(The article featured
below is a selection from SEC
Today, which is available to subscribers of that publication.)
Key Senators Assert Oversight of
SEC-Fed Pact on Investment Banks
The Chairman and Ranking Member of
the Senate Banking Committee asked the SEC and the Federal Reserve Board not to
implement their historic Memorandum of Understanding on regulating investment
banks until the oversight committee can determine that the agreement is in the
public interest. In a letter to SEC Chairman Christopher Cox and Fed Chair Ben
Bernanke, Senators Christopher Dodd and Richard Shelby advised that any formal
agreement among the agencies mist not be permitted to interfere with
congressional efforts to reform financial regulation.
With the ongoing crisis in
securitization and in the wake of the Bear Stearns bailout, the SEC and the
Federal Reserve Board executed the MOU to enhance information sharing and
cooperation in the regulation of investment banks and bank holding companies.
The MOU is also recognition that the securitization of loans and other assets
has connected banking and securities regulation as never before. More broadly,
the MOU is designed to help the Fed to perform its developing role of market
stability regulator.
Under its consolidated supervised
entity ("CSE") program, the SEC supervises global securities firms on
a group-wide basis. For such firms, the Commission oversees not only the U.S-registered
broker-dealer, but also the consolidated entity, which may include
foreign-registered broker-dealers, banks, and the holding company itself. The
MOU recognizes that the SEC is the primary regulator of global investment banks
through its CSE program and that the Fed is the primary regulator of bank
holding companies affiliated with SEC-registered broker-dealers.
Cox noted that the interconnectedness
of mortgage and lending markets, credit derivatives, securitizations, and
counterparty relationships requires the government to adopt a more coherent
approach to regulation. The MOU will help accomplish this, in his view, by
expanding the sharing of information on a confidential basis between the two
agencies. The SEC recently entered into a similar MOU with the Commodity Futures
Trading Commission, and an agreement between the SEC and the Department of Labor
is expected later this summer.
In their letter, Senators Dodd and
Shelby acknowledged that, in light of the market crisis, the SEC and the Fed had
to take unprecedented action. In particular, using emergency powers conferred by
the Federal Reserve Act, the Board provided market liquidity by opening the
discount window to investment banks with primary dealer status for the first
time. While recognizing that these are temporary measures, the committee is
concerned that Congress has not authorized the Fed to open the discount window
permanently to investment banks with primary dealer status. Similarly, Congress
has not authorized the SEC's CSE regime, through which the Commission regulates
investment bank holding companies that own depository institutions.
The senators reminded the SEC and the
Fed that they have only limited authority to regulate investment banks with
primary dealer status. Congress has the ultimate duty to formulate federal
financial regulatory polices, emphasized the senators, and Congress will
determine what alterations must be made to the financial regulation system.
While expressing his hope that the
MOU will improve the regulation of investment banks and bank holding companies,
Chairman Dodd noted that the agreement does not grant any new authority to
either the SEC or Fed, nor affect the ability of Congress, and specifically the
Senate Banking Committee, to oversee regulated institutions and markets. Dodd
believes that the MOU can achieve its important objectives, while at the same
time leaving consideration of any broader reform of the financial regulatory
landscape to Congress. In this regard, he promised that the Senate Banking
Committee will begin to examine these issues in greater detail over the coming
weeks and months.
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