Down on the Street

No longer can America take for granted its global superiority as a market for capital. Will regulatory reform let it keep up with the pack?

This tough-guy approach is not entirely misplaced. The SEC has unparalleled numbers of retail investors to protect and it does not want to be outflanked by aggressive state prosecutors. But in striving to be tough, it may be losing sight of the need for markets to be efficient as well as clean.

Among the SEC’s most vocal critics is Harvey Pitt, a former chairman. Most of its employees, he said recently, see it as an enforcement agency with regulatory powers, rather than the other way round. This shows up in salaries: the pay of its enforcement lawyers has shot up relative to other departments; by one estimate, over 700 of them now earn more than their chairman.

Part of the problem, says Peter Wallison of the American Enterprise Institute, is that the hard line sometimes takes on a life of its own. When wrongdoing is suspected or alleged, for instance, the SEC will open a so-called “matter under inquiry”. If this is not actively terminated within 60 days, it automatically becomes an informal investigation. Sometimes, says Mr Wallison, investigations open, and the companies involved suffer negative publicity, simply because nobody bothered to close the file.

Some would like to see the SEC become more like Britain’s super-regulator, the Financial Services Authority. The FSA has won plaudits for an approach based more on principles than hard rules. It prefers to nudge rather than bully. Moreover, it is widely considered to be better at analysing the potential costs and benefits of proposed regulatory changes. That may be because it employs a higher proportion of economists to lawyers.

The SEC, however, operates in a regulatory regime that is much more fragmented than in Europe. The number of federal and state bodies scrutinising a particular bit of the financial markets in America can lead to duplication and then to turf wars.

Rick Ketchum, head of regulation at the New York Stock Exchange, (and a former president of Nasdaq) says America’s various regulatory bodies are now better at working with each other. But in some cases, he thinks, they might want to merge. A merger of the SEC and the Commodity Futures Trading Commission, for instance, would provide one agency to regulate the cash and derivatives markets, where boundaries are already becoming blurred.

All Eyes on Capitol Hill

Whether these concerns are acted upon will depend largely, as ever, on politicians in Washington, DC. The Democrats, who retook control of Congress in the recent elections, are less likely to want to loosen financial-market laws than Republicans, and slightly more inclined to toughen up hedge-fund regulation.

That said, leading Democrats portray Sarbanes-Oxley as the other party’s doing (even though it was a bipartisan bill) and may be prepared to see it tweaked. Barney Frank, a Democrat in line to run the House Financial Services Committee in the new Congress, has said he does not want to rewrite the law but would be willing to see regulatory agencies adjust their rules so that it is not applied so stringently. The CCMR also favours this milder type of non-legislative reform, because it would not require congressional approval.

But reformers must be careful not to appear to be pushing changes through the back door. Even before the CCMR’s report is out, it has been denounced by some on the left as a self-interested attempt by big business and its Republican supporters to claw back lost ground now that the big post-Enron trials are largely over. Some in Washington refer to it as “the 7% committee”—a reference to the underwriting fees charged on Wall Street. Mr Scott, the committee’s leader, denies any such bias.

Even if the angst is overdone, the competitive threat to America is real—as the Big Apple’s hoarier financiers know only too well. They still sigh when recalling restrictions introduced in the 1960s that drove lenders and borrowers to London, where the Eurobond market promptly took off. The American government loosened the rules a decade later, but by then it was too late and London ran off with the business. This time they hope it will be different.


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