Views on improving the integrity of global capital markets
09 February 2011

Regulatory Atrophy — The SEC May be the Least of It

Posted In: Uncategorized

We can only grimace at the plight of regulators such as the U.S. SEC featured in Barron’s columnist Jim McTague’s recent article “Don’t Count on the SEC,” in which he laments Congress’ failure to adequately fund the SEC. According to McTague, the SEC’s cash-strapped status is having a debilitating effect on the agency’s oversight capabilities, with staff “unable to pay calls on broker-dealers and investment advisors located more than a few hours’ drive from any of the agency’s 11 regional offices.”

For months, alarms have sounded from all quarters that, to prevent another financial crisis of the magnitude recently experienced, three overriding issues need immediate attention: SEC resources, derivatives regulation, and systemic risk oversight. Let’s throw in Fannie Mae and Freddie Mac for good measure. Well, so much for immediate.

Despite the fanfare of Dodd-Frank, the task of filling the regulatory gaps exposed by the crisis has barely begun. And like Manhattan potholes, the atrophy of our regulatory infrastructure is met with indifference. The attitude of “We will get to it, when we get to it” shrouds our legislators and standard setters. What’s more, the SEC’s starvation diet is only the most visible side effect of this growing apathy.

The lack of follow through on systemic risk oversight is particularly surprising given all of the Dodd-Frank talk of crisis prevention. Yet the process of creating a state-of-the-art risk detection and mitigation unit has barely begun.

In the 28 months since the depths of the derivatives-fueled meltdown, the Financial Stability Oversight Council  has held exactly three meetings, issued two reports, and remained silent on the whereabouts of the “nerve center” for systemic surveillance — the Office of Financial Research. This group of technical and investigative experts, to be housed within the Treasury Department and responsible for monitoring systemic risk, is either hiding or still under development. We can find scant reference to any activity other than a technical discussion about creating a universal standard for identifying parties to financial contracts to be formalized this coming July. To borrow a line from Mr. McTague and the Financial Crisis Inquiry Commission — which recently issued a report on the causes of the meltdown — “If you were hoping to, don’t count on the Fed or the Treasury.”

About the Author(s)
Kurt Schacht, JD, CFA

Kurt Schacht, JD, CFA, is the Senior Head, Advocacy Advisor, Capital Markets Policy at CFA Institute, where he oversees advocacy efforts and the development, maintenance, and promotion of the highest ethical standards of practice for the global investment management industry.

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