Fed, SEC Near Accord To Redraw Wall Street Regulation
Fed, SEC Near Accord
To Redraw Wall Street Regulation
Shared Information,
Closer Cooperation
Fill Oversight Gaps
By KARA SCANNELL , DEBORAH SOLOMON and SUDEEP REDDY
June 23, 2008
WASHINGTON — The Federal Reserve and Securities and Exchange Commission are finalizing a formal agreement that will start the process of redrawing how Wall Street is regulated in the wake of Bear Stearns Cos.’ near collapse.
The agreement, which could be announced as soon as this week, aims to fill gaps in regulatory oversight and will increase cooperation and information-sharing between the central bank and SEC.
The type of information to be shared includes data regarding settlements, trade and positions. The SEC will also get information from the Fed on short-term financing from the banks that clear trades and hold collateral for the securities firms. It is possible that could have been useful in identifying problems at Bear.
Under the agreement, the Fed will be able to see an investment bank’s trading positions, its leverage and its capital requirements, among other things.
The change will expand the Fed’s oversight of the financial system to include investment banks. Currently, the SEC has oversight of brokerage firms while the Fed has oversight of bank holding companies and commercial banks. Treasury Secretary Henry Paulson has proposed expanding the Fed’s role even further, giving it responsibility for oversight of risk throughout the financial system.
The increased information-sharing has been in the offing since March, when the central bank initiated an unprecedented program, at the height of the financial crisis, to lend money to Wall Street firms. The agreement would remain even if the Fed ended that temporary move later this year.
Leaders of both the SEC and the Treasury Department have recently pushed for faster action to deal with the changes brought about by the Fed’s decision to lend money to investment banks.
The Treasury Department has proposed a sweeping proposal to revamp the financial regulatory structure, but that will require congressional action, which is unlikely to be forthcoming this year.
The information-sharing accord, negotiated among the two agencies and the Treasury Department, would enact some changes sought in the Treasury proposal and fill some regulatory gaps immediately. It “is designed to facilitate our joint efforts to fulfill our respective regulatory functions in a post-Bear environment,” said SEC Chairman Christopher Cox, who said the negotiations could be completed within days. He described a “post-Bear” world as one in which the SEC has responsibility for overseeing investment banks and the Fed “has an interest in monitoring systemic risk generally and in protecting its funding commitment.”
The agreement will include guidelines for sharing relevant market information and oversight, said Erik Sirri, head of the SEC division that has oversight of brokerage firms.
“We each have an obligation to be [at the brokerage firms] for our own reasons,” he said. “It lays the groundwork so we’re not bumping into each other and so we’re not overly intrusive to the firms.”
Since mid-March, the Fed has placed staff inside the four largest investment banks to assess their risk by looking at liquidity, capital requirements and banks’ ability to test their own systems, areas the SEC examines.
Its on-site presence has dwindled to one or two examiners from as many as six, people familiar with the matter say, while the SEC conducts its supervision over the phone and with periodic visits.
The Fed has wanted on-site access so that it can better understand the risk that a bank may pose to the entire financial system.
Treasury has also taken the position that the Fed must maintain some presence at the investment banks if it continues to lend money to those institutions.
The agreement was initiated by Mr. Cox in February and has been a focus of Treasury Secretary Henry Paulson, who has been in close contact with Mr. Cox and Fed Chairman Ben Bernanke.
Mr. Paulson, who came to the Treasury from the investment bank Goldman Sachs Group Inc., wanted the Fed and the SEC to hammer out a written agreement, given the recent turmoil and the Fed’s new role, according to people familiar with the matter.
Write to Kara Scannell at kara.scannell@wsj.com, Deborah Solomon at deborah.solomon@wsj.com and Sudeep Reddy at sudeep.reddy@wsj.com
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