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Proposed Merger of CFTC, SEC Draws Critical Reaction

April 7, 2008
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The Bush administration's proposal to merge the Commodity Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC) came under sharp attack by CFTC officials and others last week.

"I don't hear...a call from the countryside for moving boxes around in Washington, DC or the need for some omnipresent super-regulator," said CFTC Commissioner Bart Chilton, an avowed critic of merging the two agencies. The nation, he said, is more concerned about the subprime crisis and the ripple impact on the economy.

"I think most Americans would prefer that government do our jobs...We shouldn't be about trying to cure what isn't sick. There is enough on the table, right now, that needs healing," Chilton said.

CFTC Acting Chairman Walt Lukken was more reserved in his reaction to the "Blueprint for Financial Regulatory Reform" that was proposed by Treasury Secretary Henry Paulson last Monday. "Although the creation of a new unified regulator for securities and futures could bring efficiencies, the tradeoffs of such a significant undertaking should be weighed carefully, given these turbulent economic times and the competitive global advantage currently enjoyed by the U.S. futures industry," he said.

"Any regulatory reform effort must preserve the benefits of the CFTC's principles-based model and recognize the distinct functions of the futures markets and mission of the CFTC," Lukken noted. He believes that "many of the benefits of a unified regulator can be immediately gained through enhanced coordination and information-sharing between the agencies."

Lukken pointed out that the CFTC and SEC already have signed a cooperation agreement aimed at addressing cross-agency issues. "These sorts of agreements should be given time to bear fruit."

He also said the laws governing securities markets should be modernized similar to the futures laws before any type of marriage is even considered. Unless this is done, "a merger may ironically make the U.S. futures industry less competitive globally and run counter to the explicit goal of this important endeavor."

But SEC Chairman Christopher Cox believes the proposal has merit. "Recent events have provided further evidence, if more were needed, that financial services regulation in the United States needs to be better integrated among fewer agencies, with clearer lines of responsibility," he 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."

In recommending the marriage of the two agencies, Treasury's Paulson said that "having one agency responsible for these critically important issues for all financial products should bring greater consistency to regulation where overlapping requirements currently exist" in the federal government.

"When the topic of regulatory structure comes up, people often rush to the assumption that the SEC and CFTC should be merged. We agree that the realities of the current marketplace for securities and futures markets make it increasingly difficult to rationalize a separate regulatory regime. And we believe that we should pursue moving our regulation in the direction that the markets are taking us," he said.

"The market benefits achieved in the futures area should be preserved and we do not want to lose the CFTC's principles-based process for market exchange oversight...Instead of simply recommending merging the SEC and CFTC 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." It was noted last week that any consolidation of the two agencies would take years to implement.

At a conference in New York City last November, the CFTC's Chilton warned that a a merger of the CFTC would be ill-advised (see NGI, Nov. 19, 2007). "Let's not 'Dial M for Merger.' It would be a grave mistake, would not result in the putative efficiencies espoused by its proponents, and would do nothing in the way of improving the competitiveness of U.S. markets," he said at the time.

In October the Treasury Department asked for public comment on a blueprint to "streamline" financial services regulation, and for "a lot of people 'streamlining' is a code word used as justification for, among other things, a merger of the CFTC and SEC," Chilton noted. One of Treasury's chief concerns is overlapping and duplicative federal regulation. While this is a problem, Chilton said, merging the CFTC with the SEC is not the solution.

"The CFTC and the SEC, while both financial regulators, oversee two completely different types of markets, and consequently have two completely different sets of statutory and regulatory [schemes]. You could put us both in the same building, but we would still have two different sets of laws to carry out, two different sets of regulatory responsibilities and two different congressional mandates. We just wouldn't have to walk as far to argue about them," he said.

Chilton noted that the CFTC has a principles-based regulatory approach that "allows innovation and competition to flourish without undue regulatory impediments and get products to market faster." But the SEC "is an example of the classic, old-style, prescriptive regulator, and the differences between our two systems shows why it would be such a mistake to merge the SEC and the CFTC."

He said proponents of the merger should be asked to justify what efficiencies and economies would be produced by marrying the two agencies. "Unless and until we see that, I remain firmly on the 'no merger' side of the line."

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