Thank you very much, Bob [Robert P. Kelly, Chief Executive Officer, Bank of New York Mellon Corporation] for that kind introduction. I am pleased to be here tonight.
I'd like to focus this evening on the SEC as a capital markets regulator, reviewing what we've been doing and where we've been focused in the last several months. And, importantly, I will discuss where we expect to direct our energy in the months ahead. In all of our activities, we have been guided by a few core principles, with the most important one being this: "investors first."
Each of our initiatives is evaluated from the perspective of how it will help investors. And despite challenges, criticisms and stumbles, we as an agency return to our core value of serving as the investor's advocate, hour-by-hour, day-by-day in all that we do.
We also recognize that fully regenerating confidence in America's securities markets is critical to our nation's continuing economic recovery. Restoring our markets to their position as a revered model for the rest of the world to follow, is goal each of us in this room, and at the SEC, likely hold in common.
In order to achieve the goals of renewed investor confidence and restored market stature, it is essential that this country have a strong and effective capital markets regulator. And that regulator must have a top-of-mind and undiluted commitment to promoting the interests of investors.
Throughout its history, the SEC has served this role. And as we reform and re-energize our agency, we have a renewed commitment to our investor protection mandate and our responsibilities to effectively regulate the capital markets.
So, what have we been doing to fulfill this role? The SEC has spent the last several months rebuilding ourselves to be a stronger, more focused and more effective capital markets regulator — the kind of capital markets regulator that investors expect and deserve. Throughout this period, the SEC has dedicated much of its efforts to pursuing an investor-centric rulemaking agenda, ensuring that investor interests are promoted in regulatory reform efforts, and re-vamping our enforcement program.
These past seven months have been one of the most active periods in terms of rulemaking in the history of the SEC. We have embarked on an aggressive rule reform agenda arising directly from last year's financial crisis and issues of particular import to investors.
To avoid a recurrence of the serious problems exposed in the money market fund sector last year, we have proposed tough new standards to strengthen the credit quality, liquidity and maturity standards of money market funds.
We've also taken action to address the potentially harmful effects of naked short selling, adopting rules that have significantly reduced the number of so-called fails to deliver. We also issued proposals designed to address the public confidence and market stability implications of short selling in a downward market.
And just last week, the SEC considered a package of measures designed to create a stronger, more robust regulatory framework for credit rating agencies. The measures are designed to improve the quality of ratings by requiring greater disclosure, fostering competition, helping to address conflicts of interest, shedding light on rating shopping, and promoting accountability.
These measures are needed because investors often consider ratings when evaluating whether to purchase or sell a particular security. In the recent financial crisis, however, reliance on credit ratings did not serve investors well.
With respect to issues of import to investors, the SEC has proposed rules to facilitate the effective exercise of the rights of shareholders to nominate directors. We also proposed rules that would provide investors with more meaningful information about the leadership structure of boards of directors and the qualifications of Board nominees to serve in these critical positions as stewards of the corporation, as well as disclosure about the relationship between a company's overall compensation policies and risk and the role of compensation consultants.
The SEC also proposed rules that promote the use of independent custodians by investment advisers. But where an affiliated custodian is employed, these rules would require third-party auditing firms to provide an independent check to verify client assets and assess the controls of the affiliated custodian. If these measures are adopted, we expect that investors will be able to have greater confidence that, when their hard-earned assets are turned over to an investment adviser, those assets are well-protected.
The SEC also has proposed rules to curtail abusive pay-to-play practices by advisers to public pension plans and other municipal clients, so that advisers to those plans are considered and selected based on merit, not political contributions.
And, we have proposed rules that will provide investors and other market participants more meaningful, ongoing information regarding municipal securities, roughly two-thirds of which are owned by retail investors, either directly or indirectly through municipal mutual funds.
At the SEC, however, we have had much more than rulemaking on our plate. Like our regulatory colleagues around Washington, we have been particularly focused on regulatory reform and the need to re-work our financial regulatory system to meet the challenges of the 21st century and better serve our country's needs. The white paper on Financial Regulatory Reform issued by the U.S. Treasury Department in June recognized the need for a strong capital markets regulator such as the SEC.
Importantly, the administration's reform plan also recognized the need to close regulatory gaps and harmonize regulation of similar products and services.
One of the most significant regulatory gaps relates to hedge funds. They have flown under the regulatory radar for far too long. And without a comprehensive database of even basic census information about who these hedge funds and their managers are, it is virtually impossible to monitor their activities for systemic risk and investor protection purposes.
Thus, I strongly support the administration's recommendation to require that investment advisers to hedge funds and other private pools of capital come under the regulatory umbrella by registering with the SEC.
I also support the administration's efforts to apply a fiduciary standard of conduct to financial service professionals that provide investment advice about securities, regardless of whether those professionals carry the label "broker-dealer" or "investment adviser." The investors who turn to these professionals for advice expect such a standard to apply, and they deserve the disinterested advice of a fiduciary who puts the investor's interest before its own.
The standard of conduct that applies to the act of giving professional advice to investors should not be a watered-down, "fair and reasonable" commercial standard. In order to be consistent with the reasonable expectations of investors, the standard that applies to this activity, which is so integral to investors' financial security, must be the type of fiduciary standard that applies to a relationship of trust and confidence, as contemplated by the administration's proposal.
