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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Remarks before the Society of American Business Editors and Writers


Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

Dallas, Texas
April 8, 2011

Thank you. There is no doubt that these are critical times in America’s economic history. As a nation, we are working to emerge from a major financial crisis, speed economic growth, and create desperately needed new jobs.

And, at the same time, we are discussing and debating the proper way to implement a broad array of financial reforms in ways that strengthen our economic system.

But, too often, in our discussion about financial reform, advocates have taken extreme positions – that all regulation is intrinsically bad, or inherently good. This happens even though we all know that reality is far more nuanced.

And while we can debate theory endlessly, it is clear that the efforts to implement pending reforms will only yield a regulatory structure that supports growth and job creation, if they are anchored by an understanding that fairly and effectively regulated financial markets are a necessary component of a growing economy.

We have seen over the years what happens when financial markets are poorly regulated – they are prone to crashes, runs, manipulation and fraud. Investors are left unprotected, market structures become unstable and businesses are poorly served.

This happens over and over again. And yet, despite these lessons, even basic, commonsense regulations are too often bitterly contested affairs.

Admittedly, individual regulations can be ill- or well-conceived, effective or ineffective. They impact market participants in different ways; costs and benefits can be hard to measure; and balancing competing interests is a delicate task. And, naturally, those who fear their profits will suffer may decide to fight even the most meaningful reform.

But the idea that regulation is per se counterproductive, the idea that it is always a net negative, stands reality on its head. Fair rules of the road and effective oversight and enforcement support a system that protects providers and consumers of capital alike, brings stability to a complex marketplace, and undergirds robust economic growth. Indeed, businesses set up shop in the U.S. and will continue to do so, because of the rule of law by which we operate, not in spite of it.

Of course, we regulators must always appreciate that regulation has costs. But, as we have seen, inadequate and ineffective regulation has costs as well – sometimes costs that are far greater than any rule or series of rules could ever impose on the American economy.

And so I’d like to move beyond the question of whether regulation is necessary, and do what we can to make it most effective. Today, I want to address how we are approaching this at the SEC, where I believe we have put in place a strong foundation that will support the most effective regulatory regime possible – a regime that will encourage the economic growth we need.

That foundation is built on:

  • Principles: effective financial regulation comes from core principles – it’s not regulation for its own sake, but regulation that reinforces traits that help markets function fairly and efficiently.
  • Process: a process that that maximizes input from all sectors of the market and encourages productive debate. 
  • Operations: even the best regulations require effective oversight, examinations and enforcement. After all, if you don’t enforce a rule do you really have one? 


Let me begin with a few core principles. We understand that markets function better when certain principles are embedded in our regulatory approach.

For example, we believe that markets should be transparent – people allocate capital more efficiently and make better decisions when they have the information they need. Neither fraud nor larger, systemically risky activity, should find a haven in opacity.

We know that market rules should be fair, offering investors and businesses of all sizes the opportunities to participate on a level playing field, with full and fair disclosure, and with an understanding that those who violate the law will be held to account.

And, perhaps as a corollary, we believe that markets should be structurally sound – that risk should be confined as much as possible to the financial risk that comes with any investment, rather than arising from structural deficiencies of the marketplace or its technology.

You can see these principles at work across our agency, in the work we do and the rules we write.


Transparency is a fundamental principal of effective financial regulation and a guiding principle as we create a new regulatory framework for derivatives.

In 2000, over-the-counter derivatives were excluded from regulatory oversight by the Commodity Futures Modernization Act. Partly as a result, regulators did not have the tools needed to address problems with these financial products when the crisis hit seven years later.

We are working to change that. We believe that the transparency and other benefits of more formally defined trading, reporting and clearing regimes for derivatives will diminish the chance of another systemically challenging event.

We are aware that creating a new regulatory structure virtually from the ground up, can have unintended consequences. And we are committed to taking the time and gathering the insights needed to get it right. But we believe that by moving derivatives trading to more transparent platforms and well-regulated clearing regimes, we will reduce risks in the system and regulators will get a better picture of the interrelated positions which, in times of stress, can help a crisis spread in unexpected ways.

