Friday, November 9, 2012

SEC Chief Sees Reg Reform and Consumer Protection as One Goal

Despite the legislation's two-part name, "The Wall Street Reform and Consumer Protection Act," SEC Chairman Mary L. Schapiro understands financial regulatory reform and consumer protection to be one thing, not two separate goals.  In her October 26, 2012 remarks at George Washington University, Chairman Schapiro states that she sees Dodd-Frank, though still a work in a progress, as founded on some very simple guiding principles that benefit all market participants in the long run and are the basis for both sound regulation and consumer protection.  According to Schapiro, these principles are:

  • Markets should be transparent. 
  • Regulation should be consistent, without gaps that can be exploited by those who wish to indulge in risky, destabilizing or illegal behavior. 
  • Market participants, not taxpayers, should bear the risks of their market activities. 
  • And regulators should have the willingness and the tools they need to apply these principles to the day-to-day workings of the financial markets. 

From Scahpiro's perspective, financial regulation is not a zero-sum game, and good regulation rooted in fundamentals that are no secret -- transparency, risk management, and fairness -- broadly benefits all stakeholders. In her opinion, Dodd-Frank is a fundamentally sound framework to address systematic risk.

Transparent markets more efficiently distribute capital. Fair markets bring investors and their capital into the game. Properly allocated and managed risk curbs irrational behavior that can have devastating consequences. It’s not hard to figure out. Unfortunately, there are powerful individuals and entities which profit – at least in the short run -- from inefficiencies and opacity, from differentials in information and power and from taking irrational risks, knowing that profits and compensation will accrue to them, while losses are often assumed by consumers, shareholders and the economy at large. Dodd-Frank recognizes this, and builds a comprehensive structure on strong principles that protect investors and make Wall Street work better. 

To illustrate, Ms. Schapiro highlighted some of areas where Dodd-Frank has given the SEC mandates to regulate and powers to enforce consistent with both consumer protection and financial regulatory reform:


  1. comprehensive regulation of OTC derivatives, 
  2. regulation of asset backed securities,
  3. regulation of credit rating agencies, and
  4. "say on pay" or giving shareholders regular, non-binding up-or-down votes on executive compensation packages and golden parachutes is one such case.
These reforms look to curb or control risk taking, or risks taken by market participants that ultimately shook the financial system to the core.  Though the reforms seem to target practices which at first seem only to affect individual investors or specific kinds of participants in the financial system, cumulatively, these activities wreaked havoc throughout the entire financial system. Ms. Schapiro sees each of these regulatory changes as leveling the playing field between market players, and investors and consumers of  financial products.  As the incomplete task of implementing Dodd-Frank continues, look for the SEC, under Schapiro's leadership, to continue to carry the banner of consumer protection first and foremost, rather than as a byproduct of regulatory reform.  


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