Financial Regulators Seek to Wiggle Out of Regulating

In testimony before the House Financial Services Committee yesterday, former Fed chairman and Obama economic adviser Paul Volcker said that Congress needed to pass legislation that sets forth rules for banks, rather than authorizing regulatory authorities to eventual develop rules, because “there’s a lot of pressure [for regulators] not to do it.” The SEC had already decided to prove Volcker’s point, by joining 12 banks it was supposed to regulate in court to ask not to have to regulate them anymore.

The Securities and Exchange Commission joined 12 Wall Street firms in seeking to scrap a key portion of a landmark 2003 deal that put strict curbs on stock analysts…

Those curbs were put into effect after the tech boom went bust and the public discovered that stock market analysts employed by the investment banks (including Goldman Sachs, Morgan Stanley and Merrill Lynch) were issuing overly optimistic analysis at the behest of investment bankers working to get business from the subjects of the analysis. The rules were developed as part of a $1.4 billion settlement.

The 2003 pact included a complete separation of research and banking staffs, budgets and chains of command—and a physical separation of the two operations. Analysts were prohibited under the settlement from even speaking to investment bankers unless someone from the firm’s compliance department was present. The firewalls were aimed at prohibiting improper communications.The settlement allows the firms and SEC to seek a judge’s approval to change the agreement under certain circumstances.

Amusingly, the lawyer for the companies who didn’t want to have to abide by the rules that kept them from losing even more money in stockholder lawsuits and the SEC claimed that it was no longer important to separate stock analysis from investment banking sales strategies because the banker-funded Financial Industry Regulatory Authority was watching over them. The FINRA is the same agency exposed for such lax regulatory and oversight functions that it allowed the Madoff Ponzi scheme to go undetected and lost billions on its own investments. Its immediate past chair is SEC Chair Mary Schapiro — the architect of the botched Bank of America settlement that was laughed out of court.

The judge in this case also rejected Schapiro’s arguments.

“The parties’ proposed modification would deconstruct the firewall between research analysts and investment bankers erected by the parties when they settled these actions,” Judge Pauley wrote in his ruling. Approving the request by the SEC and securities firms “would be inconsistent with” the settlement “and contrary to the public interest.”

When a judge needs to remind a regulatory agency that it’s there to serve the public’s interests, and not solely the interests of the parties it regulates, Volcker is right: Regulators obviously need to be forced to regulate, or else they’ll spend their time cuddling up to the companies from which they’re supposed to be protecting consumers.