Speech by SEC Commissioner:
“The Regulatory Implementation and Implications of Dodd-Frank”

by

Commissioner Kathleen L. Casey

U.S. Securities and Exchange Commission

Directors’ Forum 2011
University of San Diego
San Diego, California
January 23, 2011

Thank you for that kind introduction.

I am very pleased to be here in San Diego today, and not just because it is more than 40 degrees warmer than in Washington. It is always good to escape from Washington now and then.

It is a privilege to come and speak at the behest of two such worthy organizations. For twenty years, the Corporate Directors Forum, through events such as this one, has worked to help public company directors to meet their important duties and improve their overall performance as directors.

I am privileged to be a part of today’s program. Here at the University of San Diego Law School, Frank [Partnoy] and his fellow scholars at the Center for Corporate and Securities Law work to enhance and enrich the debate on issues of critical importance to the health of our markets.

I should also at the outset make the standard disclaimer that the remarks I make this afternoon represent my own views, and are not necessarily those of the SEC or my fellow Commissioners.

Broad Implications of Dodd-Frank

Consistent with the theme of today’s discussions, I would like to focus my remarks on the regulatory landscape after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act and what the current and potential implications are for regulators, market participants, investors and our markets in general.

I use the word “focus”, but it seems an odd word to describe what is such a hugely important and broad area of new law and regulation. So, in many ways, my focused remarks are necessarily rather high level given that we are only now in the process of implementing the law.

Dodd-Frank just celebrated its six-month anniversary, and regulators in Washington are furiously working to write new regulations and stand up new bureaucracies, so it is certainly premature to say what the cumulative effect of the law will be on the health and vitality of our markets. But it is certain that the effects will be extensive and far-reaching.

In terms of its breadth and scope, Dodd-Frank is arguably the most significant financial legislation in modern history. The legislation ushers in a breathtaking amount of changes that will result in a tectonic shift in the legal, regulatory and policy landscape affecting our markets and our economy in a relatively short period of time. These changes touch every aspect of our financial markets, from consumer credit to proprietary trading at financial firms, from OTC derivatives markets to securitization, and from private fund registration and regulation to corporate governance at public companies.

Indeed, the enormity of Dodd-Frank is particularly apparent when one considers it in comparison to the last piece of so-called “massive” financial reform legislation that was passed in response to turmoil in the U.S. financial markets: The Sarbanes-Oxley Act of 2002. Dodd-Frank is 849 pages long. S-Ox is less than a tenth the size, just 66 pages long. S-Ox mandated 16 rulemakings and 6 studies. Dodd-Frank, by contrast, requires more than 240 rulemakings and nearly 70 studies.

I remember, when I arrived at the SEC in 2006, I was told about how all-consuming the S-Ox rulemaking had been to the agency. And it certainly was, and the staff made heroic efforts to complete the work. But, in the shadow of Dodd-Frank, S-Ox seems almost quaint: the SEC has to do nearly six times (95) the rulemakings and nearly three times the number of studies it had to do under Sarbanes-Oxley, most of them within one year.

Dodd-Frank comprises 16 titles, many of which would, in and of themselves, be considered hugely significant laws. And yet, Dodd-Frank enacted them all in one sweeping and ambitious piece of legislation, making transformational changes to our financial markets that will, by design or unintended consequence, have enormous impacts on our economy.

• Title I of the Act creates a new systemic risk regulatory body, the Financial Stability Oversight Council (FSOC) and a new research arm with expansive powers to collect data, to monitor and oversee systemic risk.
• Title II creates new liquidation authority intended to provide for the orderly wind-down of financial firms designated as systemically important.
• Title IV creates a new regulatory regime for the regulation of hedge funds and other private funds.
• Title VII creates a new regulatory architecture for the regulation of OTC derivatives.
• Title X creates the Consumer Financial Protection Bureau (CFPB) — essentially a new agency with broad rule writing and enforcement powers.

