All I want for Christmas is regulatory reform

Silver bells and major snowstorms aside, I
am struggling to get into the holiday spirit. I am worried that we have now gone through two Christmas
seasons with nary a single, meaningful reform to our regulatory architecture in
this land. It is an architecture
that in many respects facilitated the greatest financial and economic crisis
of our time. One that took us to
brink, just 14 short months ago.

In a moment of uncharacteristic focus on
this matter, the “Wall
Street Reform and Consumer Protection Act of 2009” passed in the House of
Representatives last week. Nothing
has been decided, mind you. This is simply a first step in crafting a final
regulatory reform proposal that will require a companion Senate proposal,
followed by days of debate and horse trading over the final details of such
legislation.  

It is a process that is impacted by so many elements.
There is a tremendously strong and active business and commercial lobby, which has
been out in force to protect its turf and keep new regulations to a minimum.
There is the fact that a 4,500 rally in the Dow and similar indexes have
dampened the urgency of the moment (maybe we don’t really need these reforms after
all, people are beginning to say). And finally, there is just the great
complexity of getting both the level, and depth, of the regulatory response
correct.

What is easily lost in this cacophony of circumstances is
making sure we focus on the key things that will prevent us from a repeat, i.e.,
cascading economic collapse taking to the brink. Mind you, we will always have cycles and bubbles and
declining markets, but they must not be allowed to take us to a point of systemic
collapse. Every tax-paying,
college-saving and retirement-planning citizen in this country has too much to
lose. 

The House bill does include several important improvements. But it falls well short of ensuring a
more effective, better-funded Securities and Exchange Commission, a systemic risk oversight system that will
work and have proper oversight of both over-the-counter derivatives and  private fund managers.

Soon, it will be the Senate’s turn to
advance their proposals. Here is
my holiday wish list for them:

SEC funding:  SEC should have both (1) more stable, long-term funding and
(2) a self-funding mechanism that maintains sufficient resources and enhances
independence. Think of it as
Madoff repellent.

Systemic risk oversight: This is the most important thing to get
right. We desperately need a more independent
and robust review of risk factors that could lead to systemic failure. To
achieve this level of independence, we need a new oversight board (not existing
regulators), with independent, full-time staff and systemic experts to
identify, monitor and prevent bubbles from becoming too big to manage.

OTC derivatives: As much as anything, the
lack of oversight and controls on these instruments is what took us to the
brink. These instruments should be required to be electronically cleared and
traded on regulated exchanges with very limited exceptions. The Senate should take a more
comprehensive approach to federal oversight of all derivatives.

Regulation of investment managers:  
The unregulated activities, lack of transparency and questionable practices of
these private asset management firms continue to be significant concerns to
investors. The Senate can serve investor interests by requiring all fund
managers holding themselves out to the public, without regard to size, type or
domicile, to register with the SEC and be subject to oversight.

May all our dreams for investors
come true this holiday season.

Schacht is a managing
director for CFA Institute, which administers the Chartered Financial Analyst Designation,
CFA®