Mary Schapiro could have been triumphal in her talk today to the U.S. Chamber of Commerce.
The chairman of the Securities and Exchange Commission walked into the den of perhaps the agency’s leading adversary with a massive new regulatory law in her back pocket that greatly enhances the SEC’s powers.
That law demands the SEC undertake studies and rulemaking to get the job done.
The Securities and Exchange Commission should be on the verge of a better funding mechanism to do an ever-expanding job.
The about-to-be-signed Dodd-Frank financial reform bill changes the SEC’s funding structure, said SEC Chairman Mary Schapiro, tying the agency’s funding to the fees it collects. “So any increase or decrease in the agency’s budget would be matched by a rise or fall in fee collections,” she said.
The SEC chairman, in testimony prepared for a U.S. House of Representatives committee, offered a way to look at the quite recent bad old days of too-tight budgets. Schapiro said that in the past 20 years, the dollar value of the average daily volume in stocks, exchange-traded options and securities futures has grown by more than 25 times, now standing at about $245 billion a day.
In that same period, the agency designated to watch over those burgeoning markets actually reduced staff “and its technology fell further behind,” said Schapiro.
But there’s no doubt the wind is now at the SEC’s back. This year, budget wise, the agency got back to where it was five years ago.
For fiscal 2011, the administration request is for a 12% budget increase, which would allow the SEC to add another 374 professional staff, bringing SEC employees to a total of 4,200.
Given the extra responsibilities coming with the Dodd-Frank bill, Schapiro repeated her view that the SEC will need 800 new positions over time to cope.
You would think, given the onslaught of studies and rulemaking about to come their way thanks to financial reform legislation, the leaders of the Securities and Exchange Commission wouldn’t look for new things to take on.
Give the commissioners credit. They voted 5-0 today to get the ball rolling on a fundamental review of the basics of corporate democracy in the U.S.
SEC Chairman Mary Schapiro modestly terms the issue “proxy plumbing,” and some of the issues do have eye-glazing characteristics. But this goes right to the heart of actual shareholder rights, issues such as who gets to vote and how the companies that advise those votes are regulated.
The numbers make it look like corporate democracy is alive and well in America. The SEC reports 600 billion shares are voted at more than 13,000 shareholder meetings each year. But behind the numbers are activities such as “empty voting,” which turns on its head the notion that a voting shareholder has an economic interest in seeing his company succeed.
Technically, what the SEC did today was approve the issuance of a “concept release,” a broad call to the interested public to comment on some fundamental questions related to the proxy voting process. The public has 90 days to make their views known. After that, there may or may not ultimately be any action taken by the SEC. If there is action, it likely won’t come for a good while.
Given the technological changes and advances in human cleverness about using market structures in ways they were never intended, and given the salient fact that the last comprehensive view of these issues took place some 30 years ago, you can say it’s about time.
Even for the SEC to recognize the “empty voting” issue has taken a while. An alarm-ringing legal article that outlined the issue quite well (the lead author, Henry T.C. Hu, now works for the SEC) was published in January 2008.
The article said this: because of the growth of derivatives, share lending and other factors, we “permit decoupling of voting rights from economic interest to occur quickly, at low cost, on a large scale, and often hidden from view.”
Certain investors have the legal right to vote on such crucial issues as mergers when their market maneuvers mean their economic interest can be in direct opposition to that of traditional shareholders.
“Empty voting” isn’t the only issue sure to draw comments. The SEC also wants comment on the growing role of proxy advisory firms and whether there’s a case for “enhancing regulatory oversight.”
The Securities and Exchange Commission’s Tuesday announcement about the coming of individual stock circuit-breakers that are uniform across exchanges was welcome news after the debacle of May 6th’s market activity.
But the last line of the SEC’s press release wanders into the world of fixing an adjacent problem that likely doesn’t exist.
First, the headline news described in the first paragraph. With what must be studied understatement, SEC Chairman Mary Schapiro said, “We continue to believe that the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges.”
Of course it was. Why one exchange (The New York Stock Exchange) was ever allowed to slow trading in particular shares if they fell a large amount in a short period of time while other exchanges were not so obliged is now a most appropriate question. Looking back to May 6, it in hindsight seems a practice destined to help cause disaster as liquidity dries up and stock prices briefly plummet.
