In what is being described as the most sweeping regulatory overhaul since the 1930s, President Obama on Wednesday introduced his blue print for a new regulatory environment in a Treasury document titled: Financial Regulatory Reform, A new Foundation: Rebuilding Financial Supervision and Regulation.
The size and scope of the recommendations ensured that most of the initial responses by industry insiders were positive affirmations of the general principles. After all there will be plenty of time to tear it apart and given its enormous scope and the realities of the sausage making process of legislation, the likelihood of the recommendations becoming law anytime soon is pretty slim.
The 89 page document cites five key objectives to the proposed reforms: (1) Promote robust supervision and regulation of financial firms, (2) Establish comprehensive supervision of financial markets, (3) Protect consumers and investors from financial abuse,(4) Provide the government with the tools it needs to manage financial crises and (5) Raise international regulatory standards and improve international cooperation.
One exception to the mostly general responses to the document came from Chicago Board Options Exchange Chairman and CEO Bill Brodsky, who was invited to the White House for the announcement and played a part in creating the document, and who provided more specific comments on the recommendations. “We are particularly pleased that the plan recognizes the need for greater coordination and harmonization of the SEC and CFTC, including streamlining the approval of new products and rule filings. We are gratified to have been included in the process,” Brodsky said in a statement.
The item Brodsky refers to may be of concern to the Futures industry as it seeks a compromise between the Commodity Futures Trading Commission’s core principles and the Securities and Exchange Commission’s rules based approach to regulation (see page 49 of document). If you recall, the main argument against numerous proposals to merge the two agencies cited by futures industry insiders has been that they would lose the benefits of principle based regulation and fall under the proscriptive rules of the SEC.
When former Treasury Secretary Hank Paulson released his Blue Print for a Modernized Financial Regulatory Structure in March 2008, it recommended an eventual merger between the CFTC and SEC but it also noted that the SEC would need to adopt a core principles type approach similar to the CFTC. The document stated, “Treasury recommends that the SEC use its exemptive authority to adopt core principles applicable to securities clearing agencies and exchanges. Embracing such an approach for these sophisticated market participants will not only be more conducive to the modern marketplace, but it will also facilitate a smoother merger of the CFTC and the SEC.”
The current Treasury document seems to ask the CFTC to meet the SEC half way, stating, “Efforts at harmonization should seek to build a common foundation for market regulation through agreement by the two agencies on principles of regulation that are significantly more precise than the CEA’s current “core principles.”
We are in a new regulatory environment. Ironically it is one more supportive of the SEC’s model, despite its numerous failures, and less supportive of the CFTC’s model, despite its relative successes.
Tags: CFTC, Financial Regulatory Reform, SEC
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