Hey, Obama, the SEC And CFTC Are Ripe for Consolidation

This week, Obama asked Congress for the power to consolidate several federal agencies such as the Small Business Administration and the Commerce Department because they were performing overlapping functions. Oddly, he did not mention the financial regulatory space, which is even riper for combination. Perhaps, he was mindful of the copious contributions to his campaign from Wall Street. 

Having two regulators, the SEC and the CFTC, did not prevent MF Global from failing. In fact, it might have hastened its decline. Professor Cornelius Hurley, director of Boston University’s Center for Finance, Law, & Policy, advocates combining the SEC and CFTC into one agency. He asserts that a merged agency would save money by eliminating the duplication of oversight and allow for a more efficient deployment of a staff and other resources.

“The collapse of MF Global suggests that we are paying a price for not combining the CFTC and SEC, which was suggested in a white paper about financial reform developed by the Treasury Department soon after Obama arrived in town,” he said. “Anyone can see that an organizational chart where two regulators are regulating the same space is absurd.”

He inveighs against the greed of members of Congress killed the unification efforts. “The House and Senate Financial Services Committees oversee the SEC while the Agriculture Committee administers the CFTC.  Members of the agricultural committee did not want to lose the tremendous contributions to their campaigns from the commodities firms,” explained Hurley.

Jonathan Katz, the former Secretary of the SEC, observed that SEC Chairmen from both political parties have supported merging the two regulatory agencies since 1980. “The United States is the only country in the world where the regulations of securities and derivatives is separated,” he said.

Mike Koehler, a professor of business law at Butler University, challenges the current practice of  the SEC and the Department of Justice (DOJ) to announce concurrent settlements with the same violating entity. With limited enforcement budgets, Koehler doesn't understand why the SEC is still prosecuting cases once the DOJ became involved. He thinks “the SEC step down after a case is referred to the DOJ”.

 He asks, “What purpose does it serve to have two separate enforcement actions of the same course of conduct?  Basking in the klieg lights, while holding a press conference to take credit for the enforcement action, sadly appears to the only purpose of dual prosecutions.

Federal Judge Jed Rakoff’s rejection of the SEC’s punishment in the Citigroup cast has caused many to reassess the types of penalties that should be levied against serial violators of securities laws. Low fines and SEC settlements have become a cost of doing business not a deterrent. "Companies will think twice about committing fraud if they can’t settle for chump change,” said Hurley.

Robert Fusfeld, a former SEC employee of 31 years and manager of litigation in the Denver office of the SEC for 15 years, suggests that current settlements include the potential punishment of the company if they break the law again. “If you violate again, the SEC will bring an administrative proceeding. We will pull your ticket (license), close you down for 6 months, or deny your right to bring in new business for a period of time,” he said. “If corporations knew that they could be barred from soliciting new customers or could potentially be closed for a period of time, they might think twice about violating the law.”

Although the SEC has rarely rescinded the license of a major New York firm, he emphasized that that the pulling of a license is standard procedure in law enforcement.  He noted, “When a business is caught serving someone under aged alcohol, they lose their license immediately. The SEC bars mom and pop, no name firms in the Midwest all the time. Yet, they do not use this weapon in their arsenal against major New York firms.”

Katz, who described his position at the SEC as the last set of eyes before an enforcement action was voted on, wants to see more SEC enforcement actions end in criminal prosecutions.

“Ponzi schemes are criminal activity. Injunctive relief, which is the sole weapon of the SEC, is not effective. There should be a criminal prosecution,” said Katz. “While the SEC routinely cooperates with the DOJ, I would propose that it become standard practice that they refer cases to local law enforcement if the DOJ declines to prosecute.”

It was shocking too many that Citigroup’s recent settlement was their fifth violation of the nation’s securities laws. Former NY Governor Spitzer, known as the “Sheriff on Wall Street during his tenure as NY State Attorney General, believes the first step in tackling the problem of corporate recidivism is to establish a career criminals unit that would be modeled after similar unit at the Manhattan District’s office.  He recalled, “When I was assistant district attorney in the career criminal’s unit, those that had committed more than two felonies were punished more severely. They were sent away for a long time,” he said. “For corporations that repeatedly offend, we need to increase exponentially the financial penalties and insist on structural changes such as compensation.”

“Right now, the SEC now uses restitution as a proxy,” said Spitzer. Under that current system, it is the shareholders, not the corporate executives that committed the wrongdoing, that bear much of the financial pain of a corporation’s malfeasance. Spitzer wants to change that. “There must be individual responsibility. Executives of violating corporations must be held responsible."

If the SEC is going to effectively change, Katz opines that it must be restructured from the top down. “The commissioners are overburdened,” he said.  “The problem is that too many decisions are being made at the staff level.”

 In his opinion, the number of commissioners needs to expand from five to seven. Currently, all five commissioners must vote on an enforcement action. Katz proposes that number be reduced to rotating working groups of three.

Barbara Roper, director of investor protection at the Consumer Federation of America, recommends changing the way the commissioners are chosen. She laments, “SEC commissioners can’t be straight up and down consumer advocates, which is the job that they are appointed to do. They must be acceptable to the financial industry, the very industry that they have been appointed to regulate.”

Most financial regulation experts are in consensus that no additional regulations are needed. “The collapse of MF Global violated long existing securities laws about customer account segregation not newer regulations like Dodd Frank, said Hurley. “Regulation is about individuals, culture.  Former Federal Reserve Chairman Alan Greenspan could have protected the mortgage borrower with powers given to him in the Home Owners Equity Protection Act had he been a different person – not a free market champion and devotee of Ayn Rand.”


The research for this article was supported by the community report site spot.us