Former Securities and Exchange Commissioner Annette Nazareth yesterday said that any overhaul of the financial regulatory system should not eliminate the SEC because it plays an important and effective role in protecting investors.
Nazareth's comments, which she made during a panel discussion on regulatory reform that was held by the U.S. Chamber of Commerce, follow the Treasury Department's release of a regulatory "blueprint" in March that recommends expanding the powers of the Federal Reserve while suggesting that new "conduct of business" and "corporate finance" regulators eventually take over many existing SEC functions.
Nazareth, a Democrat who left the commission in January, said she was surprised the Treasury Department does not envision the SEC fulfilling both of those functions as part of its mandate to ensure investor protection, which the commission has carried out for more than 75 years.
"It was pretty remarkable, frankly, that the SEC was not just slotted in as the agency" for investor protection, she said, while speaking at a panel on financial regulatory reform sponsored by the U.S. Chamber of Commerce.
Nazareth said that the dialogue about changing the financial regulatory structure should focus first on what needs to be done, and only after that, on who will perform each regulatory function.
To that end, she said the United States is "decades" behind some financial industry regulators in European and South American countries that have rethought their regulations amid the convergence of multiple financial products that are regulated in the United States either in a balkanized or duplicative manner, or not at all. She cited as an example the distinction in the United States between securities, which are regulated by the SEC, and futures contracts, which are regulated by the Commodity Futures Trading Commission.
"Regulation should be adapted in response to changes in business, and that's what we have not seen," she said.
But Peter Wallison, who also spoke on the panel and is a fellow at the American Enterprise Institute, a Washington think tank, praised the Treasury blueprint and said that the SEC is a "dysfunctional agency" and should essentially be phased out.
However, Wallison criticized one aspect of the blueprint that called for a market stability regulator within the Fed, suggesting that the agency would not have the acumen to predict and resolve financial disasters before they occur.
"It's impossible to imagine that the Federal Reserve, wandering among the business activities of the nation's financial community, will spot those things that are going to cause systemic risk," he said.
He added that giving the Fed such authority might have the unintended effect of stifling constructive financial innovation.
"When interest rate swaps developed about 25 years ago, it could be that if the Fed actually had the power that Treasury wants to give them, they would have said, 'Oh wait a minute, people are going to be trading these obligations with one another. We don't know what the consequences of that might be. Gosh, maybe we ought to suppress that or we ought to allow it to be done only the most restrictive circumstances under our direct and prudential supervision,' " he said. "The result of that would have been that something that has been exceedingly useful to the markets would never have been developed."
Meanwhile, former SEC chairman Harvey Pitt, now chief executive officer of Kalorama Parners LLC, said that greater transparency is a better alternative to more regulation, which would be hard to achieve anyway. He noted that Congress left the existing regulatory framework intact in 1999, when it passed the Gramm-Leach-Bliley Act, which modernized financial services regulation.
