Brokerage firms beware. State securities regulators aren’t finished with their investigations of products that lost clients’ money in the market meltdown, according to Denise Voigt Crawford, the incoming president of the North American Securities Administrators Association (NASAA).

“There will be more and more enforcement actions that flow from this recession,” Crawford, the Texas State Securities Commissioner, told On Wall Street, in an interview that covered topics ranging from the fiduciary standard to expanding the role of state regulators in probes of smaller, regional firms.   

Crawford, who formally becomes president of NASAA, which represents all states securities regulators, on September 15, said her group has task forces looking at a number of areas. But, she wouldn’t specify which firms or issues were being investigated.

However, NASSA has been spearheading actions against brokerage firms following the meltdown in the auction-rate securities (ARS) market last year. Overall, Crawford says, the organization was responsible for $60 billion of clients’ auction-rate securities being repurchased by firms. The states also imposed fines totaling around $597 million against the major brokerage firms.

And investigations continue into the role of so-called “downstream” firms, such as Charles Schwab Corp, which didn’t initiate ARS securities but still marketed and sold them to clients as supposedly liquid, cash-equivalent investments. “We have to look at each one of the (downstream firms) on a case-by-case basis and see how we can unfreeze these assets,” Crawford says. Schwab is facing an investigation by the New York State Attorney-General’s officer over ARS securities.  

Also high on Crawford’s agenda for her year-long term is influencing the government’s regulatory reform agenda. She would like to see a greater role for the states in regulatory oversight. Currently, state regulators only oversee investment advisors with assets under management of $25 million or less. All advisors with assets over this amount are regulated by the SEC. Crawford wants to raise this dividing line so states oversee advisors with assets up to $100 million. In the scandal surrounding the $65 billion Ponzi scheme of disgraced financier Bernard Madoff, Crawford says, “we saw a failure (of regulators). But we also see similar failures on a much smaller scale that we could deal with. The SEC doesn’t have the resources.”

Crawford says that most of the investment advisors under $100 million are smaller firms based in regional areas. From a geographical standpoint, she argues, it’s easier for state regulators to examine them.

Dan Barry, director of government relations for the Financial Planning Association, the trade group for investment advisors, says his organization is open to the idea of NASAA taking a greater role in regulation. “We’re supportive of any redefinition that strikes a balance between what the states are capable of handling versus the SEC,” he says. But he wouldn’t specify the dollar amount of the cutoff.

Both the FPA and NASAA are vehemently opposed to FINRA playing a greater role in the oversight of investment advisors. FINRA, a self-regulatory organization, currently oversees Series 7 licensed registered representatives who are subject to a different standard Series 65 licensed investment advisors. “In terms of regulation, we have to rely on government rather than SROs,” says Crawford.

But FINRA insists it has a role to play too. "In light of all the frauds we have seen in the last 18 months, FINRA believes it is imperative that there be a more robust and routine examination process for investment advisers, like the one that exists for broker-dealers." said a FINRA spokesman. "The SEC has stated that it only has the resources to examine around 9 percent of SEC-registered IAs in 2009 and 2010. That is compared to 55 percent of broker-dealers that will be examined by the SEC and FINRA this year and next," he added.

Indeed, the debate over the standard of care that brokers and investment advisors should be subject to is also high on Crawford’s agenda. Investment advisors are subject to a fiduciary standard, which requires them to always act in the best interests of their clients. Series 7-registered representatives must only meet a “suitability” standard, which only requires that they recommend products that are suitable for clients.

NASAA supports requiring all brokers to be subject to the fiduciary standard. “We believe that ‘harmonization’ is code for a lowering of the standard,” Crawford says. “We’re not in favor of a simplistic definition beyond that because it’s easy to circumvent. The standard should be that you put your clients’ interests first and then case law can give guidance on how that operates.”