Writing Rules for Specialized Disclosures ‘Distracted' SEC, Former Chair Schapiro Says

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By Yin Wilczek

April 1 — One shortfall with respect to the Dodd-Frank Act was its requirement that the Securities and Exchange Commission write specialized disclosure rules, former chairman Mary Schapiro said March 31.

While resource extraction payments, conflict minerals and mine safety are important matters, “I’m not sure the federal securities laws were exactly the right venue and vehicle to bring those kinds of disclosures into the fore,” she said.

Because the SEC lacked expertise in such issues, it was an “enormous amount of work” for the staff and proved a “huge distraction,” Schapiro said.

New Roles 

Schapiro spoke at the Council of Institutional Investors' spring conference in Washington with Gary Gensler, the former chairman of the Commodity Futures Trading Commission.

The former SEC chair now is a board member at General Electric Co., as well as vice chairman of the Sustainability Accounting Standards Board's board of directors.

The SASB board is chaired by Michael Bloomberg, the founder and majority owner of Bloomberg BNA parent Bloomberg LP.

The SEC's mine safety disclosure requirements were adopted in 2011 and now are in effect. However, parts of the conflict minerals rulemaking remain in litigation while the SEC has yet to repropose a new resource extraction rule after its original requirements were invalidated in 2013.

Current SEC Chairman Mary Jo White March 16 told lawmakers that the commission has expended 20,000 employment hours and more than $2.5 million to implement and defend the conflict minerals rule in court.

At the conference, Schapiro said another concern she had over the Dodd-Frank Wall Street Reform and Consumer Protection Act was its failure to provide adequate funding for the SEC and the CFTC after it expanded their responsibilities.

SEC's Bounty Program, Proxy Access 

Meanwhile, one benefit the act brought was the SEC's whistle-blower bounty program, Schapiro continued. Among other advantages, the program has helped the SEC in its enforcement actions and investigations, she said.

Another benefit is the statute's requirements that hedge funds register with the SEC, she added. Prior to the requirements, hedge funds were a “huge blind spot for the SEC, and I suspect for the CFTC as well.”

In other comments, Schapiro said she was “enormously proud” of GE's adoption of proxy access, describing it as a “turning point” for the mechanism. “It's been really interesting to me to see company by company through private ordering effectively adopt exactly the same rule” that the SEC proposed and adopted, she said.

The SEC rule was invalidated by the U.S. Court of Appeals for the District of Columbia Circuit in July 2011 on the basis of inadequate economic analysis.

However, Schapiro added that she did not think the SEC will repropose a federal proxy access rule. “Like so many other governance changes over the last couple of decades, it will become the norm just through private ordering,” she said.

White recently told lawmakers that she does not intend to issue a rule at this time, but the SEC is closely monitoring how U.S. companies are handling proxy access. 

As to emerging threats to the capital markets, Schapiro observed that while a lot of risk has been pushed into central clearinghouses, neither the SEC nor the CFTC has been adequately funded to provide “robust oversight” of such entities. In addition, “dealing with cybersecurity would cause me to have sleepless nights,” she said.

Schapiro also suggested a solution to the SEC “revolving door” problem. She said the “answer lies in structural change” that would make “a lifelong career at a federal agency” an “attractive option.” Right now, federal employees are “overburdened,” she said. “We make it hard for people to stay in federal government for their entire careers.”

Equity Market Structure, Fragmentation 

For his part, Gensler noted that Dodd-Frank should have taken a crack at the equity market structure. Due to fragmentation of the markets, up to 35 percent of securities now are traded in dark pools, he noted. While the structure is working for some investors, he asked whether it is working for others.

Gensler and Schapiro disagreed on whether the SEC and CFTC should be combined into one agency. Schapiro suggested that there should be only one capital markets regulator. She cited to the regulation of over-the-counter derivatives, noting that Dodd-Frank authorized the CFTC to oversee 95 percent of the market and the SEC to oversee the remaining 5 percent. Those jurisdictional lines were “arbitrarily drawn” and created opportunities for regulatory arbitrage and dissonance, she said. It also made international cooperation “much more difficult.”

In “my view, it would have been the right thing to merge the two agencies at this point,” Schapiro said. She added that while there are benefits to separate entities—including “more eyes” and “different perspectives”—“overall we could have been stronger as a combined agency.”

However, Gensler said the markets and U.S. agricultural interests have benefited from a dedicated commodities regulator. He also said the SEC is “already very capacity-constrained” and doesn't need more responsibilities.

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com