Advertisement

SKIP ADVERTISEMENT

Editorial

A Disappointing Debut

Mary Jo White, the new chairwoman of the Securities and Exchange Commission, has gotten off on the wrong foot. Last week, in her first commission vote, Ms. White led the commissioners in approving a proposal that, if finalized, could leave investors and taxpayers exposed to the ravages of reckless bank trading.

At issue is the regulation of the multitrillion-dollar market in derivatives. When speculative derivative bets go right, the results are lavish bank profits and huge banker paydays. When they go wrong, the results are shareholder losses and taxpayer-provided bailouts. Even when derivatives are used in a relatively prudent manner — say, to hedge against price swings in food or fuel — the largely deregulated and opaque way they are traded allows the big banks that dominate the market to charge more than they could if trading were more transparent, enriching bankers at the expense of businesses and consumers.

The S.E.C. proposal would let the foreign branches of American banks avoid rules being developed under the Dodd-Frank financial reform law and instead follow rules that prevail in the foreign countries where the deals are done. Foreign banks involved in derivative deals with American companies also could adhere to their own country’s rules as long as those rules are deemed broadly comparable to Dodd-Frank rules.

The banks lobbying for this approach say they want to avoid duplicative regulation and preserve competition. In fact, it would enable them to avoid regulation and preserve bank profits. The proposal implies that foreign regulation will be adequate, but the rules elsewhere are weak or nonexistent. It is no coincidence that major derivative failures have been linked to trading from abroad, including the meltdown in the financial crisis, the failure of the hedge fund Long-Term Capital Management in 1998 and, most recently, JPMorgan Chase’s London Whale fiasco.

To make matters worse, the S.E.C. proposal is weaker than the sound guidelines from the Commodity Futures Trading Commission, which oversees a larger swath of the derivatives market than the S.E.C. does. Disagreement among regulators now gives the banks and their Congressional allies in both parties renewed opportunity to shape final rules to their liking.

Meanwhile, the S.E.C. is about to consider a major rule governing hedge funds and other private companies that solicit investments from the public. Ms. White’s immediate predecessors supported an early proposal of the rule that, shockingly, did not include any specific investor protections. What is needed is a new proposal with the safeguards recommended by the S.E.C.’s own Investor Advisory Committee, including steps that nonpublic companies must take to verify the ability of investors to understand and absorb the risks in private offerings, and requirements that those companies disclose the data the S.E.C. will need to adequately police them. This is a critical test for Ms. White, who has yet to show that she supports stronger regulations.

A version of this article appears in print on  , Section A, Page 26 of the New York edition with the headline: A Disappointing Debut. Order Reprints | Today’s Paper | Subscribe

Advertisement

SKIP ADVERTISEMENT