Outgoing CFTC Chair Offers Take on Regulatory Revamp
SEC, CFTC merger would be a mistake, says Lukken
January 5, 2009
President-elect Barack Obama has indicated that revamping the financial regulatory system will be an early priority for his administration. And while the form that the new structure will take--and what that will mean for existing regulatory bodies--is a matter of speculation, recommendations are in no short supply, including a proposal from outgoing Commodity Futures Trading Commission head Walter Lukken.
Playing key roles in Obama's plans, assuming their nominations are approved, will be former Treasury Department undersecretary Gary Gensler and Mary Schapiro, CEO of the Financial Industry Regulatory Authority (Finra). Gensler, who will become chairman of the CFTC, has been a senior adviser for former Sen. Paul Sarbanes--co-author of the 2002 Sarbanes-Oxley Act--and spent 18 years at Goldman Sachs. Schapiro, head of NASD before the self-regulatory organization (SRO) merged with the member-regulation functions of the New York Stock Exchange, will be the Securities and Exchange Commission chairman.
A merger of the agencies they will lead was called for in March by Treasury in its blueprint for a regulatory overhaul, a plan that advocates the development of three distinct entities. As a former acting chairman of the SEC who led the CFTC from 1994 to 1996, Schapiro possesses a useful background if Obama decides to combine the regulators.
Acting chairman of the CFTC until later this month, Lukken has said the U.S. should "scrap" the current structure. In a speech at the Futures Industry Association's Futures & Options Expo in November, Lukken, a member of the commission since 2002, described an "objectives-based framework" that is "similar in concept" to Treasury's blueprint.
Lukken, who replaced Reuben Jeffery at the top of the CFTC in June 2007, provided Securities Industry News with a modified version of the proposal he presented in Chicago. He also explained in an e-mail exchange how the regulators would interact with the SROs that deal directly with broker-dealers.
Under Lukken's plan, a systemic risk regulator would be responsible for policing the entire financial system for "black swan" risks that could cause a contagion event. A market integrity regulator would oversee the safety and soundness of key financial institutions including exchanges, investment firms and commercial banks, while another body would oversee investor protection and business conduct across all firms.
The current functions of the CFTC, SEC and the various banking regulators would be distributed among the new bodies. Regulation by objective rather than function would seek to ensure products and institutions are supervised based on identified public risks rather than determinations--often difficult to make--about whether an instrument is a security, future or swap contract. The risk regulator would have broad access to information from the entire marketplace to monitor concentrations of risk, while the market integrity and investor protection agencies would have a narrower focus.
One of the lessons from the current crisis, said Lukken, is that the regulatory model was not able to keep up with the speed and innovation of the financial markets. He noted that a principles-based structure complements tailored rules by adding guidance and flexibility to desired policy objectives, helping to prevent institutions from violating the broader public interest by taking advantage of loopholes in static rules.
Lukken called a merger of the CFTC and SEC an "overly simplistic" move that would reinforce the existing infrastructure and, if pursued as an interim step, carries the risk of becoming permanent. "This would be a crucial lost opportunity because the merger alone would not address the current problems that plague our economy or the shortcomings in our regulatory system," he said.
