal was to "supplement and strengthen" the existing investor protection regime, rather than replace it.

Over the years of course, there was concern about duplicative and unnecessary regulation. As a result, in 1996 Congress adopted the National Securities Markets Improvement Act (NSMIA) to address the practical difficulties arising from having more than 50 different sets of laws and an aspiration to have a single national market. Congress targeted what it viewed as unnecessary regulatory burdens that increased the cost of raising capital.

The 1996 Securities Market Act (NSMIA) actually pre-empted state regulation of the securities registration and offering processes. But, at the same time, and this is important, the drafters of the Act were careful to explain that while eliminating regulatory burdens, the Act "preserves important investor protections" by allowing the states to "continue to exercise their police power to prevent fraud and broker-dealer sales practice abuses."

The Current Environment in Federal-State Relations

Today, state and federal securities authorities continue to grapple with striking the right balance of power. I'm reminded of all those cop shows where the local police force and the FBI tussle over who's going to work a high-profile crime case. Just as the FBI and local police want to solve the crime and do justice, so do federal and state securities regulators and enforcers. But an overlooked story is how effectively we have used our partnership over the years, and particularly the past two years, to help clean up America's financial markets and restore investor confidence. Of course, everyone is familiar with New York Attorney General Eliot Spitzer's landmark case against Merrill Lynch, and then the historic global settlement involving research analysts in which the states, the SEC, and the SROs were all active participants. In addition, in the last two years, the Commission has publicly recognized the assistance of 14 states -- Alabama, Georgia, Kansas, Oregon, Arizona, California, Texas, New York, Wisconsin, Washington, Pennsylvania, Virginia, Florida, and Indiana -- in 20 different Commission enforcement actions. During the same period of time, the Commission's Division of Enforcement has granted more than 250 requests from state and local government entities for access to our investigative files. These numbers speak to a cooperative and synergistic relationship among securities enforcement officials at the federal and state levels, as well as a strong esprit d'corps of which we should all be proud.

Developments in the recent past also illustrate the overlapping responsibilities and inherent challenges in the relationship between state and federal securities regulators.

I view the global settlement as having been instructive for regulators as well as beneficial to investors. It reminded regulators how much could be accomplished in a relatively short period of time when there is careful coordination, open communication, and extensive cooperation. Investors benefited from the speed with which a far-reaching settlement was reached, thanks to the pooled resources and shared expertise of those involved.

Just two weeks ago, aided by a whistleblower's tip, the New York Attorney General announced a case against Canary Capital Partners, a hedge fund, for allegedly engaging in illegal trading practices with several mutual funds. The action is a terribly important one and is the result of excellent investigative work by the Attorney General and his staff. As I have said before, the conduct alleged in the Canary Capital Partners complaint is reprehensible and there is no place for it in our markets. We are working closely and cooperatively with the New York Attorney General to see that appropriate action is taken against all wrongdoers.

While this state action clearly opened a new front in our efforts to ensure all investors are treated fairly, only weeks earlier another state official decided to re-fight an old battle. The move by Oklahoma's attorney general to file securities fraud charges against WorldCom and several former officers and employees of the company -- without pursuing any investigation or bringing new evidence to light, and without communicating with federal officials who already had taken similar actions and indicted and entered into cooperation agreements with some of the individuals -- highlights the need for better and more consistent cooperation between state and federal securities authorities.

The failure of the Oklahoma attorney general to inform federal officials, who had been actively investigating the WorldCom fraud, runs the risk of undermining the federal prosecutions - raising the possibility that those most deserving of prosecution could slip through the net -- and without any meaningful incremental benefit to investors. For its part, the SEC sued WorldCom within 48 hours of the company's announcement of its earnings overstatement -- which resulted in the largest penalty ever obtained in a civil action under the federal securities laws -- and thus far, we have brought enforcement actions against four of WorldCom's former employees. The SEC's investigation into WorldCom is active and continuing. The United States Attorney's Office for the Southern District of New York has criminally charged five of WorldCom's former employees. It is my hope that the Oklahoma Attorney General's actions will not jeopardize the criminal cases being prosecuted by the U.S. Attorney's Office or our ongoing investigations. We all want to see malfeasance punished, and want to see criminals behind bars - especially those who have defrauded countless investors. However, a desire for faster resolution of difficult cases should not be allowed to sacrifice effective prosecutions. We should, instead, be guided by what is in the best interests of investors, and the pursuit of fairness and justice.

