4 years after Wall Street crash, regulation of financial markets is still spotty

Reply Mon 7 May, 2012 05:27 am
May. 07, 2012
4 years after Wall Street crash, regulation of financial markets is still spotty
By Kevin G. Hall | McClatchy Newspapers


Almost four years after America’s financial near-collapse, regulators are now empowered to police financial markets as never before. Yet some of the most important rules to curb Wall Street’s bad behavior have yet to take effect – and could be watered down.

Historians likely will view Barack Obama’s presidency through the prism of the worst financial crisis since the Great Depression. Like that period in the 1930s, the legislative and regulatory response to this crisis is sure to influence the U.S. economy for decades.

The 2010 revamp of financial regulation – the Dodd-Frank Act – attempted to do what much of the legislation in the 1930s did: Reshape the landscape. Dodd-Frank empowered the Securities and Exchange Commission and the Commodity Futures Trading Commission to regulate hedge funds, oil traders, credit ratings agencies, money market funds and a host of other Wall Street players that had enjoyed relaxed regulation.

But only about 33 percent of the new rules to rein in Wall Street are in force, according to the Davis Polk law firm, which specializes in regulation and puts out a monthly report on Dodd-Frank. And financial firms are aggressively trying to slow down the rule-making process and roll back some of the rules.

One measure of progress is the number of cases being brought by the regulators’ enforcement divisions. The CFTC filed 99 enforcement actions in the fiscal year ending Sept. 30, 2011. That was the highest tally ever, and a 74 percent increase over the prior year.

Similarly, the SEC, during the same period, brought 735 enforcement actions, its highest number ever.

But even as enforcement steps up, some of the biggest triggers of the financial crisis remain only half-addressed.

Hoping to return to a semblance of the pre-crisis status quo, financial lobbyists are stridently opposing efforts by bank regulators to prevent big Wall Street players from investing their own money in the same markets where they also invest money on behalf of their clients.

Wall Street trade associations also have sued to prevent the CFTC from imposing congressionally mandated limits on how much of the oil market can be controlled by financial speculators.

The suit on oil trading uses many of the same arguments – and the same legal team – successfully deployed by the U.S. Chamber of Commerce and the Business Roundtable against the SEC. A federal judge last July overturned a Dodd-Frank provision to promote more democratic boardroom elections, finding that the SEC did not do enough to measure the costs and benefits of its new rule.

“The regulatory framework has changed, but the attitude of financial services companies hasn’t. It’s been one constant pushback after another since Dodd-Frank was put on the books,” complained Travis Plunkett, director of regulatory affairs for the Consumer Federation of America. “In some cases the securities and financial services industries have won rollbacks that pushed back to well before the financial crisis.”

Plunkett’s referring to President Obama’s April 5 signing of the JOBS Act, a bipartisan measured designed to support small businesses and start-ups. It undid some of the key provisions of the 2002 Sarbanes-Oxley Act, which was designed to shore up accounting practices after the collapse of energy trading giant Enron Corp.

The JOBS Act allowed companies to avoid registration with the SEC until they have 2,000 shareholders, instead of the law’s requirement of 500. Moreover, a big investment firm can appear as a single shareholder, even if it’s holding shares for more than 5,000 clients.

The act also weakened investor protections, prompting SEC Chairman Mary Schapiro to issue warnings to lawmakers that were roundly ignored.

“I might say I’m disappointed, but I can’t say I’m surprised,” said Jack Coffee, a Columbia University law professor specializing in securities issues.

Coffee frets that Wall Street firms are succeeding in weakening rules and warned that the SEC too often goes after smaller cases and settles for too little.

“Settlements over $100 million is where, in my view, they should be,” said Coffee, adding that “they’re overworked and underfunded. I think they try to do too many cases.”

There have been some notable large settlements, including $154 million in penalties against Wall Street titan JP Morgan Securities last June and $550 million in penalties in a 2010 settlement with Goldman Sachs.

The SEC’s 682 settlements in fiscal 2011 mirrored the 680 during the prior year. Both were well below the 889 settlements in fiscal 2003.

A January analysis of 2011 settlement patterns by researcher NERA Economic Consulting noted that over the past two years the SEC has de-emphasized misstatements by publicly traded companies and focused instead on insider trading and misappropriation of investor funds.

“They are not going after the very large cases that I think will create deterrent,” Coffee said. He noted that officers from failed investment bank Lehman Brothers were never charged, nor were top officials at credit-rating agencies Moody’s and Standard & Poor’s; both inflated ratings to win lucrative Wall Street business, according to documents held by congressional investigators.

Bart Chilton, a Democratic commissioner on the CFTC, also wants larger fines.

“That’s important because we need to ensure that the fines that regulators issue aren’t merely a cost of doing business for some of these large traders. I know that’s the case for some of them,” Chilton said. “I’ve seen it. It’s hardly a slap on the wrist for some of these firms.”

