This story appeared in SEC Today.
Chair Mary Schapiro reviewed the SEC’s current initiatives and shared her views on an appropriate system of regulation in remarks at the Investment Company Institute’s recent membership meeting. She said the SEC has entered what will be one of the most active rulemaking periods in the agency’s history. This week, the SEC will consider a rule proposal to enhance the controls over investment adviser custody of customer assets.
The SEC recently proposed rules aimed at short selling abuses and will soon propose rules to improve investor access to corporate proxies. The staff is working on proposals for credit rating agencies, money market funds, target date funds and Rule 12b-1. That is just the beginning, according to Schapiro. She said there is a great deal of urgent work ahead.
The SEC is also focused on regulatory reform which is centered on investor protection. Recent market events proved that markets are neither self-regulating nor self-correcting, she said. The regulatory system must foster competition for capital.
Schapiro said that, above all, the information upon which investors base their decisions must be truthful. She noted the belief of some that certain extraordinary circumstances should permit the withholding of information from the markets, particularly when the survival of “indispensable financial institutions” is at stake. Schapiro warned that withholding the truth comes at a very high price.
If investors do not have confidence in the information on which they base their decisions, they will avoid the financial markets for ones that are more transparent, or they will demand risk premiums for their participation, Schapiro explained. The efficient allocation of capital is impossible without transparency, she said, and any new regulatory structure must preserve the integrity and the independence of those responsible for setting standards for financial disclosure.
Schapiro believes there is a need for a regulator that is responsible for the capital markets, but one that is independent and protects investors. Investors need a strong voice and a forceful advocate in the federal government, she said. The capital markets regulator must also be integrated, in her view. Capital markets regulation is of a single piece, she explained, and splitting it into smaller pieces would be a disaster.
Banking institutions must be safe and must treat their customers fairly. Schapiro said she would leave it to others to determine how they should be regulated, but when they are public companies, there may be different views on the intersection of safety and soundness with concerns about the capital markets and investor protection. Schapiro believes it is useful to maintain the separation between market regulation and banking institution regulation, which provides a healthy tension, in her view.
There appears to be a consensus about the need for a systemic risk regulator with the authority to wind down financial institutions that are no longer able to function. There is not as much consensus on the form the regulator should take, Schapiro noted. She leans toward a structure outlined by FDIC Chair Sheila Bair which envisions a single regulator for systemically significant firms coupled with a systemic risk council to provide macro-prudential oversight of risk. Schapiro said she is concerned about an excessive concentration of power in a single regulator which would reflect an excessive concentration in the point of view.
Schapiro pledged to do whatever she can to preserve the interests of investors in the debate over regulatory reform.