If one unpacks just the major securities regulation title, Title IX, one finds a plethora of new laws and required rulemakings regarding, among other things: securitization, credit rating agencies, municipal securities advisor regulation, executive compensation and corporate governance, and the establishment of a new corporate whistleblower and bounty program.

But, of course, the size and scope of the law are not, ultimately, the best measure of a law. Instead, I believe there are two major questions to ask when evaluating the totality of Dodd-Frank:

• First, did the legislation address the fundamental causes of the financial crisis?
• Second, regardless of what one thinks about particular provisions of Dodd-Frank, including whether all of the provisions actually address the underlying causes of the financial crisis, to what extent does the additional burden of the Act on regulators, market participants, issuers and the markets undermine the core purpose of Dodd-Frank, which was to address the systemic weaknesses of our financial system?

On the first question, while certain provisions, including the establishment of FSOC, the orderly liquidation authority for systemically important financial firms, and the mandate for more transparency in the derivatives markets, are ostensibly designed to address concerns about “too big to fail” and uncertainty about the health and stability of financial firms and the system as a whole, Dodd-Frank noticeably avoided one major contributing cause of the financial crisis: the role of our overheated and overleveraged housing market, fueled by low interest rates and loose underwriting standards driven in significant part by policies designed to promote home ownership.

The challenge, then, for policy makers and regulators flows from both the under-inclusiveness and the over-inclusiveness of Dodd-Frank. Because Dodd-Frank does not fundamentally address the underlying causes of the housing bubble, policy makers may wish to focus efforts on this area, as well as other areas that, further analysis suggests, pose significant threats to the health of our financial system and our markets.

At the same time, the over-inclusiveness of Dodd-Frank, with hundreds of pages of law mandating rulemaking in areas unrelated to the causes of or weaknesses that contributed to the financial crisis, will make it more difficult for regulators to focus their energies on important mission critical priorities and more pressing risks.

In addition, the breadth of Dodd-Frank makes it increasingly important that policy makers stay mindful of the costs and effects that the regulation in its totality will have on our markets. The costs of Dodd-Frank will be enormous, and we will have no idea of the actual total costs for years to come. Given prior experience, such as the original estimates about the cost of S-Ox, those actual costs will prove substantially more significant than legislators and regulators predicted.

Almost a decade has passed, and the true costs and benefits of S-Ox continue to be debated. If S-Ox produced provisions like Section 404 — and I would note, not so ironically, that Dodd-Frank requires the Commission to study ways to reduce the cost of Section 404 for small business issuers — then there is an even greater risk that Dodd-Frank is likely to spawn many “404s.” Quite frankly, Congress and the Commission are just not very good at predicting the costs of new laws and regulation.

This error probability is great enough when legislative and regulatory changes are made discretely, but they are magnified when changes are made to a dynamic ecosystem like our financial system, and on such grand scale.

And in a key respect, while Dodd-Frank seeks to address systemic risks to our financial system, various provisions within the law do not appear to have been considered from a systemic perspective.

But perhaps even more important than seeking to identify direct costs, policy makers and regulators need to be mindful of the opportunity costs that the law will impose. Again, getting a firm handle on this is very difficult, since there are so many moving parts involving different agencies and regulators, and the instinct of regulators is to view their rules in isolation. But given the overlapping and concurrent actions of regulators, we need to be aware of these interactions.

• How will the new regime, which attempts in part to fundamentally alter the operation of our financial markets, affect the health of our capital markets, which ultimately serve to help our business raise capital and grow?
• How many companies that would have considered an IPO decided not do so? How many non-U.S. companies that would have listed in the U.S. determined not to do so?
• How many companies will have determined to organize or reorganize offshore and list on foreign exchanges?
• In a global economy where currency flows freely, will we lose our place of prominence as the largest capital market in the world?

Impact on Constituencies

So far, I have spoken in generalities about the impact of Dodd-Frank, so I want to turn now to some specifics, in terms of its impact on the key constituencies affected by the Act: regulators, major market participants, investors and the U.S. capital markets themselves.

