Sweepting Changes for the SEC and CFTC

17 06 2009

The White House today released a “white paper” outlining their plans for reform for the regulation of financial markets.  Two major changes will greatly affect the world of Securities Markets.  The first deals with Hedge Fund filings with the SEC.  From the Wall Street Journal.

Hedge funds and other private pools of capital would have to register with the Securities and Exchange Commission. Thousands of financial institutions would be required to hold more capital in reserve to protect against unexpected losses, and companies would also have to retain a portion of the credit risk for loans they have packaged into securities.

It seems that the main target of this regulation is not the hedge funds themselves, but Ponzi schemes.  The registration and reserve requirements will have the affect of allowing the SEC to monitor investments closely.  Ponzi schemes by their nature lack reserves because they are structured based on continuing investment and payouts to where their capitol is always less than what was invested.  This will raise large red flags for the SEC which has been criticized for their inability to spot Ponzi schemes.

The second major change involves an increase of police powers by both the SEC and the CFTCWall Street Journal:

The Securities and Exchange Commission and Commodity Futures Trading Commission should get “clear, unimpeded authority to police and prevent fraud” in the derivatives markets, according to a new Obama administration proposal….

“All OTC derivatives markets, including CDS (credit default swaps) markets, should be subject to comprehensive regulation that addresses relevant public policy objectives,” according to a near-final draft of the regulator plan….

The plan calls for amending commodities and securities laws “to authorize the CFTC and the SEC, consistent with their respective missions, to impose recordkeeping and reporting requirements (including an audit trail) on all OTC derivatives.”

In their conception, the SEC and the SFTC were not designed as policing bodies, but as regulatory institutions.  It will be interesting to see how they make the shift.   It would involve a major shift in the role played by both bodies.  There may even be some constitutional questions regarding federal policing powers.  Congress, and more importantly, the public ought to take a hard look at the Obama plan and scrutinize the proposed changes.

The white paper has been made available by the Wall Street Journal.  You can access it here.

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SEC and CFTC Merger?

2 06 2009

The New York Times published an article this morning which had a large part devoted to a possible merger of two agencies charged with monitoring securities, the Securities Exchange Commission, and the Commodity Futures Trade Commission.  Both bodies have faced accusations of weak oversite over their prospective areas.   Many reform minded people feel that this would be a good way of changing business in Washington, by consolidating two government agencies which do similar jobs.  The article does touch on amajor roadblock, turf.  One source of this is in congress itself. With oversight commities looking over both agencies, members of congress would be hard pressed to give up their territory.  Another turf battle would be largely territorial.  With most of the Securities Trading occuring in New York, and the Commodities Trading taking place in Chicago, some would fear that the smaller commodities trading institutions will be swallowed by the larger securities institutions (I am a bit partial to this concern as a native Chicagoan).  With that there is a fear that regarding oversite, the commodities division would be largely ignored.  Here is the article from the New York Times:

A merger of two other federal agencies — the S.E.C. and the Commodity Futures Trading Commission — would face fierce political resistance. In recent years, both agencies have been accused of weak oversight. But the industries regulated by the agencies have traditionally opposed a merger, and the Congressional committees with jurisdiction over each agency historically have been reluctant to cede any authority….

A central goal of the plan is to more tightly control companies that are now largely unregulated but could pose risks to the financial system if they failed, such as hedge funds. Under the proposal, hedge funds would be required to register with the S.E.C. and provide access to their books. Many hedge funds already do so….

As part of its overhaul, the Obama administration announced three weeks ago that it would seek new authority over the complex financial instruments known as derivatives, which were a major cause of the financial crisis and have gone largely unregulated for decades. While some in Congress are pushing for tougher oversight, the financial industry is lobbying hard against it, arguing that too much regulation would thwart financial innovation. On Thursday, Gary Gensler, the new chairman of the C.F.T.C., is expected to provide more details about that proposal at a Senate Agriculture Committee hearing.

For years, the debate over how to regulate such instruments has been mired in disagreement between the C.F.T.C. and the S.E.C., reflecting the rivalries between markets in Chicago and New York. But officials said this week that Mr. Gensler and Mary L. Schapiro, his counterpart at the S.E.C., had reached an informal understanding that would enable their respective agencies to share authority over the derivatives market.

The understanding, which the regulators hope Congress will ultimately ratify, would essentially give the S.E.C. authority over derivatives that are related to publicly traded securities and other instruments under the S.E.C.’s jurisdiction, such as credit-default swaps, while the C.F.T.C. would oversee commodities-based derivatives, the officials said.





Cox v. Shapiro SEC Chairs

1 06 2009

Today’s post will be very short, as I have a loaded day today.  The Washington Post today printed an article about enforcement problems that occured during Christopher Cox’s tenure of the Securities Exchange Commission, and how the new Chair, Mary Shapiro, must deal with them.  I do not dispute problems that occurred during the Cox years, and I do agree that Shapiro inherited a mess.  There are some things I’d like to ask.   How much of a role did the securities market play in the economic situation we are now facing?  Would more regulation solve the problems, or exhaserbate them?

