Markey asks GAO: is legislation needed to write derivatives sales practice rules?

WASHINGTON -- Rep. Edward J. Markey, D-Mass., has asked the General Accounting Office to determine whether legislation is needed to give securities regulators authority to establish sales practice standards for derivatives.

Markey, who chairs the House Energy and Commerce subcommittee on telecommunications and finance, and Rep. Mike Synar, D-Okla., asked the GAO in a June 10 letter to make the finding after conducting a survey of firms' current derivatives securities practice standards.

"We believe that an examination of this issue is important in [considering] the necessity ... of remedial legislation to close regulatory gaps in the regulation of the derivatives market," the two lawmakers said in the letter.

Sales practice standards, which are designed to prevent securities firms from engaging in abusive practices when selling financial products to state and local governments and other investors, "have long been a fixture investors, "have long been a fixture of U.S. securities markets," the lawmakers said.

Abusive practices would include selling investors financial products that are unsuitable for them, charging unreasonable markups, or generating excessive trading in customer accounts to obtain commissions, they said.

But public hearings on derivatives held by the subcommittee last month revealed that while bank regulators currently regulate the sale practices of banks that sell derivatives, securities regulators have no such authority for derivatives that are not clearly defined as derivatives, the lawmakers said.

During those hearings, GAO officials testified that they had not fully explored the sales practices area with regard to derivatives, but would like to do so, Markey and Synar said.

The hearings focused on the General Accounting Office's recent report on derivatives. The report concludes that legislation is needed to ensure derivatives are federally regulated in a comprehensive and consistent manner.

Markey and Synar told the General Accounting Office in their letter that the sales practices survey "should focus on the extent to which dealers establish, maintain, and enforce appropriate policies which are reasonably designed to assure that only suitable or appropriate derrivatives products are sold to their customers."

The survey should also examine whether securities firms adequately disclose the risks of the derivatives products they sell, as well as any fees, commissions, or markups that result from such transactions, they said.

In particular, the GAO should determine whether municipalities, mutual funds, and other investors are satisfied with securities firms' current derivatives sales practices and disclosures, they said.

Meanwhile, two other House subcommittees have scheduled hearings on the GAO's recent reprot on derivatives.

The House Agriculture Committee's environment, credit and rural development subcommittee plans to hold a hearing tomorrow. Three panels of witnesses are scheduled to testify, including: GAO officials; Darcy Bradbury, the Treasury's deputy assistant secretary for federal finance, who will be speaking on behalf of the President's Working Group on Financial Markets; and Brandon Becker, director of the Securities and Exchange Commission's division of market regulation.

The House Banking Committee plans to hold a hearing on the report on June 23. GAO officials and representatives of the Financial Accounting Standards Board have been asked to testify at the hearing. The committee is still working on its witness list, a source said.

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