Bear Stearns Companies' hedge fund problems were still unfolding in uncertain fashion on June 27, when Securities and Exchange Commission member Annette Nazareth addressed the Securities Industry & Financial Markets Association (Sifma) Risk Management Conference in New York. But that wasn't too soon, she said, to draw some conclusions about the risks in illiquid and hard-to-value securities and the need for additional human and other resources to manage them. Nazareth led up to those points with discussions of the SEC's consolidated-supervision approach with five top holding companies and of concerns about leveraged loans to non-investment-grade counterparties. Excerpted here are her sections on consolidated supervision and Bear Stearns; the full text is in the speeches section at www.sec.gov.
The commission currently supervises five of the major U.S. securities firms on a consolidated, or groupwide, basis. For these firms, referred to as consolidated supervised entities (CSEs), the commission oversees not only the U.S. registered broker-dealer, but also the holding company and all affiliates on a consolidated basis. These affiliates include other regulated entities, such as foreign-registered broker-dealers and banks, as well as unregulated entities such as over-the-counter derivatives dealers. The CSE program is designed to be broadly consistent with Federal Reserve oversight of bank holding companies. Indeed, the commission's CSE program has been recognized as equivalent to that of other internationally recognized supervisors, including the U.S. Federal Reserve, for purposes of the European Union's Financial Conglomerates Directive.
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