And, in addition to the broader use of central counterparty clearing agencies, transparency itself may help reduce counterparty-specific risk by allowing many more participants to get a clear understanding of the overall market. This will, in turn, allow the discipline of the marketplace itself to be exercised more effectively.


Fairness is another key component of quality rulemaking. And again, we can see its effect in our derivatives efforts, where we are structuring our rules to diminish the chance that less sophisticated investors – including municipalities and small pension funds – will find themselves losing millions of dollars on trades that they may not have entered into if they had fully understood the product.

For example, we are developing new business conduct standards for derivatives intermediaries. These standards should help improve sales practices in derivatives markets and bring counterparties critical information through enhanced disclosures.  These standards will also provide additional, heightened protections for special entities such as pension plans, governmental entities and endowments.

This commitment to fairness and transparency well predates Dodd-Frank, and goes to the core of our mission. Investors, especially retail investors, need to know that they are playing on a level field.

Last year, for example, we adopted rules curbing “pay-to-play” practices, where investment advisers make campaign contributions in hopes of influencing decisions regarding the management of public sector monies, like pension funds.

And, we updated Form ADV, the basic disclosure document that investors use to determine their adviser’s strategies, conflicts, compensation and disciplinary history. The new form abandons the 1970s-style check-the-box approach for a plain English narrative that is easily accessible on-line.

And most recently, in January, the SEC staff released a report that examined the differing standards of conduct offered to investors by investment advisers and broker-dealers. The report noted that few investors are aware of or understand the difference between the fiduciary standard required of investment advisers and the less strict “suitability” standard observed by broker-dealers.

As I have long advocated, the report recommended the establishment of a uniform fiduciary standard of conduct for all financial professionals when they provide personalized investment advice about securities to retail investors. I believe that investment professionals’ first duty must be to their clients, and I look forward to beginning work soon to codify the report’s recommendations.

Structural Reliability

A third principle guiding our actions is that markets must be structurally sound. The structure of today’s markets – in part because of past SEC actions – offers high liquidity, low spreads and innovative investment options. But, there is much room for improvement.

As we saw last May, the technology and strategies that have brought these advantages have also brought potential hazards, including the risk of sudden liquidity loss and resulting dramatic price volatility.

When the events of May 6 occurred, the SEC had already begun a thorough examination of equity market structure, and we were positioned to respond rapidly.

The SEC worked quickly with the exchanges and FINRA to develop a series of rules that:

  • Trigger circuit breakers for certain individual stocks that experience a rapid increase or decline.
  • Clarify how and when erroneous trades will be cancelled.
  • Effectively prohibit “stub quotes” – the phenomenon that results in stocks trading at pennies in the U.S. equity markets.

Just last month, an SEC/CFTC Joint Advisory Committee lauded the actions already taken and suggested additional steps we might consider.

One of these recommendations was the adoption of a limit up/limit down regime for stocks experiencing rapid price movement – a measure that we had already begun to explore and one that the exchanges and FINRA proposed earlier this week. In a limit up/limit down world, the possibility of a significantly mispriced trade being executed is eliminated, as this mechanism prevents trades in listed equity securities from occurring outside of a specified moving price band.

Further, we are working with our CFTC colleagues on an initiative to update market-wide circuit breakers – which have only been triggered on one day in the past 20 years.

Another area of interest is the risk presented by systems and technology that may break down when volume surges, or which may be vulnerable to intrusion from outside. One option is to turn existing policy statements into formal regulations that require market participants’ automated systems to meet minimum standards for capacity, resiliency, and security.

An additional goal would be to reinforce the current expectation that markets report systems changes, malfunctions and intrusions to the SEC and publicly disclose material problems. We owe the public – who entrusts these markets with their capital – nothing less.

In a complex marketplace, regulation will at times be complex as well. However, by staying true to fundamental principles like fairness, transparency and reliability, we can ground our rulemakings on characteristics that make markets functions more effectively for all investors, while adopting clear rules so everyone knows what is permissible and what is not.


The staff at the SEC is extraordinarily talented and dedicated. And the caliber is ever-increasing. But we know that even the most talented people benefit from considering the ideas and opinions of others, especially when outside ideas challenge internal assumptions. That’s where process comes into play.

