Measured response to S.E.C.-C.F.T.C. merger proposal

by Jay Sjerven
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WASHINGTON — The Treasury Department’s proposal to merge the Commodity Futures Trading Commission and the Securities and Exchange Commission into a single agency with oversight responsibility for business conduct and consumer protection has drawn mixed reviews. The proposal was one of several contained in Secretary of the Treasury Henry M. Paulson’s 218-page "Blueprint for a Modernized Financial Regulatory Structure" issued March 31.

The release of the blueprint, which aimed to overhaul how the U.S. financial system is regulated, came in the midst of a national economic downturn triggered by the sub-prime mortgage lending crisis. But the blueprint study itself was not a response to that crisis, rather it was the result of a year-long process initiated by Mr. Paulson in response to complaints that excessive rules and overlap in regulatory agency responsibilities adversely affected the nation’s competitiveness.

With regard to the specific C.F.T.C.-S.E.C. merger proposals, the Treasury Department in its blueprint asserted the current marketplace has "significantly diminished, if not entirely eliminated, the original reason for the regulatory bifurcation between the futures and securities markets." Given product and market convergence, market linkages and globalization, continued bifurcation of the futures and securities markets is "untenable, potentially harmful and inefficient," the study stated.

Mr. Paulson said, "The market benefits achieved in the futures area should be preserved, and we do not want to lose the C.F.T.C.’s principle-based process for market exchange oversight. Accordingly, instead of simply recommending merging the S.E.C. and C.F.T.C., with the expectation that all will work out, we recommend a number of steps and an evolutionary approach to shape the merger process so as to preserve the best aspects of each regulator."

Mr. Paulson proposed changes at the S.E.C. to bring its operations and procedures more in line with those of the C.F.T.C., whose "principle-based" regulatory approach provided a greater role for industry to regulate itself.

This aspect of the plan was criticized by some former leaders of the S.E.C., including David Ruder, chairman of the S.E.C. under President Reagan, who said it would not be useful for the S.E.C. to have "a prudential-based attitude in which regulators solve problems by discussing them informally with market participants and ask them to change. We have to have an enforcement approach."

The response of the current S.E.C. chairman, Christopher Cox, was more measured. Mr. Cox said, "The proposed consolidation of responsibility for investor protection and the regulation of financial products deserves serious consideration as a way to better address the realities of today’s markets."

Walter Lukken, acting chairman of the C.F.T.C., cautioned his agency’s expertise "may be jeopardized with the creation of a larger regulatory bureaucracy."

The Senate and House agriculture committees have oversight responsibilities for the C.F.T.C. Senator Tom Harkin of Iowa, chairman of the Senate Committee on Agriculture, Nutrition and Forestry, said, "The C.F.T.C. is not responsible for the current state of financial and economic problems, and so it is misguided to think a part of the answer is abolishing the independent federal regulatory agency having oversight for our nation’s critical futures markets."

Senator Saxby Chambliss of Georgia, ranking Republic member of the Senate agriculture committee, said he agreed the principles-based regulatory philosophy at the C.F.T.C. was a great model and perhaps should be adapted for the S.E.C.

"However, I am concerned that the broad rationale for merging the S.E.C. and the C.F.T.C. fails to properly account for the distinct and necessary differences involving margin, insider trading, customer suitability and short sales regulations for futures and securities," Mr. Chambliss said. "Additionally, I am concerned that agricultural market participants, namely farmers and ranchers, may not continue to receive adequate attention that only focused expertise can provide."

Michael D. Walter, president of the Commodity Markets Council, the successor organization to the National Grain Trades Council, commended the Treasury Department for its extensive study of the U.S. financial services regulatory system.

"C.M.C. also supports the proposal to adopt core principles and streamline the S.R.O. (self-regulatory organization) process at S.E.C.," he said. "The futures industry has prospered under the core principles of the Commodity Futures Modernization Act as well as the S.R.O. process currently in place under the C.F.T.C. As we move forward, C.M.C. will eagerly work with the Treasury Department, C.F.T.C. and S.E.C. to ensure that the innovation experienced under the current regulatory regime is not harmed or hampered under any harmonized system."

Mr. Walter said the Treasury Department’s report acknowledges there is still a significant amount of study that must be done.

"Our concern is the harmonization process might result in a diminished regulatory understanding of the technical/fundamentals of our markets as well as the quick response time that is a hallmark of the C.F.T.C.," he said.

This article can also be found in the digital edition of Food Business News, April 15, 2008, starting on Page 21. Click here to search that archive.

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