SEC should have foreseen the current turmoil on Wall Street and Main Street

WASHINGTON, D.C. – Following the release of two scathing reports detailing lax regulation, shoddy oversight and incompetence at the Securities and Exchange Commission, Representative Edward J. Markey (D-MA) today questioned SEC Chairman Christopher Cox about the SEC's failure to use and enforce risk assessment authority, thereby possibly exacerbating the problems roiling our nation's financial markets.

Rep. Markey was the principal House author of the Market Reform Act of 1990, enacted by Congress in the aftermath of the economic turmoil of the late 1980s, which required all broker-dealers to report to the SEC any information about the financial condition of any affiliates, subsidies, etc. which could impact the underlying stability of the broker-dealers. Full implementation of this risk assessment regulation would have allowed the SEC to find out about risky activities such as credit default swaps or exotic mortgage-backed securities that threatened the stability of Wall Street firms through their unregulated affiliates.

"I am appalled at the SEC's inexcusable failure to implement the risk assessment regulations laid out in the Market Reform Act almost two decades ago," said Rep. Markey. "We knew back then that securities firms were hiding risky activities outside the regulatory eye, we knew back then that this hidden risk was potentially dangerous to the stability of our markets, that's why back then we gave the SEC this authority! Instead they created a voluntary, ineffectual program that turned out to be a complete fiasco."

The SEC's internal Office of Inspector General issued two reports late last week that paint a disturbing picture of lax regulation, shoddy oversight, and outright incompetence on the part of the SEC and its staff. (see reports HERE and HERE ) According to the IG reports, not only has the SEC failed to finalize the "temporary" rules issued 16 years ago to implement the Market Reform Act's risk assessment provision, the SEC has failed to even review the risk assessment filings being submitted under these temporary rules. The SEC has failed to enforce the rules, and even accepts outdated paper filings.

"I believe that SEC's inexcusable regulatory failure in this entire area has contributed to the current turmoil in our nation's financial markets - a failure that has now necessitated a massive federal government intervention into the financial services industry," added Rep. Markey.

In his letter, Rep. Markey asked Chairman Cox to lay out what steps the SEC will now take to fully utilize the risk assessment authority from the Market Reform Act and how the SEC plans to respond to the IG reports.

The full text of Rep. Markey's letter is available here: http://markey.house.gov/docs/finance/letter_sec_risk_assessment.pdf

"The fact that Bear Stearns was compliant with the SEC's requirements, yet disastrously collapsed nonetheless, is an example of what a joke SEC's risk assessment efforts have become," Rep. Markey said. "The SEC must step up to the plate.  More aggressive and effective use of the SEC's risk assessment legal authorities is not only warranted but necessary if we hope to prevent future financial crises."

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 Rep. Markey was the chairman of the House Subcommittee on Telecommunications and Finance from 1987-1995, and ranking member until 1997, when the jurisdiction for securities and trading issues was shifted to the Financial Services Committee.