The Future of the SEC: Where We Stand, 75 Years in the Making

Where it was once debated whether the SEC should remain a government agency or if the public would be better served by having its responsibilities absorbed into other existing agencies, there was no debate amongst the esteemed panelists at the Fordham Law School's Seminar on September 27th regarding the important place the SEC holds in the future of the financial industry. According to former SEC Chairman Harvey Pit, in the wake of the financial crisis if we didn't have it [the SEC], we'd be creating it. Joining Pit at the Fordham Law School were Richard Breeden former SEC Chairman and current SEC Chairman Mary Shapiro who offered their insights into the past, present, and future of the SEC. (Video of the 90 Minute Panel Discussion)

As a consulting firm that specializes in providing compliance support to broker dealer, investment advisor, and hedge fund clients, ACI is looking to the SEC with each new rulemaking to help navigate the changing financial regulatory landscape with and for our clients. We're now seeing a transformation in the SEC as it responds to today's financial crisis, a transformation that reinforces the original mission and values of the SEC (fairness, transparency, disclosure, and accountability) while investing it with more regulatory and enforcement power.

As Breeden said, the SEC aims to sustain democratic markets in a democratic society and has a mission to protect markets that operate on supply and demand. By creating as much integrity in those markets as possible the SEC works to keep up demand and to make the market, as much as possible, fair and equal to everyone.

Mary Shapiro highlighted the very "special" nature of the SEC as a government agency, in the combination of its amazing mission to serve as the investor's advocate while developing confidence and maintaining integrity of capital markets - and - its jurisdiction over a unique combination of responsibilities: regulation of disclosures for public companies, mutual funds, market structure, corporate governance and also as a major law enforcement agency.

During her time as SEC Chairman, Shapiro has already overseen several initiatives and leveraged the existence of other government organizations and third parties to develop greater oversight and stability in capital markets. Examples of SEC initiatives include:

• Creating a risk based exam program in which to evaluate investment advisors and hedge funds for systemic risk. In some cases, depending on the assets under management of the firm, this will fall under State enforcement jurisdiction.
• Calling for custody reviews to occur, leveraging independent CPA firms to be 3^rd party gatekeepers by conducting surprise custody examinations.
• Undergoing internal housekeeping, removing a layer of internal bureaucracy for greater efficiency, and hiring specialized and diverse individuals to join its staff (eg. Former traders, hedge fund specialists, etc).
• Relying on SROs such as FINRA to develop costly technologies such as a consolidated audit trail system that the SEC can then leverage in their efforts. Right now, the SEC is unable to reconstruct real-time markets for analytic purposes, which is in part why it took so long to issue the recently released report on the May 6^th flash crash.

The panelists also highlighted the SEC's attempt to make a distinction between the company and the individual in its mission of investor protection as far as regulations affecting retail investors vs. institutional investors and liability/fines in enforcement cases. The panel concluded that in enforcement cases, it's necessary to have a combination of individual and company liability so that companies remain responsible for the actions of their employees, but that there is also individual liability so that too much of the burden does not fall on company tax holders while allowing corporate fines to reinforce that there are real penalties for transgression of securities laws.

And the future of the SEC does not look any less busy. Over the next year alone, SEC responsibilities under the Dodd Frank Act include

• opening 5 new offices,
• producing about 105 new rulemakings, and
• conducting 20 case studies for the benefit of capital formation and investor protection.

The first of those rulemakings, the registration of municipal advisors, went into effect on October 1^st. Other key areas undergoing rule changes over the next year include proxy voting, credit agency regulations, OTC derivatives, and the creation of a uniform fiduciary standard.

For domestic success, Shapiro says there needs to be greater cooperation between the SEC and States, as state officials play a valuable role in meeting the resources demands faced. There is also too much cross border business in the world today for the SEC to ignore its role on the international state, and the SEC has a leadership role to play.

In his words of wisdom to the audience and Ms. Shapiro, Mr. Breeden heeds us all to remember that there are real investors behind the headlines, and their investments are critical to the future of the financial markets so that other people can use these investments to create businesses, factories, and jobs so that savings lead to capital formation and investors feel safe to make the leap to take that risk.

ACI helps our clients to achieve this mission by developing tailored programs for that account for the firm's individual risks relating to size, strategy, structure, and business practices, to create and maintain cost effective business and regulatory programs that will withstand the scrutiny of regulators, auditors, and investors. ACI is the premier accounting and compliance consulting firm on Wall Street. Contact ACI at 212-668-8700 or info@acisecure.com.