Today, the Senate Banking, Housing, and Urban Affairs Committee held a hearing entitled "Enhancing Investor Protection and the Regulation of Securities Markets.” The topics discussed ranged from problems in the securities markets to prudential and systemic risk systems. Testifying before the committee were:

  • Professor John Coffee, Adolf A. Berle Professor of Law, Columbia Law School
  • Lynn E. Turner, Former Chief Accountant, Securities and Exchange Commission
  • Timothy Ryan, President and CEO, Securities Industry and Financial Markets Association (and former Director of the Office of Thrift Supervision)
  • Paul Schott Stevens, President and CEO, Investment Company Institute
  • Professor Mercer Bullard, Associate Professor and President, University of Mississippi School of Law and Fund Democracy
  • Robert Pickel, Executive Director and Chief Executive Officer, International Swaps and Derivatives Association
  • Damon A. Silvers, Associate General Counsel, AFL-CIO
  • Thomas G. Doe, CEO, Municipal Market Advisors

On the topic of risk oversight, Professor Coffee advocated the “twin peaks” model, as adopted in Australia and the Netherland, “that places responsibility for the ‘prudential regulation of relevant financial institutions’ in one agency and supervision of ‘business conduct and consumer protection’ in another.” Under this model, all financial institutions would be subjected to prudential financial oversight from a common regulator and a systemic risk regulator, presumably the Federal Reserve, would be tasked with five responsibilities:  

  • Establishing debt/equity ratio ceilings
  • Supervising and restricting the design and trading of new financial products
  • Mandating the use of clearing houses
  • Exercising authority to write down risky assets regardless of accounting rules
  • Preventing liquidity crises resulting from asset/liability mismatches  

Mr. Turner also had a five-step plan for regulator reform in order to “ensure investors can have [the] confidence [that] they are playing on a level playing field [which is] critical to [the] recovery of our capital markets and economy”:  

  • Independence
  • Transparency
  • Accountability
  • Enforcement of the law
  • Adequate resources

Mr. Ryan suggested that regulatory gaps could be eliminated by regulating similar activities by the same regulator. For example, he supports the merger of the SEC and CFTC, as well as harmonizing investment adviser and broker dealer regulation. He focused his testimony on:

  • Creation of a financial markets stability regulator;
  • Reforms that enhance investor protection and improve market efficiency; and
  • Investor protection through international cooperation and coordination.

Mr. Stevens recommended “bold steps to strengthen and modernize our financial regulatory system,” in particular:

  • Establishing a “Systemic Risk Regulator”;
  • Creating a “Capital Markets Regulator” representing the combined functions of the SEC and the CFTC;
  • Considering consolidation of the bank regulatory structure and authorization of an optional federal charter for insurance companies; and
  • Enhancing coordination and information sharing among federal financial regulators.

Professor Bullard focused his testimony on “investor protection issues related to investment management and investment advisory services.” In particular he cited “gaps in mutual fund fee disclosure rules [and] reform of fund distribution regulation” as problems the SEC is long overdue in addressing, as well as revisiting hedge fund participation requirements.

Mr. Pickel discussed the benefits of credit default swap (CDS) contracts as well as his organization’s support for the evolution of the regulatory framework for privately negotiated derivatives. Mr. Pickel supports the President’s Working Group policy objectives with regards to CDS, including:

  • Improving the transparency and integrity of the credit default swaps market;
  • Enhancing risk management of OTC derivatives;
  • Further strengthening the OTC derivatives market infrastructure; and
  • Strengthening cooperation among regulatory authorities.

Mr. Silvers emphasized that Congress can aid investor protection by:

  • Strengthening the regulatory architecture;
  • Give the SEC jurisdiction over derivatives that are written using public debt or equity securities as their underlying asset; and
  • Other specific substantive steps, in areas such as governance, executive pay, and litigation.

Finally, Mr. Doe testified on how the municipal industry’s era of self-regulation must come to an end and that the market would be improved by the creation of new regulatory oversight if:

  • The regulator was independent of the financial institutions that create the products and facilitate issuers’ borrowing;
  • The regulator was integrated into the national regime of regulation;
  • The regulator’s reach and authority were extended to all financial tools and participants of the municipal transaction: ratings agencies, insurers, evaluators, and investment and legal advisors for both the cash and swaps transactions; and
  • The regulator was charged with more aggressively monitoring market data with consumers’ interests in mind.