During his opening statement July 22 on a hearing concerning the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), Rep. Barney Frank (D-Massachusetts), chairman of the House Financial Services Committee, admitted that if Congress was “starting from scratch we wouldn’t have two separate agencies, but we do have two separate ones and there’s no point in trying to merge them.” Thus, he said, the SEC and CFTC “will work closely together.”

The heads of both the SEC and the CFTC pledged that they are already working closely together to fill gaps in the financial regulatory framework, specifically on how to share oversight of the over-the-counter (OTC) derivatives market and harmonizing areas where both agencies share joint regulatory authority.

Gary Gensler, chairman of the CFTC, testified that the SEC and CFTC will be holding joint public hearings in August and September to further discuss harmonization of the agencies’ rules. Both agencies are also doing a “gap analysis,” Gensler said, to determine the location of gaps in regulation. Both agencies have a deadline of September 30 to send a joint report to Congress detailing their recommendations for harmonizing the agencies.

Gensler told members of the Committee that he believes the most effective way to oversee the OTC derivatives market is to have two regimes: one that oversees derivatives dealers and the other that oversees the market function. “We must enact both of these regimes,” he said. Gensler said that “the unregulated derivatives dealers allowed for more leverage in the system.”

SEC Chair Mary Schapiro told the Committee that the proposals described in the Obama Administration’s white paper on financial services reform and in several recent legislative proposals “do much to strengthen the Commission and improve investor protection in the process, as well as to help to restore confidence in the soundness and integrity of our financial system as a whole.” Specifically, Schapiro noted what she said are the areas that most directly bear on the SEC’s regulatory mission: over-the-counter derivatives; harmonization of securities and futures regulation; hedge funds; broker/dealers and investment advisors; Commission enforcement; credit rating agencies; and the need to identify and address emerging systemic risks that pose a threat to the stability of our financial system.

Schapiro again reiterated her position that “all financial service providers that provide personalized investment advice about securities should owe a fiduciary duty to their customers or clients and be subject to equivalent regulation.” As such, she continued, “I support the standard contained in the Department of the Treasury bill recently put forth entitled the ‘Investor Protection Act of 2009,’ which would enable the Commission to promulgate rules to provide all broker/dealers and investment advisors providing investment advice to retail customers act solely in the interest of their customers or clients without regard to the financial or other interests of the financial service professional.” (For more on the bill and other fiduciary developments, please click here.)

Frank also queried Schapiro on how best to require hedge funds to register with the SEC. “Hedge funds are not mutual funds,” Frank said. “Should we pick one of the existing models or draft a registration model that’s separate for hedge funds?” Schapiro responded that while there are lots of ways to get hedge funds to register–to register the funds as investment companies, or register the advisors to hedge funds–the SEC has recommended having the advisors to hedge funds register because this allows the SEC “to get what [oversight information] we need.”