Today is the last day of the chairmanship of Mary Schapiro at the SEC. As investor advocates, let’s look ahead at major issues for the SEC in 2013. It’ll be a busy year. There are at least five large-scale reforms under way, all with a bearing on the safety of equity investments.
Mary Schapiro took the reigns of the agency in the immediate wake of the Madoff scandal and the 2008 financial crisis. She’ll be replaced on an interim basis by Commissioner Elisse Walter. This change in leadership also means a two-to-two partisan split between the remaining commission members, a wider staff change among heads of divisions and lower levels of officials, and waiting for President Obama’s candidate for Schapiro’s permanent replacement, who must be confirmed by the Senate. It may be months before the agency’s cast of characters is settled.
There’s significant catching up to do. In Schapiro’s own view, in an exit interview with NPR today, her “major disappointment” was the failure to reform money market funds, which continue to be popularly regarded as “equivalent to a bank account”, but which remain vulnerable to a run, as shown in 2008. “We did not have three votes on the commission in August to go forward with a plan that had a couple of different options in it. One was to require money market funds to have a small capital buffer, the way banks have a capital buffer, to absorb losses. The other was to have them float their share value to reflect the underlying investments…. Money market funds are a source of systemic risk, unless we go forward with either capital or a floating share price.”
The agency still needs to complete the implementation of its 95 financial market reform rules called for by the Dodd-Frank Act. As of early December, 32 of those 95 have been finalized. Some consumer advocates (Barbara Roper of the Consumer Federation of America, among others) question the true bite of the 32 rules already finalized. At the same time, in January the chairmanship of the House Financial Services Committee goes over to a Texas Republican who has called for the repeal of the entire Act. As the New York Times pointed out on Monday lobbying and legal challenges against Dodd-Frank have been frequent, heavy and well-funded. That, you can be sure, will continue.
Crowdfunding advocates continue to impatiently press the SEC to hurry up with the rulemaking that would regulate the advertisement and sale of equity securities online. “Funding portals” as authorized under the JOBS Act signed in April remain illegal until regulation is complete. The most optimistic projection for having rules in place is summer of 2013. In the meantime, a small army of start-ups claim to have found legal crowdfunding business models using debt funding, donations, or state-level regulatory workarounds. And the state regulators in NASAA have told us to prepare for an explosion of fraudulent offerings and a long line of burned investors next summer, even with the new rules in place. Our guidance here is simple. Do not invest online.
Since the “flash crash” of 2010, and more recently since the spectacular $440M self-destruction of Knight Capital in August of this year blamed on a technology error, high-frequency trading continues to loom as an issue crying out for regulation. Or, better said, multiple issues: issues of fair market access for smaller investors, issues of the systematic high-speed version of the ancient front running tactic now deemed “flash trading”, issues of market volatility, and issues of vulnerability to computer error posing a systemic risk to the entire market.
And then there’s the CAT. This month the SEC will be asked to approve an eight-month delay for the implementation of its massive Consolidated Audit Trail system. FINRA, along with the operators of the markets to be monitored by CAT (13 equity exchanges, 10 options markets, and more than 200 broker-dealers), will ask to move the deadline from April 2013 out to next December. CAT will provide regulators new tools for targeted surveillance and broad analysis of market activity. A cradle-to-grave audit trail for each stock transaction has, surprisingly, never been done before. Its price tag is around $4B.
We believe Mary Schapiro has done an admirable job in an underfunded and politically controversial agency. We also believe that SEC rules are absolutely necessary but cannot, by themselves, prevent you from being victimized by unscrupulous brokers and advisors.