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From Securities Regulation Daily, October 25, 2013

Gallagher calls for SEC to establish priorities in rulemaking

By Jacquelyn Lumb

Commissioner Daniel Gallagher today spoke at the AICPA/SIFMA securities conference about the need to establish priorities at the SEC rather than following trends and the political winds. The Dodd-Frank Act expanded the SEC’s docket exponentially, but in his view, the SEC must spend its time and resources on the most pressing issues. Some things matter more than others, he said, and some things do not matter at all. The SEC must focus on its three overriding mandates in establishing its priorities, but Gallagher believes the investor protection mandate gets the most attention. Without fair and efficient markets and the promotion of capital formation, there are no investors to protect, he said.

Misplaced priorities. Gallagher questioned whether the rules on conflict minerals and resource extraction should have been among the SEC’s top priorities since neither has anything to do with the SEC’s mandate or the financial crisis. On the other hand, there has been no progress on the removal of references to credit ratings in the SEC’s rules. Over-reliance on credit ratings was at the heart of the collapse of securities products in the financial crisis, he said, and former Chair Christopher Cox proposed removing them over five years ago, but no progress has been made.

Gallagher also pointed to a proposal that a majority of commissioners approved last month, over Gallagher’s and Commissioner Michael Piwowar’s objection, to require the disclosure of the CEO’s pay ratio to that of other employees. The proposal does not contribute to capital formation or protect investors, Gallagher said, nor does it address any aspect of the financial crisis. Congress did not mandate a time frame for the adoption of the rules, so in Gallagher’s view, it was a misprioritization of the SEC’s time and resources.

Gallagher’s priorities. Gallagher said the SEC’s initiatives should be based on whether they are clearly important in fulfilling the SEC’s three-fold mandate. The SEC should consider whether an initiative is more pressing than other tasks that meet that criteria and whether it addresses one or more causes of the financial crisis or would help avoid future crises. The SEC should consider the trade-off with what an initiative, if taken up, will leave undone. Gallagher said the SEC also should consider whether it has the requisite expertise and whether it can implement an initiative in a cost-effective manner.

Gallagher’s own list of priorities includes the removal of credit agency references from the SEC’s rules, which is clearly a crisis-related action, in his view. Second, he said that a market structure review is long past due, and added that he was pleased that Chair Mary Jo White addressed the need for a review in a recent speech.

Another priority would be proxy advisor reform. Gallagher said this industry is a tiny oligarchy that wields a disproportionate influence. Many institutional investors are outsourcing their responsibilities to these third parties, he said.

Gallagher would also move forward on Title IV of the JOBS Act by adopting Regulation A+. Current Regulation A is seldom used, and many say it is because the offering limit is too low. Gallagher believes Regulation A+ would be a helpful step in the capital formation process and would offer an investment opportunity for retail investors.

Gallagher would also like to take up fixed income regulatory reform and a review of the SEC’s complex disclosure rules and forms. Information that is truly material gets buried and shareholders pay the price, he said.

Gallagher highlighted one thing that would not make his list, and that is the disclosure of political contributions. If they are material, he said issuers already must disclose them, but adding all political contributions to the list of mandated disclosure items would impose significant costs, in his view.

After presenting his prepared remarks, Gallagher answered questions from the audience. In response to a question about what he would do if there were no political constraints, he talked about the problems with the Dodd-Frank Act. He noted that the Act eliminated one government agency but added three more. If the SEC and the CFTC were ever going to be merged, he said that would have been the time. He believes the Act has made things worse. Gallagher said that bankers are now making decisions about markets they do not understand. He believes there should be a bright line between banking regulation and market regulation.

Gallagher was also asked about the status of converging U.S. GAAP with international financial reporting standards. He said that White has expressed an interest in making progress in that area, but it has been a political hot potato. He noted that the SEC has been in a period of transition over the past year with three different chairs and the addition of new commissioners, but predicted that action may be taken in six to nine months.

MainStory: TopStory SECNewsSpeeches DoddFrankAct JOBSAct

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