Financial Regulatory Forum

ACCELUS SUMMIT: Former U.S. SEC chief Pitt warns against imposing regulations abroad, urges industry engagement

By Guest Contributor
May 2, 2013

Nick Paraskeva, for Compliance Complete

NEW YORK, May 2 (Thomson Reuters Accelus) – The United States should recognize it can no longer impose its regulatory solutions on the rest of the world, former U.S. Securities and Exchange Commission head Harvey Pitt said on Thursday.

“The time when the U.S. could be arrogant is long over, as is the time when it could believe it could hold on to financial services in this country,” Pitt told the Thomson Reuters Accelus annual Compliance & Risk Summit in New York. 

Pitt had been asked to comment on a request by nine overseas finance ministers to Treasury Secretary Jack Lew asking for recognition of their domestic rules. The letter sought relief from the imposition of U.S. rules on cross-border derivatives activity, after concern at lack of progress on workable rules. Ministers from nations including France, Germany, Japan, the UK and EU, made the approach after seeing evidence of market fragmentation, due to a lack of coordination.

Pitt headed the SEC under former President George W. Bush until 2003, and now leads consulting group Kalorama Partners.

Within the United States, the financial industry needs to take a more constructive stance in working with regulators, by working cooperatively to address regulators’ concerns, rather than dismissing and criticizing them, Pitt said.

“A strategy of only stating that a new rule is not required, when the government has already decided it is, is not a winning strategy in my experience” he said. Professional groups need to engage in constructive dialog on what the rules should contain. The previous lack of engagement was a factor in the authorities’ response to the 2008 financial crisis, in the form of the Dodd-Frank regulatory overhaul.

“Our regulatory environment is an absolute mess,” Pitt said. He said Dodd-Frank was complex and filled with unintended consequences, but it was here to stay. It’s stricture are overwhelming for regulators as well as industry, and have resulted in 60 percent of the act’s rule deadlines being missed.

To keep up, compliance and regulation professionals are now spending 20 percent of their time just on tracking regulatory changes, Pitt said. More resources are clearly required, although nearly half of the chief compliance officers surveyed said they had not received any increase in budget over the last two years.

Pitt said “the SEC is shamefully underfunded and set up for failure” by new Dodd-Frank’s responsibilities without resource. The agency supervises thousands of new hedge funds, private equity, security swap dealers and credit ratings. Divisions at the agency on rules, and rigorous cost benefit analysis, threatens its ability to effect reform. Pitt said that new chairman Mary Jo White may facilitate greater collaboration.

“The Commodities Futures Trading Commission (CFTC) fared no better under Dodd-Frank,” which gave it jurisdiction over most swaps markets, said Pitt. The law subjects new persons to oversight such as major swap participants. This is a departure from prior law, which had only regulated market professionals. Now those who only use the markets in a large scale, with no professional function, also require regulation.

Rules now have the added component of fear. Regulators are concerned that if their rules are found to be under-inclusive, conduct that they did not foresee will lead to them being criticized. “The SEC and CFTC have also seen rulemaking challenges in court and the results to date haven’t been pretty” said Pitt.

The risk that rules under challenge may be struck down by the courts is a risk for compliance officers, for whom certainty trumps uncertainty. There is a question whether firms should comply with rules that might be overturned. While compliance staff will say they always should, business managers may not always agree, potentially causing conflicts between them, Pitt said.

(Nick Paraskeva is principal of Reg-Room LLC (www.reg-room.com), which provides regulatory information and consultancy. He covers various facets of the banking and securities industry and delivers exclusive analysis through Thomson Reuters. He can be contacted at (212) 217-0403 and nparaskeva@nyc.rr.com. Follow Nick on Twitter@regroom.)

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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