States Form Task Force on Securities Regulation

Faced with a congressional bill that would drastically cut their powers, state securities regulators moved Monday to seize the initiative by appointing an independent task force to recommend changes in the way states police the securities industry.

In a related development, Securities and Exchange Commission Chairman Arthur Levitt Jr., in a speech to the state regulators, said there is room for changes in state regulation. He listed six areas where he thinks state regulation could be changed or left entirely to the federal government.

“The truth is that the current system of securities regulation is not the system you and I and the Congress would create if we were starting from scratch,” Levitt said.

Announcement of the task force and Levitt’s speech preceded a hearing originally scheduled for today by the House Telecommunications and Finance subcommittee on a bill that proposes to cut back on many areas of securities regulation, including states’ rights to impose their own rules on securities firms. However, the hearing was postponed late Monday until Nov. 14 due to scheduling conflicts.

Wall Street investment houses have been lobbying heavily for Congress to limit state regulators’ authority. In interviews, state regulators and others said both Levitt’s speech and the task force were part of a combined attempt to find a less drastic way than the House bill to meet calls for changes.

State regulators have often been in the vanguard of steps to protect small investors, including a crackdown on penny stock fraud and major frauds by Wall Street firms. Some states also have stringent requirements on the licensing of individual brokers in order to weed out those with records of defrauding customers. Such initiatives have irritated some Wall Street firms, particularly those that have been prosecuted.

But many firms have also complained about the duplication of regulation from state to state, such as the different requirements in each state for the types of records that firms must keep and the amount of capital they must have on hand as a cushion to protect investors. It was mainly in these areas that Levitt said change should be considered.

The North American Securities Administrators Assn., the organization of state regulators, said a 13-member task force was being named to “conduct a full and open debate about how the states and federal government should go about dividing up” securities regulation. In obvious reference to the pending House bill, it said it hopes the task force will provide a thoughtful alternative to “hasty, ill-conceived proposals.”

Only three state regulators will be on the task force, with the others coming from the securities industry, law firms and universities. The members include former SEC Chairman David Ruder, now a professor at Northwestern University School of Law; Stephen L. Hammerman, vice chairman of Merrill Lynch, and Richard Syron, chairman and chief executive of the American Stock Exchange.

Philip A. Feigin, Colorado securities commissioner and president of the state regulators organization, said the task force will be independent, with no limitations on recommendations it can make. But some members of the task force, including Ruder, have gone on record stating that they believe the House bill goes too far.