Why the SEC won’t merge with the CFTC

June 17, 2009

David Sunstrum emails with an interesting idea:

I know the big surprise of the last couple weeks was how the SEC would survive Obama’s regulatory shakeup. But the paper repeatedly states (bottom of p. 6 for instance) an intention to harmonize regulation between futures and securities. Could they be paving the way for a merger of the CFTC and the SEC in the not-too-distant future? Did he not want “Obama abolishes SEC” headlines?

I’m not holding my breath on this one. Here’s what the paper says:

We recommend that the CFTC and the SEC complete a report to Congress by September 30, 2009 that identifies all existing conflicts in statutes and regulations with respect to similar types of financial instruments and either explains why those differences are essential to achieve underlying policy objectives with respect to investor protection, market integrity, and price transparency or makes recommendations for changes to statutes and regulations that would eliminate the differences.

While it’s conceivable that the “recommendations for changes to statutes and regulations” might comprise an outright merger of the CFTC with the SEC, I’d put the probability at roughly zero, for three main reasons:

  1. All institutions have a natural tendency to self-perpetuation, and government institutions particularly.
  2. The CFTC is principles-based, while the SEC is rules-based. That’s like oil and water: you can’t comfortably merge two institutions which are run so very differently.
  3. The report has to go to Congress, where the SEC is governed by the House Financial Services Committee and the Senate Banking Committee, while the CFTC is governed by the House and Senate Agriculture committees. Any merged entity would lose the oversight of the Ag committees, which are very attached to the power and influence which comes with being able to regulate the futures market. What’s more, Congress feels zero responsibility for having in any way caused or enabled the crisis, and therefore feels zero need to reform its own outdated practices, like having the House Agriculture Committee oversee the CFTC.

Basically, any momentum for an SEC-CFTC merger has been lost, and the two agencies will remain separate for the foreseeable future. It’s a pity, but it’s in line with the generally-disappointing nature of the reforms being announced today.

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