FM: On the SEC site is a page that lists elements of Dodd-Frank rulemaking that have been deferred due to “budgetary uncertainty.” Do you anticipate this list growing?
MS: The rulemaking will get done. We will not meet all of the statutory deadlines in Dodd-Frank; we are moving very deliberately to complete the rules but taking the time to get them right. The next step, fully implementing [the regulations], that is where resources are going to be critical. We are required to create five new offices and we have to have permission from our appropriators to move money within our existing budget to create those offices. We don’t have that permission yet.
FM: Many people view inappropriately rated securities and conflicts of credit rating agencies as key drivers of the financial crisis. How has the Commission addressed this?
MS: I have been talking for a long time about the conflict of interest of credit rating agencies. I have likened the ratings process to college students who get to choose a teacher based on which one will give them an ‘A.’ We have been committed to adopt the rules that are necessary to increase transparency and improve the integrity of ratings. We started that process well before Dodd-Frank but just a couple of weeks ago we proposed a comprehensive set of new rules under the Dodd-Frank authority that should make the ratings process more objective and transparent. And we are going through all of our rules that are already on the books to eliminate over-reliance on ratings by investors.
FM: High-frequency trading is now accounting for a majority of securities volume. How concerned are you with this and what steps is the SEC taking to address what some traders believe is an unfair edge by these players?
MS: I am very concerned that our regulatory structure needs updating to keep pace with the tremendous changes in trading technologies that we have seen over the last few years, and high-frequency trading falls into that category. We already have taken some important steps in that direction. We have adopted the single stock circuit breakers to address the extraordinary volatility that happens when high speed and high volume strategies operate as they did on May 6 in unintended and unpredictable ways. We also have adopted a market access rule that goes into effect fully in November — parts of it go into effect sooner — that requires brokers to use risk and regulatory controls when they provide their customers with access directly to the markets; it has been called banning naked access to the market. We also proposed two measures — that I hope [to be completed] by the time this is published — that would allow us as regulators to have a greater ability to monitor trading and enforce trading rules. Those are the consolidated audit trail and the large trader reporting proposals. One of the issues coming out of May 6 was, because of our highly fragmented equity market structure and the lack of a single consolidated audit trail, it took us a very long time and an enormous amount of effort to recreate the trading that happened on [that day]. Once we can catch our breath from the Dodd-Frank rule making it would be my hope to turn our attention back to flash trading and dark pools and the concept release that we have out on high-frequency trading issues.