At the SEC, we put a great deal of emphasis on a process that brings together staff from many different backgrounds; that invites stakeholders with differing viewpoints to be a part of the rulemaking discussion; and that is often informed by Congressional debate.

And every now and then a journalist raises a point that we haven’t considered, as well.

In response to the passage of the Dodd-Frank Act, we launched a particularly expansive information-gathering effort. The SEC established a series of e-mail boxes on our website, allowing interested parties to comment on provisions of the Act even before formal rulemaking had begun or the official comment periods had opened.

I encouraged senior staff to honor requests for face-to-face meetings as often as possible. We held public roundtables on key components of the Act. And I gave directions that – in cases where a particular viewpoint had not been well-represented in comments or in meetings -- these viewpoints be sought out, so that Dodd-Frank implementing rules could be considered from every angle.

The process works. To return to derivatives for a moment, input from investors helped inform our approach to trading procedures at security-based swap execution facilities that will host a substantial amount of derivatives trading. We expect that the regulations we are considering will enable investors to trade in a manner that best serves their needs. Our approach to these types of regulations has not been to be inflexible in our proposals, but instead to be open to alternative approaches suggested by stakeholders or the markets themselves, yet adhering to the mandates of the law.

And when Dodd-Frank required us to write disclosure rules for companies that utilize “conflict minerals” – minerals whose extraction and sale have underwritten brutal wars in the Democratic Republic of the Congo -- I began a series of meetings with an extraordinary variety of organizations.

In the past few weeks, I met with representatives of humanitarian organizations like the National Conference of Catholic Bishops and the Enough Project, which works against genocide and crimes against humanity. I also met with representatives of the affected industries, including executives from Apple, Hewlett-Packard and Motorola Solutions. The result, I believe, will be final rules that reflect both business and humanitarian concerns.

Quality rules can’t evolve in a Washington bubble. We understand the impact our actions can have on the financial markets, on companies large and small, and on individual lives. This understanding drives us to hear a wide range of opinions, and consider every view as we move forward to carry our mission and – in the case of Dodd-Frank – our Congressional mandate.


But, we recognize that clear principles and an open process are not enough. They have to be supported by good baseline operations that transform goals into reality and that earn the respect of the public and regulated entities. In short, we have to deliver after the rules are written,

In many ways, this imperative is rooted in the traditional oversight and enforcement actions that keep markets fair and ensure the integrity and real transparency of financial transactions. Work that ensures that brokerage statements reflect real sums and transactions, that 10(k)s are informative and accurate, and that traders with inside information aren’t dumping shares on unsuspecting buyers.

With an entirely new leadership team, we have placed a priority on making the SEC a more agile and robust regulator.

Enforcing the Law:

With this in mind, one of my top priorities has been creating an Enforcement Division that can handle large and complex cases. The newly-restructured division has streamlined its operations, put managers back on the front lines, and created five specialized units focused on troubling conduct in some of the more challenging areas of our markets, like structured products and the Foreign Corrupt Practices Act. These five units also have developed risk analytic initiatives to probe into large-scale aberrational trading, outlier hedge performance, conflicted product structuring and mutual fund fee arrangements, to name a few.

It’s a division that does not shy away from the complex, difficult cases.

In the past 14 months, for instance, we brought actions against significant players in the financial crisis, including Citigroup, Morgan Keegan, Goldman Sachs, State Street, Wachovia and ICP Asset Management. And, to date, we have brought significant cases against 26 CEOs, CFOs and other senior officers, when the law and the evidence supported such actions.

We also filed our first case against a state, involving municipal securities. And we continued to weave together the strands of one of the largest insider trading probes ever launched.

Additionally, we are acting on a number of fronts to get information from the men and women who are eyewitnesses to fraud and manipulation.

Last year, for example, we introduced cooperation tools, similar to those used by criminal authorities to encourage cooperation. We opened that toolbox in December entering into a non-prosecution agreement with a children’s clothing marketer, in exchange for its cooperation as we built a case against one of its former senior executives.

