New SEC Regulation Controversy

 
The Securities and Exchange Commission (SEC) was chartered 75 years ago with the purpose of overseeing Wall Street and safeguarding investors.  However, since the Commission, under the direction of Christopher Cox, did not anticipate the financial crisis and failed to detect Bernard Madoff’s $65 billion Ponzi scheme along with the fact that two of its SEC’s enforcement attorney’s are being investigated by the FBI for insider trading, the firm’s reputation has been severely tarnished. 
 
In addition, under Cox, penalties imposed on companies fell 84% (from $1.59 billion in 2005 to $256 million) in 2008.   This all occurred due to the “voluntary supervision program” that was in place with the SEC, which gave investment banks the authority to opt out of SEC supervision. Currently, the program is no longer in existence, which is somewhat academic, since the five largest independent Wall Street firms are no longer in existence. 
 
To ensure such a crisis never occurs in the future, Obama’s administration is currently working on a regulatory reorganization which would strip the Securities and Exchange Commission (SEC) of some of its powers.  Controversy between the Obama administration and the SEC, along with union pension funds and other advocates for shareholders, is rapidly growing.  The Obama administration’s regulatory reorganization is working toward the following:
 

• Federal  Reserve to be given more authority to supervise financial firms who are deemed too big to fail
• The Fed to inherit some SEC functions, while other functions go to other agencies
• Providing oversight of mutual funds to a bank regulator or a new agency to police consumer-finance products 

Washington DC is providing the stiffest resistance to change, not Wall Street.  Government officials, regulators and congressional leaders are all locked into ideological battles and turf wars. 
 
The most difficult challenge facing regulatory reorganization is the lack of consensus on the proposed “systemic-risk” regulator, who would identify and act on emerging “macro prudential” dangers.  As mentioned above, the administration wants the Federal Reserve to take the role, but many individuals in Congress oppose this; they feel the crisis is being used to give the Federal Reserve too much power.  The suggestion to have systemic regulation be executed or overseen by a multi-agency council is gaining some speed although it could be a recipe for inaction.
 
The shake-up of existing regulators is proving to be an even bigger battle.  However, all parties agree the overlapping patchwork of agencies needs to be brought up to date so that regulation is focused on the firm’s activities rather than their legal form.  This is where the administration is considering rolling the four banking -supervision agencies into one.
 
Furthermore, even though it may make sense to merge the SEC with the Commodity Futures Trading Commission, which regulates derivatives, the move would probably be blocked by Congress’s powerful agricultural committee. Issues such as what restrictions to place on, or whether to dismantle, banks that are too big to fail hasn’t even been discussed.  Agreement to pass the rules in pieces or roll them up into one large bill can’t even be agreed on. 
 
With all this turmoil, there will be very little, if any, further financial reform passed in 2009.  This could work to the financial industry’s benefit, as it will reduce the likelihood that “heat-of-the-moment” laws, like Sarbanes Oxley, will be rushed through.  However, if stability is not provided quickly, due to politics, we will certainly be worse off.
 
By Debi Calim