A decade ago, the worldwide financial crisis began wreaking havoc on the American economy. Over the course of the crisis, many workers lost not only their jobs, but also their savings. By the end of the Great Recession, unemployment had topped out at above 10 percent nationally, and the U.S. workforce had lost 8.7 million jobs as the economy contracted. Throughout the nation, losses to 401(k)s and IRAs totaled around $1.8 trillion in the final two quarters of 2008.
Nine years ago, Lehman Brothers filed for Chapter 11 bankruptcy, a grim anniversary that marked a low point in the crisis, which wiped out the savings of so many. The bankruptcy spurred one of the worst days for the markets since Black Friday as the Dow dropped more than 500 points following the news.
{mosads}Today, the Dow Jones Industrial Average, S&P 500 and Nasdaq have recovered and are once again trading near historic highs. Likewise, unemployment has fallen back below 5 percent nationally. The Dodd-Frank Act is the law of the land and has established new reforms and tools for oversight.
While we’ve made great progress in recovering from the financial disaster, we cannot afford to forget its stark warning about the dangers of careless oversight of financial markets and products. The country has made great progress in better protecting hard earned nest eggs, and it’s critical to that progress that we don’t let our vigilance fall back. There are two important components of that vigilance that we must continue to support if we are to keep history from repeating itself.
The first is federal legislation to protect investors. Unfortunately, the current discussion in Congress has turned to rolling back many of the very protections that were enacted in response to financial crises. While these issues will always be debated, that debate must remember the reason laws like Dodd-Frank were passed and the danger it sought to address.
The second component of vigilance against financial disaster is ensuring that regulators throughout the financial services industry have their ears to the ground. Laws don’t stop crime, regulators do. Laws alone won’t prevent another financial crisis. It will take vigorous enforcement of the laws and outreach to consumers to educate them about their investment decisions for retirement, for college and for the future.
State securities regulators are on the frontline of this effort. They are the cops on the beat of financial fraud. State regulators are vigilant about stopping financial crimes, punishing criminals, and sounding the alarm about the scams and shady dealings that put Americans’ savings and financial futures in jeopardy. The authority given to state regulators is well placed, and has been well exercised in the defense of Main Street investors for over a century.
The most recent enforcement report from the North American Securities Administrators Association (NASAA), which includes responses from 50 jurisdictions throughout the United States, quantifies the impact state regulators can have. In 2016, NASAA’s U.S. members alone conducted more than 4,300 investigations and took more than 2,000 enforcement actions. These actions led to concrete punishment for criminals and scammers to hold them accountable for their actions, with $230 million in restitution ordered to investors and more than 1,300 years of prison or probation.
Of course the burden of vigilance must not be borne by regulators alone. Industry and individual investors also have important responsibilities. Broker-dealers and investment advisers can and should work with regulators to develop high standards of accountability and security so that they can avoid the recklessness of the past and secure the futures of their clients. Individual responsibility has a role to play as well, but this can only be realized when supplemented by genuine investor education, something state regulators are uniquely positioned as a local and unbiased resource.
In the aftermath of the financial crisis, policymakers took care to understand the cause of the crisis by convening the Financial Crisis Inquiry Commission. The 10-member commission concluded that the crisis was the result of high risk, complex financial products, undisclosed conflicts of interest, and loose federal regulatory oversight. Then-NASAA president Denise Voigt Crawford, in testimony before the commission, said, “Deregulation is no longer the presumptive policy prescription. Indeed today, the sense is that the current crisis was deepened by excessive deregulation.”
Even as deregulation sees a new surge of federal support, we must remember the role it played in precipitating the financial crisis of the past, and we must look to how states and state regulators can provide insight and oversight to avoid a future financial crisis.
Mike Rothman is president of the North American Securities Administrators Association, the oldest international investor protection organization. He also serves as commissioner of the Minnesota Department of Commerce.