Signs That The SEC Is Returning To Its Historic Roots

New Chairman Mary Schapiro and her fellow Commissioners appear to be returning the SEC to its historic roots, remaking the agency in the image of its illustrious past – investor protector and guardian of the nation’s capital markets. These themes were on full display yesterday in a Commission press release and a speech by Commissioner Louis Aguilar.

The SEC press release announced the creation of an Investor Advisory Committee. Commissioner Luis A. Aguilar will serve as the SEC’s primary sponsor of the Committee which will be co-chaired by Richard Hisey, President of AARP Financial Inc., and AARP Funds, and Hye-Won Choi, Senior Vice President and Head of Corporate Governance for TIAA-CREF.

The Committee is designed to give investors a greater voice in the work of the SEC. Now not only will the SEC’s statutory mandate be investor protection, but they will have an advisor who can counsel the Commission on matters such as new products, trading strategies, the effectiveness of disclosures and other items which are important to investors. The formation of the Committee, which will be composed of a diverse group of securities industry and investor experts, comes at a time when reports have been circulating that the SEC may be stripped of its investor protection role in favor of vesting that task with a new consumer agency.

As the Investor Advisory Committee was being introduced to the public, its primary sponsor, Commissioner Luis Aguilar, was delivering a speech at the Compliance Week Annual Conference titled “Reversing Course — Putting Investors First in Regulatory Reform.” The Commissioner opened his remarks by noted that there “is a need to shift the dialogue [on regulatory reform] from the discussion of how best to preserve financial institutions to what is best for investors. … Any credible effort at regulatory reform has to work for investors, so that they can feel confident in our markets. My objective is to ensure that prioritizing investors is the primary goal of any regulatory reform.”

Commissioner Aguilar emphasized four points in his remarks. First, there must be a searching inquiry into the causes of the crisis. The Commissioner thus applauded the creation of the Financial Crisis Inquiry Commission to conduct this inquiry.

Citing the Gramm-Leach-Bliley Act and the Commodity Futures Modernization Act (which left derivatives largely unregulated), Commissioner Aguilar made his second point: there must be a reversal of philosophy in regulation. These Acts used the “excuse” of “modernization” to “disguise proposed regulatory changes that benefit the financial services industry,” rather than consumers. “Modernization” should mean putting investors first.

Third, any regulatory reform must prioritize the needs of investors. Any reform must ensure that the U.S. capital markets remain pre-eminent. The SEC is the only regulator entrusted with advocating for investors and ensuring the integrity of the capital markets. To this end, there should be a systemic risk regulator that would supplant the “too big too fail” approach with one that would ensure essential functions are heavily reinforced against failure and could be separated if necessary. This should be done not by supplanting primary regulators such as the SEC, the Commissioner noted, but rather by either having a monolithic risk regulator or a counsel of regulators charged with that task. Commissioner Aguilar favors the counsel of regulators approach.

Finally, Commissioner Aguilar discussed potential regulatory reform. Here, he called for the creation of an Integrated Capital Markets Regulator. This regulator would be created by merging he SEC, the Commodity Futures Trading Commission and the Department of Labor’s Employee Benefits Security Administration, although a separate CFTC could retain oversight of agricultural commodity derivatives. Combining these agencies would “create a financial regulatory structure that truly has oversight over the entire capital markets,” and which could enhance investor protection by adopting the SEC model of regulation.

The new Investor Committee and Commissioner Aguilar’s remarks clearly signal a return to the Commission’s historic roots. Given the news stories and rumors inside the beltway about new investor or consumer agencies, it is none too early. No doubt, powerful interests are already at work in their own special interest. It is thus critical that the reforms being instituted take hold and that the SEC in fact returns to its historic mission. The Commission must again becomes the guardian of investors and the nation’s capital markets which over the years inspired millions of investors to believe they were protected and that the markets were fair for everyone.