The Center for Public Integrity

The Securities and Exchange Commission has a mechanism to allow financial companies “exemptions” from financial laws. But it allows those companies to essentially police themselves and a report by the SEC inspector general suggests those companies might not be doing a very good job.

From January 2008 through March 2010, the SEC’s Office of Compliance Inspections and Examinations, or OCIE, launched 477 investigations into companies that had been granted exemptions. In some cases, a company had been issued a so-called exemptive order, allowing them to undertake an activity otherwise forbidden by SEC regulations. In others, it was a no-action letter, in which an SEC staffer indicated that a particular course-of-action that otherwise might run afoul of regulations wouldn’t yield any enforcement activity.

In one example cited in the report, a financial company asked for permission to distribute capital gains to its shareholders more frequently than permitted under law. A no-action letter cited in the report suggested that investment companies could lend their portfolio securities.

In these special cases, the exemption is contingent on the company adhering to strict conditions. But the report found that the SEC agencies setting those conditions don’t follow up to make sure that companies comply with those rules. Rather, investigations are carried out exclusively by the OCIE, with no formal sharing of information between other divisions and that office to indicate when exemptive orders or no-action letters have been issued.

The report looked at 72 of the 477 examinations flagged for the presence of an exemptive order or no-action letter, and found that companies had violated the conditions of the order or letter more than 60 percent of the time.

Securities regulators have proposed derivatives market rules that would require big players such as Goldman Sachs Group Inc., JPMorgan Chase & Co., and Morgan Stanley to reveal key information about their deals.

The Securities and Exchange Commission’s five commissioners unanimously agreed to propose a regulation that would give counterparties insight into the material risks, characteristics, incentives and potential conflicts of interest of each deal, reports MarketWatch. The plan "would level the playing field in the security-based swap market by bringing needed transparency to this market and by seeking to ensure that customers in these transactions are treated fairly,” said SEC Chairman Mary Schapiro.

The SEC will collect public comment on its proposal before finalizing the regulation later this year.

The secretive derivatives, or swaps, market was blamed for a large role in the 2008 financial meltdown. Last year, Goldman Sachs paid $550 million to settle the SEC's civil fraud charges that the bank should have told investors in a collateralized debt obligation (CDO) that a hedge fund had helped build the CDO but was now betting against it.

Winners and losers in swipe fee – The Federal Reserve’s decision to cap debit swipe fees at 21 cents may be a big win for banks, but says little about how financial reform efforts as a whole are succeeding, writes Time columnist Stephen Gandel.

Mega-banks' capital – The very largest, "too-big-to-fail" banks will have to hold capital equal to about 9.5 percent of their risk-weighted assets, compared with about 7 percent for other big banks, international banking regulators in Basel said over the weekend. And if any of those mega-banks get even larger, they could face an additional 1 percent requirement, bringing their capital up to 10.5 percent.

That means Bank of America, Citigroup, and JPMorgan Chase & Co. will need a combined $150 billion of extra capital, reports the Wall Street Journal’s Heard on the Street column. Basel regulators give them until 2019 to fully meet the tougher standards, enough time to build capital through profits while also reducing risk-weighted assets.

U.S. banks have objected to higher capital standards being considered by American regulators, saying such a move could cause them to lose business to overseas banks. But Sheila Bair, head of the Federal Deposit Insurance Corp., and Federal Reserve Gov. Daniel Tarullo have said requiring banks to hold more capital is a sensible way of increasing their ability to absorb potential losses.

Four Democratic senators are demanding new leadership at the Office of the Comptroller of the Currency after acting chief John Walsh said banks shouldn't be burdened with capital standards that are too high.

Sen. Sherrod Brown of Ohio sent a letter to Treasury Secretary Timothy Geithner on Thursday saying Walsh's resistance to tougher capital requirements threatens the economy, The Hill reports.

Brown joined Sens. Jack Reed of Rhode Island, Jeff Merkely of Oregon, and Carl Levin of Michigan in calling for Walsh's removal after he said in a speech that current capital levels are “extraordinarily high” by historical standards, and any increase would stifle economic growth.

Regulators must "stick to their guns" - Sheila Bair, who steps down as head of the Federal Deposit Insurance Corp. next month, urged banking regulators to "stick to their guns" and fight industry attempts to water down Dodd-Frank reforms that are needed to prevent another financial crisis.

In a speech today at the National Press Club, Bair criticized banks for fighting higher capital requirements and said that was the kind of  "short-term thinking that got us into this mess in the first place."

If regulators fail to follow through on tough new rules for bank capital and systemically important financial institutions, "it will need to be explained that the alternative is to risk another financial crisis that could someday throw millions of people out of work and wreck our public finances," she said.