In a speech
before the Investment Company Institute earlier today (May 8) U.S. Securities and Exchange Commission Chairman Mary L. Schapiro provided her views on financial regulatory reform, and noted that a proposal on proxy access will be considered soon. (Specifically, she said: "Shortly, we will consider a proposal to enhance investor access to corporate proxies, to make real the promise of universal corporate suffrage, so shareholders can act as the owners the law says they are.") She also noted that proposed rulemaking concerning investment advisors will be taken up next week. (See Sunshine Act Notice
for May 14 Open Commission Meeting.)
Schapiro's speech to the ICI, entitled, Building a Stable and Efficient Financial System, provided an outline of what she views as key principles of financial regulation, as well as her thoughts on moving to a new regulatory 'architecture' including a capital markets regulator, a banking institution(s) regulator(s), and a systemic risk regulator.Principles of Regulatory Reform
After reviewing some of the SEC's investor initiatives, "Topping our agenda is regulatory reform," said Schapiro. Following are the principles for regulatory reform which she outlined. (NOTE: headings below are provided for simplicity; the headings did not appear as such in the SEC Chairman's speech, although items shown in quotes are verbatim from her speech.)
1. Protect individuals.
"At the SEC... we call it investor protection," said Schapiro. "We must and do attend to the safety of institutions, particularly those that are significant to our financial system, but as a means to an end and not as an end in itself.
2. Facilitate fair and efficient financial markets.
However, Schapiro cautioned, do not "supplant" the markets. "A strong and steady regulatory hand is needed to assure [the markets'] continued survival," said Schapiro, "[b]ut that hand must not be so intrusive as to point to winners and losers, lest we lose the benefits of competition." She added, "Stable markets that manage risk and allocate capital effectively are essential for economic prosperity."
3. Promote and preserve public trust through transparency and disclosure
. "Investors must know that the information upon which they base their investment decisions is the truth, the whole truth, and nothing but the truth," said Schapiro. She added, "Some may believe that there may well be extraordinary circumstances in which the truth is withheld from the markets when the very survival of indispensable financial institutions is at stake. But make no mistake, when the truth is withheld, we all pay a very high price. Without that essential confidence that they have truthful and complete information upon which to base their decisions, investors will avoid our financial markets for ones that are more transparent, or they will demand risk premiums for their continued participation. The efficient allocation of capital is simply impossible without transparency. To state the obvious, markets rely on words and numbers. They must both be true; and any new regulatory structure must preserve the integrity and independence of those charged with the responsibility for setting standards of financial disclosure."
4. Market architecture (e.g. pricing, processing and clearing
). "Investors ... need to be confident that when they transact in markets the architecture will work," said Schapiro. She added, " Amidst all the economic devastation, it is understandable that we forget that over the last year, despite record volumes and enormous volatility, our markets have priced, processed, and cleared hundreds of billions of dollars in customer orders in an orderly and generally fair way.
Schapiro noted: "When investors transact through intermediaries, they must be able to trust that those intermediaries deal with them honestly and fairly and with investors' well-being as their sole goal."Architecture Would Include Four Regulatory Entities
Schapiro listed four entities that should be part of the new financial regulatory structure:
1. Capital Markets Regulator
: responsible for regulating the markets for investment capital. Schapiro notes this regulator has historically been the SEC and she implies the SEC (or at least an 'independent agency' such as the SEC) should continue to serve this function. She emphasized: "Capital markets regulation is of a single piece. Splitting it into smaller pieces, I strongly believe, would be a disaster."
2. Banking regulator(s):
responsible for regulating banking institutions. "For now, I leave it to others to describe precisely how [banks] should be regulated and who their regulators should be," said Schapiro, noting, "It is sufficient to acknowledge that, where banking institutions are public companies, there are sometimes different views among regulators about how safety and soundness concerns should intersect with concerns for the soundness of our capital markets and for investor protection." She added, "This may surprise you, but I regard this tension as healthy, creative even. Different regulators appropriately have different perspectives. It is important, I believe, to preserve these multiple perspectives. That is why I think it is useful to maintain the separation between market regulation and banking institution regulation. The best solutions come from the clash of legitimate, varying viewpoints."
3. Systemic risk regulator:
responsible for monitoring and averting risks to the financial system as a whole. Shapiro observed there appears to be "substantial consensus" around the need for a systemic risk regulator and a regulator to resolve troubled institutions. However, she noted, "There is, though, rather less consensus about the precise form such a regulator should take — whether a single entity, a College of Regulators approach, or a hybrid as FDIC Chairman Sheila Bair proposed this week: a single regulator for systemically significant firms coupled with a systemic risk council to provide macro-prudential oversight of risk."
4. Regulator for resolving troubled institutions.
Schapiro said: "we need to improve our capacity to wind up financial institutions that are no longer able to function."
Further details are in this FEI Summary
; refer to Schapiro's speech
for her complete remarks.