Recently, the Massachusetts Securities Division rejected a licensing request from a broker whose background includes 22 disciplinary actions, and 17 customer complaints alleging unauthorized trading, unsuitability, churning, misrepresentation and more. But next year, if that broker re-applies for a license, he might well be approved.
That’s because a new securities regulation proposal set to work its way through the federal government this summer would declare open season on investors, by reducing states’ authority to refuse licenses to brokers.The situation started a few months back, when Senate Banking Committee Chairman Phil Gramm (R-Texas) set about looking at securities regulation, and declared that everything was open for debate.
One of the big issues in securities regulation revolves around how much power individual states should have in the licensing process. Currently, the Securities and Exchange Commission, the various stock exchanges, and the National Association of Securities Dealers have power nationally, with the states providing the local buffer.
The states, effectively, act as the local police force.
But because each state sets its own rules, and they vary widely in how strictly they enforce securities law, the process of doing business in many states can be confusing, expensive, and onerous, at least in the eyes of the people in the securities business.
Which is why Gramm’s invitation for proposals on how to change the regulatory process drew suggestions from the Securities Industry Association (SIA) that, if approved, would curtail investor protection. It’s a proposal Senate Banking Committee types say will get serious consideration. The Securities Industry Association proposal calls for:
– Removing states’ rights to license individual brokers, except in cases in which the broker has an office in-state.
This is why the broker with the violations would be allowed into Massachusetts, or 48 other states, next year. In fact, virtually every bad broker who was denied a license at the state level would have a decent shot of being licensed under the new law. And in this day and age of the Internet, a broker hardly needs to keep an office in a state to do business there.
SIA general counsel Stuart Kaswell points out that forcing brokers to obtain licenses in every state in which they want to operate is costly and inefficient. If the home state of these brokers does its job, he noted, bad brokers would be out of business and would not be getting licenses to sell everywhere.
That’s nice thinking, but it’s not realistic.
The patchwork of state laws leaves loopholes that scoundrels can get through. In New York, for example, the securities commissioner can’t revoke a broker’s license without going to court. In most states, securities regulators can pull the plug on the bad guys.
Under the SIA proposal, someone who has a current license in, say, New York would have a licensing application rubber-stamped by every other state.
And that would happen even while New York was taking steps to kick him out of the business.
Moreover, some securities commissioners are more active than others. Bradley Skolnik, Indiana’s securities commissioner and the president-elect of the North American Securities Administrators Association, noted that his office did not decline any applications in the year before he took office. Last year, it turned away more than 300 applicants.
William Galvin, secretary of state in Massachusetts, sees this proposal as the securities industry “trying to establish a path of least resistance, where they can get pesky regulators out of the way and find some happy host state that will take licensing fees and leave them alone.” Galvin’s office turned away more than 300 license requests in 1998, only a few of which it could stop under the SIA’s proposed guidelines.
– Giving more control over broker disciplinary history to the National Association of Securities Dealers (NASD).
Currently, states and the NASD share in the collection and distribution of disciplinary histories, maintained in something known as the Central Registration Depository.
Not only would the proposal cede control of the system to the NASD, it would limit the public’s ability to use state officials to track down a broker’s records.
The idea, according to the SIA, is that these changes reduce the possibility of erroneous information being given out.
But as anyone who has ever checked a stockbroker’s background can attest, the states typically provide more detailed reports, the kind of stuff that lets a consumer figure out if a past problem was just a misunderstanding between broker and client or a red flag that the broker could be a problem.
– Cutting states’ rights to penalize individuals or firms in cases in which the SEC or a stock exchange has taken action.
The SIA wants to stop legal piling on, in which a firm owns up to a problem and settles a case in, say, New York, only to have regulators from other states, in areas unaffected by the wrongdoing, impose penalties.
Although most people would be against frivolous legal actions, it appears that the SIA’s proposal oversteps its bounds. A brokerage firm that knows it has a problem could seek a quick settlement with the SEC or the exchanges to limit exposure to legitimate state punishments.
– Eliminating the right of investors to rescind trades when a broker is not properly registered.
Currently, an investor can rescind any trades made with a broker who is not properly licensed. The securities industry has a problem with this because the rules allow investors to keep their winning trades and get their money back on losers.
In this case, the industry has a point. Rules should be adjusted so an investor who chooses to rescind must turn back both the winners and losers.
But eliminating recision entirely is too drastic a step.
“If you consider that more small investors than ever before are investing in the stock market, then the whole SIA proposal is a dangerous proposition,” says Skolnik. “There is nothing necessarily wrong with regulatory relief. I think there are ways to make the licensing process more efficient. But I don’t think the answer is to totally eviscerate state authority over licensing professionals.”
Worse yet, don’t give the lawmakers on Capitol Hill much credit for realizing what they could unleash here.
Kaswell notes that his group is hoping for a “good-faith discussion . . . and the chance to try things and see how they work, then trying something else if they don’t work.”
That’s the wrong answer, because too many people will get burned before the next fix is deemed necessary.
The Internet makes stock fraud easier, not harder. The stock market looks so good, day after day, that it makes even ludicrous investment ideas sound plausible. Investors do not need less regulatory protection in this market, they need more.
A license to sell securities has never been the Good Housekeeping seal, but it should stand for something. If Congress lowers the standards, it will mean nothing at all.
