The feds can't do it alone

Jack Allegrini had a problem, so he put in a few calls to Washington. He never heard a word back.

Allegrini, who owns a small company in Brockton, eventually called Massachusetts Secretary of State William Galvin's office to complain about his money that had been frozen in a brokerage account invested in auction-rate securities. He didn't know he was in the middle of the latest hot-button financial crisis. He wasn't even sure what auction-rate securities were.

But Allegrini found someone to talk to about his problem in February. In fact, he discovered state officials were already working on auction-rate securities that seemed to have been pitched to brokerage clients as liquid investments.

"At least someone's out there," says Allegrini, who has $225,000 in a brokerage account invested in auction-rate securities. "I don't seem to be getting anywhere on my own."

Regulators in Massachusetts and other states are not the only people investigating the way auction-rate securities are sold to investors these days. The Securities and Exchange Commission and the Financial Industry Regulatory Authority both appear to be interested. But state officials seem to have been out front, and if I had to bet on who will get results, I'd put my money on them.

While these investigations run their course, a much larger debate is underway in Washington and elsewhere over how financial markets should be regulated. Everyone agrees the current system is antiquated and unsuited to oversee modern markets. Treasury Secretary Henry Paulson is out front with a lot of big ideas, but state regulators like Galvin would not have much to do in his idea of the future.

Once Paulson outlined the Bush administration's ideas earlier this month, Galvin complained that state regulators would be effectively rubbed out of the securities regulation business. A federal regulator would tell them what they could and couldn't do.

"We'd basically be gutted," says Bryan Lantagne, head of Galvin's securities division.

Of course, there are much bigger issues on the table.

Does the Federal Reserve have the obligation to save Wall Street's investment banks and the power to regulate them?

Should the SEC be merged with regulators of other markets that trade commodities, to make it harder for some people to exploit gaps between the two of them?

But consumer protection, and that's what securities regulation really means on the state level, matters, too. Who can do that best?

Many people, some of them in Washington, don't like aggressive state regulators getting in the middle of financial markets. They complain that regulators like Galvin are headline hunters with limited resources and agendas that can shift from one border to the next. They point to former New York attorney general Eliot Spitzer as a kind of unchecked state regulator who could go too far.

This is all true, at least to a point. I'm not a fan of every case Galvin chases in Massachusetts, including some of his pursuits in the hedge-fund world. But he's also made a big impact in other important areas, most impressively when state officials pursued abuses in mutual fund sales practices that hurt small investors.

Spitzer was extremely aggressive as a regulator, perhaps over the line at times, and Galvin can push his authority, too. Abuses aren't acceptable, but state securities regulators routinely face large business interests with very deep pockets. Do you want a pussycat in that role?

More importantly, state regulators have a good record of fielding complaints and jumping on issues early. Federal officials have more resources, but are also part of very big bureaucracies with poor records of responding quickly to financial consumers.

Back to Jack Allegrini in Brockton: He's actually been lucky. He took half of his money out of auction-rate securities in December and says his business, buying manufacturers' closeouts and selling them to stores like the Christmas Tree Shops, would have been in trouble if he hadn't.

Like most other investors in his situation, Allegrini thought he had a chance to get his money back every 28 days. He spread his auction-rate securities out so at least some of his money would be available every week. When investors stopped bidding at monthly auctions for the fixed-income securities, that liquidity dried up. Nothing has changed since.

State regulators may be able to help in the end, maybe not. But an average investor like Jack Allegrini is better off with them on his case.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.