The SEC’s Strategic Plan for Regulatory Reform

(Editor’s Note: Earlier this month the SEC released for comment its draft Strategic Plan for 2010-2015, including their strategic goals and outcomes for regulatory reforms and investor information. We have extracted below the list of strategic goals and outcomes, and the discussion and initiatives associated with the regulatory reforms and investor information goals. The complete draft Strategic Plan is available here.)

Strategic Goals and Outcomes

Strategic Goal 1: Foster and enforce compliance with the federal securities laws

• Outcome 1.1: The SEC fosters compliance with the federal securities laws.
• Outcome 1.2: The SEC promptly detects violations of the federal securities laws.
• Outcome 1.3: The SEC prosecutes violations of federal securities laws and holds violators accountable.

Strategic Goal 2: Establish an effective regulatory environment

• Outcome 2.1: The SEC establishes and maintains a regulatory environment that promotes high-quality disclosure, financial reporting, and governance, and that prevents abusive practices by registrants, financial intermediaries, and other market participants.
• Outcome 2.2: The U.S. capital markets operate in a fair, efficient, transparent, and competitive manner, fostering capital formation and useful innovation.
• Outcome 2.3: The SEC adopts and administers rules and regulations that enable market participants to understand clearly their obligations under the securities laws.

Strategic Goal 3: Facilitate access to the information investors need to make informed investment decisions

• Outcome 3.1: Investors have access to high-quality disclosure materials that are useful to investment decision making.
• Outcome 3.2: Agency rulemaking and investor education programs are informed by an understanding of the wide range of investor needs.

Strategic Goal 4: Enhance the Commission’s performance through effective alignment and management of human, information, and financial capital

• Outcome 4.1: The SEC maintains a work environment that attracts, engages, and retains a technically proficient and diverse workforce that can excel and meet the dynamic challenges of market oversight. Outcome 4.2: The SEC retains a diverse team of world-class leaders who provide motivation and strategic direction to the SEC workforce.
• Outcome 4.3: Information within and available to the SEC becomes a Commission-wide shared resource, appropriately protected, that enables a collaborative and knowledge-based working environment.
• Outcome 4.4: Resource decisions and operations reflect sound financial and risk management principles.

Strategic Goal 2:
Establish an Effective Regulatory Environment

The Commission’s role is to put the federal securities laws into action by establishing a regulatory environment in which the agency’s mission can be met and sustained. Most securities regulation flows from two central principles. First, all investors should have equal access to accurate, complete and timely information about the investments they buy, sell and hold. Second, investors should be able to rely upon self-regulatory organizations, broker-dealers, investment advisers, investment companies, and other market participants to conduct investors’ securities transactions efficiently and in the investors’ best interests.

The Commission has broad authority to shape the regulatory framework for the securities industry. Rulemaking often is required to remedy abusive practices or to respond to Congressional mandates, changing economic conditions, advances in technology, or novel products or services. In general, rulemaking and policies are designed to improve disclosure, facilitate the flow of important information to investors and the public, improve governance, promote high-quality accounting standards, enhance the accountability of financial intermediaries and other market participants, and strengthen the structure of the trading markets, among other goals. When properly crafted, these rules serve to further the agency’s mission.

In addition to promulgating its rules and regulations, the SEC provides guidance when, among other things, it sets forth the views of the Commission or its staff on questions of current concern, without stating them in the form of legal requirements. The principal form of this guidance is publicly available staff statements on a particular legal or accounting issue or on an interpretation of a rule or regulation. The staff also responds to inquiries from individuals and companies about whether an activity undertaken in a specified manner would violate the securities laws. The inquiries can take the form of written requests that the staff not recommend enforcement or other action to the Commission if the activity is completed as specified. The Commission also issues individual orders granting relief from provisions of the securities laws when the specific facts indicate that doing so is consistent with the protection of investors and the policy and purposes behind the laws. These orders can serve as a testing ground for useful innovation and may pave the way for rulemaking.

The Commission believes that its rules and regulations should be drafted to enable market participants to understand clearly their obligations under the federal securities laws and to conduct their activities in compliance with law. Just as the securities laws require that disclosures be clear and precise, the Commission aims to promulgate rules that are clearly written, easily understood, and tailored toward specific ends. In addition, the agency recognizes that regular reviews of Commission regulations and its rulemaking processes are necessary to confirm that intended results are being achieved. (go back to list of goals)

Outcome 2.1: The SEC establishes and maintains a regulatory environment that promotes high-quality disclosure, financial reporting, and governance, and prevents abusive practices by registrants, financial intermediaries, and other market participants.

