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SEC Chairman Shapiro on the Future of Investment

Mary Shapiro, Chairman of the U.S. Securities and Exchange Commission (SEC), gave a speech at the Securities Industry and Financial Markets Association (SIFMA) annual meeting yesterday signaling the agency’s priorities in the coming months and years. Key issues raised by Chairman Shapiro include revitalizing enforcement efforts, the need for forthrightness in consumer products, as well as filling gaps in regulation, among others. The message for her audience was clear, reforms are coming, they are going to be game changers, and investors are to be the raison d’etre of each and every change.

Enforcement is a key feature in Chairman Shapiro’s drive to restore investor confidence in the financial sector. The SEC is currently in the process of internal restructuring, the goal of which is to increase the SEC’s capacity to investigate wayward broker-dealers and investment advisors. Rob Khuzami, head of enforcement at the SEC has removed an entire layer of management, thus allowing the redistribution of dozens of attorneys back to the, “front lines.”

In addition to the need for greater enforcement, Chairman Shapiro clearly has her eye on new rules and regulations aimed at helping investors understand the very products in which they are putting their hard-earned capital. All too often, new and innovative financial products are failing to provide simple, clear disclosures of risk to investors. In Chairman Shapiro’s words, “America’s investors and future retirees deserve products that they can understand and evaluate.” Specifically, target date funds and securitized life settlements will be thoroughly scrutinized.

Regulatory gaps are one issue that many advocates for investor’s rights hope Chairman Shapiro will address posthaste. Hedge funds have been largely unregulated in the past, and many have been hit with sharp declines in assets in response to the current economic crisis. Sadly, due to lack of regulation, it has been next to impossible to monitor the risk and potential illicit activity perpetrated by hedge fund managers. Recent headlines, such as the Galleon Group scandal, may have been avoided if sufficient regulations existed.

The SEC also sees a need for a common fiduciary standard for broker-dealers and independent advisors. As Chairman Shapiro points out, “investors don’t make a distinction between the two [brokers and advisors] – and neither should we.” While many have echoed such sentiments, among them Richard Ketchum, Chairman of the Financial Industry Regulatory Authority (FINRA) as well as countless securities attorneys, it remains to be seen if words will beget action. Her words were forceful, however, and being that her audience included many leaders of the very financial firms she hopes to greater regulate, one can hope they take note.