CNBC - Transcript

Interview

CNBC - Transcript

MR. QUINTANILLA: The Madoff scandal will be the topic on Capitol Hill this morning when the Senate Banking Committee hears testimony from two key SEC officials.

Joining us this morning, first on CNBC with a preview is Senator Jack Reed. He's a member of the committee and he joins us from our nation's capital.

Senator, good morning to you.

SEN. REED: Good morning.

MR. QUINTANILLA: This Cosmo case, I guess, is like piling on. It makes you wonder how many more we're going to find.

SEN. REED: Well, it does, and it also illustrates the gaps in federal regulation that is ultimately going to be the purpose of these hearings today, not just to discover what happened with Madoff, but what we can do to fix the gaps, not only in terms of SEC performance, but the review by their accountants, a host of other issues that are illustrated by Madoff and now by this Cosmo case.

MR. QUINTANILLA: In addition to the hearing, you're also giving a speech this morning at the Mayflower, I believe, right, in a few minutes' time?

SEN. REED: In a few minutes, I'll be speaking to the Council on Institutional Investors about the task we have to begin to restructure the federal regulation of the securities markets and the financial industry, and one of the first steps is to provide more resources to the SEC. That has to be done. And then we have to think very clearly about systemic regulation, what do we want in terms of systemic regulation and what agency or agencies should be doing this regulation.

MR. QUINTANILLA: Yeah. There's a lot of people who say, okay, more resources to the SEC. It's not as if they didn't have enough people to find the Madoff trail, I mean, they were close, it was under their noses. How do you justify giving them more resources when it seems the resources they have are not being used effectively?

SEN. REED: Well, I think you can make both cases, one, that the resources they had could have been targeted more effectively, but two, I mean, just given the limited resources, they only can review on an annual basis roughly ten percent are broker dealers. That allows a big, big area to operate if you're trying to avoid SEC scrutiny, but the other problem, I think, was key to SEC was, really, handcuffing the enforcement agencies, the culture or the message in the agency over the last several years was, you know, enforcement is not a top priority. It has to be a top priority.

Regulations, enforcement and interpretations are key to effective supervision of markets.

MR. KAMINSKY: Senator Reed, good morning.

SEN. REED: Good morning.

MR. KAMINSKY: I don't think anybody can dispute or take the argument against the fact that more regulation needs to happen now, but if you think about Sarbanes-Oxley and think you about Reg FD and clearly major landmark changes that were supposed to put things in a better place, why should we as investors think that Washington can get it right this time?

SEN. REED: Well, we have to get it right this time because we recognize that even the efforts in the past that you pointed out, Sarbanes-Oxley, were not only well intended, but I think there was a great deal of thought and I think if they had been carried out and implemented effectively would have made a difference.

One of the provisions of Sarbanes-Oxley was direction to the SEC and FASB, the accounting standards board to govern more effectively off balance sheet transactions. That's the root of so many of the problems, particularly some of the larger bank holding companies. That was never really done. They're still arguing about how effectively they can report off balance sheet transactions.

So there are, I think, the outlines of significant reforms, but unfortunately, I don't think they're implemented as effectively as they should.

MR. KAMINSKY: Okay, just sort of a layperson, in terms of Reg FD, we were talking about Bank of America earlier in the show and there was clearly a gap of time between when Bank of America board of management knew of some of the problems of Merrill Lynch and when it was reported. So in terms of what you're saying enforcement, the Reg FD is there, but you're feeling is it's just not being enforced at this point?

SEN. REED: Well, I think what happened is there was a climate or perception on Wall Street that the enforcement of the SEC was getting more and more lax. It was a function, not only of resources, but the composition of the Commission, the fact that Chairman Cox put a pilot program in where an SEC enforcement official would have to go in and negotiate with the committee first about the types of penalties they might suggest to someone who was engaged. That whole atmosphere, I think, created this notion of, well, you know, we don't have to be as prompt. We don't have to be as thorough, and, in fact, we can take a few more chances and that, I think, gradually permeated the market.

MR. QUINTANILLA: It doesn't help either that you can be a top enforcement cop of the SEC one day and general counsel for an investment bank the next.

SEN. REED: That's absolutely right, I mean, I think there has to be a very thorough review of jumping from one position of enforcement to on the other side. That's something, you know, we are governed by at least a year of standing down from any type of engagement with the Congress.

MR. QUINTANILLA: Right. Right.

SEN. REED: That principle has to be followed.

MR. QUINTANILLA: We're talking about regulating some of the darker elements of the market, right, CDS, dark pools. Whose responsibility should that become, I mean, people worry about all of that being piled into one agency and that agency just being given too much power?

SEN. REED: I think you're absolutely right. I think we have to be very, very, very careful about delineating what are the responsibilities of this systemic regulator than what agency or agencies have these responsibilities?

MR. QUINTANILLA: Is it an agency that's already in existence? Or do you think it's going to be something new, something from scratch?

SEN. REED: I think it will probably be an agency in existence, I mean, creating something would not be, I think, as rapid and as responsible as taking agencies now and trying to reorganize them. But we have to be very careful and thoughtful for the reason you point out. Just simply piling more responsibilities on an agency without looking seriously at the institutional culture and the resources and their approach to regulation would be, I don't think would solve the problem.

MR. QUINTANILLA: You have your hands full, senator.

SEN. REED: Thank you.

MR. QUINTANILLA: Appreciate your time this morning. Senator Jack Reed joining us from D.C.

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