SEC’s Aguilar Sees Need for Stronger Agency

Securities and Exchange Commission Commissioner Luis A. Aguilar offered "New Year's Resolutions for 2011 and…my wishes for the SEC," at the SEC Speaks event in Washington on Feb. 4.

In setting the stage, Aguilar (left) mentioned what he'd said at this event last year, which gives a glimpse into what is driving and the SEC's mission and financial reforms: "In 2010, I pointed out what has been one of the most stark truths of recent years, deregulated markets actually misallocated our country's capital and other scarce resources, resulting in trillions in mispriced assets, devastated the savings of American families and resulted in painful levels of unemployment that persists to this day."

Aguilar has four "wishes for 2011:"

"Regulators Must Have Raw Data." Real-time market data, that is, in order to oversee markets that trade at the speed of light, which can result in incidents like the "Flash Crash" last May 6, when the market plunged and recovered in a matter of seconds. If the marker-trading entities have real-time market data, and they do, why shouldn't the SEC?

"The Enforcement Division Must Bring Cases With Obvious Deterrent Effect." I envision a world where our remedies are calibrated to be meaningful, not merely routine—and where federal judges can clearly see that the SEC understands its mission and seeks to protect investors and deter wrongdoers by obtaining appropriate sanctions and meaningful deterrence."

"Recognize that Underfunding the SEC is Creating Harm Right Now." Aguilar seeks "a stable source of resources," he said, to "the chronic funding problems facing the SEC."

The funding "situation is causing real harm with a devastating impact that could be avoided," Aguilar noted. In fact, he added, "the Commission has had to identify several actions required under Dodd-Frank that it cannot implement due to budget uncertainty."

He also said he agrees with the new Chairman of the Senate Banking Committee, Sen. Tim Johnson (D-SD), that "a lack of resources ultimately leaves investors more vulnerable."

"Let's Not Break Things That Are Working." Aguilar cautions about how rules to close gaps in investment advisor (RIA) and broker-dealer (BD) regulation should be closed.

The SEC will, said SEC Chairman Mary Schapiro in a speech to the same group, "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."

Aguilar's concern, he said in the speech, is that investment advisors, many of whom are "small businesses," could be fundamentally harmed if the principles-based fiduciary regulation that is in place were to be changed to rules-based regulation, which is how broker-dealers are regulated. He said, "there has been much discussion about 'harmonizing' the rules. In the rush to 'harmonize,' I am not in favor of a multitude of new rules that may institute barriers to entry and could be anti-competitive to small business. Small businesses have flourished in the advisory industry and I would not want to see them disappear and/or be forced into consolidation because the Commission has adopted a series of rules that may not be needed."

Anxiety for All

The harmonization of the rules and a study on beefing up investment advisor regulation, The SEC's Study on Enhancing Investment Adviser Examinations, which relates directly to the SEC's funding issue, has caused anxiety to both RIAs and BDs.

RIAs are, at 2010 numbers, are being routinely "examined less than once every 11 years," the study says. RIAs recognize that it is not enough. If the SEC gets a more "steady" funding basis, or if, as Aguilar desires, the agency becomes "self-funded," which would mean keeping the fee revenue it brings in, instead of having only a yearly appropriation from Congress that's only a fraction of its revenue, the it can examine RIAs more often, as is necessary. The study provides three recommendations to Congress: an SRO for RIAs instead of SEC oversight; SEC oversight paid for by RIAs; and Finra oversight of RIAs that are affiliated with BDs.

If the SEC was well-funded, or self-funded, it could retain RIA oversight.

Schapiro also spoke of the frustration over funding, and the danger to investor confidence—and the markets, because of that, in her Feb 4 speech. "Investors, especially now, want to know that someone has their back," she said, adding later, "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."

Schapiro also pointed out that, "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."

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