So…what happened? In testimony submitted to the Subcommittee on Securities, Insurance and Investment Committee on Banking, Housing and Urban Affairs, Erik Sirri, the SEC’s director of the agency’s division of trading and markets explained insights gained from the financial crisis and how the SEC was regulating CSEs, consolidated supervised entities, and U.S. registered broker/dealers.

“One lesson from the SEC’s oversight of CSEs — Bear Stearns in particular — is that no parent company liquidity pool can withstand a ‘run on the bank,’” Sirri said in a written testimony. “Supervisors simply did not anticipate that a run-on-the-bank was indeed a real possibility for a well-capitalized securities firm with high quality assets to fund. Given that the liquidity pool was sized for the loss of unsecured funding for a year, such a liquidity pool would not suffice in an extended financial crisis of the magnitude we are now experiencing, where firms are taking significant writedowns on what have become illiquid assets over several quarters while the economy contracts. These liquidity constraints are exacerbated when clearing agencies seize sizable amounts of collateral or clearing deposits to protect themselves against intraday exposures to the firm. “

Sirri said the SEC is supporting a program allowing it to set capital standards at the holding company level and to obtain financial information about the holding company and material affiliates.

“Such broker-dealer holding companies may also have an emergency liquidity provider (not the SEC). The SEC would determine the universe of broker-dealer holding companies that would be subject to parent company capital standards. The remaining broker-dealer holding companies not affiliated with banks would be subject to material affiliate reporting requirements, similar to the reporting regime under Section 17(h) of the Exchange Act,” Sirri said.