Four years after crash, market regulation still spotty

Washington - Almost four years after America's financial near-collapse, regulators are now empowered to police financial markets as never before. Yet some of the most important rules to curb Wall Street's bad behavior have yet to take effect - and could be watered down.

Historians likely will view Barack Obama's presidency through the prism of the worst financial crisis since the Great Depression. Like that period in the 1930s, the legislative and regulatory response to this crisis is sure to influence the U.S. economy for decades.

The 2010 revamp of financial regulation - the Dodd-Frank Act - attempted to do what much of the legislation in the 1930s did: Reshape the landscape. Dodd-Frank empowered the Securities and Exchange Commission and the Commodity Futures Trading Commission to regulate hedge funds, oil traders, credit ratings agencies, money market funds and a host of other Wall Street players that had enjoyed relaxed regulation.

But only about 33 percent of the new rules to rein in Wall Street are in force, according to the Davis Polk law firm, which specializes in regulation and puts out a monthly report on Dodd-Frank. And financial firms are aggressively trying to slow down the rule-making process and roll back some of the rules.

One measure of progress is the number of cases being brought by the regulators' enforcement divisions. The CFTC filed 99 enforcement actions in the fiscal year ending Sept. 30, 2011. That was the highest tally ever, and a 74 percent increase from the prior year.

Similarly, the SEC, during the same period, brought 735 enforcement actions, its highest number ever.

But even as enforcement steps up, some of the biggest triggers of the financial crisis remain only half-addressed.

Hoping to return to a semblance of the pre-crisis status quo, financial lobbyists are stridently opposing efforts by bank regulators to prevent big Wall Street players from investing their own money in the same markets where they also invest money on behalf of their clients.

Wall Street trade associations also have sued to prevent the CFTC from imposing congressionally mandated limits on how much of the oil market can be controlled by financial speculators.

The suit on oil trading uses many of the same arguments - and the same legal team - successfully deployed by the U.S. Chamber of Commerce and the Business Roundtable against the SEC. A federal judge last July overturned a Dodd-Frank provision to promote more democratic boardroom elections, finding that the SEC did not do enough to measure the costs and benefits of its new rule.

"The regulatory framework has changed, but the attitude of financial services companies hasn't. It's been one constant pushback after another since Dodd-Frank was put on the books," complained Travis Plunkett, director of regulatory affairs for the Consumer Federation of America. "In some cases the securities and financial services industries have won rollbacks that pushed back to well before the financial crisis."

Too many small cases

"I might say I'm disappointed, but I can't say I'm surprised," said Jack Coffee, a Columbia University law professor specializing in securities issues.

Coffee frets that Wall Street firms are succeeding in weakening rules and warned that the SEC too often goes after smaller cases and settles for too little.

"Settlements over $100 million is where, in my view, they should be," said Coffee, adding that "they're overworked and underfunded. I think they try to do too many cases."

There have been some notable large settlements, including $154 million in penalties against Wall Street titan JPMorgan Securities last June and $550 million in penalties in a 2010 settlement with Goldman Sachs.

The SEC's 682 settlements in fiscal 2011 mirrored the 680 during the prior year. Both were well below the 889 settlements in fiscal 2003.

Bart Chilton, a Democratic commissioner on the CFTC, also wants larger fines.

"That's important because we need to ensure that the fines that regulators issue aren't merely a cost of doing business for some of these large traders. I know that's the case for some of them," Chilton said. "I've seen it. It's hardly a slap on the wrist for some of these firms."

Financial players offer a different view of the post Dodd-Frank world. They complain that too few rules have been finalized, and they deny obstruction, countering that they're merely acting in self-interest.

"It's a constructive engagement. That is how the process works," said Ken Bentsen, vice president of public policy for the Securities Industry and Financial Markets Association and a former Texas congressman. "I think it's a mistake for people to underestimate the magnitude of what Dodd-Frank is bringing in terms of a regulatory architecture over many parts of the financial industry. We're exercising our statutory and constitutional right for comment on rules, which is entirely appropriate."


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