Regulators

As a starting point, it is notable that Dodd-Frank, while highly prescriptive in some areas, also left much to the interpretation and discretion of regulatory agencies. As a result, regulators have their work cut out for them in terms of the sheer volume of work required to implement the Act.

The timetables that the Act sets forth are in many cases extremely aggressive; yet the markets will be poorly served by regulations that are timely but ill-considered. There is a real risk, in my view, that the existing timetables threaten the quality and effectiveness of the rules that we are considering and adopting right now.

Congress could not have intended such a result. This is partly a function of how the law was considered and passed. Unlike S-Ox, where the law was considered fairly comprehensively, Dodd-Frank is a compilation of different titles and provisions that were not considered holistically before the Act was finally passed.

As a result, there was not likely a considered view of the sheer amount of rules required within the one year time period, nor whether it would be important, desirable, or realistically achievable for regulators to produce so many rules in such a short period of time.

This is not a resource or funding issue. While there may be legitimate issues of funding for new authorities and responsibilities that the Commission has been tasked with under the new law, those resources would support core mission functions and would mostly go to our examination and enforcement programs, as the bulk of our funding does every year.

In the short term, hiring new people does not affect the existing capacity of the staff in the rule making divisions to produce rules, consider public comments and draft final regulations within such an abbreviated timetable.

And moreover, the fact remains, there are only 5 commissioners. So even with numerous rules coming up from the various divisions, they must all be considered and approved by the Commission. The real threat here is that we are not able to fully consider the rules we are adopting, and that the shortened public comment periods undermine their very function of supporting and strengthening the confidence we have in the likely effects of our rules. As part of this, the cost benefit analysis of our rules is also severely limited and potentially undermined.

As a legal certainty matter, this may make our rules more susceptible to challenge on APA grounds — a result that serves neither the interests of the Commission nor the interests of the investors and markets we serve. It is my hope that Congress considers these risks arising from the implementation of the law and, where appropriate, gives regulators additional time to scale its regulatory mandates.

Beyond the magnifying effect that the lack of specificity in the Act will have on the amount of work to be done by regulators, this lack of specificity leads to uncertainty for market participants, for investors, for our markets and, ultimately, for our economy.

In order to begin to add specificity to some of these broad mandates, regulators must not only adopt regulations mandated by the Act, but also make decisions about how to exercise newly granted authority. These grants of authority range from rather specific to the quite broad, but regulators have discretion in crafting how prescriptive or flexible the rules are.

For instance, at the SEC, we were given discretionary authority to adopt “proxy access” rules, as well as new authority, along with the CFTC, to regulate the over-the-counter (OTC) derivatives market, including mandatory trade reporting, mandatory registration of dealers and major participants, and, where possible, mandatory clearing and trading.

In response to our proxy access authority, we adopted a broad, highly prescriptive set of rules. In the OTC derivatives space, we have begun to propose new rules, some of which are more prescriptive than the statute requires.

As I have already mentioned, outside the context of the SEC, the Act established the FSOC and the CFPB. How the FSOC and the CFPB determine to use their new authority is only beginning to take shape, but they will clearly face significant decisions that will have dramatic effects on our financial system and our economy.

Moreover, while new legislative mandates and authority are understandably the primary focus of regulators in light of the scope of the Act and the timetables it sets, they cannot be the sole focus. Agencies had important agendas before Dodd-Frank was enacted.

For instance, at the SEC, we issued a Concept Release on the U.S. Proxy System on July 14, exactly one week before President Obama signed the Dodd-Frank Act into law. This release identified and discussed a host of issues in the proxy system that the market has struggled with for decades. I have highlighted my concern that reforms to our “proxy plumbing” must not fall to the wayside as we focus on the requirements of Dodd-Frank, and our Division of Corporation Finance continues to work on those issues; yet the SEC is no different from other agencies in that our human resources are limited, and no amount of funding can substitute for the expertise that experienced staff can bring to bear on a problem when given enough of that other scarce and vital commodity — time.

