In his speech given to the Practicing Law Institute’s 40th Annual Securities Regulation Institute yesterday, SEC Chairman Christopher Cox broadly outlined the need for a new financial regulatory framework to keep pace with the dramatic changes in the financial markets and the continued globalization of finance. He stated that “the fact that firms and investors in every sector of the financial services industry have been vulnerable to the effects of the toxic mortgage contagion highlights the weaknesses and gaps in our existing system of stovepiped responsibility and parallel regulation.” Additionally, Cox emphasized the “disjointed” nature of financial regulation by noting that different entities, including insurers, investment banks, commercial banks, thrifts, derivatives dealers, and futures traders, among others, all have different regulators and comply with different legal rules.
Cox proposed that Congress appoint a Select Committee, with representation from each existing standing committee with responsibility for financial services regulation, to address the “current dysfunctional patchwork of our regulatory system,” though he expressed his reservations that “even this extraordinary financial crisis” would eliminate the inertial tendencies of Congress, noting the legislative jurisdictional split in the House and Senate, where banking, insurance and securities fall within the province of the Financial Services and Banking Committees and futures fall within the domain of the Agricultural Committees in each chamber, as a challenge that “threatens to forever stand in the way of rationalizing the regulation of these products and markets.”
To remedy this jurisdictional split, Cox advocated the consolidation of the SEC and the Commodity Futures Trading Commission (CFTC) into a single agency to protect investors by regulating the markets in securities, futures and derivatives. Notably, two days ago, Acting Chairman of the CFTC, Walter Lukken, publicized his strong opposition to a simple merger of the CFTC and the SEC.
Cox focused on the growth of financial products that exist outside of any regulatory system, specifically credit default swaps (CDS), “which can have profound and even manipulative effects on unregulated markets.” In order to improve transparency for CDS, Cox stated that the SEC was working to establish a disclosure regime and strengthen market infrastructure that would result in the public reporting of prices and trading volumes, and give regulators access to trade and position information to monitor market trends, identify potential issues and prevent market manipulation and insider trading. Specifically, Cox announced that the SEC was working with the Federal Reserve to provide regulatory approval for the establishment of one or more central counterparties for CDS. Additionally, Cox stated that the SEC is working with the Federal Reserve and the CFTC on a memorandum of understanding that will establish a framework for consultation and information sharing between the agencies. However, pointing to the failure of the SEC’s Consolidated Supervised Entities Program, Cox emphasized that where “SEC regulation is strong and backed by statute, it is effective,” but “where it relies on voluntary compliance, or simply has no jurisdiction at all, it is not.”
In addition to calling for Congress’ assistance with the regulation of the CDS market, Cox asked for Congress to undertake regulatory reform to address the unregulated gaps in the municipal securities market. He stated that he would ask the full SEC Commission within the next few weeks “to improve the current disclosure of information regarding municipal securities by requiring that secondary market disclosure information be provided, in an electronic format, to a single repository.”
In his speech, Cox also highlighted the strong enforcement endeavors undertaken recently by the SEC and the leading role the SEC has played in providing transparency about issuers and their securities. However, he stated that the traditional mission of the SEC is not to “regulate the safety and soundness of diversified financial conglomerates whose activities range far beyond the securities realm” but noted that Congress has yet to give this authority to any existing agency. As such, he called for Congress to close this and other regulatory gaps, including the gap in statutory regulation of investment bank holding companies, and the gap between the supervision of broker-dealers under the Securities Exchange Act of 1934 and that of investment advisers under the Investment Advisers Act of 1940.
Cox concluded his remarks by proposing that Congress authorize the SEC to conduct a thorough study, analogous to that conducted by the Brady Commission following the 1987 crash, to evaluate the reasons for the current extraordinary market volatility.