State employee benefit funds invested heavily in complex financial instruments before the crash of 2008. These investments were tempting to the funds because the instruments carried higher yields than those offered by traditional securities in the low interest climate created largely by Federal Reserve policies after the turn of the century. The risks of the unconventional securities were concealed by investment-grade ratings issued by credit rating agencies and by deceptive marketing practices. With the crash, funds incurred major losses, which, unlike losses by private funds, are not insured by the federal Pension Benefit Guaranty Corporation.

This Article deals both with enforcing claims based on deceptive practices, and protecting funds against future investments of this kind. Enforcement is an issue because the SEC has limited resources, though it faces fewer procedural burdens than the states, and is the only party with standing to bring actions under statutes such as the Investment Advisers Act of 1940. Enforcement by states acting alone is problematic because most states have limited experience in securities litigation, and because they may proceed under state law, risking divergent outcomes that could undermine the consistency in dealing with securities fraud intended by the federal securities laws.

This Article proposes that the SEC create within itself an Office of State Coordination to help train state legal personnel in securities fraud actions, and to enable the SEC to coordinate enforcement with stateagencies in order to maximize the effectiveness of limited enforcement resources. Next, it discusses protecting benefit funds in future investments and analyzes the provisions of the new Dodd-Frank Act intended to improve the securities rating process, finding them to be largely ineffective. It therefore recommends largely bypassing Dodd-Frank, and giving earlier securities laws new teeth through regulatory changes restricting the sale of unregistered securities to larger, more sophisticated funds. It also recommends extending the SEC’s “Plain English” disclosure rules—now applicable only to registered securities—to all securities offerings. These rules require issuers to disclose the risks of the instruments they offer in plain English and in order of the magnitude of the risks they pose. Thus, these rules would provide better guides to risk than the rating system, even as modified by Dodd-Frank, and will aid states both in regulating investments by their funds and in enforcement actions against deceptive practices.

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