One Year In: Embracing the Change
February 8, 2010
Mary L. Schapiro marked her first anniversary as Securities and Exchange Commission chairman on January 27. These remarks are excerpted from her keynote address on January 20 to the Securities Regulation Institute in Coronado, California.
Since I became Chairman, we have been strongly pushing for legislation that would require advisers to hedge funds and other private funds to be registered with the SEC. And, we are seeking access to information that will enable us to create a comprehensive database so we can monitor activities for systemic risk and investor protection purposes.
To further our missions, we are cooperating with our regulatory counterpart in the United Kingdom as to the sharing of hedge fund related data. And, we are working with international organizations toward gathering consistent and comparable hedge fund data globally.
Pooling the SEC and [U.K.] information will result in a more comprehensive understanding of the overall hedge fund landscape and its impact on our broader securities markets.
We also have been driving for new regulation in the area of over-the-counter derivatives. These complicated financial instruments were largely excluded from our regulatory framework ten years ago by the Commodity Futures Modernization Act. In that time, they have grown exponentially in size and impact.
But rather than serving as merely a hedge against risk, during the crisis, these derivatives may have exacerbated it.
That's because OTC derivatives can facilitate significant leverage, resulting in concentrations of risk and increased, opaque interdependence among parties worldwide. What's more, they can behave unexpectedly in times of crisis-further complicating risk management for financial institutions.
Further, these products are incredibly versatile and can essentially be engineered to achieve almost any financial purpose. This includes enabling market participants to essentially invest in a company without having to purchase any shares.
We are seeking measures that encourage the standardization of products. And we seek to require centralized clearing to reduce counterparty risks.
But our push for increased transparency and regulation doesn't stop there. We are reviewing our regulation of the asset-backed securities market. As we speak, the staff is working on proposals that would align the interests of those selling these products with those investing in them.
Among other things, I envision proposals that would seek to:
* Provide significantly more time for investors to conduct a careful analysis before investing.
* Require that loan-level data is provided in a format and manner that is accessible by investors.
* Revise the eligibility standards for "shelf" offerings and eliminate the use of credit ratings as an eligibility standard for shelf.
* Create a mechanism for ongoing disclosure.
In addition to seeking greater regulation, we are also strengthening existing standards.
For instance, we have already increased the safeguards imposed upon investment advisers who control their customers' assets.
For the first time, advisers who do not keep their client assets with a truly independent third party ... will have to undergo a surprise exam to verify the existence of client assets.
Since the financial crisis began, there has been some unease that markets are being stacked against retail investors. The roots of any deficiencies in market structure must be addressed head on to ensure that markets are transparent and investors are treated fairly.