From the Washington Post:

During Cox’s tenure, investigators who wanted to subpoena documents or compel interviews faced an increasingly cumbersome process to win the commission’s approval for each case, according to current and former agency officials….

This is the legacy Mary Schapiro inherited when she replaced Cox as chairman this year. Among her first acts, Schapiro freed enforcement officials from getting commission approval before negotiating settlements with companies and established an accelerated process for authorizing subpoenas and depositions. She speaks frequently of taking the “handcuffs” off of the enforcement division.

I invite you to leave comments.  This blog is not my soapbox for me leaving my ideas.  Let me, and everyone else who reads this, know what you think.





Cuban Turns Tables on SEC

29 05 2009

Both the Dallas Morning News and Bloomberg are reporting that Dallas Mavericks owner, and one time Chicago Cubs ownership contender, Mark Cuban, is suing the Securities and Exchange Commission claiming that the government agency is illegaly witholding information he requested through the Freedom of Information Act. From the Dallas Morning News:

The billionaire owner of the Dallas Mavericks is seeking a court order to make the nation’s securities cop turn over documents related to its insider-trading investigation of him.

Cuban filed a request for the records in December under the Freedom of Information Act.

“The SEC improperly refused to produce any records,” according to Cuban’s lawsuit.

An SEC spokesman was not immediately available for comment.

The Freedom of Information Act (FOIA)  is a law enacted by Congress in 1966 which allows the Federal Government to release information controlled by the government.  The government retains control over the type of information which can be released, and may deny requests based on the sensativity of the information.  The type of information Cuban seeks is very low on the government sensetivity level.  It is doubtful that the investigation of Mark Cuban’s alleged insider trading is a matter of National Security.  Further such documents relating to the investigation should be released through normal disclosure.  Though FOIA applies to the Federal Government, states have their own versions.  Here is an excellent website with more information on FOIA and how to request information.





Sunshine or a Tight Leash, which works better?

31 03 2009

Gordon Crovitz has an interesting article on the Wall Street Journal discussing the regulation of securities markets in the light of the recent economic failures.  In the article, Covitz argues that even the most liberal minds of the , Brandeis and Franklin Roosevelt specifically, advocated transparency over regulation in response to beginning of the Great Depression.

Supreme Court Justice Louis Brandeis had made the point that “sunlight is the best disinfectant,” and the Securities Act of 1933 mandated the information that public companies would have to share. One indicator that disclosure was more important than regulatory power is that it wasn’t until the following year that the Securities and Exchange Commission (SEC) was created.

What worked to restore confidence in the equity markets then can help to restore confidence in the debt markets now: more disclosure, aimed at making the terms of debt such as mortgages more transparent. Unlike the case of stocks, under current law no one in the chain of making, insuring and rating debt is required to disclose full terms to regulators or to the market. Instead, debt markets function based on best estimates, with mathematical models determining probabilities of cash flows and defaults.

Ever since the models failed due to an unpredicted bubble, the market has been paralyzed with uncertainty. There is still a wide gap between what banks think their bad debt might be worth and what the Treasury or private investors are willing to pay.

In passing the Securities Act of 1933 and the creation of the Securities Exchange Commission the following year, Congress and the Roosevelt Administration showed a preference of transparency over regulation. While both acts created large regulatory provisions to be enforced by a powerful government body, the focus was largely on transparency because those regulatory provisions focused on report requirements by publicly traded companies to the SEC.

Today, advisors to the Obama administration have largely advocated greater regulation and oversight over the trade in securities.  Conservatives argue against this opinion over largely philosophical grounds, rooted in the economic philosophy of the likes of Milton Freidman.  Advocates of free trade have frequently railed over how excessive regulation restricts free trade and inhibits economic growth.  Transparency is viewed as a much better option in that it should accomplish the goals of regulation, while not inhibiting the free market.  As Corvitz stated, modern technology makes transparency an even more viable option.

“Today’s financial crisis was driven in part by a lack of accurate, easily usable information to give investors what they need to make informed, responsible decisions,” testified Mark Bolgiano, chief executive of a nonprofit technology and accounting consortium called XBRL US. “The value of toxic asset-backed securities remains a mystery because information on the underlying loans and ongoing viability of those loans and the securities themselves was not collected consistently and even if it had been, it would not have been in a usable, portable form.”

XBRL sounds complicated, but eXtensible Business Reporting Language is simply a new technology language that allows data to be easily extracted, searched and analyzed. XBRL is already being used for some equity disclosures, tagging financial information into a globally consistent, computer-readable format.

Along with Edgar, the XBRL system could be the most valuable tool to prevent securities fraud.  Let us hope that cooler minds prevail, and that the Obama administration chooses transparency over regulation.