Caution on Financial Reform

The Council of Institutional Investors yesterday released a white paper it commissioned from me entitled Some Investor Perspectives on Financial Regulation Proposals. The paper critically evaluates Treasury Department proposals to reform US financial regulation, initially made in March 2008 and still the Department’s recommendations for the future.

The paper examines Treasury’s proposals to integrate securities and futures regulation, including merging the Securities and Exchange Commission and Commodity Futures Trading Commission, and to create a single-agency oversight of all financial markets. It also considers SEC proposals to pursue global mutual recognition in securities regulation.

My analysis urges authorities to take a cautious approach to these proposals. The blueprint’s thrust is to consolidate regulatory authority in a unitary way in the executive branch of the federal government, under presidential control, and then delegate much of this authority to self-regulatory organizations in the various financial industries being supervised. As matters of substance, procedure and philosophy, the proposals could considerably weaken critical investor protections in existing US law.

This is important. The Council, an association of pension funds controlling more than $3 trillion in assets for US workers, so suggests in the following from its press release announcing the paper:

The global credit crisis has unmasked weaknesses in U.S. regulation of the capital markets and has badly shaken trust in those markets. A careful analysis of the factors that fueled the crisis is required before regulators, lawmakers and market participants consider ways to strengthen financial oversight and restore confidence in our markets. As they evaluate potential reforms, certain principles should be paramount: Oversight must be independent and reliable; disclosures must be timely and meaningful. Above all, investor protection and enforcement of the rules must be vigorous.

Alternative to Treasury’s proposals appear in the Report, issued earlier this week, of the Group of Thirty. Other comprehensive alternatives likely will be forthcoming. But Treasury’s blueprint will continue to be an important starting point for coming debate on financial regulation.

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