Luis Aguilar Keynote at Compliance Week Conference


My notes, live, from the keynote by SEC Commissioner Luis A. Aguilar:

James Doty of Baker Botts introduced the Commissioner. (A disclaimer from the Commissioner: the speech is his opinion alone and not necessarily the view of the SEC.)

The Commissioner titled his presentation “Reversing Course: Putting Investors First.” The focus should be on protecting investors and restoration of stability to the capital markets. We need to restore trust in the markets. That means regulatory reform.

First, we need a search and inquiry into the cause of the crisis. Blaming the regulatory market is not responsive. Perhaps it was an unwillingness to exercise their management and look deeper into the markets. He is enthusiastic about a bi-partisan panel to look into the crisis. Too much regulatory reform focused on how it would help the financial firms and not how they would help investors. We need to look at the intrinsic risks and conflicts in the system. He saw pattern of de-regulation that help financial firms with little examination of how they would affect investors. Modernization of the markets has been used as a disguise for de-regulation.

He moved onto the need for a systemic risk regulatory body. He thinks we need some clarity on what we mean by systemic risk. He does not like the focus on “Too big to fail” and its focus on particular entities. He thinks the focus needs to be key functions in the market not the entity. He would want to isolate these functions in the entity.

Instead of a new regulatory body, he prefers a council of different regulators with different expertise would work better. It is better to have several sentries instead of just one monolithic guard. It would also avoid the conflicts inherent in the mandates of a particular regulator. There is a question of the particular powers of the council and the procedures for the council.

He moved onto the idea of a financial product safety commission. There is an idea that financial products get rated as safe or unsafe. The Commissioner does not like this idea. He draws a line between investment financial products and non-investment financial products. For non-investment products like credit cards and mortgages, the terms are set at the outset. However, with an investment financial product has values that will fluctuate and the risks will change over the course of time.

Investor protection is different than consumer protection. Removing products from a regulatory scheme could result in regulatory arbitrage.

What about a U.S. FSA, a single regulator for all of the financial markets? Commissioner Aguilar has concerns about this model. Could a regulator responsible for keeping financial institutions viable also be aggressive in pursing consumer claims of misdeed against the institution? The Commissioner does not think so. It can also increase systemic risk. If the single regulator gets it wrong, there is no fall back protection or other bodies to step into the gap.

He does like the idea of a single regulator for all of the capital markets. He does not like the split between the CFTC and SEC with the regulation of derivatives separate from the regulation of the underlying securities.

He advocates self-funding the SEC. He alludes to reductions in the budget of the SEC has affected the effectiveness of the SEC.

The Commissioner think the staff of the SEC has been unduly tarnished.

After his speech, the Commissioner sat down for a fireside chat with Matt Kelley, the Editor-in-Chief of Compliance Week, taking questions from the audience.

He expects enforcement to be quicker than in the past.

He went back to the self-funding part of this speech. He compares the big staff of the FDIC to the SEC. The FDIC has more people and keeps tabs on fewer institutions. The SEC needs more resources.

It sounds like the IFRS may be a lesser priority under the new administration.

It was a nice speech and chat by the Commissioner.

(These notes are taken live, so I apologize if I left out anything or misquoted someone. Please forgive any typos or grammatical errors.)