Brady Wants SEC to Be Able to Close Markets During an Emergency

Treasury Secretary Nicholas F. Brady, taking issue with newly installed Securities and Exchange Commission Chairman Richard C. Breeden, endorsed a proposal Thursday that would give the SEC the right to shut down the stock market in an emergency.

Breeden told lawmakers Wednesday that he did not want the authority to close securities markets, arguing that uncertainty over whether the SEC might halt trading could worsen market volatility.

Brady, in contrast, said the SEC should be able to close the markets temporarily rather than requiring the President to make such a decision, as required by current law.

And in a letter accompanying his testimony to the Senate Banking, Housing and Urban Affairs Committee, Brady said the initial governmental response to market emergencies should come “from a regulator with expertise and proximity to the markets.”

A bill under consideration by a House subcommittee would give the SEC authority to halt stock market trading during times of turmoil. Besides Brady, former SEC Chairman David S. Ruder has endorsed the proposal.

Apart from that point, Brady--in his first testimony to Congress since the Oct. 13 stock market plunge--joined Breeden in supporting the bill, which would make several additional reforms in the way financial markets are regulated.

Brady also defended the use of “circuit breakers” by futures and stock markets to halt trading briefly when prices plunge or soar beyond predetermined points.

On Oct. 13, trading was halted temporarily in some futures markets by such mechanisms. But the New York Stock Exchange did not stop trading because the drop in the Dow Jones industrial index stayed below the 250-point level at which the exchange’s circuit breaker is triggered.

The use of circuit breakers, while voluntary, was assailed by Sen. Phil Gramm (R-Tex.), who said they represent an unwarranted restraint on free market activity.

Brady also told lawmakers that he sees no need to take any legislative action to restrict leveraged buyouts, contending that the sharp rise in the use of LBOs is on the wane and that they “will end of their own weight.”

While not taking a direct stand, Brady hinted that he might be willing to support a proposal that would impose a profits tax of as much as 10% on pension funds that engage in excessive short-term trading. Under current law, pension funds are exempt from taxation.

The plan, sponsored by Republican Sens. Nancy Landon Kassebaum and Bob Dole, both of Kansas, “is worthy of a good deal further study,” Brady said.

At the same time, Brady--a former Wall Street executive and chairman of a commission that investigated the October, 1987, market crash--cautioned lawmakers against going too far in any efforts to eliminate market volatility.

“We cannot and should not attempt to eliminate major market moves, whether by legislation or regulation,” he said. “But we do need to ensure that our markets are configured in the best manner possible to withstand the increasing demands that are placed on them.”

Because of sharp improvements in technology, it is now possible for markets to move much faster than they once did. Several analysts have noted that the 190-point plunge in the Dow index that occurred in less than two hours on Friday the 13th was not necessarily any worse than a similar bear market decline in the past that might have been spread over a week or more.

Brady said certain “market mechanisms” are now capable of producing sharp “down drafts,” but that “one shouldn’t be terrified” just because the stock market turns so quickly.

To help improve market regulation, Brady said the Bush Administration supports changes that would require large securities transactions to be reported to the SEC and other agencies so that the agencies would have a better idea of who is buying and selling large blocks of stock during periods of sharp market swings.

Other parts of the legislation that Brady favors included rules that would allow regulators to assess the financial soundness of the parent holding companies of brokerage houses. He also supported improved coordination in the clearing and settling of market transactions.