Letter on “Fixing the Watchdog: Legislative Proposals to Improve and Enhance the Securities and Exchange Commission”

September 13, 2011

The Honorable Spencer Bachus
Chairman
Committee on Financial Services
U.S. House of Representatives
Washington, DC 20515

The Honorable Barney Frank
Ranking Member
Committee on Financial Services
U.S. House of Representatives
Washington, DC 20515

Dear Chairman Bachus and Ranking Member Frank:

The U.S. Chamber of Commerce, the world’s largest business federation representing the interests of more than three million businesses and organizations of every size, sector and region, believes that effective regulators are needed to ensure the safety and soundness of the financial markets.

As the House Committee on Financial Services holds a hearing entitled “Fixing the Watchdog: Legislative Proposals to Improve and Enhance the Securities and Exchange Commission,” the Chamber would like to draw your attention to a report, Examining the Efficiency and Effectiveness of the U.S. Securities and Exchange Commission (report). This report was released by the U.S. Chamber on February 11, 2009 and makes 23 recommendations to improve the core operations of the U.S. Securities and Exchange Commission (SEC) to improve the agency’s regulatory oversight.

While some improvements have been made to the management and operations of the SEC, much remains to be done. Effective financial regulatory reform cannot take place until the regulators themselves are better managed and have the tools and expertise needed to understand the markets that they regulate. The recommendations that are needed to create a more effective agency include:

• The SEC should provide its Chief Operating Officer (COO) with sufficient authority to oversee daily operations throughout the SEC to promote efficiency and prompt action.
• The SEC should establish a coordinating council, chaired by the COO, to resolve issues or disagreements involving more than one division or office, in order to prevent regulatory silos.
• The SEC should expand the breadth of its staff expertise. Legal and accounting expertise should be complemented with staff experts in capital markets operations and the business operations of regulated entities as well as financial economics.
• The Division of Trading and Markets 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. Additionally, the Office of Compliance Inspections and Examinations should be folded back into the divisions.
• The SEC should create an accelerated conditional approval process for new investment products or services.

The Chamber will release new recommendations later this fall when the second report on SEC efficiency and effectiveness is released.

The Chamber would also welcome this opportunity to comment on the discussion draft of the “SEC Modernization Act of 2011” and H.R. 2308 the “SEC Regulatory Accountability Act.”

The Chamber agrees with the goal of the SEC Modernization Act of 2011: to bring about transformative change to establish even handed and effective regulation to ensure that U.S. capital markets are competitive in a global economy. However, the legislation can be improved to promote the nimbleness of the SEC in an ever changing financial market. The legislation should outline a series of principles and objectives for the SEC to achieve, such as a defined chain of command, elimination of regulatory silos and improved coordination and communications amongst divisions, and a defined regulatory plan to promote market efficiency and capital formation. The SEC should be directed, within a specified period of time, to present a reorganization plan for Congressional review, consistent with Congressional oversight responsibilities and the long-established process for review of agency reprogramming requests.

These changes would put the onus on the SEC to reorganize itself with Congressional oversight, and overcome an organization resistant to change. A holistic reorganization could also be mandated to reoccur over specified time horizons.

The Chamber is also supportive of H.R. 2308 and believes that it should be amended to ensure the effectiveness of cost-benefit analysis.

The use of cost-benefit analysis in rulemaking is a significant issue of public policy. It is particularly pertinent for the SEC in the wake of the recent decision of the DC Circuit Court of Appeals in Business Roundtable and U.S. Chamber of Commerce v. Securities and Exchange Commission vacating the proxy access rule because the appellate court concluded that the Commission “failed once again adequately to assess the economic effects of a new rule.”

Smart regulation requires a re-thinking of the process for developing and implementing regulations. A final regulation is the start of the process, not its completion. The current means of producing cost-benefit analyses is limited and subject to potential manipulation. Accordingly, the Chamber believes that H.R. 2308 should be amended to mandate a different approach that combines a pre-adoption cost-benefit analysis with a post-adoption look-back requirement.

Under such an approach, as an example, the Commission should collect data and reevaluate a rule after a defined period to determine the effectiveness of a rule, the need to keep it on the books, or to modify it. Such a periodic check of all rules would also help to determine if rules are obsolete.

A retrospective look back also offers several advantages. In addition to compelling the staff to examine the rule’s impact, the legislation would fundamentally change how rules are developed. Knowing rules would be empirically examined would force the staff to carefully consider how it would be done and to develop internal discipline in the drafting process. Institutionalizing a meaningful evaluative role for the Chief Economist would strengthen its hand during drafting of the rule. Finally, requiring the examination staff to consider these issues at the outset would cause it to be more pro-active in its inspection program, less inclined to focus on after the fact disasters and provide the SEC with more oversight of its function.

The Chamber looks forward to working with the Committee on these issues and these bills to ensure the vibrancy of American capital markets.

Sincerely,
R. Bruce Josten

Cc: The Members of the House Committee on Financial Services