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 have executed an historic Memorandum of Understanding designed to enhance information sharing and cooperation in the regulation of investment banks and bank holding companies. The MOU also builds on the recent joint bank broker exception regulation by providing that the SEC and the Fed will jointly conduct any future rulemaking or enforcement actions. The MOU also envisions the coordination of examinations and visitations, as well as consultations on regulatory expectations.
The MOU is recognition that the securitization of loans and other assets has connected banking and securities regulation as never before. More broadly, the MOU will help the Fed to perform its developing role of market stability regulator. Treasury Secretary Henry Paulson has emphasized the need to quickly consider how to give the Federal Reserve Board the authority it needs as the primary market stability regulator to access necessary information from complex financial institutions and the power to mitigate systemic risk in advance of a crisis.
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 the CSE program and that the Fed is the primary regulator of bank holding companies affiliated with SEC-registered broker-dealers. With regard to the firms supervised under its CSE regime, the SEC agrees to provide the Fed with information regarding their financial condition, risk management systems, internal controls and liquidity, as well as any market conditions that may materially affect the operations or financial condition of the CSEs and the bank holding companies.
For its part, the Fed agrees to provide the SEC with information on the financial condition, risk
management systems, internal controls and liquidity of CSEs that it develops in the course of assessing them. The Fed will also provide its assessment of any conditions in the securities financing markets that could materially affect the operations or financial condition of the CSEs.
As the primary regulator of the bank holding company, the Fed will also provide the
Commission information about the financial condition, risk management systems, internal controls and liquidity of those entities that affect the company’s broker or dealer subsidiaries or the compliance by such subsidiaries with the conditions of eligibility to compute net capital under the alternative method of the net capital rule.
Similarly, the SEC and the Fed will reciprocally share information about the financial condition, risk management systems, internal controls, and liquidity of primary dealers and primary dealer holding companies.
In 2007, the SEC and the Fed jointly adopted Regulation R to implement the bank broker exception provisions of the Gramm-Leach-Bliley Act. Regulation R provides a flexible framework for banks to continue to conduct securities transactions for customers as part of their banking activities.
Building on the joint bank broker exception rules in Regulation R, the SEC and Fed agreed to jointly adopt any new bank broker rules and pursue joint amendments to Regulation R. The Commission and the Board also pledged to promptly share any request for a no-action letter or other interpretive guidance concerning Regulation R. Similarly, the SEC and Fed will jointly issue any interpretations and responses to requests for no-action letters or other interpretive guidance concerning the scope or terms of Regulation R. Finally the two regulators said that they will consult and coordinate on enforcement actions against a bank for violations of Regulation R.