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Reforming the SEC

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Some of the nation’s top financial leaders and lawyers say reforming the Securities and Exchange Commission’s regulatory process would indeed help the U.S. capital markets stay competitive.

Speaking at an American Enterprise Institute (AEI) event in Washington April 20, which addressed whether excessive regulation and litigation is eroding U.S. financial competitiveness, Robert Glauber, former chairman and CEO of NASD, who’s now a visiting professor at Harvard Law School, said the SEC should revamp its regulatory process in four ways.

Also a member of the Committee on Capital Markets Regulation, Glauber’s suggestions were included in a report issued by the Committee last November, which concluded there was strong evidence that financial transactions were migrating away from the U.S. due to excessive regulation and litigation.

First, Glauber said, the SEC needs to adopt formal cost-benefit analyses of its proposed rules and regulations. The SEC is currently exempt from establishing a cost-benefit analysis, he said, but the securities regulator could choose to do so voluntarily by either recruiting more economists to its staff or by outsourcing the analysis to a third party.

Second, Glauber said the SEC needs to “shrink” its rulebook and establish more risk-based and principle-based rules, like the Financial Services Authority (FSA) in the U.K.

Third, he said it’s “time for the SEC to learn more from banking regulators’” approach to supervision and enforcement. The SEC’s supervision and enforcement should be “more private and less confrontational,” Glauber said. Indeed, Edward Greene, Citigroup’s general counsel, who sat on the same panel with Glauber, called the SEC’s regulatory structure “antiquated,” and said the Commission’s power to settle enforcement proceedings gives the regulator “the power to dictate.” Glauber also said the SEC needs to refrain from making ad hoc rules through enforcement. In recent years, enforcement actions have been used as a basis for ad hoc rulemaking, he said.

The fourth change the SEC should make is to cooperate more with state regulators. The fragmentation of the regulatory structure, with many regulators at the state and federal level, made sense at one time, Glauber said, but not today because of the convergence of products and institutions. While more cooperation is needed at the federal and state level, Glauber said, it is “unlikely to happen.”


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