Schapiro outlines sweeping SEC reform agenda

Mar 26, 2009 @ 3:41 pm

By Neil Roland

Securities and Exchange Commission Chairman Mary Schapiro said that the SEC will move to tighten oversight of money managers and bolster regulation of money market funds as part of a wide-reaching plan to implement regulatory reform.

Testifying before the Senate Banking Committee today, she said that the SEC will soon propose rules to increase shareholder opportunities to nominate corporate board members as part of an effort to increase investor democracy and rein in executive compensation,

“We view regulatory reform as vital,” Ms. Schapiro said, noting that investor protection should be the SEC’s top priority. “Much more needs to be done.”

On April 8, the SEC also will address short-selling by proposing a restoration of the uptick rule, or something like it, she said.

Senate Banking Committee Chairman Christopher Dodd (D-Conn.) endorsed that plan.

The SEC had eliminated the uptick rule, which inhibited the ability of short sellers to trade on sharp market declines.

Additionally, Ms. Schapiro urged Congress to require central clearing of credit default swaps, the unregulated derivates involved in the downfalls of American International Group Inc. and Lehman Brothers Holdings Inc., both of New York.

CME Group Inc. of Chicago and Intercontinental Exchange Inc. of Atlanta received final regulatory approval this month to process these transactions domestically, though dealer participation is optional.

The SEC may also urge Congress to require registration of hedge funds and their investment advisers, combine oversight of advisers and broker-dealers and extend supervision of municipal bonds, she said.

“Those who control access to our capital markets must be competent, financially capable, and honest,” Ms. Schapiro said.

In order to avert Ponzi schemes such as the one perpetrated by Bernard Madoff, the SEC will consider requiring investment advisers who have custody of client assets to undergo an independent, unannounced audit “to confirm the safekeeping of those assets,” she said.

Some advisers also would be subject to an outside audit to ensure their compliance with the law.

In addition, a senior officer at each advisory firm may be required to certify the adequacy of its controls over client assets, Ms. Schapiro said.

These firms could be listed on the SEC website, along with their auditors.

“I have asked the staff to develop a series of reforms designed to better protect investors when they place their money with a broker-dealer or an investment adviser,” she said.

Mr. Madoff pleaded guilty to defrauding investors of as much as $65 billion through the investment-adviser arm of his brokerage.

The SEC, which had authority to examine Mr. Madoff’s advisory business, never did so. The industry’s self-policing group, the Financial Industry Regulatory Authority of Washington, said it inspected his brokerage but not his advisory unit.

In another move, the SEC will propose a tightening of rules for the $3.9 trillion money-market mutual fund sector in the wake of the collapse last fall of the $62.5 billion Reserve Primary Fund, Ms. Schapiro said.

“These efforts will be aimed at shoring up money market fund investments and mitigating the risk of a fund experiencing a decline in its normally constant $1 net asset value,” she said.


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