It is also vital that regulators, as well as market participants and investors, have realistic expectations about what can be achieved by these rules. There can be little doubt that, in light of the size and scope of the Act, there will be many bumps in the road in terms of anticipated benefits that are not realized and unintended consequences. Some of these shortcomings and unforeseen results will become apparent quickly while others may not be known or fully appreciated for a decade or more. As a result, both Congress and regulators will have to monitor market developments and be ready to respond by tweaking, rewriting, adding or scrapping provisions of the Act and individual rules.

Market Participants

For major market participants such as issuers, financial firms, private funds, brokers and investment advisers, the impact of Dodd-Frank will be reflected in the costs and burdens associated with compliance with the new law, significant changes in how firms operate, and the effects of the Act on capital-raising.

New compliance matters include, for example, registration for private funds and new disclosures and procedures required of issuers. For issuers, these include a number of “specialized disclosures” — Conflict Minerals, Mine Safety Disclosure and Disclosure of Payments by Resource Extraction — that, while noble in intent, depart from the traditional focus and purpose of financial disclosure in providing information material to investors’ analysis of their investment alternatives.

In addition, a major area under Dodd-Frank that requires not only significant new disclosures by issuers, but also mandates additional proxy procedures and imposes other substantive requirements, is executive compensation.

In particular:

• In October, we proposed rules to implement the Dodd-Frank requirement that issuers hold advisory votes on executive compensation, or “say-on-pay,” on stockholders’ preference for the frequency of such say-on-pay votes, and on “golden parachute” compensation arrangements;
• The Act requires that we direct the national securities exchanges to adopt listing standards setting forth independence and other requirements for compensation committees and their retention of compensation advisers, as well as disclosure and other substantive rules relating to compensation committees and compensation advisers;
• The Act requires that we adopt rules requiring public companies to disclose specified executive compensation information, including “pay for performance” information and the ratio of CEO pay to the average pay of the companies’ employees; and
• The Act requires that we mandate that the stock exchanges require listed companies to adopt compensation clawback policies that apply in the event of non-compliance with any financial reporting requirement.

Changes to operations include, for financial firms and brokers, restrictions on proprietary trading under the so-called “Volcker Rule,” as well as restrictions on short-sale and certain other transactions in asset-backed securities (ABS) when the firm acts as a sponsor of those securities.

The Act will also have a number of effects on the way that issuers — both corporations and issuers of ABS — raise capital. For corporate issuers of debt securities, we are required to revise or remove the shelf eligibility criteria conditioned upon the securities obtaining an investment grade credit rating.

For primarily smaller corporate issuers, capital formation will be affected by the new prohibition on felons and other “bad actors” from participating in raising capital under Regulation D, as well as by a smaller pool of accredited investors as a result of the removal of the value of an investor’s primary residence from the calculation of an investor’s net worth.

For sponsors of ABS, the market will be affected by a number of rules, including most prominently rules to be issued jointly by the SEC and other regulators relating to the obligation that issuers retain a portion of the risk in ABS transactions.

In addition, ABS issuers will be impacted by rules that we adopted this past week relating to disclosure of securitizers’ repurchase history, disclosure and analysis by NRSROs relating to the representations, warranties and enforcement mechanisms in an ABS offering, and rules relating to issuers’ review of assets underlying ABS.

In addition to the impact of the Act on market participants’ compliance, operations and ability to raise capital, participants will, of course, be affected by potential liability, both private and under enforcement actions brought by the Commission, for actual or alleged violations of these new provisions.

Relatedly, the Act established a whistleblower program that requires the Commission to pay an award to whistleblowers who provide the Commission with original information about a violation of the federal securities laws that leads to a successful enforcement action. Commenters have expressed serious concerns with the possible effects of this program on their own internal compliance programs, and the manner in which we implement this provision will have significant consequences on the ability of companies to police themselves.

Investors

For investors, one consequence that follows directly from some of the impacts on issuers is that they will receive significantly more information pursuant to new disclosures by corporate and ABS issuers, and will have a number of new rights established under the Act.

