WASHINGTON — Securities and Exchange Commission Chairman Christopher Cox asked Congress for authority to regulate credit default swaps, investment bank-holding companies and municipal bond disclosure, saying the SEC can't provide effective oversight in areas that are off-limits to it.
In testimony Thursday to the House Oversight and Government Reform Committee, Cox defended the agency that oversees Wall Street, saying its investor-protection role now is more important than ever.
"If the SEC did not exist, Congress would have to create it," Cox said.
Cox received blistering criticism from committee Chairman Henry Waxman, D-Calif., who said he wasn't an effective regulator, and from Rep. Elijah Cummings, D-Md., who questioned whether Cox undercut the agency's risk-assessment office and a task force to examine derivatives. Cox disputed both claims, saying risk assessment has increased under his watch.
According to Cox, the SEC has been effective in areas where it has clear authority, but hasn't succeeded when it has no jurisdiction or where it relied on voluntary compliance, such as oversight of investment bank-holding companies, including Bear Stearns Cos. and Lehman Brothers Holdings Inc. Bear collapsed in March and was acquired by JPMorgan Chase & Co.; Lehman filed for bankruptcy protection in September.
Regulation of credit-rating agencies is another example of where voluntary regulation failed, Cox added. He praised a 2006 law giving the SEC direct oversight of rating firms, allowing it to inspect rating firms and report on its findings. The result, said Cox, is a "much chastened" ratings industry.
The SEC chief repeated his call for Congress to close "dangerous regulatory gaps," including one created by a 2000 law that barred the SEC from regulating swaps contracts, including credit default swaps, a kind of insurance against bond defaults.
"We don't have authority to regulate credit default swaps because Congress hasn't given us that authority," Cox commented. He said that has spawned $55 trillion of credit default swap contracts, an unregulated market larger than all the world's economies combined, and prompted the federal rescue of American International Group Inc. (AIG), which made bad bets on $440 billion of credit default swaps.
Separately, Cox asked for authority over municipal bond disclosure so that the SEC can require municipal borrowers to provide the same kind of disclosure as corporate borrowers, and urged Congress to fix a "fateful mistake" in a 1999 bank deregulation law that didn't designate an overseer for Wall Street investment bank-holding companies.
The SEC began voluntary oversight of a handful of Wall Street companies in 2004, which didn't prevent several of them from failing or merging with commercial banks. Those remaining, Goldman Sachs Group Inc. and Morgan Stanley, have reorganized as commercial bank-holding companies, but Cox said the responsibility for oversight still needs to be addressed by lawmakers.
A top-to-bottom review of U.S. regulation should be high on the agenda for Congress and the next administration, according to Cox. He characterized 1930s-era U.S. securities laws as an outdated hodgepodge and advised Congress to update and rationalize laws that treat brokers differently than investment advisors and regulate securities differently than futures contracts.
Cox, a former House Republican, acknowledged that part of the problem is the splintered responsibility in Congress for financial oversight, with banking and financial-services committees overseeing securities markets and the SEC while agriculture committees handle futures markets and the Commodity Futures Trading Commission. He suggested turf battles could be overcome by convening a select committee composed of representatives from each of the existing committees with financial-services oversight.
On the law-enforcement front, Cox said the SEC has more than 50 investigations underway in the subprime-mortgage area and is working with criminal prosecutors to probe claims of fraud, manipulative short selling and rumor-mongering about the nation's largest financial companies. As part of that probe, the SEC required hedge funds, brokers and institutional investors to file sworn statements on their trading in stocks and credit default swaps in such companies. Cox said the SEC is creating a database of the information and will use it to search for any "manipulative patterns" in stocks and derivatives.