The investments of nearly every American family are dependent upon the maintenance of healthy capital markets. The greater availability of and access to investment opportunities can help Americans build their portfolios to create a better life for themselves and their children. Investment opportunities may include attendant hazards, however, such as the potential for abuse by market intermediaries and other participants. Such abuses erode the investing public’s trust and undermine investor confidence in markets as a whole. To protect investors and to promote confidence in the integrity and fairness of the markets, the Commission uses its regulatory authority to deter potentially abusive tactics.

The federal securities laws entrust the Commission with authority to shape the regulatory framework so that investors are protected through the availability of high-quality disclosure about their investments. In addition, the agency develops regulations that promote and strengthen corporate and fund governance. (go back to list of goals)

Initiatives:

To accomplish this outcome, the SEC plans to implement the following initiatives:

• Improve the quality and usefulness of disclosure: The SEC will continue to evaluate and, where necessary, amend its requirements to improve the quality and usefulness of registrants’ disclosures to investors. Areas of focus will include disclosure about risk management, executive compensation decisions and practices, nomination of directors, board governance, and discussion and analysis of results of operations and financial condition.
• Strengthen Proxy Infrastructure: The SEC will conduct a comprehensive review of the issues related to the mechanics of proxy voting and shareholder-company communications, including the role of proxy advisory firms.
• Modernize beneficial ownership reporting: The SEC will consider how to modernize its beneficial ownership reporting requirements to, among other things, address the disclosure obligations relating to the use of equity swaps and other derivative instruments.
• Harmonize regulatory structures for investment advisers and broker-dealers: The SEC will continue reviewing how the different regulatory systems that apply to broker-dealers and investment advisers may be harmonized for the protection of investors.
• Promote high-quality accounting standards: The SEC will continue to promote the establishment of high-quality accounting standards by independent standard setters in order to meet the needs of investors. For example:
  • In overseeing the Financial Accounting Standards Board (FASB), the SEC will strengthen and support the FASB’s independence and maintain the focus of financial reporting on the needs of investors, consistent with the recommendations set forth by the SEC Advisory Committee on Improvements to Financial Reporting;
  • The SEC will support FASB’s efforts to improve financial reporting, including recent standard-setting initiatives such as off-balance sheet accounting and accounting for financial instruments; and
  • Due to the increasingly global nature of the capital markets, the agency will promote high-quality financial reporting worldwide through, among other things, support for a single set of high-quality global accounting standards and promotion of the ongoing convergence initiatives between the FASB and the International Accounting Standards Board.
• Foster high-quality audits through the oversight of the accounting profession: The SEC will continue to oversee the PCAOB and its regulation of the accounting profession through the PCAOB’s inspection and disciplinary programs. The SEC also will work closely with the PCAOB on the promulgation and interpretation of auditing standards to address current issues in the capital markets.
• Continue global coordination and assistance: The SEC will continue to work closely with its regulatory counterparts abroad, as well as with relevant international organizations, to promote high-quality securities regulation worldwide and convergence where appropriate. In addition, the SEC will continue to provide technical assistance to emerging and recently-emerged markets to help these jurisdictions in establishing and implementing laws and regulations that minimize the likelihood of regulatory arbitrage and promote cross-border enforcement and supervisory assistance.
• Strengthen investment adviser and broker-dealer oversight: The Commission will continue to enhance its oversight of investment advisers and broker-dealers. For example, the Commission is considering rules designed to prevent political contributions from influencing the selection of investment advisers to the detriment of public pension plan clients, as well as rules that would provide additional safeguards to investors when an adviser has custody of client assets. The Commission will also consider requiring those who provide investment advice to provide clients and prospective clients with clear, current, and more meaningful disclosure of their business practices, conflicts of interest, and backgrounds.
• Address investment company distribution fees: Given the evolution in the investment management industry and in the uses of investment company distribution fees, the SEC plans to reconsider the rule permitting these fees and the factors that fund boards must consider when approving or renewing them.
• Enhance disclosures related to asset-backed securities: The SEC is considering revising its rules and forms to improve registration and disclosure requirements for asset-backed securities.

Outcome 2.2: The U.S. capital markets operate in a fair, efficient, transparent, and competitive manner, fostering capital formation and useful innovation.

Through rulemaking and other initiatives, the Commission works to assure that investors have fair access to securities markets; that their orders are handled in an efficient and transparent manner throughout the order entry, execution and settlement process; and that U.S. securities markets remain vibrant, competitive and resilient. These efforts help to promote markets in which investors have the necessary information to make investment decisions, the price discovery process is fair and free from manipulation, and trades can be executed efficiently. Also, the Commission fosters capital formation by facilitating market access for novel products and innovative and competitive investment company structures when consistent with investor protection.

