Corporate & Securities Law

NASAA Advocates Creation of Systemic Risk Council

The North American Securities Administrators Association (NASAA) has joined the Conference of State Bank Supervisors and the National Association of Insurance Commissioners in calling upon Congress to establish a council of regulators to identify and manage systemic risk in the financial markets. The state regulators made their recommendation in a joint comment letter to the Chairmen and Ranking Members of the Senate Banking Committee and the House Financial Services Committee on May 18, 2009.

As proposed by the state regulators, the council would include representatives from all federal and state banking, insurance, and securities regulators. The council would be given the task of collecting and evaluating data from all financial sectors to assess existing levels of risk, as well as identifying and analyzing new financial products and business practices that may be expected to increase levels of risk. The organizations believe that the "council approach" offers the greatest promise of evaluating and controlling systemic risk in the marketplace because it would formalize regulatory cooperation and communication. Although the proposed council would have the authority to require industry participants and other agencies to share information and would issue recommendations, its powers would be carefully circumscribed, leaving the authority of existing functional regulators intact.

Such a holistic approach would be both effective and efficient, the state regulators argued, because it would create a body with access to all relevant information regarding the accumulation of risk in the financial system. Moreover, the council would draw upon the existing expertise and proficiency of each functional regulator, while minimizing the possibility of regulatory capture. As an additional measure to prevent undue influence or capture, the state regulators believe that the council should be headed by an independent chair.

The presence of state regulators on the council is necessary and appropriate, the organizations stated, because state regulators gather and act upon large amounts of information from industry participants and investors in all financial sectors. Consequently, state regulators perform the function of an "early warning system" as they are usually the first to identify risks and related trends that are substantial contributing factors to the creation of systemic risk.

The proposed systemic risk council would also be given the task of issuing recommendations to regulators with primary authority over a given market sector when the council perceives the need for corrective measures. As envisioned in the proposal, these recommendations would include the taking of such actions as emergency market intervention, the promulgation of new regulations, or even the initiation of enforcement proceedings. Where appropriate, the council would also recommend the passage of new legislation at the federal or state level.

Full post as published by Jim Hamilton's World of Securities Regulation on June 03, 2009 (boomark / email).