SEC Chairman Christopher Cox testified before the Senate Committee on Banking, Housing, Urban Affairs on Wednesday, September 23. In his prepared statement, Chairman Cox testified about the Commission's temporary emergency action to ban short selling, stating:
All of these actions relying upon the Commission's Emergency Authority under Section 12(k) of the Securities Exchange Act remain in effect until October 2, and are intended to stabilize the markets until the legislation you are crafting becomes law and takes effect.
He further testified that the Commission is investigating, among other things, the roles and activities of mortgage lenders and the various parties involved in the securitization of mortgages to determine if risks profiles of underlying loans were adequately disclosed, whether portfolios were valued properly, if risk disclosures to retail investors were adequate and appropriate, and if investment banks and broker-dealers acted properly with respect to selling and recommending mortgage-backed investment.
Chairman Cox assured the Committee that, "[t]he Commission is likewise using our regulatory authority to ensure that the market continues to function in a fair and orderly manner," and identified gaps in the current regulatory scheme the SEC would do its best to monitor while legislative remedies are being formulated.
The failure of the Gramm-Leach-Bliley Act to give regulatory authority over investment bank holding companies to any agency of government was, based on the experience of the last several months, a costly mistake. There is another similar regulatory hole that must be immediately addressed to avoid similar consequences. The $58 trillion notional market in credit default swaps — double the amount outstanding in 2006 — is regulated by no one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market. This is an area that our Enforcement Division is focused on using our antifraud authority, even though swaps are not defined as securities, because of concerns that CDS offer outsized incentives to market participants to see an issuer referenced in a CDS default or experience another credit event.
The full text of Chairman Cox's September 23 testimony can be found on the SEC's website at: http://www.sec.gov/news/testimony/2008/ts092308cc.htm