Given that the SEC's voluntary Consolidated Supervised Entities program lost its last customers when Goldman Sachs and Morgan Stanley went under Fed supervision, the agency's decision today to kill the program is unsurprising. Maybe it's also not surprising that a regulator would say, as the SEC chair did in announcing the end of CSE, that the program didn't work because it was voluntary:
the CSE program was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate of the CSE program, and weakened its effectiveness.
What will the SEC do now? The impending bailout, plus the repeated failures of OTS-supervised thrifts, plus a newly active Treasury Department, plus the end of the standalone investment banks means that substantial regulatory reform is, in our view, exceedingly likely (a standalone thrift regulator, for example, is absolutely impossible to imagine). Christopher Cox says the agency will be "focused even more clearly on our statutory obligation to regulate the broker-dealer subsidiaries of the banking conglomerates." But depending on how you define regulation, even that may only be a temporary responsibility of the agency. Steven Davidoff on the impending reorg:
I fear that the S.E.C. will not fare well in the coming regulatory reform. It may indeed absorb the Commodity Futures Trading Commission, but the real, substantive regulation will go under the aegis of the Treasury Department or the Federal Reserve. The S.E.C. is likely about to become a pure consumer protection agency, like the Food and Drug Administration.
PS: Somewhat amusingly, the SEC killed its CSE program immediately after receiving a lengthy report from the agency's inspector general on how to improve it. Sayeth SEC Chair Cox:
The Inspector General's office also made 26 specific recommendations to improve the CSE program, which are comprehensive and worthy of support. Although the CSE program is ending, we will look closely at the applicability of those recommendations to other areas of the Commission's work and move to aggressively implement them.
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