A top regulator says the US Securities and Exchange Commission (SEC) is in a poor position to adequately regulate markets. Commissioner Daniel Gallagher told a conference of investors, regulators, innovators, and traders today that new rules and a lack of resources are damaging the agency’s ability to oversee exchanges amid the constant stream of financial products coming out of Wall Street.
Believe it or not, Gallagher says, ”the last time the Commission undertook a formal, thorough evaluation of the equity markets, the result was the January 1994 Market 2000 Report. … Smart regulation involves taking the time to understand how things became the way they are, and, critically, better defining and articulating the goals of regulations.”
Further, it is clear that investors and exchanges have not taken safety and soundness into their own hands—at least, not yet. “Interestingly, market participants at every level of the trade life cycle reported they are looking to regulators to establish best practices in risk management and to monitor compliance with those practices,” wrote researchers from the Federal Reserve Bank of Chicago in a letter published last month. It’s little surprise, then, that analysts criticize the SEC for failing to keep markets fair and eliminate risky behavior (we certainly have).
Gallagher, who was appointed to his current position by President Barack Obama last year, makes no bones about admitting that a lack of market understanding is inhibiting the regulator’s ability to control trading.
“To say that the Commission’s resources are stretched thin by the workload imposed by Dodd-Frank is an understatement. All that rulemaking, however, only exacerbates the risk that we are missing the forest for the trees,” says Gallagher. “It’s troubling to me that we have been creating and amending so many rules, and in many cases such fundamentally important rules, while operating within a framework that we have not analyzed in depth for almost 20 years and that no longer accurately reflects the state of today’s markets.”
Read the full text of Gallagher’s speech at the SEC’s website.