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The SEC’s Proposed Cross-Border Rule Is a Major Disappointment and Puts the American People at Grave Risk from Wall Street’s Overseas Activities

“The SEC’s proposed cross-border rule is a major disappointment.  It fails to adequately protect the American people from having to again bailout Wall Street from its unregulated or under-regulated overseas activities.  The 2008 financial and economic crisis was ignited and fueled by Wall Street’s massive use of derivatives.  That is why the financial reform law required the SEC to protect Main Street, our financial system and economy, not Wall Street’s profits, business lines and competitive standing,” said Dennis Kelleher, CEO of Better Markets, a nonprofit organization that promotes the public interest in the financial markets.

“Regrettably, Wall Street is already cheering the SEC’s proposed weak rule, which it will use as a club against a stronger cross-border proposal issued by the CFTC last summer.  This is the ultimate tail wagging the dog.  The CFTC specializes in derivatives, has jurisdiction for 95% of the market, and is the preeminent regulator of derivatives.  The SEC specializes in securities and has jurisdiction over just 5% of the derivatives market.  It is inexplicable that the SEC would not only second-guess the CFTC’s expertise and considered judgments, but would adopt so many provisions pushed by Wall Street and its special interest army of lobbyists,” said Mr. Kelleher.

“Specifically, exempting foreign subsidiaries and branches of U.S. parent companies, even those guaranteed by the parent, will almost certainly result in losses from overseas operations to come back to the U.S.  To add insult to injury, such exemptions will also incentivize U.S. banks to move their business and jobs overseas to avoid U.S. regulation.  The result will be U.S. taxpayers bearing the risk of overseas financial operations, having received none of the benefit, however modest,” Mr. Kelleher said.

“The 2008 financial crisis and the off-shore derivatives activities of AIG, Lehman Brothers, Bear Stearns, Citigroup, JP Morgan Chase and so many more have demonstrated that, when things go wrong overseas, the U.S. taxpayers are going to be on the hook for the bill,” Mr. Kelleher continued. 

“Those many examples also demonstrate the weaknesses in regulation by foreign countries.  While Wall Street wants to rely on such ‘substituted compliance’ to regulate foreign activities that have a direct and substantial impact on the U.S., such so-called regulation has too often been little more than an illusion.  ‘Substituted compliance’ should only be allowed if the foreign regulation is equivalent in fact, form, substance, enforcement and over time, and that equivalence must be determined on a regulation-by-regulation basis.  To do otherwise would be to subordinate the protection of the United States to a mirage of some hoped-for foreign protection that has been absent in the past,” Mr. Kelleher said.

“Wall Street and its allies are experts at playing countries and regulators against each other to create a race-to-the-regulatory-bottom.  That has to stop.  Given that U.S. taxpayers are at risk for billions of dollars in bailouts and trillions of dollars in damages, the U.S. must lead a race-to-the-top, with strong, comprehensive financial reform rules that apply to overseas activities that have a direct and significant connection with or effect on the United States.  The SEC must strengthen its weak proposed rule when finalized and join the CFTC in a race-to-the-top that protects the American people from another devastating financial crisis,” Mr. Kelleher concluded.

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