The U.S. Senate and the U.S. House of Representative are working toward a final version of the financial reform bill, which is expected be on the desk of President Barack Obama by July 4. According to Hillary A. Sale, JD, securities law expert and professor of law at Washington University in St. Louis, the bill is coming at a good time for the Securities & Exchange Commission (SEC).
“The proposed financial reforms will improve the SEC’s funding and attempt to regulate financial instruments that have not been regulated before — including derivatives,” Sale says. “A new layer of financial regulators has developed over the last decade in the U.S., largely because the SEC has been underfunded.
“State regulators now have become important players in major financial scandals, often preceding the SEC in detection and enforcement,” Sale says.
Sale notes that regulators can’t be fully insulated from political pressures. “Better funding for regulators would help lessen the pressure,” she says.
Under the current state of the SEC and financial regulation, financial institutions position themselves to fall within the jurisdiction of the most accommodating regulator, and investment banks design new financial products so as to encounter the least regulatory oversight.
Credit rating agencies
Sale says that the possible conflicts between consumer protection and bank regulation are not easily resolved. As an example, she says that credit rating agencies are “horribly conflicted.”
“The main problem is that issuers pay for rating agency reviews,” Sale says. “Rating agencies can’t survive without giving good reviews.
“Unless we deal with these conflicts, reforms are likely to be ineffective,” she says.
Sale, along wtih John C. Coffee Jr., JD, discussed regulatory oversight in Redesigning the SEC: Does the Treasury Have a Better Idea? in the June 2009 edition of the Virginia Law Review.