WASHINGTON — Securities law experts yesterday urged the Securities and Exchange Commission and Commodity Futures Trading Commission to jointly establish a task force on swaps, principles for identifying enforcement cases and assessing sanctions, and a team of attorneys to investigate abuses.
The recommendations were made during the second of two days of hearings before SEC and CFTC commissioners on how the agencies should harmonize their regulatory regimes and enforcement programs for securities and commodities as they divide up oversight of over-the-counter derivatives.
Columbia University securities law professor John Coffee pushed the SEC and CFTC to set up a joint task force to look at swaps as they “enter the brave new world” of regulating OTC derivatives. The Treasury Department has sent lawmakers draft legislation that would, for the first time, authorize comprehensive regulation and enforcement of OTC derivatives, splitting the jurisdiction between the two agencies and allowing the CFTC to regulate most interest rate swaps, including muni swaps.
Richard Owens, a partner at Latham & Watkins LLP who formerly headed the securities and commodities fraud unit in the U.S. attorney’s office in New York City, urged the commissions to draft joint sets of principles for deciding what enforcement cases and charges to file as well as what sanctions to seek.
But William McLucas, a partner at WilmerHale who formerly served as SEC enforcement director, suggested the best way for the commission and CFTC to resolve gaps in, or overlaps of, enforcement authorities may be to work “from the bottom up rather than from the top down.”
He said the two agencies should put together a team of six to 15 enforcement lawyers who would investigate cases together and apply the securities and commodities laws. The idea would be for the staffs of both agencies to work together to develop the best approaches to enforcement and practical solutions to difficult issues.
But McLucas said that the biggest concern right now should be greater transparency with which to assess systemic risk. In that regard, David Downey, chief executive officer of OneChicago, a regulatory exchange for the trading of securities futures, suggested the SEC and CFTC jointly set up a “shell organization” that would collect and analyze data from traders and clearing organizations as well as make that data available to certain market participants.
Damon Silvers, general counsel of the AFL-CIO, said his group wants broad, flexible regulations that prevent market participants from outmaneuvering the agencies. If the SEC and CFTC are not merged, the SEC should regulate financial products derivatives and the CFTC should oversee derivatives involving “physical things,” he said.
Silvers said it’s critical that “the antifraud and market conduct rules for derivatives must be no less robust, at a minimum, than those rules for the underlying assets the derivatives reference.” He urged the agencies to reexamine their current rules and suggested the CFTC’s are lacking.
Meanwhile, Coffee said the SEC’s failure to uncover Bernard Madoff’s massive ponzi scheme is “the worst embarrassment in the SEC’s long history” and that the commission should consider a “fraud college program” that would teach enforcement attorneys to grasp the big picture rather than focusing on individual small issues. SEC chairman Mary Schapiro said she supports the idea.