The Federal Reserve Board and the Securities and Exchange Commission on Monday laid out how they will jointly supervise investment banks and large dealers, issuing a 10-page document that — at least initially — did little to clear up the confusion about their shared activities.
Market participants have argued for greater transparency in how the agencies expand their regulation and supervision to keep in step with an expanding federal safety net. Lawmakers, however, have asked them to hold off on unveiling a program that takes significant actions and sets precedents that might better be left to Congress.
On its face, the document does what was widely expected: It formalizes the communications channels by which the SEC and the Fed will share information they uncover in their supervisory activities. The ground rules of the understanding are mundane: They reveal whatever they find to each other but treat the information confidentially.
The document makes it clear that the SEC retains primary authority and responsibility for broker-dealers, but one provision says it must "collaborate and cooperate" with the Fed in "setting supervisory and regulatory expectations [and] guidelines or rules concerning the capital, liquidity, and funding position and resources, and associated risk management systems and controls."
What it means to "collaborate and cooperate" — and whether this is a significant policy shift in the Fed's favor — is unclear.
"Either you have a vote or you don't, and there is no vote here," said Oliver Ireland, a former Fed lawyer who is now at Morrison & Foerster LLP. "I don't see it as power sharing so much as a coordination — and you would think that there would have been coordination and cooperation anyway."
But formalizing an arrangement to discuss capital and liquidity requirements may give the central bank greater leverage than it has had in the past.
"It gives them effectively a supervisory and regulatory play," said Gil Schwartz, a former Fed lawyer who is now at Schwartz & Ballen LLP. "The SEC has the regulatory authority to set the requirements, but the Fed is the one that has the money."
Sens. Christopher Dodd, D-Conn., and Richard Shelby, R-Ala., have expressed concern about the release of the memorandum of understanding between the agencies.
"We ask that no action regarding implementation of the MOU be taken before we can determine that it is in the best interests of our nation's economy and the well being of its citizens," they wrote in a June 27 letter to SEC Chairman Christopher Cox and Fed Chairman Ben Bernanke. "It is Congress' role to determine if and how any alterations to our financial regulatory system should be undertaken."
Regardless of whether the agreement affects the balance of power between the SEC and the Fed, it was notably silent on an element that is of key concern to the senators.
"What the document doesn't do is discuss the Fed's intention or plans to provide ongoing assistance to organizations beyond its traditional supervision and oversight, which is the investment banks," said Charles Horn, a former SEC lawyer now at Mayer Brown Rowe & Maw LLP.
Sen. Dodd endorsed the agreement in a statement issued by his office. The agreement "seeks to achieve its important objectives while leaving consideration of any broader reforms to our financial regulatory landscape to Congress — issues that the Senate Banking Committee will begin to examine in greater detail over the coming weeks and months," he said.