Whether Dodd-Frank is a net benefit to investors will depend on whether the added disclosures are properly focused and prove truly useful to investors. As annual reports and proxy statements become longer and longer, it is worth considering whether investors can be expected to absorb so much information and whether we have properly placed emphasis on the items that are likely to be the most significant for investors.

Most notably, while executive compensation disclosure is, of course, material to investors’ investment and voting decisions, I question whether policy makers have properly considered the relative importance of executive compensation disclosure compared to the importance of other vital information such as business strategies, risks, trends, competition and other matters.

In addition to greater disclosure, the Act and rules that we have adopted under the Act provide investors with broad new rights, including proxy access and say-on-pay and related votes. How investors use these rights may have significant implications for public companies and our capital markets. Many commentators have expressed the concern — a concern that I share — that these new rights and others will be used by some investors not primarily with a view to maximizing shareholder value, but as method to gain leverage in order to advance priorities unrelated to maximizing value for all shareholders.

In the ABS space, new required disclosure is intended to provide investors with significant new information that will allow them to assess the quality of an issuer’s due diligence relating to the assets underlying securities, to assess the quality of asset originators’ underwriting practices, and to understand the representations, warranties and enforcement mechanisms in a particular offering and how they compare to representations, warranties and enforcement mechanisms in similar offerings. In addition, the Commission has proposed other amendments to Regulation AB (outside the context of Dodd-Frank) that would, among other things, provide issuers with loan-level data about many ABS assets.

One significant objective of the Act in the securitization space was to attempt to prevent undue investor reliance on credit ratings — an objective with which I strongly agree — and a primary objective of new ABS disclosures is to give investors the tools they need to independently analyze offerings before making an investment decision.

Thus, with expanded disclosure comes the responsibility that investors conduct proper due diligence before investing.

Impact on Capital Markets

Ultimately, the impact of the Act on regulators, market participants and investors will combine to define the Act’s affect on our capital markets.

Capital Formation

We have already seen some of these effects. For example, the securitization market narrowly avoided a complete shutdown as a result of a Dodd-Frank provision that repealed Section 436(g) of the ’33 Act, which provided an exemption from “expert” liability for NRSROs.

This provision dramatically illustrates the approach to legislating that, I fear, characterizes many provisions that were ultimately included in the new law. As Congress sought to identify “villains” to blame and punish for the crisis, rating agencies were an easy target given their role in the crisis. The notion of holding them “accountable” by ensuring that they were liable for their credit opinions resonated well as a talking point.

The authors of this provision, however, failed to appreciate the likely systemic consequences of such expanded and uncertain exposure to liability: namely, that rating agencies would not consent to be named as experts in prospectuses and that, as a result, deals would not get done and the broader securitization market would shut down. Thus, when, not surprisingly, credit rating agencies refused to consent to “expert” liability, the Division of Corporation Finance was forced to issue a no-action letter that enabled transactions to proceed by permitting issuers of ABS to omit ratings disclosure from ABS prospectuses.

While Section 436(g) was a clear and tangible “unintended consequence” of the new law, most of the effects of the Act on our markets may not be known for several years.

In the absence of more 436(g)’s, one benchmark to look to is the IPO market, which can serve as a “canary in the mine” in judging the law’s effect.

Going public has historically been viewed as a significant and positive step in the lifecycle of a company. IPOs have been viewed as opportunities for companies to gain access to large pools of capital that will enable the company to grow in directions that may not otherwise have been possible. IPOs have also been viewed as enticing opportunities for investors to share in potentially outsized rewards associated with investing in young, dynamic, growing companies.

To the extent that a result of the new law’s requirements and the SEC’s rules is that the costs of being a public company are greater than the benefits, private companies will be at a competitive advantage compared to their public company rivals, and alternatives to going public will become relatively more attractive than undertaking an IPO. Thus, some companies that may have sought to expand through a capital infusion may choose not to expand. Many more companies would likely elect to raise capital through private placements instead of through a public offering.

