Wednesday, May 20, 2009

Pension Funds Urge Congress to Give SEC Crucial Role in New Financial Regulatory Regime

As Congress develops legislation to reform the regulation of financial markets, a group of large public pension funds has urged congressional oversight leaders to give the SEC a crucial role in the overall reform legislation. In letters to House Financial Services Chair Barney Frank and Senate Banking Committee Chair Christopher Dodd, the pension funds emphasized that the SEC must have the independence, robust regulatory authority, staffing, and budgetary resources necessary to effectively fulfill its unique mission of investor protection. The pension funds writing to the oversight committees included the California Public Employees Retirement System and the New York State Common Retirement Fund.

The funds said that they depend on the SEC to help protect the pension fund community’s interest in the integrity of the financial markets. Congress established the SEC to serve as the investor’s advocate, they pointed out, and in the wake of recent market events it is hard to imagine a more compelling need for a strong, independent regulator with a proven record of expertise to oversee and advocate the interests of investor protection. They similarly strongly support SEC Chair Mary Schapiro’s commitment to vigorously carry out this mission.

As the oversight committees develop legislation to revamp the current financial regulatory system, the pension funds request that a number of principles be given careful consideration with respect to the future role of the SEC. For example, the SEC’s independence must continue under a revamped financial regulatory regime. Congress established the SEC as an independent agency, noted the pension funds, and such independence has been critical to the SEC’s historical success as regulator.

Also, the SEC must maintain robust regulatory and enforcement authority over securities market transactions and trading practices, the policing of market professionals, and the disclosure and accounting standards which provide investors with the tools and market information necessary to make sound investment decisions and to participate in meaningful corporate governance dialogue.

The pension funds believe that the SEC has historically demonstrated the expertise to most effectively carry out these critical regulatory functions. While recognizing the difficulty in drawing precise boundaries between systemic risk regulation on the one hand and oversight of market integrity and conduct and investor protection on the other, the funds urged that regulatory boundaries be drawn with the utmost care so that the SEC retains the full panoply of authority and tools necessary to deter market misbehavior and enforce the law where violations do occur, in order to discharge its unique and fundamental mission of investor protection. At the same, the SEC’s oversight and protection of the integrity of capital markets would make an important contribution to effective systemic risk regulation.

Within the reality of the current overall Federal budget constraint, continued the funds, the SEC must be given the staffing and budgetary resources necessary to be a vigorous regulator. An emerging market problem that is addressed promptly by strong regulatory action avoids a much more costly government intervention later.

In earlier Banking Committee hearings, SEC Chair Schapiro emphasized that the SEC must have a role in the areas of systemic risk that are part of its investor protection mandate. The systemic risk regulator should not diminish the role of the SEC, noted Ms. Schapiro, adding that systemic risk cannot trump investor protection. Senator Dodd said that the SEC should have a role in systemic risk regulation; and advised the Chair to ``kick down the door’’ to make sure the Commission has input.

In a letter to President Obama earlier this year, Senator Dodd and Rep. Frank pledged to work together in a bicameral and bipartisan effort to pass legislation reforming the regulation of the nation’s financial markets by the end of the year. The legislators said that they agree with the Administration’s core principles for modernizing financial regulation as recently articulated by Treasury Secretary Tim Geithner, including providing for systemic risk regulation, strengthening consumer and investor protection, streamlining prudential supervision, and addressing regulatory gaps, such as with hedge funds and other private pools of capital.