SEC chief talks about new financial regulations

Making it easier for shareholders to seat directors on company boards, restricting short-selling in down markets, strengthening oversight of mutual funds, and tightening scrutiny and standards for investment advisers are among the pro-investor initiatives being undertaken by the Securities and Exchange Commission, the agency’s chairman said Thursday.
The agency also plans to work to identify emerging risks to investors, including so-called “dark pools,” or automated trading systems that do not provide public quotes, SEC Chairman Mary Schapiro said in prepared remarks to a gathering of the New York Financial Writers Association in Manhattan Thursday evening.
Large institutional investors like banks, pension funds and mutual funds use such systems when they buy and sell large blocks of shares. But dark pools create a lack of transparency that could cause suspicion and speculation in public markets, Schapiro noted. The pools could also prevent the public from fair access to information, she said, taking away a significant flow of volume from those markets.
Given the risk, dark pools may face increased regulatory action and scrutiny in the future, Schapiro said.
She said the SEC’s proposals issued for public comment in recent months are in line with the goals of the Obama administration’s sweeping financial overhaul plan unveiled Wednesday — to buttress protection of investors and consumers and avert another financial catastrophe.
Many of the proposals in the administration’s plan — like the key element of making the Federal Reserve the so-called “systemic risk regulator” — will require congressional legislation that likely will be arduous to reach. The central bank’s proposed function means it would oversee financial institutions deemed so big or interconnected in the market that their failure could seriously damage the economy. Lawmakers of both parties already have telegraphed opposition.
But the Obama blueprint also cites areas that can be addressed by SEC administrative action, rather than by legislation.
The plan “makes real progress in helping to fill gaps in our financial regulatory framework that became apparent in the wake of the financial crisis,” Schapiro said. “Although the SEC is just one part of that landscape, the proposals … go a long way to strengthening the SEC and improving investor protection in the process.”
The administration’s plan also calls for giving the SEC oversight of hedge funds and other private pools of capital, including venture capital funds. And it seeks to bring so-called “over-the-counter” derivatives, the complex financial instruments traded privately in a multitrillion-dollar market and blamed for hastening the global crisis, under government supervision. The plan involves a network of clearinghouses to provide transparency for trades in credit default swaps and other derivatives, though it is yet to be determined whether the SEC or the Commodity Futures Trading Commission would be the principal regulator of those instruments.
Schapiro said merging the SEC and Commodity Futures Trading Commission would have made sense, but said she was not disappointed that the two agencies will continue to operate separately.
“There’s a logic to the merger,” she said, given overlap between the agencies. “But, short a merger, there is so much we can do work together more effectively.”
Schapiro, an Obama appointee who became head of the SEC in January amid the worst economic crisis in 70 years, has brought a number of changes to the agency — which was widely assailed and demoralized over its failure to detect the multibillion-dollar fraud scheme of money manager Bernard Madoff despite red flags raised by outsiders over a decade. She has taken steps aimed to strengthen and speed the agency’s enforcement efforts and installed a new enforcement director.
In her speech to the financial journalists, Schapiro cited a series of proposals recently put forward for public comment by the five-member SEC. They could eventually be formally adopted, and include:
—Making it easier for shareholders to nominate directors for ballots of public companies, a change pushed by investors and governance advocates. Groups that own a certain percentage of a company’s stock would be allowed to put their nominees for director on the annual proxy ballot that is sent to all company shareholders. Under the current system, dissident investors must wage costly proxy fights and appeal to shareholders at their own expense if they seek new directors on a company’s board.
—Opening a public debate on ways to restrict short-selling, or trades that bet against a stock. Investors and lawmakers have been clamoring for brakes on moves they say worsened the market’s downturn.
—Requiring most investment advisers to submit to surprise exams by outside auditors, a move aimed at patching gaps that allowed Madoff to deceive investors about their funds’ health.
Schapiro said the SEC also plans to soon take up proposals to strengthen oversight of money-market mutual funds, to improve disclosure around municipal securities, and to apply stockbrokers’ stricter standards of conduct to investment advisers who provide services to retail investors.
The SEC has filed civil fraud charges against Reserve Management Co. Inc., alleging it withheld key facts from investors when its $60 billion money-market fund “broke the buck” last fall — after investment bank Lehman Brothers filed for bankruptcy protection. The Primary Fund, which had invested $785 million in Lehman’s debt, saw the value of its assets fall to 97 cents per investor dollar put in — below the dollar-for-dollar level needed to fully repay investors.
In a question-and-answer session, Schapiro also said the agency is stepping up efforts to prevent another Madoff-style scheme from happening.
She declined to speculate on what went wrong at the agency that allowed Madoff’s actions to go undetected, stating that an inspector general report will release those details this summer.
Still, she said she’s moving ahead with making improvements.
“I’m not waiting for any report to start to take the kind of actions that so clearly needed to be taken to try to prevent another failure of that magnitude again,” she said.
Besides hiring new personnel, she said the agency removed regulatory hurdles and is working to develop a system to better identify tips and complaints about alleged schemes.
The SEC receives about 2,000 fraud tips per day, or up to 1.5 million per year, she said. Yet the agency has only 3,600 staffers, many of whom are not assigned to review such complaints.
Schapiro said she is looking to set up new systems to parse through the tips. She also wants to develop “whistle blower authority” to compensate people for offering up well-documented, credible complaints, she said.
Other federal agencies, including the Internal Revenue Service, already have such authority, she said, and it could help the SEC in its quest to safeguard investors.
“It is fair that we be judged by our actions, not by our words,” Schapiro said. “And the SEC’s investor-protection regulatory agenda, as well as our renewed commitment to a meaningful enforcement program, will — I hope — restore investor confidence.”

Related Topics: Securities and Exchange Commission