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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Evolving to Meet the Needs of Investors
Address to Practising Law Institute’s SEC Speaks in 2011 Program


Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

Ronald Reagan International Trade Center
Washington, D.C.
February 4, 2011

Thank you. And thank you Rob.

Rob and Meredith have done an extraordinary job in their time at the Commission.

It’s a pleasure to be here at SEC Speaks.

Each year, this event gives me a chance to take stock of the previous year and reflect on what’s yet to come.

As you can imagine, last year was busy.

So much so, that I began to wonder whether we’d ever been busier.

And I started to think about what it must have been like in the 1930s, when the SEC was established.

Clearly, it was a tumultuous time. The shadow of the Great Depression hovered and the staff was still mastering the various provisions of the new federal securities acts of 1933 and 1934.

Recently, I came across a letter from William O. Douglas to Joseph Kennedy that was written 75 years ago this very day.

Douglas, who had just become a Commissioner at the SEC, was filling out the remainder of Kennedy’s term, and he sounded somewhat daunted by the task at hand. He wrote “I fear the shoes are much too large” to fill.

But, he said, I will try “all the time to live up to the high standard of performance” that Kennedy had set.

In less than a year’s time, Douglas became Chairman of the SEC and soon dubbed the agency “the investor’s advocate.”

The similarities between then and now can be overstated — but the standard of performance today is as high as it has ever been. And, the need for an investor advocate is just as great.

Investors, especially now, want to know that someone has their back. They want to know that someone is making sure companies are disclosing accurate numbers. That someone is policing Wall Street and pursuing fraud. And, that someone is making markets as fair as possible, even for those without their own supercomputers.

That’s what the SEC aims to do. That’s what it’s done for three quarters of a century. And, that’s what we’ll continue to do for years to come.

The fact is that without a strong agency to carry out that mission, Americans will not have the confidence to invest in our markets. And, when investors don’t have confidence — when investor dollars don’t flow freely — companies don’t get the capital they need, innovation slows down and jobs disappear.

At the SEC, everyone who comes to work each day knows this all too well. And that is why they are so committed to their work — whether it’s reviewing a corporate filing, analyzing market data, examining a broker-dealer, or pursuing an enforcement action.

This morning I know we are joined by many of the fine men and women who currently grace the halls of the SEC.

And so I ask all of you who work at the SEC to please stand and be acknowledged.

These are people who make the difference in the lives of investors.

And we are just as determined as William O. Douglas to live up to “the highest standards of performance.”

I have seen it first-hand.

In my first year as Chairman, I saw the staff embrace the call for reform, welcome new leadership across the agency, adopt a new culture of collaboration, and suggest innovative ways to improve our systems and streamline our procedures.

And, over the past year, I saw true public servants continue to perform under significant pressure and under an intense spotlight.

I’ve seen them roll up their sleeves to figure out what caused the market disruption of May 6th. I’ve seen them bring some of the most complicated enforcement actions and reach record settlements. And, I’ve seen them work long hours to fulfill their new responsibilities for derivatives, hedge funds and credit rating agencies.

While every agency evolves to meet the demands of the day, the evolution of the SEC has been rather rapid in the past two years and continues today.

Enforcing the Law

In 2010, we saw a restructured Enforcement Division that did not shy away from the complex, difficult cases. And, we saw the new specialized units begin to take hold.

When I spoke here last year, I said the pipeline is full, with cases growing out of the financial crisis. And, since then, many of those cases have emerged.

Over the past year, the Commission brought actions against Citigroup, Morgan Keegan, Goldman Sachs, State Street, and ICP Asset Management.

We filed our first case against a state, involving municipal securities — and continued to unravel the strands of one of the largest insider trading probes.

We brought accounting cases against Dell and Diebold, to name just two.

And, most recently, we brought a significant case in which a proprietary trading desk at Merrill Lynch inappropriately used confidential customer information to make trades for the firm’s benefit.