Private markets are inherently less liquid than public markets, which can result in a “liquidity discount” in the price paid by investors for their securities. Moreover, because purchasers of privately placed securities do not benefit from liquid markets, the SEC’s disclosure regime and many of our investor protection provisions, these investments are generally only available to large, sophisticated investors. As a result, retail investors have far fewer opportunities to invest in earlier stage companies with significant growth opportunities, and instead are largely relegated to investing in more mature, lower-growth public companies.

Private placements are an essential element of our capital markets and are vital to our economy, and the SEC and other regulators should actively support and encourage a robust private market. Yet, if our regulations inadvertently drive IPO candidates into the private placement market, we should question whether we have the regulatory balance right. We should ask whether we are accomplishing our mission of protecting investors and promoting efficient capital markets if we make the public markets unattractive to companies looking to grow and to investors seeking investment opportunities.

International Competitiveness

Furthermore, increasingly, companies’ options for raising capital are not limited to public and private offerings in the United States, but may also include organizing and raising capital outside the United States. It remains unclear what the full impact of Dodd-Frank will be on our international competitiveness. To be sure, increasing costs of compliance, capital raising and liability provide incentives to avoid or minimize these added burdens. Once again, S-Ox is instructive as a point of comparison here.

Even though S-Ox was considered to be a purely domestic statute and was focused on issuers listed in the United States, the international implications of S-Ox were huge. Dodd-Frank, on the other hand, recognizes the global nature of the entities, activities and markets that it seeks to regulate domestically. This recognition reinforces the observation that significant changes to our legal and regulatory regime, by either strengthening or weakening our domestic markets, will correspondingly affect our international competiveness.

While Dodd-Frank was considered as part of a broader effort internationally to address the root causes of, and weaknesses exposed by, the financial crisis, there have, naturally, been differences in how jurisdictions have chosen to regulate their markets.

Thus, while cooperation and coordination at the international level has been viewed as vital to the success of certain reforms aimed at supporting global market financial stability , policy differences are already emerging that may put the U.S. at a competitive disadvantage. In particular, to the degree that Dodd-Frank has overreached in its response to the crisis and increased the overall burden and cost on our financial markets without minimizing or effectively addressing real problems identified in the crisis, our competitiveness may be unduly harmed.

Indeed, it remains to be seen whether Dodd-Frank will place the U.S. in a first mover advantage or disadvantage in our regulation of markets, like the OTC derivatives market. How the SEC and CFTC implement these new provisions will be particularly relevant to that outcome.

Lessons for regulators

Because of the lack of specificity of the Act, and the latitude afforded regulators in so many places to interpret and implement it, regulators’ greatest opportunity to have a significant effect on the markets and the economy — for good or for ill — is in how they exercise their authority under the new law. Particularly where regulators have broad discretionary authority, they should carefully consider whether each new regulation is truly necessary, and resist the temptation to view any rule that is not, by itself, onerous or burdensome as therefore "free."

At the SEC, for instance, we should ask, of each new or expanded disclosure, what the true value of that additional disclosure really is, rather than taking the view by default that it is "just one more disclosure.” Rules do not operate in a vacuum, and an accumulation of relatively small requirements can be as burdensome and costly as a significant new requirement. This is particularly true for small businesses, which have more limited human and financial resources to absorb the impact of these incremental regulations.

I noted with great interest President Obama's Executive Order on Thursday requiring that Executive Agencies review their existing regulations to ensure that their benefits justify their burdens. I was heartened by his comments on the impact of regulations on small businesses and his stated preference for disclosure over prescriptive rules where they may be effective. While I understand that the Order is voluntary and would not necessarily apply to independent agencies such as the SEC, I believe the Commission should reinforce its commitment to these principles, both retrospectively and prospectively.