Maybe we have reached the sad point in the U.S. when each chairman of the Securities and Exchange Commission will have to produce a ‘Donaldson moment’ to prove his or her independence.
The reference is to William Donaldson, who ably chaired the SEC for a time under the presidency of George W. Bush. Donaldson, appointed by a Republican president, famously and more than once sided with the two Democrats on the five-person commission on controversial rule-making votes.
“I couldn’t care less,” Donaldson said of the cross-party-lines votes. The SEC shouldn’t be political.
The New York Fed on Maiden Lane
The Securities and Exchange Commission today approved a rule today designed to reduce the risk in markets like those for asset-backed securities. But some real questions remain as to whether the new rule would really prevent much of anything.
Basically, the SEC wants issuers of asset-backed securities to retain at least 5% of the securities they are offering. As SEC Chairman Mary Schapiro says: It will force them to have some “skin in the game.”
But will making issuers have “skin in the game” really make them more responsible in evaluating risk?
A lot has changed for Eliot Spitzer since he was the hard-charging attorney general for New York in the early 200s, making Wall Street quake.
One thing that hasn’t changed is Spitzer’s less than sterling regard for the Securities and Exchange Commission. As attorney general, he jousted with the SEC over regulatory authority and leadership.
Now, as a columnist at Slate, the online publication, he takes the current SEC chairman, Mary Schapiro to task. “Two years after the largest financial meltdown in history, the SEC has still not brought any cases that challenge the structural flaws of the financial industry,” Spitzer wrote in a post made yesterday.
Finally and unfortunately, 2010 is likely to be the year of proxy access at the Securities and Exchange Commission.
SEC Chairman Mary Schapiro today again publicly supported the concept, which would allow certain shareholders to nominate directors to the board. Their candidacies would be carried on company supplied voting materials, making it easy for holders to choose.
The long debate and delay over proxy access (the idea has been kicking around the SEC since at least 2003) only makes this blogger believe ever strongly it’s a concept whose time has passed. Still, three of the five SEC commissioners seem to back the plan.
There are simpler ways to achieve the goal of giving shareholders (all of them, not just large ones) more say about who represents them on a corporate board of directors.
In prepared remarks for a California speech today, Schapiro said current barriers to holder nominations of directors “weaken a board’s accountability to shareholders, which in turn may impact a board’s incentive to manage risks appropriately.”
Boards, generally speaking, have been no heroes in judging corporate risk, maintaining sensible top executive compensation and much else. But accountability is easier to achieve via annual elections of all directors where a majority rules. More withhold votes than yes votes at every public company should mean a director has to resign. More companies are moving that way, but not all.
Proxy access does not spread small d democracy. Only large holders would have the limited nomination rights. Presumably, most holders of all sizes care more about the share prices rising than about permission to enter the inner workings of corporate governance. Voting in annual director elections is enough of a burden for most.
The large institutional holders who will make use of the proxy access are those most likely to have other things besides a financially thriving company on their minds. Large public pension funds and others with social and political agendas surely will be tempted to have their ‘own’ board members.
And that will only lead to more fractious boards and diversions of management time and effort.
“Strengthening the ability of shareholders to hold boards of directors accountable to them should further empower shareholders and help to restore investor trust in our markets,” Schapiro also said today.
Yes, certain large holders will be further empowered. As for trust, a 60% plus gain in the main U.S. stock indexes since the depths sunk to in March 2009 is likely a more relevant measure than proxy access.
The U.S. Securities and Exchange Commission is getting around to assessing a fundamental aspect of share ownership: do you need to have economic skin in the game in order to vote shares.
Don’t look for any action soon. Securities and Exchange Commission Chairman Mary Schapiro on Wednesday talked about a staff review that will result in a “concept release” about the ownership/voting conundrum and related proxy topics.
A concept release, as defined on the SEC’s web site, is designed “to solicit the public’s views on securities issues so that we can better evaluate the need for future rule making.”
If the hedge fund adviser registration bill that sailed Tuesday through the House Financial Services Committee becomes law, it had better come with a budget supplement for the Securities and Exchange Commission.
If it does not, there might be a lot less present than meets in the eye in the bill to force hedge fund advisers along with those working for private equity firms and other private pools of capital to register with the SEC.
The committee approved the measure by a vote of 67 to 1.
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