Will There be an SEC Next Year?

Last Updated Sep 29, 2008 2:26 PM EDT

An era has ended at the U.S. Securities & Exchange Commission. No longer will the regulatory agency rely upon "voluntary" self-policing at financial institutions.

SEC Chair, Christopher Cox, now under intense fire for the SEC's role in the Wall Street meltdown, has ended the so-called Consolidated Supervised Entities program which was begun by his predecessor in 2004.

The CSE program allowed large investment banks to pretty much regulate themselves -- a polict that obviously has not worked. Cox made his move after his inspector general's office came forward Sept. 26 with a scathing report that the SEC repeatedly mixed warning signs at Bear Stearns before the bank went under and was sold off in March.

While the SEC will continue overseeing the brokerage departments of investments banks (what few of them are left), the Federal Reserve will review the banks themselves.

Cox's move undoes several years worth of regulatory philosophy that supported "voluntary" regulation in several spheres, including accounting and banking oversight.

The philosophies grew out of the anti-regulation fervor sparked by the flawed 2002 Sarbanes-Oxley Act. Indeed, Cox was put in office in part because of the fervor, Meanwhile, the idea grew more popular of giving more power to voluntary groups such as stock exchanges, securities dealers and accountants' organizations, to regulate themselves. At the time, it seemd a useful compromise to deal with regulation without getting too heavy handed about it.

The voluntary regulation philosophy also can be linked to the growing globality of investment markets. More and more securities trading is being done across several countries at the same time. Figuring out whose regulatory system should be used can be problematic because complying with several at once can be expensive and troublesome.

So, Cox has repeatedly pushed voluntary regulation as a way to satisfy foreign regulators and streamline and encourage cross-national investing.

One of the biggest problems in policing U.S. investment companies results from a flawed law, Cox claims. The 1999 Gramm-Leach-Bliley Act, which helped break down barriers in the U.S. between commercial and investment banking, gave the SEC the duty to regulate the brokerage parts of investment banks but not their holding companies.

This loophole hamstrung the SEC and led to regulatory lapses that Cox has admitted took place. Cox also has complained that the tightly budgeted SEC doesn't have the manpower to oversee the kinds of wild investments that took place in securitizing bad mortgages and selling investment products created from them.

With the voluntary CSE gone, the SEC's oversight responsibilities of investment banks will shift to the Federal Reserve.

Another twist in this stunning development is that Treasury Secretary Henry Paulson has been pushing a reorganization plan of investment regulation that predates the Wall Street meltdown. In his complicated plan, the role of the SEC would be greatly marginalized and the Fed would get a lot more power.

With Paulson and Fed Chief Ben Bernanke running the bailout show and Cox on the sidelines, it seems that the plan will get legs regardless who who wins the White House and Congress in November. The chances of a wholesale restructuring of all federal financial regulation looks more likely.

That prompts the ultimate question: Will there be an SEC next year?