Before the Senate passed its version of the financial reform bill, S.3217, the Restoring Financial Stability Act, on Thursday, May 20, former Securities and Exchange Commission (SEC) Chairman Harvey Pitt, who’s now the CEO of the global business consulting firm Kalorama Partners in Washington, detailed his viewpoints on financial services reform to Investment Advisor’s Washington Bureau Chief Melanie Waddell in an e-mail message. Of Pitt’s many opinions on how reform should play out, he supports putting broker/dealers under a fiduciary mandate, and hopes the final reform bill, after it emerges from the Senate/House conference, will include a self-funding mechanism for the SEC.
Following is an excerpt of Pitt’s e-mail message.
By Harvey Pitt
Progress of financial services reform
We need regulatory reform because our system is badly broken. It’s disappointing, however, that in the last year, we’ve spent trillions of dollars but haven’t addressed the systemic problems that caused the current crisis and threaten additional rounds of disasters. Nor have we improved the ready availability of necessary credit, especially for middle and small companies. … I believe there are a number of critical deficiencies in these [House and Senate] reform bills:
– Much of the legislation addresses last year’s crisis, but does nothing to prevent the ‘next’ crisis.
– Both the House and Senate bills are ‘too big to succeed’.
– The legislation unwisely would permit the growth of financial institutions to be capped; neither Congress nor regulators can set ceilings above which no financial institution should go. Like a clock that’s stopped working, the standards may be correct for two brief periods every day, but the rest of the time they’ll be wrong.
– Structural problems with our regulatory problems are not being fixed; government isn’t given appropriate tools.
– Instead of eliminating regulation, the bills would add additional layers of regulation.
– The Country needs something compact and flexible to adapt to new instruments that the marketplace will create before regulators understand how they work.
– Housing the proposed Consumer Financial Protection Agency (CFPA) within the Federal Reserve Board will encumber the agency and divert its attention from monetary policy/systemic risk. In any event, the proposed CFPA will create havoc and overlapping jurisdiction.
– The additional burdens being imposed on the Fed pose a threat to its effectiveness and independence.
– The SEC will be given authority it can’t possibly implement–expanding its jurisdiction, but requiring it to perform compliance examinations for thousands and thousands of additional regulatees poses serious threats. The bills will reflect the law of unintended consequences; a prime example of this is the Senate proposal to create an independent ‘Investor Advocate’ at the SEC; apart from the fact that that is already the SEC’s mandate, the legislation would create a position that could trump the five Commissioners and any other staff member.
Derivatives, private equity and hedge fund reform