Market Structure Moves to Top of Regulatory Agenda

May 7, 2010

The SEC’s chief said the growing concerns about technological changes in the capital markets are going to drive much of the agency’s agenda for the rest of the year. She fears creation of a two-tier system—one for hedge funds and other large traders and a more limited tier for everyone else. Her goal includes passing a series of rules designed to update the basic principle of market fairness that was established at the agency’s founding during the New Deal, according to Thomson Reuters Checkpoint’s WG&L Accounting & Compliance Alert.
Once she righted the SEC’s sinking ship in 2009, Mary Schapiro spent most of her first year at the agency’s helm shoring up the enforcement division and strengthening investors’ say in the corporate governance process.
Her second year appears to be shaping up as a top-to-bottom review of the bread-and-butter issue of market fairness for retail investors.
The SEC’s next moves will include asking capital market self-regulatory bodies, such as the Financial Industry Regulatory Authority (FINRA), which Schapiro ran before she went over to the SEC, to establish audit trails to monitor all trades and orders across all markets, Schapiro said in a May 6, 2010, speech at a conference sponsored by the Securities Industry and Financial Markets Association (SIFMA) in Oxon Hill, MD.
The review will also include a public roundtable on market structure that the SEC wants to hold in June, where Schapiro plans to examine proposals put forth in 2009 in Release No. 34-60684, Elimination of Flash Order Exception From Rule 602 of Regulation NMS, and Release No. 34-60997, Regulation of Non-Public Trading Interest.
The push on marketwide issues continued with the January publication of Release No. 34-61358, Concept Release on Equity Market Structure, one of the SEC’s first releases in the new year.
In February, the SEC put out a final rule to reestablish a modified version of the uptick rule, a New Deal era limit on short selling, with Release No. 34-61595 Feb. 26, 2010 Amendments to Regulation SHO. In January, the SEC also proposed to limit the practice of sponsored-access, by which licensed brokers let customers who don’t have licenses use the broker’s access to the securities markets to trade directly on an exchange. Release No. 34-61379, Risk Management Controls for Brokers or Dealers with Market Access.
Schapiro said the common thread among all the rules is the SEC’s effort to explore the basic issue of market fairness for all investors. Regulators are trying to determine whether the electronic, high-speed trading systems used by large firms help or hurt other investors.
She also said that the SEC planned to amend Form ADV, Part 2, the primary disclosure document investment advisers provide to their clients, to include plain English information on the adviser’s conflicts of interest, method of compensation, and disciplinary history.
Without mentioning the recently launched case against Goldman Sachs Group Inc. by name, Schapiro said she planned to use enforcement cases to send a message to all market participants that the SEC is watching them.
“In the wake of the financial crisis it has become a cliché that regulators cannot keep up with innovators in a market as dynamic as finance,” Schapiro said. “I don’t think that’s true. But I think that where we sometimes go wrong is in trying to react to and respond to every change or innovation, often before its significance is known—or after it has become too apparent.”
Schapiro added, “We should be looking to the future by returning to proven principles of the past, like transparency and fairness—principles that empower investors to make rational decisions and give regulators the tools they need to prevent crises, without stifling growth.”

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