Corporate & Securities Law

By Jim Hamilton

The Chair and Ranking Member of the Senate Banking Committee admonished the SEC and the Federal Reserve Board not to implement their historic Memorandum of Understanding on regulating investment banks until the oversight committee can determine that the agreement is in the public interest. In a letter to SEC Chair Christopher Cox and Fed Chair Ben Bernanke, Senators Christopher Dodd and Richard Shelby advised that any formal agreement among the agencies mist not be permitted to interfere with congressional efforts to reform financial regulation.

Against the backdrop of an ongoing crisis in securitization and in the wake of the Bear Stearns bailout, the SEC and the Federal Reserve Board executed the MOU to enhance information sharing and cooperation in the regulation of investment banks and bank holding companies. The MOU is also recognition that the securitization of loans and other assets has connected banking and securities regulation as never before. More broadly, the MOU is designed to help the Fed to perform its developing role of market stability regulator.

Under its consolidated supervised entity (CSE) program, the SEC supervises global securities firms on a group-wide basis. For such firms, the Commission oversees not only the U.S-registered broker-dealer, but also the consolidated entity, which may include foreign-registered broker-dealers, banks, and the holding company itself. The MOU recognizes that the SEC is the primary regulator of global investment banks through its CSE program and that the Fed is the primary regulator of bank holding companies affiliated with SEC-registered broker-dealers.

The senators appreciated that, in light of the market crisis, the SEC and the Fed had to take unprecedented action. In particular, using emergency powers conferred by the Federal Reserve Act, the Board provided market liquidity by opening the discount window to investment banks with primary dealer status for the first time. While recognizing that these are temporary measures, the committee is concerned that Congress has not authorized the Fed to open the discount window permanently to investment banks with primary dealer status. Similarly, Congress has not authorized the SEC?s CSE regime, through which the Commission regulates investment bank holding companies that own depository institutions.

The senators reminded the SEC and the Fed that they have only limited authority to regulate investment banks with primary dealer status. Congress has the ultimate duty to formulate federal financial regulatory polices, emphasized the senators, and Congress will determine what alterations must be made to the financial regulation system.

While expressing his hope that the MOU will improve the regulation of investment banks and bank holding companies, Chairman Dodd noted that the agreement does not grant any new authority to either the SEC or Fed, nor affect the ability of Congress, and specifically the Senate Banking Committee, to oversee regulated institutions and markets. Sen. Dodd believes that the MOU can achieve its important objectives, while at the same time leaving consideration of any broader reform of the financial regulatory landscape to Congress. In this regard, he promised that the Senate Banking Committee will begin to examine these issues in greater detail over the coming weeks and months.

Full post as published by Jim Hamilton's World of Securities Regulation on July 09, 2008 (boomark / email).