On June 3, 2009, SEC Commissioner Luis A. Aguilar addressed the Compliance Week Annual Conference in Washington, DC. In his address, Commissioner Aguilar called for a shift in the discussion about how to reform the regulation of the financial system away from how to preserve financial institutions, to how to best protect investors. Asserting that "investors need the SEC now more than ever," Aguilar focused his remarks on how he feels regulatory reform should be structured to enhance investor protections.
In order to best achieve reform that enhances investor protection, Aguilar recommended:
1. A searching inquiry in to the causes of the crisis.
The focus on regulatory reform must start with a searching inquiry into the causes of our economic crisis. Automatically blaming the regulatory structure is not a satisfactory answer. In fact, it reveals a striking blind spot. The staggering amount of taxpayer funds that have been mobilized to try to manage this crisis are being paid to prop up companies who made serious mistakes. The only way to make sure that our regulatory structure is responsive and well-built is to understand what went wrong, and what continues to go wrong.
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By investigating and analyzing what happened, we can, in turn, assess whether the regulatory reform proposals are being driven by the right concerns.
2. A reversal of the philosophy that resulted in the affirmative decisions that forced gaps in, and otherwise undercut, regulatory protections in order to favor the industry.
The recent turmoil in the markets and our economy illustrate that Gramm-Leach-Bliley (also known as the Financial Services Modernization Act) and other laws such as the Commodity Futures Modernization Act, did not prioritize investors and average Americans. I have concerns about reform proposals that hide behind the excuse of "modernization" to disguise proposed regulatory changes that benefit the financial services industry, but may be to the detriment of investors. We must ensure that "modernization" means regulatory changes that put investors first.
3. An assessment of whether the current regulatory reform proposals will protect investors and promote market integrity.
To that end, it is essential that any regulatory reform prioritizes the needs of investors and the maintenance of America's pre-eminent capital markets. The SEC, a capital markets regulator that puts investors first, is integral to a modern regulatory system that pays attention to overarching systemic risk. The SEC is the only regulator entrusted with advocating for investors and charged with overseeing the integrity of the capital markets. In these times, the SEC is needed more than ever. If the SEC didn't exist, it would need to be invented.
Commissioner Aguilar then discusses his views on three proposed reforms.
Systemic risk regulation
[S]ystemic risk regulation should recognize that the various market functions exist to serve investors and other users — and that the focus needs to be on ensuring the continuation of systemically important market functions, not institutions, and should have a clear focus on investor protections. This orientation toward investors and away from a "too big too fail" philosophy would involve identifying the systemically important market functions that an entity provides, and working to isolate these functions within the entity. The objective would be to ensure that the functions would be heavily reinforced against failure, and could be separately maintained should other parts of the entity weaken.
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Regardless of the eventual model adopted for regulatory reform, it must be one that prioritizes the needs of investors and markets rather than one that diminishes their value.
The possibility of a consumer financial products safety commission.
Commissioner Aquilar expressed some reservations to this reform approach.
Investment products such as securities are fundamentally different fFrom other non-investment financial products. I would have serious concerns that the differences between investment products, like mutual funds, and non-investment financial products, such as mortgages, have not been seriously discussed.
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Let's look at the differences between investor protection and consumer protection. Although there may be some overlap between the concepts of investor protection and consumer protection, they are not the same. Consumer protection typically refers to regulation of the retail interactions between individuals who buy things and the people from whom they buy them — for example, between the person that gets a mortgage and the mortgage holder. By contrast, because of the nature of the products involved, investor protection includes the retail transaction — for example, the relationship between a customer and a broker-dealer — but extends significantly beyond it to reach a number of other market participants. The SEC understands that to effectively protect investors, it must have a holistic understanding of the overall system. This means that the regulatory regime includes regulation of the inter-connected chain of market participants. . . [T]o remove any portion of investment products from this regime would be to risk regulatory arbitrage and seriously undermine investor protection.
The possible integration of all US financial regulators into a single consolidated regulator, a so-called US Financial Services Authority.
[A]s former SEC Chairman Breeden recently testified, a consolidated regulator
'. . . can create systemic risk because if the regulatory 'czar' proves wrong, every part of the system will be vulnerable to damage. Some regulators prove more effective than others, so a system with only one pair of eyes watching for risk is weaker than a system in which lots of people are watching. What counts is that somebody rings an alarm when problems are small enough to fix, not who pushes the button.'
Chairman Breeden's concerns resonate with me. I could not support any regulatory proposals that threaten to undermine investor protection.
However, Commissioner Aguilar stated that he does favor the creation of an "Integrated Capital Markets Regulator."
The reform proposal that I believe best serves investors and would promote market integrity is to create an Integrated Capital Markets Regulator. This regulator would combine the functions of the SEC, the Commodity Futures Trading Commission (CFTC), and the functions of the Department of Labor's Employee Benefits Security Administration (EBSA). I would envision this Integrated Capital Markets Regulator as having the comprehensive investor protection mandate for all investment products such as securities, derivatives, and interests in retirement funds, among others.
By combining these entities, you create a financial regulatory structure that truly has oversight over the entire capital markets. . . Today's markets are so interconnected that centralized market oversight by a single independent regulator makes sense. The characteristics that differentiated these separate regulatory entities and justified their separate existence have largely disappeared.
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In order to be a robust regulator, the Integrated Capital Markets Regulator must also have a sustainable funding mechanism.
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Accordingly, it is important that the Integrated Capital Markets Regulator have a sustainable funding mechanism, much the same as financial regulators such as the Federal Deposit Insurance Corporation, Office of Thrift Supervision, Office of the Comptroller of the Currency, and the Federal Reserve, to name a few. The Integrated Capital Markets Regulator should be in the same position as these other financial regulators.
The full text of Commissioner Aguilar's June 3, 2009 speech is available at: http://www.sec.gov/news/speech/2009/spch060309laa.htm
- "Board Diversity a Competitive Advantage," April 27, 2009
- "Commissioners in the Spotlight at SEC Speaks," February 17, 2009
- "Commissioner Aguilar Calls for Change at the SEC," January 29, 2009