Financial players offer a different view of the post Dodd-Frank world. They complain that too few rules have been finalized, and they deny obstruction, countering that they’re merely acting in self-interest.

“It’s a constructive engagement. That is how the process works,” said Ken Bentsen, vice president of public policy for the Securities Industry and Financial Markets Association and a former Texas congressman. “I think it’s a mistake for people to underestimate the magnitude of what Dodd-Frank is bringing in terms of a regulatory architecture over many parts of the financial industry. We’re exercising our statutory and constitutional right for comment on rules, which is entirely appropriate.”

The financial sector has been critical of SEC Chair Schapiro, who until taking her present job in 2009 headed the industry’s regulatory compliance group, which at the time was called FINRA. In a recent interview, Schapiro called bad Wall Street behavior rooted out by her agency “disheartening” and defended her accomplishments.

“I think lots has been done,” she said.

Through Dodd-Frank and separate measures to address the so-called “flash crash” – when the Dow Jones Industrial Average lost about 1,000 points almost instantly on May 6, 2010 – the SEC has erected circuit-breakers to halt trading during aberrant periods. It’s restricted “naked short selling” of borrowed stock to prevent traders from making deals with stocks they haven’t firmly identified; banned the use of placeholder prices on stocks that don’t match market prices; and forced a number of risk-management requirements on traders.

Schapiro and other regulators are unhappy that Congress has not substantially added to their budgets after saddling them with almost 400 rulemakings and a range of new enforcement powers. Republicans opposed to the complex regulatory law have sought to weaken it by starving regulators of funding. CFTC Chairman Gary Gensler, a former Goldman Sachs partner, complained about this publicly in a May 2 speech to an industry group.

“The CFTC is an under-resourced agency .We’ve now been tasked with overseeing the $300 trillion U.S. swaps market – nearly eight times larger and far more complex than the futures market we’ve historically overseen,” he complained to the trade group for derivatives, which are complex financial instruments. “We’re barely larger, however, than we were before we were given these new responsibilities.”

That can’t be in the best interest of the financial sector, he warned.

Congress shaved the CFTC’s request for $308 million in the current fiscal year to $205 million. President Obama wants another $52 million for the agency in a supplemental budget that’s unlikely to pass in an election year when spending is an issue.

The financial sector is laying low on the issue of regulator funding.

“I think industry itself is focused on trying to comply on the rules that are there . . . and pick our battles where we have them. We just haven’t engaged in the budget side of this,” said Bentsen.

Still, that so many rules are not yet in place since the near-meltdown in summer 2008 is worrisome to Daniel Tarullo, a Federal Reserve governor who meets regularly with the heads of big banks

“For some time my concern has been that the momentum generated during the crisis will wane or be redirected to other issues before reforms have been completed,” Tarullo said in a May 2 speech to the Council of Foreign Relations in New York. “As you can tell from my remarks today, this remains a very real concern.”
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Reply Mon 7 May, 2012 05:31 am
Financial Institutions and BankingSecurities and Finance
NERA Releases 2011 Fiscal Year-End SEC Settlement Trends Report: Total Number of Settlements Remain at High Levels; Median Settlement Values for Companies and Individuals Soar
SEC Settlement Trends: 2H11

23 January 2012
By Dr. Max Gulker, Dr. Elaine Buckberg, and Dr. James A. Overdahl

The latest report from NERA's ongoing analysis of trends in Securities and Exchange Commission (SEC) enforcement action settlements finds that the SEC reached a total of 682 settlements in fiscal year 2011 (FY11), almost unchanged from 680 settlements in fiscal year 2010. However, while the total number of FY11 settlements remained relatively constant, there has been a substantial shift in the composition of allegations. Since FY09, Trends authors have observed an increase in settlements with financial services firms for misrepresentations to customers or misappropriation of funds, and an offsetting decrease in settlements relating to public company misstatements.

The authors -- Senior Consultant Dr. Max Gulker, Senior Vice President Dr. Elaine Buckberg, and Vice President Dr. James A. Overdahl -- note that the three-year rise in the percentage of SEC settlements involving misrepresentations or misappropriation by financial services firms suggests a shift in the SEC's enforcement focus since the financial crisis began and the Madoff fraud was revealed. These types of settlements accounted for 41.6% of all SEC settlements in FY11, as compared to the FY03-08 average of 23.7%. Illegal offering and market manipulation cases were the second most common in FY11, representing 27.3% of settlements, the highest level since 2005. Public company misstatement settlements continued to decline for a fourth consecutive year, to 10.4% of total settlements, the lowest level since Sarbanes-Oxley was passed.

The report's findings are informed by NERA's proprietary database of settlements in SEC enforcement actions, which is based on litigation releases and administrative proceeding documents. SEC Settlement Trends: 2H11, historical SEC settlements data, and previous SEC settlement trends reports can be viewed on NERA Economic Consulting's Securities Litigation Trends website at www.securitieslitigationtrends.com.
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