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How can you fail to listen when six former SEC chairmen gather to talk about today's regulatory environment? During a roundtable discussion at SEC headquarters June 4, six former SEC chairmen pointed to quite a few regulatory challenges that loom large for the SEC and other regulators to tackle--namely globalization of the world markets, the burgeoning market for complex synthetic securities, and the continued growth of hedge funds.
Current Chairman Christopher Cox acted as moderator and first queried the six former SEC stewards on what changes they see happening in the markets now and what impact those changes would have on regulation. William Donaldson, who served sa SEC chairman from 2003 to 2005, said the financial markets are "globally faced with a cross border investment environment, trying to come up with a global regulatory system." David Ruder, SEC chairman from 1987 to 1989, a professor at Northwestern University School of Law and chairman of the Mutual Fund Directors Forum, agreed, stating that "we're in a period of unprecedented change in the global markets; we have to find ways to interact with foreign regulators." Harvey Pitt, SEC chairman from 2001 to 2003 who's now CEO of Kalorama Partners in Washington, said the days when "regulation of our [U.S.] markets are confined to our borders are gone."
This global capital markets convergence is putting considerable strain on SEC resources. Within the last year alone, Cox said the SEC has "made demands on" or queried foreign regulators 500 times. "We have been thrust into each other's arms," Cox told the former SEC chairmen. He then asked for their collective advice on what methods could be put in place to lessen the burden on the SEC. Donaldson asked Cox if another organization needs step up an act as a global regulator, pointing to the International Organization of Securities Commissions (IOSCO). But Cox shot back that IOSCO "is not good as a global regulator."
Pitt agreed with Cox, stating that some entity besides IOSCO needs to be created to bring "regulatory and enforcement convergence to the world." For now, unilateral, bilateral, and multilateral agreements--which the SEC is already engaged in--among global regulators will have to suffice, the chairmen said.
The Hedge Fund Issue
Another troubling trend for regulators is the "steady growth of independently managed funds," said Richard Breeden, SEC chairman from 1989 to 1993, who founded Breeden Partners, a private investment partnership, in 2006. "The hedge fund world has grown enormously, and I don't see that changing," he said. "We'll all be wrestling with the growth and regulation of investment funds." Indeed, Donaldson, who during his stint as SEC chairman instituted the rule that hedge fund managers must register with the commission (this rule, of course, was overturned by an U.S. appeals court), said one of the biggest regulatory worries is getting "on top of not so much what goes on inside the hedge funds, but the techniques [the funds] deal with. We know far too little." Ruder chimed in that back when he was SEC chairman, he told Congress that hedge funds should have to disclose their risk positions. He suggested the SEC assess how foreign regulators are treating hedge funds.
Once the subprime fiasco is settled, Breeden said that regulators and the financial services community need to do "a lot of thinking" about how it occurred, noting that the subprime crisis will not be the last financial crisis for the U.S. "Securities and banking regulations don't work as well as they should," Breeden said. "I think there is a challenge across industry lines to think through better ways of disclosure." Donaldson said he'd like to see an independent investigation with involvement from other regulators besides the SEC "about whether we should have been on top of the subprime" mess. Pitt added that transparency makes the capital markets work, noting that there was none around subprime loans.
Washington Bureau Chief Melanie Waddell can be reached at firstname.lastname@example.org.