Securities Law Prof Blog

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

Wednesday, November 12, 2008

Cox on Regulatory Reform

SEC Chairman Christopher Cox spoke on 'Building on Strengths in Designing the New Regulatory Structure' at the PLI 40th Annual Securities Regulation Institute, in New York, New York, on November 12, 2008.  Here is an excerpt from his speech:

One tangible outcome of appointing a [Congressional] Select Committee on Financial Services Regulatory Reform could be a consolidation of the SEC and the Commodity Futures Trading Commission into a single agency with a clear mandate to protect investors by regulating the markets in all financial investments, including securities, futures, and derivatives. Similar consolidation is needed in the banking arena, were a half-dozen federal regulators overlap not only with each other but with state agencies.

The lessons of the credit crisis all point to the need for strong and effective regulation, but without major holes and gaps. They also highlight the need for a strong SEC, which is unique in its arm's-length independence from the institutions and persons it regulates. For example, banks regulated by the Federal Reserve Bank of New York elect six of the nine seats on the board of the New York Fed. Both the CEOs of J.P. Morgan Chase and Lehman Brothers served on the New York Fed board at the beginning of the credit crisis. In contrast, the SEC's regulation and enforcement are completely institutionally independent.

Some have tried to use the current market crisis as an argument for replacing the SEC in a new system that relies more on supervision and less on regulation and enforcement. That same recommendation was made before the current crisis a year ago, for a very different and inconsistent reason: that the U.S. was at risk of losing business to less-regulated markets. But what happened in the mortgage meltdown and the ensuing credit crisis demonstrates that where SEC regulation is strong and backed by statute, it is effective. And where it relies on voluntary compliance, or simply has no jurisdiction at all, it is not.

Not only the current crisis, but the significant corporate scandals such as Enron and WorldCom earlier this decade, have amply demonstrated the need for independent, strong securities regulation and enforcement. That's why an independent SEC, regulating at arm's length, will remain as important in the future as ever it has been before. If the SEC did not exist, Congress would have to create it.

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