SEC Chairman's Speech Highlights Key Securities Initiatives and Reforms

By James Eccleston

EC Chairman Mary Schapiro's recent speech to the securities industry, entitled, "The Road to Investor Confidence", certainly was not designed to win over friends from Wall Street. Prefacing her remarks by blaming Wall Street for the "recent crisis" (it didn't understand or simply ignored the risks) and by blaming the SEC (for being asleep at the wheel), she described how the SEC is going about restoring investor confidence, and protection. Let's review the more important initiatives and reforms.

First, Chairman Schapiro emphasized that the SEC has taken steps to "re-energize" the division that enforces the securities laws. Those efforts have paid off. In the last nine months and compared to last year, the SEC has issued more than twice as many formal enforcement orders, has filed more than twice as many emergency actions, has opened nearly 50 more investigations, and has obtained orders for twice the amount of monies in disgorgements and penalties.

Second, Chairman Schapiro has recognized that the SEC needs to improve its ability "to analyze risk and cutting-edge market trends", especially with new financial products or strategies that have "the potential to destabilize financial institutions or the system." So, the SEC created a new Division of Risk, Strategy and Financial Innovation, and it employs "people with current street experience in derivatives, hedge funds, trading and risk."

Third, during the last nine months, Chairman Schapiro stated that the SEC has "pursued one of the most significant, investor-focused rulemaking agendas in our history" to help protect investors and ensure the markets operate fairly. Examples include regulations designed to improve: money market fund credit quality, liquidity and maturity standards; the quality of credit rating agency ratings; protection of clients of investment advisers to avoid a repeat of the Madoff fraud; and information regarding municipal securities.

Fourth, retirement products are a key focus of the SEC as it searches for "newly emerging risks." Chairman Schapiro noted her concern that increasingly workers are called upon to make their own retirement investment decisions as employers replace defined benefit plans with defined contribution plans. In that environment, she said that "barraging investors with retirement products that feature the latest financial gimmick or marketable fad will ultimately be a disservice to investors, their financial intermediaries and the economy overall." Accordingly, the SEC will concentrate its efforts on disclosure, product development and marketing for retirement products. Already, the SEC has on its "radar screen" target date funds and securitized life settlements.

Fifth, Chairman Schapiro discussed the SEC's "concerted effort to fill the regulatory gaps that became so apparent over the past 18 months." She focused on four areas: private funds; fiduciary duty; over-the-counter (OTC) derivatives; and asset-backed securities (ABS). Regarding private funds - or hedge funds - she argued that "it is virtually impossible to monitor their activities for systematic risk and investor protection purposes." As a result, the SEC will continue to advocate a requirement that advisers to private funds register with the SEC.

Likewise, the SEC will continue to push for a uniform, fiduciary standard that will apply to all financial services professionals who provide investment advice about securities. Chairman Schapiro stated that the SEC wants a "high fiduciary standard", and not some "watered-down, 'fair and reasonable' commercial standard."

Regarding OTC derivatives, the SEC is continuing to lobby for "vital legislation" to fill the gaps that exist in an area that has exhibited enormous growth and which presents substantial risks to the financial system. "Robust regulation and transparency" are required.

Lastly, regulatory gaps exist with respect to asset-backed securities (ABS). Chairman Schapiro has called for a broad review of regulation pertaining to disclosures, the offering process and the reporting of asset-backed issuers. Further, the SEC is lobbying for sweeping legislation to enhance investor protection. Chairman Schapiro noted that "substantive protections beyond disclosure requirements are needed for the ABS arena" due to the "unique character of securitization and the role it plays in the national economy."

In sum, the SEC now appears to be awake at the wheel! Investors should rejoice.

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About the Author:
James J. Eccleston is the president of Eccleston Law Offices, P.C. The Chicago-based firm represents investors and advisers nationwide in securities and employment matters. 312-332-0000 www.EcclestonLaw.com.