Truly Independent Financial Regulators

Our federal financial regulatory system was set up to emphasize independence for our regulatory agencies. A number of reasons justify that philosophy, not least of which is a desire to insulate these agencies from the political pressure they come under from all sides, particularly during crises. We want our regulators—analogous to cops on the beat protecting consumers, investors, and markets—to be able to make the right decisions, which are often also tough decisions. The government shutdown may end up highlighting a weak spot in our regulatory structure.

This is because it is hard for an agency to be fully independent if it depends on congressional appropriations to fund itself. Congress is at times the primary source of the political pressure on agencies and, when Congress pays the bills, it is more apt to try to exert influence. Agencies like the Federal Deposit Insurance Corporation, Federal Housing Finance Agency, and Federal Reserve were given independent sources of funding. The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), our two capital markets regulators, instead rely on appropriated funds from Congress.

The SEC and CFTC perform several vital functions in overseeing financial markets. The two agencies are at the center of several of the key Dodd-Frank reforms, including writing rules and regulations on derivatives exchange and clearing and the Volcker Rule. They are also responsible for enforcement of securities and commodity trading laws, such as those combating fraud. Just last month, JP Morgan Chase agreed to pay a $920 million fine to the SEC, Office of the Comptroller of the Currency, and Federal Reserve, while the SEC continues to investigate individual negligence in the so-called London Whale case. The CFTC is planning votes on finalizing a number of rules on derivatives by the end of the year, by which time current Chairman Gary Gensler will leave office. The end of the year is also the time frame by which President Obama has reportedly told the SEC, CFTC, and three other agencies with independent funding he expects them to finalize the Volcker Rule.

The SEC says that it will use carryover funds to keep itself open for up to “a few weeks,” while the CFTC is effectively shut down as a regulator. The wisdom of individual provisions of Dodd-Frank are debatable, as are their implementations by agencies. Leaving those agencies unable to function or fulfill their consumer- and investor-protection functions—taking the police off the streets, in effect—hurts the parties they are supposed to protect, and harms the public perception of the integrity of our financial markets. Our independent financial regulatory agencies should not be caught in political crossfire.