Throughout the remainder of this year and into 2009, all eyes will be on how Treasury’s Blueprint for financial services reform plays out. We’ve already seen, quite earlier than many financial services executives expected, a piece of the Blueprint implemented–the memorandum of understanding (MOU) between the Securities and
Exchange Commission and the Fed, which cements a deeper information-sharing relationship between the two. An information-sharing accord was also struck between the SEC and Department of Labor (DOL) in mid-July.
In testimony before the House Financial Services Committee July 24, SEC Chairman Christopher Cox said the current market turmoil demonstrates how “interconnected the markets have become.” In the past, he said, “stovepipe regulation of different products could be justified on the ground that the boundaries in the marketplace were clear enough.” Today, however, “when derivatives compete with securities, and futures and insurance products are sold for their investment features, that is no longer true. As we approach the end of the first decade of the 21st century, the growing gaps and crevices in our venerable system are beginning to show.”
It is precisely those gaps that Congress will focus heavily on next year as it continues to debate financial services reform. As the debate ensues, one thing seems to be clear: the SEC will have to aggressively defend its regulatory turf. Former SEC Commissioner Roel Campos is just one informed industry observer who isn’t shy about acknowledging this fact. Campos left the SEC in September 2007, and is now a partner at the Washington, D.C. law firm Cooley Godward Cronish. I spoke with Campos in July about how he sees financial services reform taking shape, and where the SEC stands in that debate.
Do you think the SEC is at risk of being marginalized under Treasury’s Blueprint? For instance, there is talk of combining the SEC and the Commodities Futures Trading Commission (CFTC) and the Fed getting more regulatory control over all types of financial institutions.
I’ve been very public about my views on that. I think that in whatever final form of restructuring–whether it’s the original Blueprint or the subsequent iterations of the Blueprint where you have the Fed taking on more and more responsibility as a systemic risk regulator–whatever that is and whatever combination of the banking agencies, whatever consolidation that occurs there, where you have some sort of prudential regulator–I first think the Fed needs to be involved in day-to-day oversight of the financial institutions. Only in that way will it really have the ability and the data available to know when to intervene, and intervene in advance of a problem. Otherwise it’s always coming in after the train has wrecked.
The SEC has to be maintained in terms of its current mission and the way it does business. By design, Congress created the SEC, as we know, in the aftermath of the Depression as an enforcement agency that is meant to maintain integrity in the markets, investor confidence, and to promote capital formation. If you start discussing consolidating the SEC with the CFTC, which is now clearly a prudential regulator, then you start essentially diluting the culture and the mission of the SEC–there’s no way you cannot do that. However the restructuring goes forward, the SEC’s mission has to be maintained scrupulously.
I think it’s likely going to share, if not lose outright, its consolidated supervised entity program. I think the SEC has been unfairly blamed for much of what happened with Bear Stearns, which is a matter of not really having the whole story come out on behalf of the agency. I think that the prudential regulation of the particular investment banks. . .the SEC has been there but it just doesn’t have the liquidity option that the Fed does. [The SEC and Fed] currently have the Memorandum of Understanding that will be worked out even further, but I think that the SEC has a role in maintaining its oversight, possibly in conjunction with the Fed, of the investment banks. The SEC has huge expertise and history with the investment banks and can bring that to a very useful function.
Why do you think the SEC will share or lose outright its consolidated supervised entity program? What is this program’s function?