Self-regulation is a fundamental component of the regulation of U.S. securities markets and market intermediaries. The Commission’s oversight of SROs serves to provide further assurance that our securities markets operate in a fair, efficient, and orderly manner; that they are competitive; and that they promote capital formation. The Commission has authority over the rulemaking and other activities of self-regulatory organizations, which include national securities exchanges, FINRA, and clearing agencies. In approving SRO rules, the Commission must determine, among other things, that these rules are designed to prevent fraudulent and manipulative practices, promote just and equitable principles of trade, and foster cooperation in the clearing and settling of trades, and that they do not create an unnecessary or inappropriate burden on competition. (go back to list of goals)

Initiatives:

To accomplish this outcome, the SEC plans to implement the following initiatives:

• Foster a strong market structure: The SEC will continue to pursue initiatives that promote the goals of the national market system in the trading of securities, such as enhancing price transparency, facilitating best execution, assuring fair access to trading systems, and fostering fair competition. These may include:
  • Strengthening the incentives for investors to display trading interest, and thereby contribute to the public price discovery process;
  • Enhancing the post-trade transparency of alternative trading systems (including dark pools) in order to address market fragmentation and facilitate best execution;
  • Reviewing the impact of algorithmic and other automated trading on the markets, including its contribution to market volatility and, if warranted, developing an appropriate policy response;
  • Articulating core structural standards for registered exchanges, particularly in light of the development of affiliated exchange groups;
  • Considering rulemaking with respect to the options markets to promote continued fair, efficient, and non-discriminatory access to exchanges’ quotations, to provide for uniform disclosure of execution quality statistics, and to address the extent to which quoting options in penny increments is appropriate; and
  • Updating Commission rules and regulations, such as Regulation ATS and Regulation NMS, to reflect market structure developments.
• Strengthen the viability of self-regulation: The SEC will take steps to promote the continued vigor of self-regulation, particularly in light of the potential conflicts of interest that have arisen as the securities exchanges have demutualized and become operators of highly-competitive, for-profit shareholder-owned businesses.
• Enhance oversight of derivatives: The SEC will consider ways to use its existing authority to improve the transparency and integrity of the over-the-counter (OTC) derivatives market, including the market for credit default swaps. The SEC also will work with other government agencies to seek changes to laws to fill regulatory gaps in the oversight of OTC derivatives. The SEC will work with the CFTC to seek to harmonize futures and securities laws for economically equivalent instruments.
• Prevent market manipulation: As part of this initiative, the SEC will review recent changes to the regulation of short sales to assess their effectiveness and determine whether additional modifications are warranted. The agency also intends to explore ways to enhance the transparency of trading activities to better deter and detect manipulation. In addition, the SEC will pursue initiatives to update and enhance the anti-manipulation rules that address the activities of underwriters, issuers, selling security holders and others in connection with securities offerings, as well as update and enhance the anti-manipulation rules that address issuer repurchases and timely public notice of dividends and other distributions.
• Improve transparency and oversight of small capitalization securities: The SEC will pursue initiatives focused on the special characteristics of the market for small capitalization securities, in order to enhance the transparency of this market and promote vigorous oversight. Goals of these initiatives will include assuring appropriate investor protections and promoting market efficiency. The SEC also will review its rule that governs the publication of quotations for securities that are not listed on a national securities exchange, to more narrowly focus that rule on those securities and situations most likely to raise concerns about fraud and manipulation.
• Implement money market fund reforms: The SEC plans to enhance the regulatory regime for money market mutual funds to better position them to meet demands from investors who want to redeem their shares on a short-term basis.
• Streamline the process for introducing new exchange-traded funds: The Commission will consider whether to permit certain exchange-traded funds to be introduced to the market without first submitting an application and receiving an order from the Commission.
• Strengthen oversight of credit rating agencies: The SEC will continue to enhance the program for registration and oversight of credit rating agencies that operate as nationally recognized statistical rating organizations, with a particular emphasis on measures designed to increase the transparency of ratings methodologies and performance and to address conflicts of interest inherent in the credit rating industry.
• Improve clearance and settlement: The SEC will continue to pursue initiatives to enhance the clearance and settlement of securities transactions by implementing “straight through processing,” the automation of the trade process from execution to settlement without manual intervention or the reentry of data. The SEC also will consider whether to modify existing transfer agent rules in an effort to modernize the manner in which transfer agents provide transfer and other services in the U.S. clearance and settlement system.
• Enhance market continuity of operations: The SEC is working with critical market participants to develop adequate plans and procedures so that back-up infrastructure and personnel are able to maintain continuity of operations through any future market disruption.
• Coordinate closely with other agencies on regulatory issues: In order to create a more effective and coordinated regulatory environment, the SEC will partner with other federal, state, and non-U.S. regulatory agencies to share data, information and expertise on regulatory issues that cross jurisdictional boundaries, domestically and internationally.

