There is no question that we are entering an era of financial deregulation at the federal level.

Rules are being paused or repealed, agencies are facing budget cuts, and staff turnovers are reducing both capacity and expertise. Fewer sweeps and reduced fines are expected across the board. Key regulatory areas that were previously high priority, including crypto, cybersecurity, and ESG, are now being de-prioritized or eliminated.

But that does not mean that regulated industries will be off the hook.

States are now expected to fill the regulatory void that the federal government has left. But that means they will face significant challenges in intra-state coordination and use of resources, with large states such as California and New York likely to forge their own regulatory paths.

And state enforcement actions have certainly showed no sign of slowing down.

These topics were discussed during a recent panel at the Securities Industry and Financial Markets Association’s (SIFMA’s) annual Compliance and Legal conference in Austin, Texas. One key area of focus was the work of the North American Securities Administrators Association (NASAA), a nonprofit organization dedicated to developing unified state securities regulations and enforcement priorities.

The conversation encompassed issues about state enforcement cooperation, the pros and cons of state regulation, and key areas of state regulatory efforts.

The status quo

The panelists noted that the most significant developments in state regulation will come out of states with “trifecta” majorities in their house, senate, and governorships. Now, 38 states have trifectas, which will facilitate regulatory movement.

Panelists predicted that enforcement collaboration among states will increase as they begin to tackle complex, multistate actions that might have otherwise been the province of federal agencies, as the latter scale back their enforcement priorities.

But a resulting “patchwork” of state securities regulation could create inefficiency and lead to the federal government preempting state authority on certain areas.

One panelist predicted that the SEC might begin to leave enforcement actions to states for cases that have a strong factual nexus to the host state or have local significance.

We have seen states take novel approaches to securities regulation that sometimes touches on hot-button political issues, such as Missouri requiring broker-dealers to submit scripts related to the inefficacy of ESG investments. That was later struck down as unconstitutional and preempted by federal law.

Reg BI at state level

NASAA has been trying to work a version of the SEC’s Reg BI into their Dishonest or Unethical Business Practices of Broker-dealers and Agents Model Rule for states. Several states have already incorporated Reg BI into their statute books by reference, including Texas, Florida, and Washington.

Regulation Best Interest (Reg BI), is a landmark SEC regulation that requires broker dealers to act in the “best interest” of their client, including by putting their clients’ financial interests above their own, and includes a host of related obligations.

That rule displaced the former “suitability” standard that only required broker-dealers to act in manners suitable to their clients. The SEC ramped up enforcement of Reg BI in 2023, leading to millions of dollars in settlements.

But NASAA’s move was not without controversy. In late 2023, SIFMA rebuked the organization for creating a series of parallel obligations to Reg BI in its model rule that would be stricter than the federal regulation.

Now that it is possible that the SEC’s enforcement of Reg BI will decline, some states might find it prudent to forge ahead with NASAA’s plan, or a close version of it.

Digital assets

States often have divergent interests at stake when it comes to crypto regulation, with some taking a more stringent approach to regulation than others. A significant patchwork of regulation has cropped up around the licensing of digital asset companies as money transmitters and related obligations, especially surrounding anti-money-laundering (AML) regulation.

But concerns remain whether the states will be field preempted by federal legislation. However, the panelists noted that the number of state enforcement actions relating to digital assets has been sharply increasing.

Remote inspection

The panelists highlighted a recent drive by states to accept FINRA’s remote inspection program, currently in its pilot stage, which will allow broker-dealers to remotely supervise their registered representatives. Texas recently recognized FINRA’s rules on remote supervision.

But most states, and NASAA, have remained skeptical of FINRA’s program, with some voicing concern that it will lead to reduced diligence. And some have also voiced concern about the plan to label remote-work locations as Residential Supervisory Locations (RSLs).

This puts state regulators at odds with SIFMA, which has been largely supportive of FINRA’s efforts.

But one panelist noted that there may be an element of nostalgia at play too: on-site inspections were a way to inject a human element into an otherwise faceless process. And every so often, on-site inspections would yield useful though incidental discoveries.

Data privacy and cybersecurity

The panelists noted that cybersecurity will likely be a large focus of state regulation going forward as the SEC drops its previously aggressive stance.

Panelists also noted a concern over data privacy regulation: states currently have notably different definitions of data privacy on the books.