Last year, we also introduced new cooperation tools, similar to those used by criminal authorities. And, in December, we used one of these tools for the first time when we charged a former corporate executive, but not the company, which cooperated extensively with our investigation.

And, while we know that statistics alone are not a comprehensive indicator of success, the fact is that court ordered disgorgements were up 20% and the amount of penalties tripled over last year.

While I can never promise a particular case will be brought, I know that our pipeline of significant cases remains full.

Handling Tips and Complaints

In the past year, the staff also made good on a promise to create a centralized database for the massive number of tips and complaints we receive. Now, a tip received in our Los Angeles office can be viewed by an examiner in Philly.

But that was just the first phase. In a matter of weeks, we’ll have updated our system further, so that investigators will be better able to search the database and analyze the information. And, resources-permitting, we’ll then add analytics to the mix so that we will be better able to link data and detect trends.

Restructuring OCIE

2010 also saw the reorganization of our examination program.

Under its new leadership, the exam program is now more sharply focused on identifying the higher risk firms that it targets for examination.

And, to help bolster its ranks, it brought on board specialists in risk management, trading and complex structured products.

Now, rather than sending in pre-set teams to examine a firm, the exam unit assembles the individual specialists — with the right skill-sets for the firm they’re examining or the issue they’re focusing on.

In addition, the new leadership team set out to build a national exam program — that provides greater consistency and efficiencies across our 11 regions.

That hasn’t always been the case, yet all of this is important in our effort to evaluate risks, inform policy and identify potential wrongdoing. In fact, last month alone, the Enforcement Division brought three significant cases stemming directly from exams.

And, going forward, the National Exam Program will continue to conduct sweeps in critical areas from trading practices to market manipulation to structured products.

Improving our Market Structure

Of course, no discussion of 2010 would be complete without a mention of May 6th — the day our markets dropped more than 500 points in a matter of seconds only to bounce back minutes later.

That event reinforced the importance of our ongoing review of the structure of our markets — a review we had actually launched months earlier, with a January issuance of our market structure concept release.

Clearly, today’s market structure offers advantages over the market that existed when I first served as a Commissioner in 1988. Spreads are narrower and markets are — for the most part — more liquid and transparent.

But there are drawbacks, as well. High-speed, algorithm-driven electronic trading increases the risk of sudden liquidity loss and damaging volatility. The continuing growth of trading in dark pools and other types of dark venues threatens to undermine the market’s price-discovery function. Some participants may have information advantages. And the complexity of the market structure sometimes makes it difficult for even sophisticated investors to pursue their own best interests.

The challenge is to preserve the benefits of the current structure while minimizing the drawbacks.

In the immediate aftermath of May 6, the SEC worked with FINRA and the exchanges to develop rules that:

  • Trigger circuit breakers for certain individual stocks.
  • Clarify up front how and when erroneous trades would be broken.
  • Effectively prohibit “stub quotes” in the U.S. equity markets.

We proposed the creation of a large trader reporting system that would enhance our ability to identify large market participants, collect information on their trades, and analyze their trading activity. And we proposed a new rule that would require the creation of a consolidated audit trail that would enable regulators to track information about trading orders received and executed across the securities markets. And we have adopted a rule that effectively prohibits broker-dealers from providing unfiltered access to exchanges.

These are substantive rules and proposals that will diminish the risk of damaging events and do much to keep the playing field level for all investors.

But, as we analyze responses to our concept release — with the events of May 6th in mind — there are further actions to be considered.

We are looking beyond the current circuit breaker system and considering progressing to limit-up/limit-down style trading parameters. Under such an approach, trades would have to be executed within a range tied to recent prices for the security. In order to accommodate fundamental price moves, the market would pause if no trades naturally occur within those parameters for a preset period of time.

We are examining trading or other obligations that might be required of today’s de facto market makers: the high-frequency traders which account for over 50 percent of daily trading volume and supply much of the market’s liquidity. We are asking if these firms should be subject to an appropriate regulatory structure, including with respect to their quoting and trading activities.

