Treasury Plans Financial Regulatory Overhaul

The Treasury Department has released its blueprint for overhauling the regulatory structure of the financial markets in an effort to cope with the crisis in the mortgage and credit markets.

The Blueprint for a Modernized Financial Regulatory Structure recommends, among other things, a merger of the Securities and Exchange Commission with the Commodity Futures Trading Commission.

Treasury Secretary Henry Paulson (pictured) wants the transition process for the merger to be orderly. "The market benefits achieved in the futures area should be preserved and we do not want to lose the CFTC's principles-based process for market exchange oversight," he said in remarks accompanying the blueprint. "Accordingly, instead of simply recommending merging the SEC and CFTC with the expectation that all will work out, we recommend a number of steps and an evolutionary approach to shape the merger process so as to preserve the best aspects of each regulator."

Under the blueprint, there would be a "conduct of business regulator" that would monitor business conduct regulation across all types of financial firms, with the responsibility of protecting consumers and investors. The agency would assume many of the roles of the CFTC, the SEC, and the consumer protection and enforcement roles of insurance and banking regulators.

The blueprint also envisions setting up a "corporate finance regulator" that would encompass the SEC's current oversight of accounting regulations. "The corporate finance regulator should have responsibility for general issues related to corporate oversight in public securities markets," said the blueprint. "These responsibilities should include the SEC's current responsibilities over corporate disclosures, corporate governance, accounting oversight and other similar issues." The Conduct of Business Regulatory Agency would also assume the SEC's current business conduct regulatory and enforcement authority over financial institutions.

Under the blueprint, the Federal Reserve would have the overall responsibility of becoming a "market stability regulator." Not only would the Fed be able to implement monetary policy and provide liquidity to the financial system, as it does today, it would also provide more of a regulatory role in the overall financial system.

"To do its job as the market stability regulator, the Fed would have to be able to evaluate the capital, liquidity and margin practices across the financial system and their potential impact on overall financial stability," said Paulson. "The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability."

The Fed would be able to collect information from commercial and investment banks, as well as hedge funds, insurance companies and commodity pool operators. Federal oversight of insurance companies would supercede that of state regulators.

The plan also envisions the establishment of a "prudent financial regulator" that would combine all federal bank charters into one charter and consolidate all federal bank regulators, such as the Federal Deposit Insurance Corp., into a single "prudential regulator." This regulator would serve a role similar to the current Office of the Comptroller of the Currency.

The Treasury Department's plan is likely to be hotly debated in Washington. Critics are already saying that the plan does not go far enough in overhauling the system and protecting against the various abuses that led to the current problems in the economy.