Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, May 7, 2008

Cox Addresses Security Traders Conference

Excerpt from SEC Chair Cox's Address to the Security Traders 12th Annual Washington Conference, Washington, D.C., on May 7, 2008:

And yet here, the framework of federal financial services regulation as it was developed throughout the 20th and 21st centuries is dangerously behind the times.

Today, no regulator in the federal government is given explicit authority and responsibility for the supervision of investment bank holding companies with bank affiliates. Under the statutory scheme that the Congress devised, most recently in the Gramm-Leach-Bliley Act, there is mandatory consolidated supervision by the Federal Reserve for commercial bank holding companies, including financial holding companies. For investment banks that do not have U.S. banks within the consolidated group, the law provides for a holding company supervision structure that is purely voluntary — and only one investment bank, Lazard Ltd., has volunteered for this supervision. The four largest investment bank holding companies in the U.S. are ineligible for it because they have specialized bank affiliates, such as industrial banks or certain savings banks....
The notion embedded in the Gramm-Leach-Bliley Act that investment banks should be able to operate outside of a statutory consolidated supervision regime is no longer tenable in the wake of Bear Stearns. It is impossible for anyone to say that in this case, "the system worked." It is true that the statutory scheme produced all that it ever demanded — no customer cash or securities were ever at risk of loss because of the elaborate protections they enjoy under the SEC's existing regulation, including the segregation of customer funds and securities. But that limited purpose, which views the SEC's role and that of other financial regulators vis-a-vis the nation's largest investment banks as limited to protecting customer funds and securities in the regulated broker-dealer subsidiaries of firms such as Bear Stearns — is no longer enough.

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