With nearly a dozen federal regulators overseeing different parts of the financial markets, one government body must keep the regulations running on time and in the right sequence. The newly created Financial Stability Oversight Council at Treasury has that responsibility.
Like the management and sequencing of airspace, regulators implementing the new Dodd- Frank regulatory architecture must focus on overall coordination.
If the regulators do not coordinate, we will be left with a fragmented regime of conflicting or mismatched rules that could result in friction or even failures in market operations. Such friction or failures will impede the flow of capital and credit, undermining economic growth and job creation.
To be clear, this is not a call to roll back Dodd-Frank. Dodd-Frank is the law and its mandates are and will be embraced by the markets, and the industry is committed to getting these new rules right.
Regulators are faced with a daunting task: 235 rulemakings, 41 reports, 71 studies authored by 11 different federal agencies and bureaus. To complicate matters further, multiple regulators have joint jurisdiction over the same markets and products.
As the regulators proceed, often on divergent paths regarding the same or similar rules, the FSOC must step up and dictate how rules will be coordinated and sequenced. One area lawmakers should pay particular attention to during today's hearing is the crafting of rules overseeing the derivatives market now underway at both the CFTC and SEC.
A case in point is the divergent approaches taken by the SEC and CFTC regarding swap execution facilities (SEFs), a new concept introduced by Dodd-Frank. While the CFTC has proposed that all requests for quotes be submitted to at least five potential counterparties, the SEC proposed requiring only one.
The CFTC would require that when placing an order for two customers on opposite sides of a trade a broker wait 15 seconds before executing the second side, while the SEC proposals contain no such requirements.
The two proposals don't even use parallel language; the SEC refers to "participants" throughout its proposal, which the CFTC references "customers," "participants," "traders," and "counterparties."
The CFTC and SEC also diverge on their proposed whistleblower rules. The eligibility requirements between the two agencies' rules do not match although there is no difference between securities and commodities markets that would justify different standards. And while the SEC proposal does not include a specific time limit for reporting, the CFTC proposed a 60 day requirement.
Additionally, take the issue of a new uniform fiduciary standard. Congress authorized and an SEC staff study recommends adopting a uniform duty for broker-dealers and investment advisers when providing personalized investment advice to individual retail customers.
At the same time, the Labor Department has proposed its own new definition of fiduciary in the context of retirement plans that widens the scope of prohibited activities and expands the fiduciary concept.
This would negatively impact the capital markets, and it comes at a time where the SEC is seeking to define the term for both brokers and advisers for the first time in 70 years and is contrary to the direction taken by the SEC. The CFTC has also proposed rules that touch on fiduciary duties, which are out of step with the two efforts.
Lawmakers must also seek assurances that the implementation of regulations need to be properly sequenced. Where new law and regulatory structures are created, it is important that regulators finish all rules material to those structures before implementation so market participants can build and test systems, train personnel and develop legal documentation to ensure compliance.
This is especially important when global coordination is necessary.
The task ahead for regulators is difficult and complicated. With proper coordination, new rules overseeing our financial system can be written that strike the balance between implementing the law while ensuring markets function properly during and after the transition.
We hope the hearing will bring to light just how well regulators have been coordinating the rule making process, and how they will coordinate into the future.
Tim Ryan is president and CEO of the Securities Industry and Financial Markets Association.