Outcome 2.3: The SEC adopts and administers rules and regulations that enable market participants to understand clearly their obligations under the securities laws.

The process of developing and administering rules and regulations is one of the primary functions of the SEC and involves staff from virtually every division and office. One of the agency’s primary objectives is to maintain a regulatory framework that enables market participants to understand clearly their obligations.

The success of this outcome requires coordination among staff who bring a variety of different perspectives, with appropriate tools and support. In addition, the agency must continually reevaluate its regulatory framework so that it provides sufficient protections to investors as new products or services enter the market. (go back to list of goals)

Initiatives:

To accomplish this outcome, the SEC plans to implement the following initiatives:

• Improve agency-wide coordination of the rulemaking process: The SEC will seek additional ways to break down internal organizational barriers and foster greater collaboration among divisions and offices on rulemaking initiatives. The agency will establish collaboration tools to more effectively gather and analyze data from across the SEC and manage rulemaking activities
• Enhance the economic support for Commission rules and regulations: The SEC will continue to enhance assistance of economists earlier and more often in the rulemaking process, so that the Commission’s rules and regulations continue to be appropriately informed by economic reasoning and robust cost-benefit analysis.
• Assess the effect of prior Commission rulemakings: The SEC will periodically assess the impact of past rulemakings to gauge their effectiveness and determine whether more effective alternative approaches may have become available. Where appropriate, these determinations should employ empirical analysis. Pertinent divisions and offices will establish collaborative tools to more effectively conduct and coordinate such analyses.
• Improve the process for no action, interpretive, and exemptive regulatory requests: The SEC will continue reviewing its process for handling written requests for no-action, exemptive and interpretive relief, so that the agency’s responses are completed in a timely and efficient manner.
• Streamline the process for reviewing SRO rule filings: Consistent with fulfilling its obligations under the Exchange Act with respect to the oversight of SRO rules, the SEC will continue to explore further ways to streamline the SRO rule filing process.
• Facilitate market access of financial products through exemptive rules: The SEC will aim to eliminate the need for investment advisers and investment companies to submit applications for exemptive relief that are substantially similar to certain previously granted applications by adopting rules codifying the relief. For example, the SEC may propose rules or amendments to rules that would codify exemptive relief the SEC has granted permitting funds of funds, employees’ securities companies and manager-of-manager structures.

Strategic Goal 3:
Facilitate Access to the Information Investors Need to Make Informed Investment Decisions

The federal securities laws require that corporations, investment companies, and other entities provide investors with timely and meaningful information about, among other things, their operations and finances. Because an educated and informed investor ultimately provides the best defense against fraud and costly mistakes, these laws place great emphasis on providing the investing public with meaningful information. As part of its disclosure program, the SEC requires entities to disclose financial and non-financial information to the public, thereby providing a common pool of knowledge for all investors to use to judge for themselves if a security is a good investment. Similarly, SEC rules require that investors have access to certain information about the financial intermediaries that they rely upon for investment advice and other services. SEC staff review the filings that corporations, investment companies, and other entities submit to assess whether the disclosures appear adequate and accurate.

The goal of the SEC’s investor education program is to give investors the information they need to evaluate current and potential investments, while also providing agency staff with critical insight about emerging trends and factors shaping investor decision making. The SEC staff aims to collect investor-focused data from a variety of sources and use it both to track trends in the securities industry and to identify, among other things, problematic brokers, firms, and sales practices. This information can help shape the agency’s overall approach to risk assessment, focus internal resources, and shape the initiatives of other SEC offices and divisions. In addition, agency staff work collaboratively with other regulators and educational organizations to place information in the hands of the investing public to promote informed decisions, as well as to help investors avoid fraudulent schemes. (go back to list of goals)

Outcome 3.1: Investors have access to high-quality disclosure materials that are useful to investment decision making.

Investors who have access to information and know what questions to ask are more likely to invest wisely. The SEC understands that not all investors need the same information and that those needs are affected by their backgrounds, resources and goals. The SEC seeks to structure disclosure requirements so that investors are armed with the timely and meaningful information they need to make appropriate investment decisions.

