From the August 01, 2011 issue of Futures Magazine • Subscribe!

Mary Schapiro: In the eye of the storm


FM: A lot more advisors will become registered. Will you be able to handle the added workload? Is there a risk that registration will provide a false sense of security to investors?

MS: In 2010 with the number of investment advisors we had at that time, we were only able to examine 9% of registered investment advisors. On the securities side there is no NFA [ National Futures Association] for advisors, there is no self regulatory organization because Finra only can regulate and examine broker/dealers. If you look back seven years ago, 2004, we had 19 examiners for every $1 trillion of assets under management; we now have 12 examiners for every $1 trillion of assets under management. Our staff-to-assets-under-management number is shrinking and has been shrinking. With Dodd-Frank it will continue to shrink and it is a pretty disturbing trend. It is important to understand that as a result of Dodd-Frank we will take on lots of new regulated entities like securities-based swap dealers and municipal advisors and so forth. There is a category of advisors that will leave SEC jurisdiction and go be registered with the states, those with less than $100 million in assets under management. We expect 3,000 advisors to leave the SEC and go to the states but because we are going to be getting hedge fund advisors that are larger and much more complex, at the end of the day we will be regulating [a lot] more assets under management under Dodd-Frank than we were before. The base line answer is the number of advisors has grown, their assets under management have grown and our examination staff numbers have fallen and that is a disturbing trend. We have a risk-based examination approach and there is a methodology for determining which [advisors] should be subject to examinations in any given year. Bu that can mean some advisors don’t get examined for many, many years.

FM: With all of the financial innovation of the last decade, is it getting harder to draw distinction between jurisdictions? Is there room for more cooperation between the SEC and CFTC or the fundamentals differences between capital market and futures require two separate agencies?

MS: It absolutely is. When Congress created the CFTC in 1974, of course the SEC already existed at that time, but our jurisdictions could be delineated with relative clarity. Our markets were very distinct. That clarity began to blur as financial innovation took off, mostly because of the development of new derivatives products that had many features or were based on securities products. That introduced a lot of challenges to divining precisely which regulatory regime should be overseeing the new products.

FM: Don’t these agencies have two distinct missions?

MS: We have pretty much the same mission if you think about it in the broadest sense: To ensure the markets are operating fairly and efficiently and that market participants and investors in those markets have a fair opportunity to [operate] on a level playing field, but our statutory foundations are very different. Obviously the SEC is focused on capital formation, which is quite different form the futures markets which are more about risk shifting, and we have a much deeper and broader retail participation in our markets, although that exists in the derivatives markets. We all care about markets operating with integrity and participants in the marketplace being treated fairly.

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