New Regulatory Era Will Bring Broader SEC Scrutiny

September 9th, 2009

In the aftermath of what has been called “the most severe financial crisis since the Great Depression,” the US Treasury Department spent the summer of 2009 drafting volumes of proposed legislation. If enacted into law, the resulting reforms will have far-reaching effects. Most notably, investors will be armed with significantly more information, and companies will need to comply with extensive new reporting requirements particularly in areas related to risk and governance. Following a familiar pattern, the new regulatory system will rely heavily on the scrutiny of the US Securities and Exchange Commission (SEC).

Targeting Risks and Governance

As is often the case on Capitol Hill, it will take time to reach consensus on the final legislation. Some proposals may be dropped. But, considering the price paid in terms of massive job losses and decidedly unpopular government bailouts, lawmakers are likely to agree that “something” should be done to ensure future financial and economic stability.

The solution will need to include added reporting requirements, if it is to be responsive to the root causes of the credit crunch and ensuing financial crisis. Increasingly, with the benefit of hindsight, the nation’s best minds seem to agree that the causes of the crisis involve inadequate monitoring and regulation of risks and governance. Specifically:

  1. Certain types of risks were not well understood by either regulators or the investors who suffered losses as a result of the risks, and
  2. Some aspects of the current financial regulatory system may have spawned (or at least permitted) the kinds of corporate governance practices that encouraged unsafe risk-taking by big banks and other entities deemed “too big to fail.”

Areas of Broader SEC Scrutiny

Because of the focus on reporting of risks and governance, the proposed reforms call for a significant broadening of the SEC’s oversight of the following:

  • Compensation committees. The proposed Investor Protection Act of 2009 focuses on corporate governance practices related to executive compensation. It would require that all public companies include a non-binding shareholder vote on executive compensation as disclosed in the proxy for any annual meeting held after December 15, 2009. It would also mandate a separate vote on golden parachutes in the case of a merger or acquisition. The SEC will set the reporting requirements related to these votes. The Commission may also establish requirements for disclosures about the compensation committee’s independence, as well disclosures about how the company’s compensation policies relate to risk.
  • Credit rating agencies. Under another provision of the proposed Investor Protection Act of 2009, credit rating agencies would need to register with the SEC. The Commission would establish requirements for annual reports by these agencies, documentation of their rating policies and procedures, and disclosures about the risks they measure when rating a security, including use of special symbol to identify the risks associated with structured finance products.
  • Securitizers of asset-backed securities. Another provision of the Investor Protection Act of 2009 would expand the SEC’s authority to require loan-level disclosure for asset-backed securities in a standard format to enhance the ability of investors to perform their own due diligence. These requirements could conceivably be combined with the requirements for expanded use of XBRL reporting and a new taxonomy for interactive data related to the kinds of securitized loans that precipitated the recent credit crunch.
  • OTC derivative dealers and other major market participants. The proposed Over-the-Counter Derivatives Markets Act of 2009 would require central clearing of certain standardized OTC derivatives. Trading of these derivatives would be regulated by the SEC. The SEC and the Commodities Futures Trading Commission (CFTC) would oversee business conduct, reporting and record-keeping requirements for OTC derivative dealers and other major market participants.
  • Investment advisers. Several proposed laws focus on advisers, including (a) advisers to private funds, such as hedge, private equity, and venture capital funds, and (b) advisers who do not meet the legal definition of a broker or dealer. Under the proposed Private Fund Investment Advisers Act of 2009, private fund advisers will need to register with the SEC and comply with record-keeping, reporting and other requirements established by the SEC for purposes of monitoring and regulating risks in the market. Under the proposed Investor Protection Act of 2009, the SEC will establish consistent standards for broker-dealers and investment advisers. The Commission will also focus on added disclosure requirements for funds, (such as a summary prospectus), and governance practices, (such as compensation arrangements that encourage products and practices that are not in the investors’ best interest).

The Timetable for Reform

The timetable for finalization of the new laws is uncertain. The initial stages of regulatory reforms may appear to be moving slowly in part because the details can be mind-numbingly complex. But the Obama Administration is hoping the final laws will be available by the end of 2009.

Some Washington insiders caution that the economic recovery could slow the timetable by making the reforms seem less urgent. Recovery or no, there are still plenty of good reasons for enacting legislation to modernize outdated regulatory systems that have not kept pace with changes in the financial markets.

The Center commends the SEC for assigning a priority to regulatory reform initiatives and for taking a proactive leadership role in helping to shape the coming reforms. For more complete coverage of the draft legislation, see our special report on “New Era of Financial Regulation: How Will It Affect You?” at

Entry Filed under: Governance

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