The Chamber of Commerce and Reforming the SEC (Structural Reforms)

The Center for Capital Markets of the Chamber of Commerce issued a report recently titled "Examining the Efficiency and Effectiveness of the US Securities and Exchange Commission."  Of the 23 recommendations, seven of them call for an assortment of structural reforms.   We have listed them below.

A handful are hard to argue with.  They included a call for the creation of a Chief Operating Officer (the idea that the Chairman could benefit from additional professionals with specific oversight tasks is hard to argue with), greater coordination among the different divisions, increased staff expertise with respect to the operations of business and the capital markets, and the development of management program to transfer information.

There are two in particular that deserve a bit more comment.  One proposal calls for a division that regulates both brokers and advisors, at least those providing services at the retail level.  Moreover, the Report indicates that the inspection process should be part of this Division.  No more OCIE in short.  Whether market oversight and retail financial services can be so readily divided is not at all clear.  Nonetheless, the notion that advisors and brokers are regulated in separate silos within the SEC is something that ought to be reexamined.  Madoff had both a broker and served as an advisor. 

Each service came under a separate division, with the inspections conducted by a third.  In truth, where retail investors used to access the markets through their neighborhood broker, it is probably the case that this happens more and more often through investment advisors. 

Whether OCIE should be rolled into the combined division is another interesting question.  The Inspection Office was made independent of the operating divisions in part to provide greater independence (and avoid capture).  At the same time, independence probably resulted in a loss of expertise.  Recombining OCIE with the operating divisions will provide heightened expertise but create potential problems of capture.  The true reforms necessary in OCIE go less to location and more to the nature and quality of inspections.

As for the proposal to weaken the Sunshine Act, the report seems to view the Act as an impediment to staff meetings.  It is true that when the commissioners meet collectively it can trigger an obligation under the Act to hold an open meeting.  When I was in the General Counsel's Office, there were a number of occasions when I would walk a matter to one commissioner, get his/her views, then  walk to another until all five had considered the matter.  By meeting with each individually rather than collectively, we avoided triggering the meeting requirement.

Having said that, there is nothing in the Act that prohibits one or two commissioners from meeting with the staff and going over concerns.  Before the Act is weakened (it is after all an important mechanism for ensuring that the public is allowed to witness the decision making process of the Commission), further study needs to be conducted as to whether in fact it really interferes with Commission/staff interaction.

Recommendation 1—The Division of Trading and Markets and the Division of Investment Management should be realigned into a Division of Investor Protection and Retail Financial Services Regulation and a Division of Market Oversight and Operations. The Examination Programs of the Office of Compliance, Inspections, and Examinations (OCIE) should be assigned to these new divisions.

Recommendation 2—The SEC should create an accelerated conditional approval process for new investment products or services.

Recommendation 3—The five-member Commission should play a greater ongoing role in the interpretation and application of regulatory policy. This may require Congressional action to amend the Government in the Sunshine Act (Sunshine Act) that was passed in 1976 that, among other requirements, mandates that every portion of every meeting of an agency shall be open to public observation. Although the Act was developed to create greater openness in government, it has had the unintended consequence of restricting valuable communications between Commissioners and SEC Staff.

Recommendation 4—The SEC should create a Chief Operating Officer (COO) position with sufficient authority to oversee daily operations throughout the SEC.

Recommendation 5 —The SEC should establish a coordinating council, chaired by the COO, to resolve issues or disagreements involving more than one division or office.

Recommendation 6—The SEC should expand the breadth of its staff expertise. Legal and accounting expertise should be complemented with staff experts in capital markets operations and the business operations of regulated entities as well as financial economics.

Recommendation 7—The SEC should develop a knowledge management program to transfer information and expertise between divisions, preserve the knowledge and experience of departing staff, and provide future staff with ready access to materials explaining and documenting the analysis and reasons for actions taken or not taken.