February 2, 2010

Dear Chairman Dodd and Ranking Member Shelby:

With House passage of H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009, the “federal vs. federalism” debate over preemption in financial services regulatory reform now shifts to the U.S. Senate.  Governors urge the Senate to uphold the authority of states to enforce consumer protection laws and regulations against all financial institutions regardless of charter. 

While we are pleased that the House-passed bill essentially overturns past preemptions of state consumer protection laws, the final provision for a Consumer Financial Protection Agency (CFPA) unnecessarily limits the ability of states to enforce consumer protection laws. 

Both Chairman Dodd’s discussion draft, the “Restoring American Financial Stability Act of 2009” released last November, and the original House Financial Services Committee draft proposed a CFPA that set federal rules as a floor, which would have allowed states to adopt and enforce stricter consumer protection laws.  Unfortunately, as passed by the House, H.R. 4173’s preemption language and overarching emphasis on “too-big-to-fail,” risks imperiling local consumers, investors, and community lenders as “too-little-to-matter.”

As the Senate Banking Committee works to develop a consensus reform package, Governors urge the Committee to preserve state authority.  We also offer the following comments and recommendations about particular elements in the original discussion draft:

• Uniform Ratings.  We recommend amending the discussion draft to include comparable language found in H.R. 4173 (Accountability and Transparency in Rating Agencies Act, §2 (r)).  National rating agencies currently use different methodologies when rating corporate and municipal issues.  This amendment would offer investors better decision-making tools and improve the attractiveness of municipal securities because current ratings methodologies do not account well for the historically low municipal default and high repayment rates when compared against corporate issues. 

• Corporate Governance.  Governors believe that state law should continue to govern the chartering, formation, and internal governance of corporations and other business entities.  Federal law and regulations should not preempt state laws and regulations, which would limit economic benefits and development opportunities derived by the states from company formation laws and regulations.  We urge deletion of the corporate governance provisions in the discussion draft concerning election of directors (Section 971), proxy access (Section 972), and shareholder voting on staggered terms for directors (Section 974) that would effectively preempt state authority in areas of corporate governance that did not contribute to the financial crisis. 
  

• Increasing Investor Protection.  Governors applaud language in the discussion draft that would delete the broker-dealer exception to the definition of an “investment advisor.”  Governors believe it is appropriate to hold all persons who provide investment advice to the highest fiduciary duty under the law, regardless of the licensing status of the provider because consumer interests must come first. 

• Municipal Securities.  The charge to the U.S. Government Accountability Office (GAO) at Section 976 of the discussion draft to study the repeal of the Tower Amendment signals the desired outcome, which is unacceptable to state and local governments.  State and local government issuers of municipal securities are subject to state securities laws.  The Tower Amendment (15 U.S.C. 780-4(d)) recognizes the constitutional prerogatives of state and local government as issuers and respects state authority to regulate securities issued by the public within their jurisdiction.

• Government Accounting Standards Board (GASB).  GASB is the independent organization that establishes standards of accounting and financial reporting for state and local governments.  Established in 1984 by agreement between the Financial Accounting Foundation and 10 national organizations representing state and local governments, GASB is the recognized official source of generally accepted accounting principles for state and local government.  Governors urge deletion of Section 978 because GASB’s state and local trustees who help fund its operations are the appropriate responsible parties to evaluate GASB’s operations, not the federal regulator for securities, which maintains a distinct point of view on municipal finance.  In the alternative, the independent GAO, not the U.S. Securities and Exchange Commission, should conduct a study of GASB.

States are the vanguard of prudential regulation and consumer protection efforts, often developing innovative approaches and alerting the nation to emerging financial services threats.  To preempt our ability to protect consumers and investors is shortsighted and would increase risk because the diversity of consumers, financial services products and institutions, investors, and local market conditions are too great for any single regulator.   

We look forward to collaborating with Congress on a balanced national strategy for regulatory reform that strengthens the U.S. economy, upholds market safety and stability, protects consumers and investors, and preserves state authority as financial services regulators.

Sincerely,

cc.  U.S. Senate

ATTACHMENT:  Oct. 14, 2009, EDC Letter on Preemption to HFS Leadership