Given the potential for trading algorithms to cause severe trading disruptions and shake investor confidence, we also are considering whether they should be subject to appropriate rules and controls.

And, because of the fragmentation and complexity of our equity markets, we are examining rules that would enhance transparency of trading venue practices and the practices of broker-dealers acting as agents for investors.

All of these issues are complex and interrelated. But the equity markets are too important to the economic success of our nation to shy away from doing what is needed to ensure that they operate as efficiently and fairly as possible.

Engaging in an Active Rulemaking Agenda

Of course, the rulemaking front last year ranged well beyond market structure issues — and the calendar was quite packed, even before passage of the Dodd-Frank Act.

The list is way too lengthy to recite, but there are a few rules that underscore our focus and direction:

  • First, because of our intense interest in the municipal securities market — we adopted rules that provide market participants with more meaningful and timely information regarding the health of municipal securities. In addition, we adopted rules to curtail pay-to-play practices by investment advisers seeking to manage public pensions.
  • Second, because we believe dialogue between investors and corporate boards improves accountability — we adopted rules to facilitate the nomination of directors by shareholders. We also revised the e-proxy rules so that additional materials could be provided with the company’s notice. And, we issued a concept release on the process through which proxies are distributed and votes are tabulated.
  • And third, because we believe that investors deserve clear and accurate information from their advisers, we adopted rules requiring advisers to provide clients with brochures that plainly disclose their business practices, fees, conflicts of interests and disciplinary information. As I pledged last year, we also proposed rules to create a more equitable framework for mutual fund marketing fees, known as 12b-1 fees. And we proposed rules to help clarify the meaning of a date in a target date fund’s name, as well as enhance information in fund advertising and marketing materials.

Additionally, just this week, because of our actions, investors for the first time were able to access detailed information that money market funds file with the Commission — including their “shadow NAV” or net asset value.

While the Commission uses this information in its real-time oversight of money market funds, we believe that public disclosure can provide investors and market analysts with useful insight for their evaluation of funds.

Going forward, we will be working with our regulatory colleagues to assess the various options for making sure these funds are as safe and structurally sound as investors are led to believe.

Along Comes the Dodd-Frank Wall Street Reform and Consumer Protection Act

But if you thought the rulemaking was busy before Dodd-Frank, since then we’ve been in overdrive.

In connection with Dodd-Frank, we’ve proposed 24 rules, adopted six final and two interim rules, and approved two proposals from the self-regulatory organizations. That’s not to mention the reports we’ve submitted to Congress, the host of roundtables we’ve held and the thousands of public comments we’ve reviewed.

With the passage of Dodd-Frank, we took on greater responsibility in a number of areas, setting out to create the contours of a new whistleblower program, to facilitate the registration of hedge fund advisers, and to establish an entirely new regulatory framework around the over-the-counter derivatives market.

In the year ahead:

  • We’ll continue working with the CFTC to shape the regulatory regime for OTC derivatives — defining terms, developing requirements for new trading and clearing platforms, crafting reporting regulations, carving out end-user exemptions and undertaking dozens of other tasks.
  • We’ll propose, along with the banking regulators, risk-retention — or “skin in the game” — requirements for asset backed securities transactions. And, we’ll see ABS issuers, for the first time, prepare to perform reviews — required by Dodd-Frank — of the bundled assets as well as to disclose the nature, findings and conclusions of these reviews. Of course, we’ll also work to sync up our earlier ABS proposed rules with those adopted under Dodd-Frank.
  • We will begin to consider rules stemming from our recent study recommending that financial professionals who provide personalized investment advice about securities adhere to a fiduciary standard of conduct “no less stringent” than that imposed on investment advisers.
  • And, in the months ahead, we’ll also be finalizing rules that will allow us to leverage the resources of whistleblowers. After all, these individuals are closest to fraud and can be an invaluable source of information for our enforcement and inspection efforts. This is particularly important because we can’t be everywhere at all times given our limited resources.