As technology and the complexity of financial instruments change, so too do the needs of modern day investors. Providing investors with information in concise, easy-to-use formats that are tailored to their needs helps investors to help themselves. On a recurring basis, the agency examines its filing review program to explore whether its disclosure requirements, review criteria, approach to comments, and the professional and technology resources utilized provide maximum impact to

benefit investors. As a result, new initiatives are generated and internal practices are revised that shape the future of the program.
(go back to list of goals)

Initiatives:

To accomplish this outcome, the SEC plans to implement the following initiatives:

• Revise disclosure and reporting requirements to reflect the informational needs of today’s investors: The SEC will undertake a number of initiatives to enhance disclosure requirements for the benefit of investors, including reassessing current core corporate disclosure requirements and implementing the new mutual fund summary prospectus regime. In proposing changes for the Commission to consider, the staff will seek to modernize disclosure requirements and eliminate redundant reporting requirements. The staff’s efforts will include a comprehensive review of proxy voting and shareholder communications to identify ideas and proposals for potential changes to rules. The SEC also will consider changes requiring broker-dealers that sell securities such as mutual funds, variable insurance products and 529 plan interests to disclose information relating to their compensation and conflicts of interest and key product features at the “point of sale” and on the Internet.
• Evaluate filing review programs for the most effective disclosures to investors: Agency staff will evaluate the filing review programs to determine whether the SEC is properly using risk management tools to identify filings for review and seek enhancements in disclosure.   This assessment will explore the criteria the agency uses to identify filings for review, the SEC’s approach to issuing comments to companies, and new ways for technology to help improve the agency’s programs.
• Design and implement new disclosure regimes for specialized categories of issuers: The SEC also will consider revising the disclosure requirements for securitized financial products and other complex financial instruments and work with the Department of Labor to address issues with respect to target date funds. The SEC intends to consider enhancing the information that a broker-dealer underwriting a primary offering of municipal securities must determine that an issuer will provide to shareholders, as well as to improve protections against identity theft and investor understanding of financial privacy notices. The SEC also intends to consider amending the broker-dealer and investment adviser registration forms, to elicit information that will be useful to investors in comparing and selecting investment professionals.

Outcome 3.2: Agency rulemaking and investor education programs are informed by an understanding of the wide range of investor needs.

Understanding the interests and concerns of investors is critical to carrying out the Commission’s investor protection mission. The agency advances this mission by communicating daily with investors, responding to their complaints and inquiries and providing educational programs and materials.

Prospectively, the agency intends to obtain more comprehensive information about the views and perspectives of investors. It will seek more robust information regarding the behavioral characteristics of investors and the types of information investors need and use as they make investment decisions. It will compile and provide this information to the Commission to help it develop rules and educational programs that address investors’ views and concerns.

The agency is exploring ways to encourage investor input by presenting investors with clear, easily understandable explanations of Commission rule proposals and other Commission activities through a variety of communication channels, including new media. These efforts will complement those of the agency’s Investor Advisory Committee, which was constituted to present the views and experience of a broad spectrum of investors, and which will serve as an additional source of information concerning investors’ priorities and perspectives on the Commission’s regulatory agenda.

More comprehensive data about investors also will drive the Commission’s investor education efforts. Working in partnership with other federal and state agencies, financial industry associations, consumer groups and educational organizations, the agency will develop investor education initiatives that are targeted to specific audiences, yet share the common objective of helping investors to help themselves. (go back to list of goals)

Initiatives:

To accomplish this outcome, the SEC plans to implement the following initiatives:

• Inform rulemaking with research on investor behavior: The SEC will proactively seek information on how different types of investors make investment decisions, in order to inform the Commission’s rulemaking efforts and investor education programs and materials.
• Reshape how agency information is made available to investors: The SEC will encourage investor input in the Commission’s regulatory agenda by providing easily understandable explanations of the Commission’s activities, distributed through multiple communication channels including new media, and by responding in a timely fashion to investor contacts.
• Address Investor Advisory Committee input: The SEC will consider information and recommendations from the Investor Advisory Committee regarding investors’ perspectives and priorities.
• Modernize technology and service offerings targeted at assisting the investing public: The SEC plans to use automated complaint tracking tools to identify emerging investor concerns and complaint trends to inform rulemaking efforts and the development of targeted educational materials.
• Expand collaborative partnerships: The SEC will partner with other federal and state agencies, securities regulators and non-profit organizations to shape and target educational initiatives to maximize their impact on specific communities of interest.