Paul Volcker, former head of the Federal Reserve, is pushing for a fundamental reshaping of the US financial regulatory regime, which he argues is too splintered to be effective.
On Monday, a non-partisan public policy group led by Volcker said that alternative investment funds like private equity “have become highly leveraged, including through the use of derivatives transactions,” and have outpaced the sophistication of fragmented regulatory agencies.
Among other proposals, the report calls for the US Securities and Exchange Commission (SEC) and the US Commodity Futures Trading Commission (CFTC) to be merged into a single entity. Under the current setup, the “unnecessary bifurcation in the regulation of securities and derivatives” has resulted in interagency friction, costly court battles and confusion with international partners.
The report notes that the SEC examines annually only 9 percent of the 11,000 investment advisers it is charged with supervising and is only able to perform a limited number of “corrective action reviews” to advisers found to be deficient, resulting in a credibility gap for the commission. A combined SEC and CFTC, a pet cause of former US House Democrat Barney Frank, could be funded through fees and assessments, the report proposes.
Volcker, 87, has been a close financial advisor to President Barack Obama and one of the key supporters of Dodd-Frank, the 2010 financial reform bill that pushed private equity advisers managing north of $150 million into the SEC’s oversight. The bill’s “Volcker rule” also prohibits banks from certain trading activities off their own accounts and limits banks’ involvement with private equity and other covered funds.
Some observers question the political will to enact Volcker’s sweeping proposals.
The current system “has numerous imbedded interest groups who would resist any modifications to structural change,” says Dorsey and Whitney partner Joseph Lynyak, a Washington DC-based regulation specialist.
In its report, The Volcker Alliance argues that the “reorganization of the regulatory framework is not a matter of substantive regulation but rather of structure and design. Therefore, the issue should not be as ideological or partisan as the many other, more substantive matters Congress is examining.”