Too much and Too Little

I have discussed at some length some of the shortcomings of the Act, in terms of many of the ways that I think the statute seeks to do too much. I believe the genesis of those shortcomings is found in the process that led to its adoption — in fact, the content of the final statute was largely driven by the process by which it was created, rather than by problems that were identified as bona fide causes or contributors to the financial crisis.

Many of the provisions in the Act, particularly the corporate governance provisions, have been on the agenda of various constituencies that have advocated for greater federalization of corporate law matters traditionally the province of the states since long before the crisis. Notably, the corporate governance provisions that were ultimately included in Dodd-Frank were but a subset of a host of agenda items, including mandating de-staggered boards, majority voting, and split Chairman and CEO roles, that were not included in the final legislation. I have little doubt that these items will resurface as advocates of a greater federal role in corporate governance move on to future battles.

In addition, I believe the Act was born from a view of the world as it existed prior to the crisis without accounting for market responses and changes in the behavior of market participants, regulators’ ability to address some issues under existing authority, and regulatory responses that were taken or already under consideration during and soon after the crisis.

As a result, there is a real risk of overcorrecting for perceived flaws in the financial system, and imposing costs and burdens on the market that may not lead to improvements in the market.

I have already discussed two areas in which I believe this may be the case — ABS and corporate governance. I would add to that list many of the new rating agency provisions. In addition, pursuant to the Act, we are in the process, together with the CFTC, of establishing a framework for the regulation of OTC derivatives from scratch.

As a former director of the Division of Corporation Finance, Allen Beller, said recently, the SEC and CFTC have been tasked in the OTC derivatives world with creating a market framework in one year that has taken more than 60 years of refinements in the equity markets to create. There is no doubt that enhanced transparency and resilience of this market is beneficial, but it is also essential that we get the rules right.

Most critically, we must let our developing experience and understanding of these markets inform the development of the regulatory regime. An overly prescriptive regulatory architecture designed with little understanding of these markets, and the products and participants in these markets, could have severely harmful effects on American competitiveness.

If addressed imprudently, we may end up with a highly prescriptive regulatory regime and no regulatees. Not only will our competitors in Asia and Europe be more than happy to have the business, and the jobs, we will make it more difficult and expensive for American companies that use derivatives to hedge their business, interest rate, credit, and currency risks.

I have noted that Dodd-Frank is also notable for what it failed to do -- in particular, leaving the GSEs, which played such a fundamental role in the financial crisis, untouched.

And although, as I mentioned, we are working closely with the CFTC to develop the regulatory framework for OTC derivatives, this area seems again to underscore the under-inclusiveness of the law.

Other than turf wars among the various committees in Congress, there is no good reason that the regulation of our financial markets should be divided between the SEC and the CFTC. It is still my hope that Congress will reconsider merging the agencies in the future.

Conclusion

The Dodd-Frank Act is a massive law, and implementation of the Act will require massive regulatory effort.

Notwithstanding this broad grant of authority, implementation requires that regulators exercise circumspection and humility. We must implement the Act with a healthy appreciation not only of the goals we seek to achieve, but also the consequences that we cannot foresee. Regulators should focus on areas where we know we can be effective — for instance, in establishing disclosure guidelines that will elicit information that will truly be decision-useful for investors.

The Act is also an imperfect law. It is vague in some areas, it sets forth timelines that are in some cases unrealistic, and in some areas the law is simply unworkable. Where necessary, regulators cannot hesitate to press Congress for changes.

Finally, regulators, Congress, market participants and investors must have a healthy appreciation of the limitations of the Act and of regulations generally. Markets are obviously extremely complicated and there is no magic, silver bullet that can fix the problems that led to the financial crisis. Yet neither investors, nor regulators, nor market participants, nor our financial markets are served by unrealistic expectations of the protections afforded by the Act. Nevertheless, it is my hope that, with thoughtful implementation of those provisions that can truly support our markets and the flexibility to change the law where necessary to avoid undue burdens, we can ultimately strengthen the U.S. capital markets and preserve our competitiveness.

http://www.sec.gov/news/speech/2011/spch012311klc.htm