SEC Chair Schapiro Outlines Future Regulatory System

In a speech before the Investment Company Institute on May 8, 2009, U.S. Securities and Exchange Commission Chairman Mary L. Schapiro shared her vision of the future of financial regulation. Observing that “there is no time to waste,” Schapiro promised “the SEC is acting aggressively to transform itself into a stronger, better and more agile regulator.”

The SEC Chairman stated three “key principles” on which regulatory reform must be based:

• Investor Protection. This does not mean, Schapiro said, a focus solely or primarily on retail transactions, but also on the safety of institutions, “particularly those that are significant to our financial system.”
• Accommodate Competition. Acknowledging that markets are “neither self-regulating nor self-correcting,” Schapiro said the new system must ensure safety while “protecting the vibrancy and competitiveness of our capital markets.”
• Transparency. Schapiro said the new system must promote confidence in financial markets, efficient allocation of capital being “simply impossible without transparency.”

The architecture of a regulatory system based on these principles would, according to Schapiro, consist of three levels of regulation. First, a single regulator responsible for investment capital markets. Integrated regulation of issuers, intermediaries and markets by this single entity is necessary in Schapiro’s view. She said splitting capital markets regulation into smaller pieces “would be a disaster.” Schapiro advocates, however, a separate entity or entities responsible for regulating banking institutions. She acknowledged tension between safety and soundness concerns for banking institutions and the perspectives of market regulation and investor protection, but regards this tension “as healthy, creative even.” Finally, Schapiro said there is “substantial consensus” on the need for a “systemic risk regulator and resolution regime” to monitor risk to the financial system, forestall emergencies and wind up failed institutions. Schapiro supports the idea of a single regulator supported by a “systemic risk council” proposed by FDIC Chairman Sheila Bair to provide “macro-prudential oversight of risk.”