Mary Schapiro Discusses The Changing Market Landscape, Questions Just What Her Job Really Is
From Mary Schapiro's speech at the 37th Annual Securities Regulation Institute at the Hotel del Coronado, California, surely a very much deserved, and taxpayer sponsored boondoggle, on the changing landscape in financial markets. Presented without expletive filled commentary.
Indeed, today's financial landscape is quite different. It is filled with uncertainty - where new products are conjured up every day, not fully understood and nonetheless sold with lightening speed and extraordinary, sometimes devastating, consequences.
So, the key for all of us - regulators, corporate boards, securities professionals, accountants and attorneys - is to understand this new landscape, respond with vigor and adjust accordingly.
Keeping Integrity in the Markets
Another series of changes that I believe are needed and that we are making involve the structure and functioning of our markets. The fact is that markets and market regulation should promote investor confidence, not undermine it. Such confidence is essential to the efficient flow of capital and the long-term success of financial markets and the economy.
But since the financial crisis began, there has been some unease that markets are being stacked against typical 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.
That is why the SEC is taking - and will continue to take - a fresh look at market structure and trading activities. We must continually seek to ensure that we are fostering fair, orderly, and efficient markets that are designed to protect investors.
And, where there are areas of concern that warrant attention, the SEC will take action.
Already we have proposed rules that would effectively prohibit broker-dealers from providing customers with "unfiltered" access to an exchange or alternative trading system. We have proposed rules that would strengthen our regulation of dark pools of liquidity.
And we have proposed banning the practice of flashing marketable orders - a practice that provides a momentary head-start in the trading arena that can produce inequities in the markets and create disincentives to display quotes.
Reducing Reliance on Credit Rating Agencies
Another area where change is needed involves the over-reliance on credit rating agencies.
It is a change that is long overdue.
As many of you know, one significant cause of the crisis was the securitization of sub-prime mortgages, the resulting weaker underwriting standards by loan originators and the systemic risk that cascaded through the markets.
Although few understood the risks associated with these complicated financial instruments, many investors and even regulators over-relied on credit rating firms. They viewed their high ratings as indicia of good quality and low risk.
But those ratings were faulty and the consequences severe.
In response, the Commission has undertaken a series of rulemakings designed to strengthen our oversight of these agencies, enhance disclosure and improve the quality of ratings.
We would do this by:
* Requiring these firms to disclose a history of their ratings activity.
* Fostering competition by ensuring all agencies have access to similar information.
* Providing more information on where these firms are generating their revenue.
* Requiring issuers to disclose what the rating covers, who paid for it, and any limitations on the scope of the ratings.
* Shedding light on rating shopping by revealing whether any other preliminary ratings had been obtained.
Finally, we have begun the process of removing references to ratings in several of our rules and regulatory forms - a surprisingly difficult process.
The idea is to give investors a better sense of the track record of the credit rating agency, a better sense of what the rating means, and a better sense of how much weight the rating should be given.
Asset-Backed Securities: But our push for increased transparency and regulation doesn't stop there. At the SEC, we are reviewing our regulation of the asset-backed securities market - from disclosures to offering process to the reporting of asset-backed issuers.
And, 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. The proposals are being designed to be forward-looking - to improve areas that may not yet have caused serious problems, but have the potential to raise issues similar to the ones highlighted in the financial crisis.
In the future, we will be tackling issues involving the municipal securities markets, the relationship between retail clients and their brokers and advisers, the mechanics of proxy voting and the role of advisory firms. And so much more.
If there's one thing the recent financial crisis taught us it's that the status quo is clearly not good enough. Not for our markets. Not for investors. And, not for our economy.
To succeed, we all need to embrace the change - change that is needed to improve our regulatory system, better protect investors and restore confidence in the markets.