Academic

Financial Regulation and the Kindness of . . . Whom?

By Kim Krawiec

Erik Gerding has a nice post up at The Conglomerate discussing Joel Seligman?s recent NY Times op ed, which argues the case for funding the SEC through corporate fees. Currently, the SEC is funded exclusively by congressional appropriations and has to turn over fee income to the Treasury. According to Seligman, the SEC already collects more in filing and transfer fees than it gets from Congress, so the proposal would not result in higher industry fees. 

Though Gerding agrees that the SEC has been underfunded, a point he makes in a 2006 article, The Next Epidemic: Bubbles and the Growth and Decay of Securities Regulation, he argues that:

the Seligman/Obama proposal to fund the SEC through fees has a potential downside. It may create perverse incentives for regulators to take steps to increase the overall number of licenses/registration statements -- or, more profoundly, to not take steps that would decrease the amount of fees generated.  To turn around the title of Seligman's op ed, there is some danger with telling the SEC "help yourself."

Instead, Gerding favors tying the overall SEC budget (and the budget of bank regulators) to market capitalization levels without relying on direct fees.

The piece probably caught my eye because we?re reading an oldie but goodie in financial derivatives this week: Roberta Romano?s 1997 The Political Dynamics of Derivative Securities Regulation.  Romano traces the history of U.S. dispersed financial regulation to historical fortuity: the CFTC, SEC, and bank regulators are within the oversight of different congressional committees.  Thus a merging of derivatives regulation into a single entity would diminish the jurisdiction, and consequently the influence, of the losing regulator?s congressional committee. Romano concludes:

In the absence of a sustained, large exogenous shock which could focus public attention on the regulatory regime and could alter the incentives of the coalition partners to support it, we can predict with considerable confidence that . . . the dispersed organization of U.S. regulatory institutions of financial markets will remain.

The question, of course, is whether the current exogenous shock is sufficiently large to prompt consolidation.  Early on in the crisis, I thought that perhaps the time for consolidation had finally come.  Today, though, I suspect not.  Some changes are likely to occur, of course, but the impetus for true consolidation ? if, indeed, it ever existed, appears to have passed.  Romano, I suspect, remains correct even today.

 In the process of taking us through the political dynamics, Romano also teaches about the history of the CFTC, the sunset provision that provided an opportunity for repeated challenges to its authority, and finally (and most relevantly for this post), its appropriations bill, which may become much larger this year. Still a good read, even after all this time.

"Whoever you are, I have always depended on the kindness of strangers." - Blanche DuBois

Full post as published by The Faculty Lounge on February 28, 2010 (boomark / email).