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June 22--At no time since its founding has the U.S. Securities and Exchange Commission had a more crucial role in safeguarding the nation's economic health.
In the aftermath of the Wall Street crisis that erupted in 2008 and triggered the deepest downturn since the Depression, the SEC spends much of its time incorporating new federal reforms even as it carries out its traditional role as watchdog of those who trade securities.
And yet for all the new mandates from Congress, the nation's financial system might not be any safer, argues Daniel Gallagher, one of five commissioners appointed by the White House to oversee the $1.3 billion agency.
Asked if the nation is less vulnerable to another financial crisis today than it was prior to the 2008 meltdown, Gallagher gave conspicuously little reassurance.
"I'm not sure."
Speaking in an interview Friday during a visit to Milwaukee, Gallagher cataloged reasons why he thinks the SEC has been distracted by complicated and hastily drafted congressional provisions that in some cases are irrelevant and unnecessary.
The "zero interest rate environment," currently fostered by an accommodative Federal Reserve Bank policy meant to lubricate lending, doesn't help either, he said. The easy money policies act as a disincentive to savings even as they are conducive to new investment "bubbles" that bear their own potential new risks.
"Especially retirees and retail investors -- the least sophisticated folks in our spectrum -- do we want them incentivised to be taking on more and more risk?" Gallagher said.
In the event of another bubble that bursts, he said, "those who are larger, savvy and well connected will do fine." But retirees, smaller investors and small businesses could be hurt if lending dries up again because of unintended consequences of new regulations.
When it comes to the economy, those outside the investment banking and finance industry may pay far less attention to the SEC than they do to the central bank or White House. But regular SEC observers have been scratching their heads at recent events, Gallagher said.
The agency has had three different chairpersons in the last seven months, he said. And because it's the SEC chair who sets the agency's agenda, Gallagher said, that means the agency has needed time to find its bearings.
"We've been in a weird transitional state," Gallagher said.
What's more, in the panicked wake of the Wall Street crisis, Congress acted too quickly on its prescriptions for new fail-safes. Without sufficient public hearings, what quickly emerged after the crisis was a wide-ranging, 2,319-page piece of legislation called the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
"Dodd-Frank is fundamentally flawed," the 41-year-old Republican said.
The SEC has implemented only about 40% of the Dodd-Frank provisions. Some of them have been wasting his time, he said, most notably a provision that forces American manufacturers to disclose the use of any Third World "conflict minerals" in their products -- a stipulation that has nothing to do with the nation's financial system, he complains.
Meanwhile, issues that are relevant to the financial system -- such as nation's housing policies and the Department of Housing and Urban Development -- are virtually ignored by the legislation. "As far as looking at HUD policies, Fed policies, other incentives to encourage subprime lending and all these other things, Dodd-Frank is pretty much silent," he said.
Nor does it outlaw unsound methods that investment banks such as Lehman Brothers used to keep afloat just before Lehman failed during the crisis.
The official compared the reaction by lawmakers to the market crash of 1929, which triggered the Depression. Then, lawmakers took four years to analyze what triggered the crisis and came up with the 1934 Securities Exchange Act, which created the SEC.
Today the SEC is a $1.3 billion agency with 11 regional offices. About a third of the SEC's 3,800 staffers are enforcement officers.
Dodd-Frank is more similar to the "Obamacare" overhaul of the nation's health insurance system -- massive legislation that gets through Congress "on a single-party basis," he said.
As he enumerates his criticisms, Gallagher freely acknowledges he's a Republican. SEC bylaws stipulate that the White House nominate at least two of the five commissioners from the opposition party in what's meant to instill bipartisanship and balance. Gallagher is no stranger to Milwaukee. He visited when he worked as general counsel for the former securities arm of the Brookfield-based financial technology firm Fiserv Inc.
The SEC is also behind on another task assigned by the White House and lawmakers. The American Jobs Act requires the SEC to oversee provisions intended to generate capital investment that creates jobs.
"There are massive amounts of congressional mandates we're still working through," he said.
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