That being said, however, it is essential to recognize that a fiduciary standard of conduct, by itself, does not eliminate fraudsters who prey upon unsuspecting investors. To be effective for the protection of investors, a fiduciary standard of conduct must be coupled with an effective and, I believe, harmonized, regulatory program for broker-dealers and investment advisers. Again, I appreciate the administration's inclusion of the need for greater harmonization in its white paper on financial regulatory reform.
Another issue highlighted by the administration's regulatory reform white paper relates to SEC and CFTC harmonization. We have worked closely with the CFTC throughout the summer on these issues and recognize the need for enhanced coordination and harmonization. We held joint hearings on harmonization issues earlier this month, a first for our two agencies, and are coordinating on a joint report to Congress.
And, of course, we also have been focused on other areas of the regulatory reform debate, including the appropriate composition and role of a systemic risk overseer and risk council, the need to better regulate over-the-counter derivatives, the best way to oversee clearance and settlement activities, and consideration of how to bring about the resolution of troubled firms.
Unless you are a devotee of the Federal Register and anxiously await each new rule proposal, perhaps the most visible change we have made in the last several months at the SEC is the revitalization of our enforcement program, under our new Enforcement Director, Rob Khuzami. Rob brings a former prosecutor's legal skills and tough attitude to his position.
Under his leadership, our enforcement program is being transformed. We are redeploying a broad swath of middle management so that we have more enforcement investigators on the front lines, investigating and bringing cases.
In addition, we are re-structuring the enforcement program to include specialized units so that our investigators can become expert at rooting out particular types of frauds and other abuses. We also have removed some of the internal administrative hurdles that unnecessarily slowed down our enforcement efforts.
And we are starting to see very real results. Although numbers do not tell the whole story, it is illustrative to compare the period from late January to the present to the same period in 2008. In that period, we have opened many more investigations and inquiries and filed more than twice as many emergency temporary restraining orders to stop ongoing fraud.
More important than looking back at what we have accomplished is looking ahead at what is to come.
We will continue to re-make the SEC so that we are a fully prepared capital markets regulator. A focus will be on enhancing our expertise and skill-sets. In particular, the SEC needs to transform from a lawyer-centric agency to an institution that effectively utilizes the same disciplines and skill-sets as the market participants we regulate.
Just last week the SEC announced the creation of a new Division of Risk, Strategy and Financial Innovation to be led by University of Texas Law Professor Henry Hu. The new Division will bring a cohesive, integrated approach to assessing risk and analyzing market trends. I look forward to the market-based insights and inter-disciplinary approach that this Division will bring to our regulatory efforts.
Consistent with the SEC's multi-disciplinary and market-focused approach to issues, we are conducting a wholesale review of the securities lending marketplace.
Securities lending traditionally has been viewed by investors such as pension plans, endowments, foundations and mutual funds as a way to put otherwise dormant assets to use to earn a few extra basis points of return, on a relatively risk-free basis. Events of last year, however, reveal that risk was very much present. Many lenders of securities lost money on the reinvestment of the cash collateral obtained from securities lending.
In addition, without a central, public marketplace that displays quotes and prices, it is very difficult to assess the quality of a securities lending program or individual transaction. Finally, there are a multitude of intermediaries involved in securities lending, including lending agents, custodian banks, and prime brokers to name a few. Each is taking a cut of the lending revenue and each faces potential conflicts. It is important to ensure that each performs its duties with professionalism and integrity.
Given the experiences of last year, there are many questions about securities lending. Indeed, securities lending is an area that perhaps has not received the level of regulatory attention that is necessary to ensure the fair and investor-oriented operation of a multi-trillion dollar market.
As a result, the Commission will be holding an in-depth roundtable on Securities Lending on September 29. The roundtable will continue on September 30 and focus on a flip-side of securities lending — potential short sale pre-borrow or locate requirements and the demand that short selling creates for borrowed securities. In addition we will consider whether the market would benefit from additional short sale disclosure.
Another market that has been somewhat ignored by regulators, until now, is dark pools. As off-exchange trading venues, dark pools represent — by design — a trading market that is in the shadows, hidden from the antiseptic light of full transparency. Dark pools can be defined in various ways, but generally refer to automated trading systems that do not display quotes in the public quote stream. As a result, the public markets may be deprived of the valuable trading information, including price discovery, available in dark pools. We've turned our attention to these dark pools, and we expect to consider additional measures on dark pools later this fall.
Similarly, we issued a proposal to ban marketable flash orders last week so that a select group of traders does not receive an unfair advantage by their unequal access to best price information. And we will continue to focus on market activities that favor a few at the expense of overall investor fairness.
In short, where market activities are off the screen, below the radar, difficult to track and generally opaque, there is always a greater possibility for mischief. As a country we pride ourselves on our open, efficient and transparent securities markets.
Where market activity goes underground, it can undermine investor confidence in our public markets and inevitably raises the question of whether everyday investors are getting a fair deal. Where oversight is lacking, trouble often follows. And where transparency is limited, accountability becomes difficult to achieve.
As part of our overall efforts to restore confidence in America's securities markets, I am committed to shining a light on darkened corners and seeking transparency, fairness and equality of information for all investors — not just the privileged few.
I recognize that firms such as yours may have benefitted in the past from some of these practices. But hopefully you also recognize the need to continue to restore faith in the fairness of our securities markets, which can be accomplished through the tried-and-true principle of promoting more transparent, open and accessible markets for all.
Thank you for this opportunity to update you on where the SEC has been … and where we are going. I ask you to join me in a commitment to restoring investor confidence and market integrity. Together, I know we can improve our securities markets for the benefit of all American investors.