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.

Revitalizing The SEC Requires Adequate Funding

SEC Chairman Mary Schapiro testified before the Senate Subcommittee on Financial Services and General Government yesterday. Most of Ms. Schapiro’s testimony recounted current efforts to reinvigorate the enforcement program and improve investor protections. Changes such as the elimination of the penalty pilot program, facilitating the process for obtaining a formal order and recent or planned rule making proposals have been discussed before.

A critical point in Ms. Schapiro’s testimony however, should be carefully considered – the lack of funding for the SEC. This is not a new topic. Ms. Schapiro however, recited a number of critical statistics in her testimony, supplemented by three graphs in an appendix, which more than make the point: The SEC is being asked to do an increasingly difficult, complex and far-reaching task with what can only be called meager resources.

Between FY 2005 and FY 2007, the SEC had three years of flat or declining budgets and lost 10% of its employees. During the last two fiscal years, the agency obtained sufficient resources to lift its hiring freeze and just recently obtained supporting emergency supplemental funds. This will bring the current staff level to about 5% or 200 employees below that of FY 2005. Running hard to stay even is one thing. Running harder to go backwards is another.

It gets worse. While the agency fought hard to stay just a few years behind, the task demanded of it has grown and multiplied. For example, from 2003 through 2008, the cumulative growth in securities trading volume has increased over 250%. Over that same time period, the cumulative growth in the number of investment advisors has increased over 45%, while the amount of investment advisor assets has increased over 100%. The number of broker dealer branch offices increased during that same time period by over 80%. The statistics go on. The resources of the agency do not.

The increase in the current budget proposed by the administration is clearly a step in the right direction. It is however, only the beginning. No regulator can be expected to continually do more with less. This is particularly true in view of the increasing complexity of the securities markets which only makes the Commission’s job that much more difficult.

This is not to say that additional funding will solve all of the SEC’s problems. Clearly it will not. A number of the agency’s recent well publicized gaffes and outright failures would not have been cured with any amount of funding. Those however, are issues for another day. If there is to be a revitalization of the SEC, it must begin with adequate funding. Whether the agency is merged with the CFTC or several other agencies – and none of those proposals seem to make sense – without adequate funding, the job cannot be done. It is time for Congress to step up and provide the funding the SEC needs to do its job.