Since returning to the agency, I have recognized that the SEC cannot be everywhere. So I have sought to leverage third parties where we can. That is why I advocated a broad whistleblower program. The new program that we have established – and that is mandated by the Dodd-Frank Act – creates a communications channel for individuals who are often closest to fraud and who can be an invaluable source of information to our enforcement and inspection efforts.  

Of course, it is important that our new program co-exist with registrants’ internal compliance regimes. But the rules we have proposed send a clear message to whistleblowers that they play a critical role in protecting investors and that their efforts will be rewarded.

Restructuring OCIE

2010 also saw the reorganization of our examination program – a cornerstone of our investor protection efforts. Examinations not only uncover securities law violations, they foster a culture of compliance and effective risk management in registered financial firms.

Under its new leadership, the exam program is devoting more of their scarce resources to identifying high-risk firms whose practices or circumstances make it more likely that investors’ funds are vulnerable.

To help bolster its ranks, we have brought on board specialists in risk management, hedge funds and complex structured products. Some of these specialists have been deployed to our new Risk Analysis and Surveillance Unit, which analyzes a variety of public and agency data sources to strategically assess risk and determine which registrants’ risk profiles demand attention.

And, rather than keeping teams together for examination after examination, regardless of the circumstances, we now assemble a firm-specific team for each separate examination, one possessing a variety of skill sets appropriate for the particular challenges the firm offers.

In the end, our day-to-day operations across the agency are where good ideas become effective regulation, and we are committed to continuing the across-the-board improvements we have seen over the last two years.


While all of these core components of effective regulation are important, so too is the funding that allows us to put them into practice. But, sometimes, as we work to excel in our day-to-day operations, budget concerns prevent us from taking needed steps. Our budget can vary widely based on considerations outside our control.

Congress sets our budget and determines if we have the resources we need to examine investment firms as often as they should be examined; to bring actions with the legal firepower and professional and technical support our attorneys need; to track down leads from would-be whistleblowers and correlate information that comes in to every part of the SEC; and to assume the new duties that the Dodd-Frank Act assigns.

Last year, the SEC returned $2.2 billion to wronged investors – two dollars for every dollar in our budget. We collected almost $1.5 billion in fees, against an appropriation of $1.1 billion. That’s along with hundreds of millions of dollars in assessed penalties. And starting next year, fees not tax dollars, will cover our budget, making us deficit neutral.

Yet tomorrow, unlike almost every other financial regulator, we may be shut down.

Insufficient funding for the SEC means fewer cops on the beat, even though fraudsters show no sign of backing off. It means we cannot hire the qualified experts eager to help us keep pace with the ever-evolving financial markets. It means cancelling IT initiatives that would help us analyze market data faster and financial information more cost-effectively. It means bringing cases to trial without expert witnesses or the information our digital forensics lab could have discovered on laptops or iPhones.

Insufficient funding for the SEC means an investor protection effort hobbled at a time when the events of the last decade have proved that effective enforcement of the securities laws is more important than ever.

We are dedicated to being the most effective SEC ever. We’ve acknowledged past mistakes, we have changed structure and culture, and we are winning back the respect of market participants and observers. But we cannot do our jobs as well as American investors need and deserve, if we cannot hire the people, build the systems and make the changes necessary to protect our markets and support job creation.


There are days when I read the financial news and I feel that I must have been transported back to 1928. Far too often, the financial regulatory debate seems to ignore eight decades of financial history.

We now know that a functioning and effective financial system demands an effective and committed referee.

We must be that referee.

We don’t have all the answers. But we do have a commitment to principles, rooted in investor protection and long-term stability that ground our regulatory efforts in practical considerations and broadly beneficial ideas. We have a process that ensures thoughtful scrutiny from all sides when a concept is discussed or a rule proposed. We have dramatically improved operations and we have an expert staff delivering on the commitments our regulations make.

And I believe that a fully-funded SEC will have an opportunity to help America continue to grow and prosper, as we protect investors, promote the stability of the markets, and promote the capital formation that a growing economy requires.

I hope that, as the SEC debates serious issues of regulation and growth, that we will be joined in this debate by involved market participants and informed commentators eager to leave the simplistic divisions of the past behind, and help find a path toward a more prosperous future.


Modified: 04/08/2011