Testifying before the Senate Committee on Banking, Housing and Urban Affairs yesterday on the Obama administration's new regulatory reform proposals, Treasury secretary Timothy Geithner acknowledged that merging the two entities has been debated in the past and that valid reasons still exist for doing so, although this is not the time to take that step.
"Congress has considered many times in the past proposals for merging both entities and there is a simple and compelling rationale for doing that. What we propose is to begin by bringing the underlying statutes - which are substantially different for [financial] products with similar attributes - into conformity. We think that helps solve most of the substantive problems that exist by having separate regulation of securities and futures; it won't solve all of them, but it is a necessary step toward any effort to merge [the SEC and CFTC] and we think that is a good challenge to take on right now," said Geithner.
The Treasury secretary was responding to questions from senator Jon Tester, who welcomed proposals to consolidate the Office of Thrift Supervision and the Office of the Comptroller of the Currency into a new National Bank Supervisor, but queried why the similar consolidation of the SEC and CFTC was not included in the regulatory reform white paper released on June 17.
When Tester further probed the secretary's willingness to recommend a merger of the two agencies in the future, Geithner appeared amenable to the suggestion - even hinting that his office would attempt to persuade Congress into such action.
"I don't anticipate [recommending a merger] now, but that is something the Congress has considered many times in the past and I would expect that to be one of the things that Congress reflects on now, with appropriate leadership, suggestion, help [and] persuasion from our office,' he added.
The primary political obstacle to such a merger is the intransigence of both the Congressional committees that oversee the agencies. Neither the House Committee on Financial Services, which monitors the SEC, nor the House Agriculture Committee, which has jurisdiction over the CFTC, are willing to surrender any supervisory authority over derivatives markets.
The white paper proposes that the CFTC and the SEC "should make recommendations to Congress for changes to statutes and regulations that would harmonise regulation of futures and securities". If an agreement cannot be reached, the matter will be referred to the new Financial Services Oversight Council.
Even if jurisdictional conflicts can be settled amicably by the two agencies - and such agreement is regarded by the Treasury as the first step toward merging the bodies - valid arguments exist for the continued existence of both entities as independent offices.
"The notion of a merger of the CFTC and the SEC has looked unlikely for some time and although there would be operational efficiencies by merging the two, they still fulfil distinct roles and operate in distinct fashions - the CFTC is a market protection-focused principles-based regulator while the SEC is a rules-based supervisor and concerned primarily with investor protection," noted Carolyn Jackson, counsel in the regulatory, funds and financial products group at law firm Allen & Overy in London.