The SEC’s trading and markets division “devotes its resources almost exclusively to the equity markets,” the group’s Center for Capital Markets Competitiveness said in a 131-page report called “U.S. SEC: A Roadmap for Transformational Reform.”
“It does not have a single unit responsible for oversight of the secondary market in debt securities,” the report said. “This is surprising when one considers how much larger and more complex the debt market is.”
The report, authored by Jonathan “Jack” Katz, who was the SEC’s secretary for 20 years, noted that the commission created an office to oversee municipal securities more than 20 years ago under then-chairman Arthur Levitt. Despite an initiative at that time to focus on the muni market and adopt new disclosure requirements, the office was “severely understaffed,” the report said.
Eventually the market was merged into the trading and markets division, where it shrank to only two attorneys.
“One year after Dodd-Frank mandated the creation of an independent office of municipal securities, the SEC continues to function with only two or three professional staff overseeing the entire market, as it has for the past decade,” the report said. “One former senior SEC official interviewed for this study suggested that the largely retail muni market should be one of the highest priorities for the commission. Instead, it continues to be understaffed and overlooked.”
The report included a chart summarizing the types of enforcement actions brought each year by the SEC. It shows that only 1% of the SEC’s cases were muni from 2005 through 2010, with the exception of 2009, when muni cases were 0.03% of overall SEC enforcement actions. There were no muni cases in 1989 and 2000.
The Chamber seemed to support the SEC’s efforts to create five specialized enforcement units, including one on muni securities and public pensions, but said the staffing of these units should grow to represent 40% of the enforcement division.
In broader-based recommendations, the Chamber said Congress should create and fund a blue-ribbon team of experts to conduct a thorough review of the SEC and U.S. capital markets.
It also urged Congress to increase the number of SEC commissioners to seven from five and specify that at least one be an accountant, one an economist, and one an attorney. One commissioner should be designated by the president, on the recommendation of the SEC chairman, as the commission’s deputy chairman for management and operations, the group said.
The trading and markets division and the division of investment management should be realigned into a division of investor protection and retail financial services regulation and a division of market oversight and operations, according to the report. The examinations programs of the office of compliance, inspections, and examinations should be assigned to these new divisions, the group said.
Senior SEC officials should be hired for renewable five-year term appointments and new employees should be evaluated during a three-year probationary period, according to the report.
The Chamber recommended the SEC develop a comprehensive set of performance measures.
In the enforcement area, the group recommended the SEC close old or insignificant cases. In the regulatory arena, it stressed the importance of cost-benefit analyses and said they should be “an integral component at the earliest stage of the rule development process.” In addition, the SEC should only mandate the adoption of industry best practices through the rulemaking process, it said.
The Chamber said these reforms are needed because “for more than a decade, the SEC regulatory and enforcement structures have failed to keep pace with rapidly changing markets.” The recommendations go much further than the recommendations for incremental change that the Chamber made in a 2009 report.