Let a Thousand Regulators Bloom

Anyone who thought the battle over Wall Street reform ended with passage of the Dodd-Frank Act and President Barack Obama's July 21 signature hasn't seen Kayla Gillan's whiteboard.

Gillan, the deputy chief of staff to Securities & Exchange Commission Chairman Mary L. Schapiro, is in charge of coordinating the commission's implementation campaign, and she's covered her office whiteboard with dense, color-coded columns of tasks and deadlines that have already spilled over to some adjacent poster boards. There is little time to spare. A rule requiring the registration of financial advisers to municipal governments is due on Oct. 1, and myriad others must follow in quick succession.

While hotly contested issues like limits on banks' proprietary trading and a new consumer protection agency got most of the attention during the financial overhaul debate, the SEC alone will be issuing some 100 rules covering derivatives, hedge funds, asset-backed securities, and executive pay. The agency needs to hire 25 examiners right away for a new office of credit-rating agency oversight.

Rewiring Wall Street does not come cheap. The Treasury hired Booz Allen Hamilton to help design the legislation's new consumer protection agency and draw up what could be a $400 million budget next year. The SEC expects to increase its budget by about 20 percent in the next fiscal year, to $1.2 billion, more than triple its size in 2000. Its staffing is expected to increase by more than 1,000 people, some 800 just to deal with the reforms, to about 4,700, a 36 percent jump from the head count in 2007, before the financial meltdown. The legislation "creates a whole new regulatory regime," and implementation is "a massive undertaking," says the SEC's Schapiro. "This will fill regulatory gaps that have plagued the system, gaps that have long needed to be filled."

To keep the heat on the agencies, Amy Friend, the chief counsel to the Senate Banking Committee, whose chairman, Chris Dodd (D-Conn.), co-wrote the law, has been holding conference calls with regulators this month to check on their progress. Dodd plans to hold a hearing with the SEC, the Commodity Futures Trading Commission (CFTC), the Federal Reserve, and other bank regulators at the end of September to make certain they're on track.

The effort is daunting in part because it involves writing rules for businesses that are both huge and currently unregulated, such as some trading desks for currency, interest rate, and credit-default swaps. "We're talking about soup to nuts, building a new regulatory infrastructure for some completely unregulated areas that are multitrillion-dollar industries," says Annette L. Nazareth, a securities lawyer with Davis Polk & Wardwell and a former SEC Commissioner. By contrast, Nazareth says, the well-developed regulations for equity trading took shape over decades. In addition, the SEC must produce more than 20 studies of important financial issues in advance of writing some of the new regulations, and so the agency has to take competitive bids, then hire outside experts to produce the research.

The same drill is consuming the other major agencies. The Federal Deposit Insurance Corp.'s board voted on Aug. 10 to create two divisions to handle its duties, including an Office of Complex Financial Institutions, which will need as many as 200 staff members. The agency has already rented office space in Virginia to handle expansion. Among the FDIC's new responsibilities will be winding down large, systemically important banks, securities firms, and insurance companies that might be on the verge of failing, to avoid the ad hoc bailouts of the last crisis. Staff planning for the new regulations began months before the bill passed. Two conference rooms on the sixth floor of the FDIC's Washington office housed an implementation working group. One team led by Michael H. Krimminger, a deputy to FDIC Chairman Sheila C. Bair, sketched out the agency's new role in shutting down failing institutions, while another deputy, Jason C. Cave, led the preparations for the FDIC's expanded bank supervision powers.

At the Treasury, Deputy Secretary Neal S. Wolin is spearheading the effort, including creation of the interagency Financial Stability Oversight Council, already dubbed F-Sock by the reform cognoscenti. To be led by Secretary Timothy Geithner, the council will assess systemic risks and plans to hold its first meeting next month. And at the Fed, Jim Lyon, chief operating officer of the Minneapolis Federal Reserve Bank, was named to coordinate what the central bank has identified as 350 projects, including 50 rules, that the law requires.

Even the process for issuing regulations has been reworked in an attempt to make it more transparent. The FDIC, the SEC, and the CFTC will accept industry comments before the proposed rules have been written, a shift from the past when industry generally could offer ideas only after proposed regulations had been drafted. All meetings between agency staff and outsiders will be posted on websites, and visitors must provide an agenda beforehand. The comment period, which allows interested parties to try to influence the final result and can run as long as 90 days, in some cases will shrink to 30 days.

One thing all the agencies say they will do is fight any effort by Wall Street to re-debate the legislation. Schapiro says opening the process to the industry does not mean Congress's intentions are open to question. "The law is the law," she says.

The bottom line: How Washington is increasing its regulatory firepower

SEC: The agency will issue some 100 rules for derivatives trading, credit rating companies, stockbrokers, hedge funds, and corporate boards.

CFTC: It will write about 60 rules as it oversees with the SEC exchanges, clearinghouses, capital reserves, and recordkeeping for derivatives trading.

Federal Reserve: Regulating systemically risky companies falls to the Fed, which must write about 50 rules, including proprietary trading limits for banks.

FDIC: Liquidation of troubled financial companies will be the FDIC's job. It will also set new capital rules for community banks.

Treasury: Its secretary will chair the Financial Stability Oversight Council for monitoring system risks. It will also set up the consumer protection bureau.

With Robert Schmidt, Phil Mattingly, and Matt Robinson

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