SEC Must Have Role in Systemic Risk Regulation Says SEC Chair Schapiro

As Congress considers legislation to create a systemic risk regulator with consolidated power over large financial institutions, SEC Chair Mary Schapiro emphasized that the SEC must have a role in the areas of systemic risk that are part of its investor protection mandate. In testimony before the Senate Banking Committee, Ms. Schapiro also said that she supports the Administration’s proposal to regulate hedge funds, credit default swaps, and OTC derivatives as part of the systemic risk regulation legislation

The SEC Chair said the Commission favors a college of regulators for systemic risk rather than a single systemic risk regulator. Banking Committee Chair Christopher Dodd also endorsed a council of regulators for systemic risk. Ms. Schapiro specifically made favorable mention of a bill, S 664, sponsored by Senator Susan Collins, that would create an independent Financial Stability Council to serve as the systemic risk regulator. The Financial Stability Council would be composed of representatives from the Federal Reserve Board, the SEC, the CFTC, the FDIC and the National Credit Union Administration.

Given the regulatory failures leading up to this crisis, Senator Dodd has concerns about systemic risk authority residing exclusively with any one body. For example, there have been problems with regulated bank holding companies where they have not been well-regulated at the holding company level. That is why the Banking Committee Chair is intrigued by the idea of a council approach to addressing systemic risk.

The SEC Chair said that how Congress defines a systemically important financial institution will be very critical to the scope of the systemic risk regulator’s authority. If the definition is too broad, she fears that the systemic risk regulator could usurp the authority of multiple regulators, including the SEC. The systemic risk regulator should not diminish the role of the SEC, noted Ms. Schapiro, adding that systemic risk cannot trump investor protection.

The SEC Chair assured Congress that the Commission can perform its critical capital markets and investor protection functions without compromising the oversight of systemic risk. Indeed, she believes that investor protection enhances the mission of controlling systemic risk. As the primary regulator of important market functions, she reasoned, the SEC would be a critical party in contributing to any systemic risk regulator's evaluation of risks.

Senator Dodd said that the SEC should have a role in systemic risk regulation; and advised the Chair to ``kick down the door’’ to make sure the Commission has input. There are many types of risk, said the senator. Just as there are many aspects of the financial system, he explained, systemic risk itself has many parts as well. One is the regulation of practices and products which pose systemic risks, from subprime mortgages to credit default swaps

Regarding the Administration’s request for legislation authorizing the government to take control and unwind non-bank financial institutions such as securities and commodities firms, the SEC Chair generally supports such resolution authority; but again, wants the SEC to be part of actions involving broker-dealers and other market players that it regulates. It is unclear if SIPC proceedings on brokerage firm liquidation would be rolled into the new scheme or whether the resolution authority would coordinate with SIPC. Senator Dodd, who supports the resolution authority in principle, said that he wants the SEC to have an appropriate role in the proceedings. He said that the Committee will be deeply involved in how the resolution authority interacts with the SEC and other functional regulators.