News Journal: A glimmer of hope on the financial reform front

There is a new Deputy Sheriff in town, and compared to her predecessors, she has come out with both guns blazing.
Kara Stein has been one of the SEC’s five commissioners for only seven months, but – to mix metaphors – she has been making a lot of waves since her appointment. I’ll tell you in a minute what she had to say in her first appearance earlier this year at the “SEC Speaks” conference, but first some background.
I’ve devoted a lot of space in this column over the past couple of years to my concerns and doubts about the implementation of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (some friends describe this as another Kaufman broken record). I made a lot of speeches on the Senate floor back then, pointing out that the bill’s great weakness was that it didn’t write “bright line rules” (clearly defined standards) but instead kicked the can down the road to the financial regulators and made them responsible for the detailed regulations that would prevent another financial crisis. These, of course, were the same regulators who were AWOL when the markets were engaged in the behavior that led to the crisis.
Unfortunately, my concerns have been borne out. In the almost four years since Dodd Frank passed, the regulatory agencies – bombarded by intense lobbying paid for by the big banks –have completed just over 50 percent of the rules required by the act. Many of those rules, most prominently the Volcker Rule limiting proprietary trading by FDIC banks, have been watered down to the point where they can’t achieve their stated purpose.
Enter Kara Stein, my new hero. If she has her way, the days of the Kaufman broken record on Dodd Frank will come to an end. Here are some of the things she said at that “SEC Speaks” conference:
First, she recognized the fact that a number of Dodd Frank rules still need to be finished and made a personal commitment to see that was done.
Second, she committed to finishing the rules on executive compensation, including the power for “shareholders to take money back from executives who put their own personal gain ahead of the interests of shareholders and the firm.” In addition she said the agency must “finalize a rule that would help ensure that our largest financial firms don’t have executive compensation structures that encourage risky and potentially disastrous behavior.”
Third, she called for real reform of the credit rating agencies, saying, “We also need to finally and firmly address the conflicts of interest in asset-backed securitizations and the provision of credit ratings.”
Fourth, she echoed the call by the Federal Reserve “to improve capital, leverage, liquidity, and margin rules,” saying, “There is a reason why Congress and regulators have been working to tighten the definition of what constitutes ‘capital’ in the years since the crisis.”
Fifth, she addressed the fact that during the financial crisis the government had to step in and provide protection to the money market funds. She said, “We should consider whether enhanced capital, leverage, liquidity, and margin rules would help mitigate risks at the firms, and in the markets, we regulate.”
Finally, she recognized the increasing threat posed since the financial meltdown by High Frequency Trading and the resulting changes in the structure of our financial markets. She said, “Today, there are 16 registered securities exchanges, dozens of so-called ‘dark pools,’ and hundreds of so-called ‘internalizers.’ Markets and traders are connected at near-light speeds. Telephone lines have given way to fiber optic cables, microwave towers, and now, laser beams. When this system works well, futures, options, and equities trade nearly seamlessly around the world. Yet when something goes wrong, the results can be severe for the businesses and investors who rely on our capital markets.” She supported what I called for five years ago: a Comprehensive Audit Trail that includes “data from all of the inter-related markets, not just those principally overseen by the Commission.”
How much of what Kara Stein calls for will actually happen? Only time will tell. But the first step toward re-establishing our markets as the world’s fairest and most transparent is to lay out what has to be done. We now have an SEC commissioner who, for the first time, has done an excellent job of compiling that very long “to-do” list.
Ted Kaufman is former U.S. Senator from Delaware.

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