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Legislative Updates: April 2009


Capitol Call

Many in Washington DC are saying that the current Congress is the busiest in many years. The daily list of Congressional hearings reads like a newspaper, reporting on and reacting to the news of the day, with Congress adding its own unique institutional flair. The recent concern over the bonuses paid to certain AIG employees is a good example of how Congress has been involved in all aspects of the current financial crisis. At the same time, Congress is focused on its annual budget process with this week’s consideration of its budget blueprint.

The House Financial Services Committee (HFSC) was especially busy last month, holding a staggering 15 hearings. Chairman Barney Frank (D-MA) held hearings on systemic risk, with industry executives testifying at two and Treasury Secretary Geithner speaking at a third about Treasury’s proposals for comprehensive regulatory reform, including the need for a systemic risk regulator. Chairman Frank indicated that he expects to begin drafting a bill establishing such a regulator very soon, and he hopes that the House of Representatives will pass his bill by the end of July.

SEC Chairman Mary Schapiro testified before the House Appropriations Subcommittee on Financial Services to review the SEC’s actions related to the current financial crisis. Chairman Schapiro said during the hearing that she “can see the logic” in merging the CFTC and SEC, and she also supports the creation of a systemic risk regulator. In other public comments she said the Commission will consider the issue of short selling and whether to reinstate the uptick rule during the next SEC public meeting on April 8. On March 24, four exchanges sent Chairman Schapiro a letter expressing their support for a modified uptick rule in combination with a circuit breaker.

The Senate Banking Committee (SBC) held several hearings on the regulation of securities markets. SBC Chairman Chris Dodd (D-CT), like his House counterpart, supports the idea of a systemic risk regulator, but is much less sanguine about the Fed being in charge of it. SBC Ranking Member Richard Shelby (R-AL) said that he believes the Fed has “utterly failed” as a regulator. SEC Chairwoman Schapiro testified before the SBC on March 26 about the importance of the SEC’s independence and said that she will defend against any efforts to break up its functions and include its jurisdiction in a new regulator. The OCC submitted a letter to the Committee, to be included in the hearing record, stating its support of combining the functions of the SEC and CFTC to ensure holistic oversight of all exchange-traded derivatives products.

The Senate Banking Securities Subcommittee held a hearing reviewing regulators’ oversight of the risk management systems at large financial institutions. Dr. Erik Sirri, Director of Trading and Markets Division at the SEC, testified at the hearing, saying that while this crisis is “unprecedented,” the SEC’s risk management system for investment banks was not adequate. Mr. Sirri has announced his resignation from the SEC, effective April 30. He is returning to academia after being with the SEC since 2006.

Meanwhile, the International Organization of Securities Commissions Technical Committee issued a report on short selling. The report recognizes that short sell regulation should provide exceptions for legitimate activity, such as market making. Finally, after being favorably reported out of the Senate Agriculture Committee, the nomination of CFTC-Designate Gary Gensler has been held up by Senator Bernie Sanders (I-VT). Under Senate rules, any Senator can indefinitely block a nomination. Senator Sanders opposes Mr. Gensler’s nomination because, “Mr. Gensler worked…to exempt credit default swaps from regulation...”

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