Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is president of financial reform advocacy group Better Markets
This year looks to be both busy and consequential for the development of better protection for investors and markets in the US. The ongoing crypto carnage is the latest reminder of how important that is.
In 2022, we saw the best of US financial regulators in tackling that task along with some of the worst. The Securities and Exchange Commission returned to its core mission — to “protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation”. This was despite sustained pressure from entrenched incumbent firms on Wall Street with their lobbyists and allies in Congress.
On the other hand, the Commodity Futures Trading Commission seemed more focused on expanding its jurisdiction and becoming a key ally of the cryptocurrency exchange FTX and its former chief Sam Bankman-Fried.
The SEC led on financial regulation in 2022. Its regulatory agenda included 57 rulemakings, with 10 finalised, 32 proposed and 15 yet to be proposed. While some have criticised the agency on the volume and speed of its action, its rulemakings are consistent with previous chairs of the commission. What’s changed is the greater focus on investor and consumer protection.
For example, the SEC finalised rules to enable investors to obtain independent proxy voting advice and to require companies to claw back incentive-based remuneration resulting from improper accounting.
The SEC also proposed rules to hold special purpose acquisition vehicles accountable; require accurate disclosures on environment, social and governance issues; provide more scrutiny of private funds; and address many issues relating to predatory practices and fragmentation in equity markets.
The SEC had an equally active enforcement record in 2022, bringing 760 actions and recovering a record $6.4bn, including dozens of crypto-related cases. That was good but the SEC must do better, starting with severely punishing individuals, particularly supervisors and executives, in every case.
In contrast, the CFTC had regrettably few accomplishments in 2022. The agency exists to police derivatives and commodities markets but spent much of 2022 being a cheerleader for the crypto industry while trying to expand its jurisdiction even at the expense of the SEC’s duty to police securities lawbreaking.
While commodities markets were undergoing historical turmoil, Bankman-Fried and his team met the CFTC chair and other officials 10 times over 14 months. The CFTC came perilously close to approving FTX’s proposal to radically change the structure and operations of clearing houses by reducing customer, investor and financial stability protections.
As the crypto chaos continues and the criminal trials of FTX’s leadership unfold, there’s no doubt that all the financial regulators will carefully scrutinise any crypto-related activities, but their agendas are much broader.
Apart from finalising pending rules, the SEC is likely to propose a number of reforms in areas such as board diversity disclosure, predatory apps that gamify trading, and private offerings. Elsewhere, banking regulators are focusing on climate risk as well as access to products and services.
The Federal Reserve, in particular, has outlined an ambitious agenda, including strengthening all-important capital requirements and planning requirements to deal with failed banks. The Fed has also announced an upcoming climate scenario analysis.
In addition, the Federal Deposit Insurance Corporation is reviewing a deeply flawed bank merger process. Along with the Fed and FDIC, the Office of the Comptroller of the Currency has also proposed supervisory principles for banks on climate change. Plus, we expect the agencies to finalise a critically important update to the Community Reinvestment Act, which requires banks to make loans in historically avoided or underserved communities.
Against that busy backdrop, the CFTC stands out. Instead of the current redoubling of its efforts to expand its jurisdiction, it should prioritise a review of the loopholes in its rules over the limits on the holdings of traders in key commodities. These gaps allow excess speculation in the commodities markets. It also needs to establish a comprehensive framework for managing automated trading risks.
However, overall there is a lot on the agenda and for the first time in many years, all the financial regulatory agencies will have a full complement of confirmed presidential nominees (other than the OCC which has an acting director). They need to make the most of the opportunity.