For over a year, Congress deliberated on how best to reform the financial system that caused our economy to crumble and sent us spiraling into the worst recession since the 1930s. During the Senate debate, I argued Congress must draw hard statutory lines that would protect us for generations.  All too often, however, the final bill defers to the regulators, saddling them with an endless stream of rulemakings and studies and not nearly enough explicit direction from Congress. According to the law firm Davis Polk, regulators will be responsible for undertaking no fewer than 243 rulemakings and 67 studies. The Securities and Exchange Commission alone will have to write 95 rules and conduct 22 studies.  Although this burden reflects the dramatic scope of the bill, which covers everything from derivatives to corporate governance to private fund registration to investor protection, it also reflects Congress' willingness to punt tough decisions to the regulators.  Unfortunately, the totality of this burden threatens to grind ongoing rulemaking and regulatory oversight to a screeching halt. And while regulatory agencies struggle to stay afloat, current and new problems could fester. So regulators, particularly the SEC, have no choice but to triage the vast number of issues that have been dumped on their plate.  The commission's priorities must be clear and consistent. First, the SEC, along with the Commodity Futures Trading Commission, must focus its limited resources on establishing for the first time a regulatory system for the $600 trillion market for over-the-counter OTC derivatives. The two agencies will be charged with developing rules that clarify which entities and contracts will be subject to clearing and trading requirements, set business conduct standards, and establish reporting as well as capital and margin requirements for non-cleared swaps. This will reduce counterparty exposures and systemic risk while increasing market transparency. Though an arduous process, regulating derivatives must be treated with the utmost importance.  Secondly, the SEC must devote significant attention to credit rating agencies, whose faulty analysis and business conflicts led them to put AAA ratings on toxic securities. Had the Franken amendment not been changed in conference, there would be a clear process for the rating of structured financial products. Instead, the final bill instructs the SEC to conduct a study and recommend legislative solutions.  Third, the SEC should establish a fiduciary duty for brokers to ensure that they take into account their customers' best interest when recommending investment product offerings. Unfortunately, the conference bill again instructs the SEC to study the issue, after which it has complete discretion on whether to impose new standards for investment professionals.  Finally, the SEC must focus on establishing new reporting and recordkeeping requirements for unregulated hedge and private equity funds. Given the Commission's ability also to conduct periodic and special examinations, it should focus resources on determining the extent to which any such funds pose systemic risks.  As it moves forward to meet these new responsibilities, the Commission must not neglect nor give short shrift to its ongoing reviews and responsibilities. In particular, its equity market structure review must not crumble under the weight of new responsibilities. The May 6 flash crash, in which the stock market failed to perform its essential price discovery function for a harrowing 20 minutes, revealed structural market flaws that undermine investor confidence and market integrity. Of chief concern is high frequency trading, which represents 70% of daily volume in the equity markets, but largely operates outside the regulatory umbrella. The SEC must plug this hole by crafting rules to collect and analyze meaningful data on high frequency trading practices, ensure liquidity is provided in a manner that is accessible and fair for investors, promotes capital formation for companies looking to grow, and maintain orderly markets, particularly in times of stress or uncertainty.
The Securities and Exchange Commission already has a hard time policing the financial marketplace.  The new law won't help.