SEC Chairman Mary Schapiro Outlines Improvements to Investor Protection and Market Integrity

By James Eccleston

hairman Mary Schapiro recently testified before the Senate Subcommittee on Financial Services and General Government on the ways in which the Securities and Exchange Commission (SEC) is seeking to restore investor confidence. Her remarks come at a time when both investor protection and market integrity need substantial improvement. Let's highlight the key areas that the SEC is focusing upon.

First, the SEC more rapidly is commencing formal orders of investigation, which allow SEC staff to issue subpoenas for documents and witness testimony. Additionally, the SEC has hired a new enforcement director, whose marching orders are to bring "meaningful high impact cases quickly." Ms. Schapiro stated that the results already can be seen. Compared to the same period one year ago, for example, the SEC has filed nearly three times as many complaints for temporary restraining orders, and has opened more than 358 investigations compared to 292 investigations last year.

Ms. Schapiro also testified that the SEC has brought "a number of important and complex cases." These cases include bringing fraud charges against the operators of the Reserve Primary Fund for misleading investors, and bringing fraud charges in connection with a kickback scheme involving New York's largest pension fund. To her credit, Ms. Schapiro recognizes that the stigma of the Bernard Madoff Ponzi scheme persists, and that the SEC has a long road to travel before it is viewed as an effective regulator.

Second, and along those lines, Ms. Schapiro testified that the SEC must "work to improve our risk-based oversight of broker-dealers, investment advisers and mutual funds." In this regard, the SEC is working to identify "key data points" to identify and focus on firms that pose the most risk. The SEC also has begun recruiting "fellows" with experience in such things as complicated trading strategies as well as investment products and derivatives. Additionally, the SEC recently proposed "significant changes" to the custody requirements of investment advisers. In order to have "another set of eyes" to assure the safety of customer assets, one proposal would require all advisers with custody or control of customer assets to engage an independent public accountant to conduct and annual "surprise exam" to verify that those assets exist.

Third, Ms. Schapiro testified that the SEC is considering proposals "to strengthen the money market fund regulatory regime." The proposals will focus on "tightening the credit quality, maturity and liquidity standards of money market funds to better protect investors and make money market funds more resilient to risks in the short-term securities markets."

Fourth, regarding "target date funds", the SEC is very concerned that, with the dramatic rise in the popularity of these and similar investment options, additional investor protection safeguards are necessary. Ms. Schapiro testified to the "troubling investment results", and noted that the SEC closely is reviewing the target date funds' disclosures about their asset allocations. The SEC will work to ensure that the disclosures are consistent with investors' expectations, and that investors are not misled or confused by a particular target date fund's name.

Finally, Ms. Schapiro made a pitch for greater resources. She noted that the current SEC funding level will fall about 200 staff, or about 5%, short of its 2005 funding level. More resources are needed, she urged, so that the "SEC can detect fraud, prosecute wrongdoing, ensure proper disclosure, conduct strong oversight of the markets, and take other actions to protect investors." Ms. Schapiro is correct. Investors deserve a strong regulatory environment!

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About the Author: James J. Eccleston leads the Securities group at the Chicago law firm of Shaheen, Novoselsky, Staat, Filipowski & Eccleston, P.C., where he represents investors in recovering investment losses and financial services professionals in disciplinary, employment, and compliance matters. He has held numerous securities licenses and Chicago Bar Association leadership positions and serves as an arbitrator and mediator. He is a recipient of Martindale-Hubbell's highest rating (AV) for legal ability and ethics and is named to the Illinois Super Lawyer and Leading Lawyer lists.

JEccleston@snsfe-law.com, 312.621.4400, www.snsfe-law.com, www.financialcounsel.com