Is making state and federal securities enforcement laws more standardized a good idea? SEC Commissioner Paul Atkins thinks it is.

In a speech cosponsored by the Brookings Institution and the American Enterprise Institute, who have just released a book in tandem entitled "Competitive Equity; A Better Way to Organize Mutual Funds," Atkins said it is high time that the SEC looks at this issue again. He says:

Another recommendation that I support is making securities enforcement among the states and federal government more uniform. Since its passage in 1996, the Commission has not engaged in any serious effort under the National Securities Markets Improvement Act (NSMIA) to engage in "regulatory convergence" among federal and state securities regulators, especially as it may affect nationally and globally-offered securities. In passing NSMIA, Congress recognized that it was in the nation's interest to have uniform standards in the securities markets. So I pose the question, should securities fraud be different under state law than federal law? In other words, could an act or omission that is not fraudulent under federal law be fraudulent under a state law — or vice versa? I think most courts that have addressed securities fraud have viewed the federal and state laws as practically interchangeable.

For instance, some recent state enforcement cases involving several large mutual fund complexes and their in-house distributors are troubling. When the California Attorney General was asked by a Wall Street Journal reporter about whether he was seeking more disclosure than required by the Commission, his response was "that's fine" because he thought he should be "supplementing" SEC regulations.3 The setting of disclosure standards for nationally-offered securities such as mutual funds is a function that Congress, through NSMIA, clearly left to the Commission.

Atkins also takes issue with the indie chair rule stating that:

Our recent consideration of rules governing the mutual fund industry is a good example. The rule as adopted twice by the Commission, both times over my dissent, would have required each fund to have a board made up of at least 75% independent directors, one of whom is chairman. I say "would have required" because these requirements were struck down twice by unanimous panels of the D.C. Circuit because the Commission failed to consider adequately the costs of, and alternatives to, the measure. I note that Chief Judge Ginsburg, who will be one of your speakers later this afternoon, wrote the opinion for one of those panels.

When the Commission first proposed the rule in 2004 at an open meeting, my former colleague Commissioner Cyndi Glassman, a Ph.D. economist, pointed out the need for empirical analysis to support the rule. In response, she was told that there probably was not empirical evidence to support the rule, but that the rule should be looked upon as "an experiment that will have to be reversed if it was a problem." In any event, then Chairman William Donaldson infamously told her that "there are no empirical studies that are worth much."

Late last year, the Commission was under pressure to re-propose the independent chairman rule. During the course of these discussions, it was brought to my attention that the Commission's Office of Economic Analysis had previously performed a couple of studies on this very issue, although those studies had not been circulated among the commissioners.

To Chairman Cox's credit, he moved to release these studies for public comment rather than move forward with a specific rule proposal. Now that we have had a chance to review the recently-released mutual fund governance studies, the justification for an industry-wide experiment seems even more tenuous. I read these studies as to conclude that while there may be some statistical correlation between having an independent chair and the level of fees charged by the mutual fund's adviser, there is no strong correlation with overall return.

Another recommendation that I support is making securities enforcement among the states and federal government more uniform. Since its passage in 1996, the Commission has not engaged in any serious effort under the National Securities Markets Improvement Act (NSMIA) to engage in "regulatory convergence" among federal and state securities regulators, especially as it may affect nationally and globally-offered securities. In passing NSMIA, Congress recognized that it was in the nation's interest to have uniform standards in the securities markets. So I pose the question, should securities fraud be different under state law than federal law? In other words, could an act or omission that is not fraudulent under federal law be fraudulent under a state law — or vice versa? I think most courts that have addressed securities fraud have viewed the federal and state laws as practically interchangeable.

For instance, some recent state enforcement cases involving several large mutual fund complexes and their in-house distributors are troubling. When the California Attorney General was asked by a Wall Street Journal reporter about whether he was seeking more disclosure than required by the Commission, his response was "that's fine" because he thought he should be "supplementing" SEC regulations.3 The setting of disclosure standards for nationally-offered securities such as mutual funds is a function that Congress, through NSMIA, clearly left to the Commission.  

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