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Congressman Frank Makes One Last Pitch to Merge CFTC and SEC

Joe Mont | November 30, 2012

A longtime proponent of merging the Securities and Exchange Commission and Commodity Futures Trading Commission, U.S. Rep. Barney Frank (D-Mass.) is making one last push for the idea before he retires at the end of his term next month.

Frank, who discarded such a plan from the regulatory overhaul that bears his name, the Dodd-Frank Act, is co-sponsoring legislation with fellow Massachusetts Democrat Michael Capuano to bring the two agencies together.

Frank is the Ranking Member of the House Financial Services Committee. Capuano is the Ranking Member of the Subcommittee on Oversight and Investigations of the House Financial Services Committee.

"The existence of a separate SEC and CFTC is the single largest structural defect in our regulatory system," Frank said in a statement. "Unfortunately, this is deeply rooted in major cultural, economic and political factors in America. Had we sought to merge those institutions in the overall financial reform bill, it would almost certainly have caused the defeat of that legislation. Now that the basic policies have been adopted to cover security and derivatives regulation we can focus on the structural issue. I file this bill now because I believe it is time for this to be on the agenda of the next Congress."

“This is a common sense step in continuing to advance financial regulatory reform. Merging the SEC and the CFTC will consolidate the existing regulators to eliminate gaps that have put our financial system at risk,” Capuano added.

The bill is being called the Markets and Trading Reorganization Act. It would establish, a year after its passage, an independent regulatory commission to be known as the Securities and Derivatives Commission. The new agency would be composed of five commissioners appointed by the President with the advice and consent of the Senate. One of the commissioners shall be designated by the President as chairperson and no more than three can be members of the same political party. At least one commissioner will be required to have knowledge of the agricultural commodities market.

Each commissioner shall be appointed for a term of five years, except that a commissioner may continue to serve after the expiration of such term until a successor is appointed and has qualified. The terms of those first taking office after the enactment will expire, as designated by the President at the time of their appointment, in a staggered fashion: one at the end of one year; two at the end of three years; and two at the end of five years.

The proposed commission will include at least three divisions: a Markets and Trading Division with oversight of market conduct and utilities, the conduct of market professionals, and self-regulatory organizations, and related examination functions; an Issuers and Financial Disclosures Division with oversight of the issuance of securities, including investment companies and related rules and examinations; and an Enforcement Division.

In terms of funding, the new commission would “impose a fee on each agreement, contract, or transaction that is a contract of sale of a commodity for future delivery, an option on such a contract, or a swap or securities-based swap, so that the total of the fees so imposed during each fiscal year is sufficient to cover the costs of the regulatory activities [for each fiscal year].”

By March 1 of each fiscal year, the Commission will have the opportunity to adjust fees if they fail to meet budget targets.

The Frank/Capuano proposal comes on the heels of a similar pitch made in a recent report published by a subcommittee of the House Financial Services Committee that investigated the collapse of brokerage firm MF Global.

“The MF Global case alone does not necessitate the merger of the SEC and the CFTC, however the evidence found in the MF Global case is symptomatic of regulatory inefficiencies,” the report says. “As financial products, markets, and market participants have converged, the SEC's and the CFTC's regulatory jurisdictions have increasingly overlapped. It only makes sense to collapse these entities and create a regulatory framework that brings us into the 21st century.”

Among the reasons prompting that call was that the SEC and CFTC “failed to share critical information,” about MF Global with each other. “Both agencies focused on their respective jurisdictional interests and not the firm as whole,” the report says. “There is no record of meaningful communication between the SEC and the CFTC until the week before the company's bankruptcy. When these regulators finally tried to coordinate, it was disorganized and haphazard.”

“Despite the promise of Dodd-Frank that regulators would work together, what the Subcommittee's investigation found is there was no meaningful coordination among the regulators who were responsible for the supervision of MF Global,” said Financial Services Committee Chairman Spencer Bachus.

The suggestion, however, divided Republicans on the Financial Services Committee (which oversees the SEC) and their colleagues on the House and Senate agriculture committees (which oversee the CFTC). Rep. Frank Lucas, who chairs the House Agriculture Committee, and Sen. Pat Roberts, top Republican on the Senate Agriculture Committee, stated their opposition.