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Hal S. Scott, What is the Proper Role of the States in Financial Regulation? (Aug. 4, 2006).

Abstract: The U.S. system of dividing regulatory authority between the states and the federal government takes on a very different cast for three important financial firms, banking, securities and insurance. According to the Federal Reserve, at the end of 2005, total assets held by these three types of firms were $11.82 trillion, $10.5 trillion and $5.6 trillion, respectively. In banking, federal regulatory power preempts state authority over nationally chartered banks, while state power is primary for state-chartered banks, subject to significant federal constraints on risk. In insurance, state regulatory power preempts federal authority (reverse preemption) for all insurance firms. In between these federalist poles are securities offerings and securities firms that are concurrently subject to state and federal regulation. However, there has been a recent trend of increasing federal preemption in the securities field. It seems odd that we have three different approaches to preemption for three different activities that are increasingly offered in integrated financial service firms. This paper advocates that insurance adopt the dual chartering approach of banking, with complete federal preemption for nationally chartered insurance firms, and that federal preemption be further extended for securities offerings and firms.