Improving the Role of the Securities Regulators in a Changing Global Financial System

Good morning. And, thank you Hans [Hoogervorst, Chairman, Authority for the Financial Markets, Netherland, and Vice Chair of the IOSCO Technical Committee] for that kind introduction.

I’m delighted to be speaking with you today — even though it’s after 2:00 in the morning here in Washington. But, the way I see it, investor protection doesn’t sleep, so I thought I’d stay up too.

I would also like to express my warmest thanks and congratulations to our hosts, Professor Zohar Goshen [Chairman of the Israel Securities Authority], and Chairman Saul Bronfeld [of the Tel Aviv Stock Exchange], as well as Dr. Stanley Fischer [Governor of the Bank of Israel], for organizing this wonderful and important event.

And, I also would like to thank the IOSCO Executive Committee Chair Jane Diplock, Emerging Markets Committee Chair Guillermo Larraín Ríos, my colleague Technical Committee Chair Kathleen Casey, and Secretary General, Greg Tanzer — for their efforts in promoting IOSCO’s goals. I was truly looking forward to seeing so many old friends and colleagues from my many years of involvement with IOSCO.

I really wish that I could have joined you in person. But, here in the U.S. we are very deep in the process of reevaluating our regulatory landscape, as I’m sure you know, and we are having significant discussions within the Administration — so I felt I needed to remain behind.

Improving the Role of the Regulator

You might say that, in the U.S., we are attempting to do exactly what this panel is slated to discuss: “Improving the Role of [a] Securities Regulator in a Changing Global Financial System.”

But for us all to be effective regulators, improvement cannot just come once every financial crisis. No. Instead, we need to be constantly improving on our effectiveness. We need to be constantly considering whether there are gaps in and between our regulatory regimes through which certain players or products can easily slip. And, we need to be constantly doing whatever it takes to keep pace with the newest financial products of the day — so we can understand those products just as well as the people selling them. We need to be constantly alert to the risks that may attend dynamic innovation in the way financial products are packaged and sold.

The fact is that we need to do those things whether or not there is a financial crisis. But, in light of the crisis, we need to do those things even better. That’s because investors want to know that we’re looking out for them. They want to know that companies are being truthful and transparent in what they say. And, they want to know that it’s OK to put their money back into the markets.

In short, it is our time to prove ourselves. Because, we can help restore the confidence that is so desperately needed for capital markets to flourish — if we all succeed at what we do. And, if we work together, we increase the scope and impact of our individual successes.

Interconnected

While we may all come from varying legal and regulatory systems, our markets are very much interconnected. Market movements around the world are more tightly correlated than ever before. And, due in part to technology, information, money, and transactions travel across our borders at the speed of light.

Unfortunately, so too does fraud and its effects. Yet, because our sovereign power cannot cross borders with as much ease, fraud often gets a head start on our enforcement efforts. In approximately 1/3 of our insider trading and market manipulation cases, we have to go abroad for the evidence. So, for all of us to succeed, and to protect the global market’s integrity, none of us can go it alone.

The Principles

That is one of the reasons I think we all value the role of IOSCO. We all recognize the need to work cohesively — while at the same time appreciating our diverse governmental structures and sometimes divergent approaches to regulation. IOSCO provides a forum for discussing those approaches, sharing ideas, and gradually moving towards a degree of regulatory convergence.

IOSCO also keeps us all focused on three core principles that must continue to animate all who oversee securities markets:

First — the protection of investors. This is something that I think about at all times. On the door to my office I have a sign that reads “How does it help investors?” It serves as a reminder to anyone who enters that the investor is our highest priority. That’s our primary focus.

Second — ensuring markets are fair, efficient and transparent. As investor advocates, we understand the importance of stable markets and sound institutions. But, we also appreciate that truthfulness and transparency are just as important. In short, we cannot stop investors from taking risks, but we can insist that they have the relevant facts to weigh those risks.

And, third — the reduction of systemic risk. This is a topic in the U.S. that is generating significant attention as we grapple over just how best to understand and reduce the risks that can threaten our financial system as a whole.

What We’re Doing Here

Here in the U.S., we have embarked on an ambitious program to improve our investor protection efforts. And, every measure we’ve undertaken is closely allied with one of the IOSCO principles to which we have all subscribed.

Let me just give you a flavor of all we’re doing:

Executive Compensation: Just a few hours ago — I talked about new rules we are considering that would allow investors to know more about how businesses compensate their top officials. This helps investors by giving them the information they need to make better investment decisions.

While these proposals would not dictate particular compensation decisions, they will lead companies to analyze how compensation impacts risk taking — as well as the implications for long term corporate health of the behavior they are incenting. After all, incentive structures that rewarded short term risk taking without considering the potential long term effects on the company are widely believed to have contributed to the economic crisis.

Hedge Funds: In addition to executive compensation, we are also helping investors by seeking to eliminate holes in our regulatory fabric so that hedge funds, credit default swaps, asset-backed securities and other less well-regulated pools and products are subject to effective supervision or oversight. Greater oversight of these products and funding pools will help investors by bringing sunshine into shadow markets, and reducing regulatory arbitrage.

Custody Controls: We are also contemplating more stringent rules for investment advisors who maintain custody of their client assets. In such cases, we’re proposing to require these advisors and their custodians to undergo annual third-party examinations by accounting firms. By leveraging third parties to assist us we are stretching the effectiveness of our regulatory regime.

Harmonization: We also will be considering whether and how to harmonize the responsibilities of investment advisers and broker-dealers. Today, just as there are different standards from country to country, the U.S. regulatory regime employs different standards from one type of money manager to the next, depending on what they are called. This will help investors by ensuring that they have a uniform level of professionalism and accountability.

Credit Rating Agencies: Further, we are thinking about the role of the credit rating agencies in the crisis and whether more disclosure from credit rating agencies, including the assumptions underlying their methodologies, fees received from issuers, and factors that could change ratings.

Money Markets: And, finally we are looking into enhancing the standards that apply to money market funds — to improve liquidity and credit quality and to consider more fundamental changes to the structure of these instruments. This of course helps investors so that they do not purchase a risk they weren’t intending to purchase.

All these and more are on our regulatory agenda — their urgency and significance underscored by our recent economic experience. But each one has a significant impact on investors and each one is consistent with the goals that we all share, as capital markets regulators.

The toll taken by the current economic crisis has been enormous. It has shaken our capital markets to their core, but they remain. And it is our jobs, collectively, to make sure we take the steps necessary to better reinforce the system.

Thank you so much for inviting me to speak today.