Econ Vacancy May Hinder Reg Reform

The SEC and the CFTC have been looking to fill a key position for months, which is creating a regulatory backlash for new rules.
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) -- U.S. securities regulators may be busier writing new rules than they have been since they were first established, but that agenda may be jeopardized by the fact that both the

Securities and Exchange Commission

and the Commodity Futures Trading Commission have been without chief economists for several months, and do not look to be close to filling the posts.

The matter is far from academic, according to James Overdahl, a former CFTC chief economist who was the SEC's chief economist until he left the Commission in March. Overdahl says four rulemakings by the SEC in the past five years have been successfully challenged in court because of the Commission's failure to provide a sound economic justification for some of its arguments.

The issue has even attracted the attention of the Senate Banking Committee, which is monitoring the situation, according to people familiar with the matter.

Spokesmen for the SEC and the CFTC declined all comment for this article.

Overdahl says one of the reasons he left the SEC was because he felt the chief economist's role was diminished in importance under Mary Shapiro, who took over as SEC Chairman in 2009. The chief economist had reported directly to the Chairman, but now reports to the head of a new division called Risk, Strategy and Financial Innovation.

"I think it's a harder sell to bring in a well-qualified chief economist when they're not going to be reporting directly to the Chairman," Overdahl says.

While the CFTC has no such handicap, the Commission may still have a difficult time filling the chief economist post before next summer. That's because many potential candidates are academics who have teaching commitments until next summer, says Jeff Harris, the most recent CFTC chief economist, who left in February.

Harris says he left the CFTC because he was on leave from the University of Delaware and did not have a commitment from CFTC Chairman Gary Gensler that he would be able keep his post through 2010.

Though Harris is neither a Republican nor a Democrat, he was originally appointed by President Bush to the chief economist post at the futures market regulator.

"When I was offered the position I had to be cleared through the White House. I think at the time the Bush administration was fine with having an independent there. I'm not so sure that the new team was all that interested in having a Bush appointee as their chief economist," Harris says.

Among the things economists must do at the regulators is explain the potential costs of new rule-making. Such costs include narrowly defined issues such as how much it will cost a company to meet certain reporting requirements, or far broader ones, such as the potential impact on the swaps market of requiring certain instruments to be cleared through a central clearing facility.

Harris says having economic expertise on hand can save regulators lots of time. As an example, he says the idea of price controls was floated at the CFTC in recent years as a result of the sharp rise in the prices for certain commodities. Harris and his colleagues were ready with historical parallels to the wheat market of the 1930s, when the government imposed controls and ended up owning most of the wheat crop.

"We could give pretty much instantaneous guidance to say, 'well this is an idea we shouldn't waste weeks or months or even days on,'" he says. He estimates the CFTC currently has 10-12 PhD--level economists despite the leadership vacuum.

Harris says he has been trying to encourage financial industry firms to be sure to include economic justifications for their arguments as they comment on the proposed rules in the hope they will help compensate for some of the deficit in the regulators' economic expertise.

"Then again, that's sort of hard to do, since a lot of the industry people have their own axe to grind, which again sort of highlights the importance of having someone neutral or objective, or at least more objective within the government," Harris says.


Written by Dan Freed in New York


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