At the annual SEC Speaks held in Washington, DC on February 22, 2013, the SEC explained, justified, prodded, ruminated and complained.  And, despite the threat of imminent staff cuts if sequestration sets in, the Commissioners and senior staff offered an ambitious program for the coming year.

The proceedings were not without some color and controversy.

Commissioner Daniel M. Gallagher lamented the loss of the SEC’s independence, taking a swipe at Congress and the federal banking regulators.

The turning point, he suggested, was the Dodd-Frank Act.  The SEC, he said, “continues to stare down an overflowing plate of Dodd-Frank mandates in addition to its other responsibilities.”

The SEC, he cautioned, must not allow itself to assume a secondary role in the regulation of matters squarely within its jurisdiction and core competencies. This, I’m afraid, is exactly the role that the Commission has taken thus far with respect to critical initiatives, including the Volcker Rule.

Gallagher cited the Volcker Rule as an example of how Congress is attempting to whittle away the SEC’s independence.  Section 619 of the Dodd-Frank Act requires the three federal banking agencies, the CFTC and the SEC to implement the Volcker Rule.  Unfortunately, he said, “there is little doubt that notwithstanding the valiant efforts of the SEC staff, the Commission for too long has taken a back seat to the banking regulators in this rulemaking process.”

Gallagher cited what he saw was another new and immediate challenge.  FSOC, he said, “has directly challenged the Commission’s regulatory independence.”   While he did not question the importance of FSOC’s broad mandate to identify systemic risks and emerging threats to the country’s financial stability, the banking regulators have “drastically different missions.”

By definition, the securities markets put investors’ money at risk.  The SEC’s mandate, he said, is not to ensure safety and soundness, but to protect investors from fraud and to ensure fair and efficient markets.  “We must keep a healthy distance between capital markets regulation, which rightfully assumes no taxpayer safety nets, and bank regulation,” he said.

Yet, FSOC, driven by bank regulators, has been pressuring the SEC to act on money market funds, which is the SEC’s area of expertise.  He found this institutional meddling with the regulation to be “immensely troubling.”  The statutory authority that Congress granted to FSOC, he said, “is not simply a threat to the Commission’s independence—if exercised, it would be an outright annexation.”

FSOC, Gallagher noted, chaired by a cabinet appointment, consists of the individual Chairs of the banking regulators, the CFTC and the SEC.

While one might expect that the Chairman of the SEC would always represent the views of the Commission as a whole, there is no formal oversight mechanism available to the Commission to check the Chairman’s participation on FSOC.

This structure, he suggested, could lead to “undue political influence.”

Commissioner Troy A. Paredes also took a shot at Congress and the Dodd-Frank Act, which he termed “sweeping legislation that is spawning reams of new rules and regulations that I worry will overregulate our financial system and in turn suppress our country’s economic growth.”

Dodd-Frank represents what to my mind is a disquieting expansion of the federal government’s control over the economy.

Paredes also challenged the disclosure regime of the federal securities laws:  “we must account for the fact that too much disclosure, particularly when it is too complex, can be counterproductive.”

On more mundane matters, Lona Narengalla, the acting director of the Division of Trading and Markets, said that finalizing the rules implementing Title II of JOBS Act was priority of the staff.

The Division of Investment Management and the Division of Enforcement signaled more aggressive examinations and enforcement initiatives, pointing to an uptick in actions against individuals.

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