Schapiro: Multitude of trading venues a regulatory challenge for SEC

The equity market structure with more than 70 venues for trading and 35% of trades done in dark pools represents a major regulatory challenge for the Securities and Exchange Commission, Mary Schapiro, former SEC chairwoman, said March 31 before attendees at a conference of the Council of Institutional Investors in Washington.

With so many trading venues, regulators have to balance effectiveness for investors, said Gary Gensler, former Commodity Futures Trading Commission chairman, who with Ms. Schapiro made up a panel speaking about current issues in financial regulation. “Is it working for all investors, not just some investors?” Mr. Gensler asked rhetorically.

On preparedness for a financial crisis, Ms. Schapiro said, “It's going to be something uniquely human that will cause us to deal with another financial crisis.”

“I'm highly confident regulators, if politicians stay out of the way, can get this right,” regulating to avoid another financial crisis, she said. “Regulators will ultimately figure out how to work together to ensure the stability of the financial system.”

Among other issues, Ms. Schapiro said the SEC's whistleblower program, created under the Dodd-Frank Wall Street Reform and Consumer Protection Act and paying rewards for corporate employees who expose fraud, has benefited SEC enforcement.

“It's really helped fuel the SEC enforcement program in a meaningful way,” Ms. Schapiro said.

But Ms. Schapiro criticized a provision of Dodd-Frank requiring the SEC to regulate conflict minerals, those natural resources extracted in conflict zones and sold to continue the conflict.

She said she “is not sure federal security law is the right venue to bring (such rules). It was a huge distraction … While the issue is critically important, I'm not sure the federal securities agency is the right way to get it done.”

Both Ms. Schapiro and Mr. Gensler consider cyberrisk as a key developing area for regulatory oversight.

On a proposal to merge the SEC and CFTC, Ms. Schapiro favors the idea.

“We should have a single capital markets regulator,” Ms. Schapiro said, noting derivatives markets are “inextricably linked to the equity markets.”

Splitting regulation between the SEC and CFTC creates “twice as much work” and creates opportunities for regulatory dissonance with regulators out of step with each other with the timing and adoption of related rules, Ms. Schapiro said.

In addition, split regulation has made international coordination more challenging.

“If you combine the agencies, it would be stronger than just one,” Ms. Schapiro said.

Mr. Gensler disagreed and believes the SEC and CFTC should remain separate.

“You have a very dedicated derivatives regulator,” especially in agriculture, Mr. Gensler said. “The SEC is already very capacity-constrained,” Mr. Gensler said.

Neither Ms. Schapiro nor Mr. Gensler see as likely the implementation of any proposal to combine the SEC and CFTC.

On the conflicts of a revolving door of regulatory staffers moving between either the SEC or CFTC and private-sector financial companies, Ms. Schapiro calls it a “perception issue.”

The way to address a revolving door is “to make a lifelong career at a federal agency an attractive option” to the private sector in terms of pay, Ms. Schapiro said. “That is something we should be working on.”

Both Mr. Gensler and Ms. Schapiro agreed the SEC and CFTC benefit from staffers coming from the private sector, where they have experience in new complex financial products.

“It's very hard to regulate the market if you don't have people with current knowledge of (financial products),” Ms. Schapiro said. “You don't home grow” that expertise.

In terms of regulatory constraints imposed by their limited budgets, Ms. Schapiro said SEC regulation would benefit from the ability to examine more than 9% of investment advisory firms a year.

Because of its budget constraints, the CFTC tends to be more rule and case oriented than supervisory, because the CFTC has such a thin staff, Mr. Gensler said. During his tenure, “we didn't have the staff to do annual full audits” of the three big clearinghouses.

On proxy access, Ms. Schapiro said, “I don't see the SEC reproposing a … proxy access rule” like the rule it adopted in 2010 that was overturned by the U.S. Court of Appeals in Washington in 2011.

“But (proxy access) will become the norm through private ordering,” that is the adoption by companies on their own or through shareholder proposals, Ms. Schapiro said.