Benefits of the Current Structure

One of the cornerstones of our current regulatory system - a system that I believe works in the best interests of investors -- is that national regulatory policies are set at the federal level. This allocation of responsibility helps ensure consistency and certainty to participants in the capital markets. For instance, a national firm, such as a broker-dealer with offices in multiple states, can be confident that the laws on record retention will not vary from branch to branch. Similarly, a public company listed on a national exchange whose shares will be purchased by investors across the country can know that its disclosure obligations will not vary from state to state. This type of certainty encourages efficiency and cost-effectiveness and reduces the cost of raising capital. A system with different standards established in every state would impose substantial costs on listed companies, and could chill U.S. competitiveness and economic growth. Indeed, Federal Reserve Chairman Greenspan commented recently on the benefits of having a single, national regulator.

Investors also benefit from having securities market policies set at the national level. Most important, they can rest assured that their state of residence will not determine the volume or quality of information to which they have access or the standards to which their broker is held.

As Attorney General Spitzer said at a June 2003 program before the SEC Historical Society, when states initiate actions that would have a "rulemaking consequence," then a state has "an obligation to go to the SEC to get the SEC involved to ensure that there is that uniformity in the capital markets."

Role of the States

But let me be absolutely clear about this: the dialogue that such an obligation contemplates is not about diminishing state law enforcement efforts. State regulators play an essential role in protecting investors through vigorous enforcement of their laws. And, of course, the states have proven themselves highly effective in investigating and charging those who defraud their residents, and continue to be committed to doing so. Active state enforcement is critically important because the SEC lacks the resources to uncover every lead and investigate every allegation of misconduct -- even with our recent budget increases. State officials have shown themselves more than capable of helping to pinpoint, publicize, and combat, wrongdoing in the securities industry. This benefits investors and is essential to restoring, and maintaining, long-term confidence in our capital markets. We must not jeopardize those benefits.

So, if there is overall agreement that the SEC should act as the national rulemaker, and that both federal and state authorities should act as enforcers, where does the difficulty arise?

Enforcement of the laws can, in some circumstances, become a vehicle for changing the rules. That is, when faced with the risks and costs of litigating an enforcement action, some parties may agree in settlement to change or restrict their future conduct in significant and far-reaching ways. Thus, an enforcement proceeding can realign an industry standard in much the same way as a new rule, at times, making the line between rulemaking and enforcement unclear. The global research analyst investigation and settlement had the potential to fall into this trap, had the federal and state regulators not coordinated their efforts.

Moreover, allowing federal and state regulators to trip over each other in the name of headlines does nothing to inspire investor confidence. Sure, there will be situations when both federal and state authorities have an acute interest in filing civil actions focused on the same conduct.

However, I would think these situations would be the exception, rather than the rule. Routinely bringing separate but duplicative civil actions against the same wrongdoers ordinarily won't be efficient. Nor will continuously butting-heads and scrambling to file a case first lead to the best results. If it appears that each of us cares more about getting there first than getting it right, the public will question the fairness and integrity of our processes - and that's something none of us can afford.

New Joint Initiative Announced

In an effort to address these issues and increase the effectiveness of our joint efforts, along with President Bruenn, the SEC ---together with NASAA---has agreed to convene a working group to study how best to effect the concept of a single national market in our collective and individual enforcement activities. We intend to explore best practices, consistent with the mandate of a national market system, for maximizing communication, cooperation and coordination between the SEC and state authorities in significant securities enforcement activities relating to regulated entities. We also will identify possible procedures for maximizing effectiveness and consistency in Federal and State requirements imposed on regulated entities through enforcement activities.

Identifying an appropriate balance, while undoubtedly challenging, will enable the SEC and the states to make better use of our limited resources and make us collectively more effective. Together, we will undertake to devise a clearer roadmap for maximizing the effectiveness of our enforcement programs while ensuring consistency of the laws and rules that are imposed on the marketplace and its participants. It is through such collaboration that we can successfully strengthen the national rulemaking power of the SEC and the collective enforcement efforts of the federal and state regulators. I believe investors as well as other market participants will benefit from this important initiative. I also believe we must use this opportunity to thoroughly evaluate the appropriate roles of state and federal regulators in protecting investors.

Fortified by dual federal and state enforcement, our system of national securities regulation has yielded the fairest and most trusted markets in the world. We must be careful to preserve that system. Undertaking the sort of rigorous analysis we have agreed to pursue is not inconsistent with its preservation. In fact, it is a prerequisite.

Thank you for inviting me to join you today. We at the SEC look forward to working with you united in a common goal of effective investor protection.



Modified: 09/14/2003