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From Securities Regulation Daily, October 17, 2014

Commissioner Gallagher provides insight on how to maintain SEC’s relevance

By Joanne Cursinella, J.D.

Delivering the 15th Annual A.A. Sommer Jr. Lecture on Corporate, Securities and Financial Law at New York’s Fordam Law School, SEC Commission Daniel M. Gallagher provided his insights on the future of the 80-year old Commission and how it can maintain its relevance in the face of change. The Commission’s continued relevance depends on its ability to maintain the focus on the basic, everyday regulation for which it was established and to carry out its tripartite mandate in the face of innumerable distractions, especially the encroachment of prudential regulators and the prudential model of regulation on the capital markets, he said.

Existential threat. The SEC’s fate is intertwined, as it always has been, with that of the capital markets. Despite robust market activity over the last few years, the U.S. capital markets, the manner in which they are regulated, and the SEC itself collectively face the existential threat of the “encroaching imposition of so-called prudential regulation on markets wholly unsuited to that regulatory paradigm,” Gallagher said. He feels that the way the Commission responds to this encroachment as well as to the extra burdens of Dodd-Frank will determine the agency’s relevance for the 21st Century and whether the U.S. capital markets will continue to be the drivers of economic prosperity and growth.

Dodd-Frank Act mandates. Many, if not most, of the 100 mandates imposed upon the Commission by the Dodd-Frank Act do not by any measure represent the best use of the Commission’s time and resources, Gallagher claimed, and the SEC’s independence should be respected. Even the more relevant Dodd-Frank mandates have forced the Commission to radically restructure its priorities. Gallagher provided as an example, while the mandate to regulate securities-based swaps is germane to the work of the Commission, these products represent a mere 5 percent of the swaps market, with the other 95 percent falling under the jurisdiction of the CFTC but swaps rulemaking has taken up a “wildly disproportionate” amount of the Commission’s attention. If the SEC is to survive as the independent, expert agency that has produced the imperfect but unparalleled successes of the past eight decades in overseeing capital markets and protecting investors, we simply must regain control of our agenda, he said.

Addressing systemic risk. The Commission has consistently faced encroachments on its regulatory purview from prudential regulators and, even of greater concern to Gallagher, pressure to join the prudential regulators in adopting the defense against “systemic risk” as part of its mission. “It’s easy, and, to be honest, somewhat natural to see this as a turf war,” he added, but he believes that the Commission should find more ways to work with the Fed. It is his hope that the SEC and the Fed work together to attain shared goals – but that relationship must be a true partnership, he warned.

The move to impose prudential regulation on U.S. capital markets, in particular by applying a one-size-fits-all approach to capital requirements, is a threat to those markets, Gallagher said. The best way for the Commission to guard against risk, Gallagher added, is by fulfilling its mandate to maintain fair, orderly, and efficient markets, facilitate capital formation, and protect investors. With the capital markets being such an integral part of our economy, ensuring their success will have far more of a positive effect on the integrity and soundness of our financial system than would any action we could take as a result of abandoning the SEC’s mission in favor of regulating based on reducing systemic risk, Gallagher said.

The Financial Stability Board. “[A]lthough “financial stability” is the outcome to be expected if we do our job right, it’s not part of our mandate,” Gallagher said. As an independent agency, the Commission is expressly not a part of the presidential administration, and he finds it troubling to effectively be ordered about by an extension of the G-20. “Not only does the SEC not answer to the G-20, by design, we don’t answer to the president,” Gallagher said. Despite “grave concerns” about both the mandate and jurisdiction of the Financial Stability Board, however, Gallagher believes that the SEC should take advantage of its seat at the FSB – hopefully in conjunction with other U.S. regulators – to advocate for strong capital markets.

What the SEC must do next. The Commission needs to affirmatively engage Congress and the Administration and work to remove the “useless or counterproductive elements” of the Dodd-Frank Act, Gallagher said. The Commission cannot remain a passive observer, speaking only when spoken to by policymakers, and expect to succeed in reforming Dodd-Frank, he added. The Commission must also become a savvier agency – specifically, an agency that serves as an efficient overseer of the capital markets and an aggregator and analyzer of critical market information through the better use of technology. Finally, the SEC must affirmatively engage other regulators and relevant policymakers in the critical policy debates of the day, he concluded.

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