Of course, it is important that our new program co-exist with the important role internal compliance programs play in ferreting out fraud, but our rules should send a clear message to whistleblowers that they too play a critical role in protecting investors. Indeed, I believe that once the Commission clarifies the contours of this program, we will see an even greater influx of helpful whistleblower tips than we have already witnessed.

Facing a Budget Shortfall

All of these tasks — all of these confidence-enhancing measures — require resources.

But, unfortunately, we’ve been operating under a continuing resolution that has hampered our ability to do what investors and capital markets deserve.

It is a strain that is already having an impact on our core mission — separate and apart from the new responsibilities that Congress gave us to regulate derivatives, hedge fund advisers and credit rating agencies. It is a strain that will intensify the longer the budget remains at existing levels.

To fully appreciate the impact, one only needs to consider:

  • That during the past decade, trading volume has more than doubled, the number of investment advisers grew by 50 percent and the funds they manage have increased to $38 trillion.
  • That our workforce had already been cut in the years preceding the financial crisis — and had only just been getting back to pre-crisis levels.
  • That a number of the financial firms we regulate spend many times more each year on their technology budgets alone than what we spend on our total operating costs.

And, while we appreciate the need to find inefficiencies and leverage resources — which we have been doing and will continue to do — we also note that last year alone we sent the U.S. treasury nearly $300 million more in collected transaction fees than we spent. And, we will continue to pay our own way in future years.

Furthermore, in the past year, we returned more than $2 billion to harmed investors — twice our annual budget.

So we need to ask ourselves if we want our market analysts to continue to use decades-old technology to recreate market events or to monitor trading that occurs at the speed of light.

We need to ask ourselves if we want our chief securities regulator to have to pull the plug on data management systems and on a digital forensics lab needed to recreate the data that sophisticated fraudsters leave on hard drives and iPhones.

We need to ask ourselves if we want to turn away the influx of market and economic experts willing to complement our existing talent and join our ranks.

These are the questions we’re confronting even as we implement our new responsibilities for hedge funds, derivatives and credit rating agencies.


No single aspect of our immense and diverse economy is in itself sufficient to drive an economic recovery.

But I believe a particularly critical component is our flourishing equities markets which supply the capital companies need to innovate, grow and create jobs.

That only happens, though, if the markets are fair and investors have confidence in those markets.

While there is much to do, I am proud of the progress we have made at the agency, proud of the way we are evolving to meet the needs of investors, and proud of our accomplishments. We will continue to bring significant enforcement actions, continue to step up our exam program, continue to take steps to ensure a fair market structure and continue to embrace our new responsibilities.

And, we will continue to strive to live up to the standards first set by those pioneers 75 years ago who laid the groundwork for an agency whose primary role is to protect investors.

We owe it to investors, we owe it to our capital markets and we owe it to our economy.

Thank you.

February 4, 1936.

Joseph P. Kennedy, Esq.,
30 Rockefeller Plaza, New York, New York.

Dear Joe:

It was very kind of you to write me your extremely generous letter of January 28th and to send your felicitations on my appointment to the Securities and Exchange Commission.

There is one nice thing about the whole matter which transcends all others in importance, and that is the appointment was for the balance of the term of one Joseph P. Kennedy. You set such a high standard of performance down here that I realize there is tough sledding ahead for me. I fear the shoes are much too large. All I can say is that I will be in there trying all the time to live up to the high standard of performance set by you.

It is always gratifying to me to think that you are not completely out of the picture. It was most reassuring to know of your continuing interest.

I hope you will forgive me if you find me leaning on you heavily in the months that lie ahead. You see, I have suspected for some weeks that you were the one responsible for my appointment.

I hope when you are in Washington next that we can get together. The housing problem is terrific but whether it is a tent or a castle, you are invited.

Yours faithfully,

William O. Douglas,



Modified: 01/25/2011