The CFA Institute is currently holding its annual conference in Boston. There are about 1,600 investment professionals in attendance from all over the world. Not surprisingly, there is much discussion about regulatory failures. Therefore, it was appropriate that SEC chairman Mary Schapiro kicked off the morning session on Tuesday. Unfortunately, she did not appear in person. She addressed the crowd remotely from her office.
Schapiro talked about a number of issues, but one she stressed strongly was the need for high quality international accounting standards. She called for a convergence of U.S. and international accounting standards.
The audience, however, was more interested in hearing about reforms at the SEC that might prevent the kinds of failures seen in recent years. Harry Markopolos, who was sitting in the audience, is particularly interested in this. Markopolos is a former student of mine from Boston College's M.S. program in finance. He is best known as the man who tried to stop Bernie Madoff. Markopolos complained to the SEC for years about Madoff, but was ignored. He recently published a book titled "No One Would Listen," which details all of this.
Its failure to stop Madoff before things got worse is one of the SEC's most embarrassing moments--even more embarrassing than the recent revelation that some employees had spent a considerable amount of time surfing pornographic websites during working hours. Without directly mentioning its Madoff failure, Schapiro said the SEC receives thousands of tips and leads every month. She is trying to get the agency to do a better job of processing all of these.
Some observers have complained that the SEC has too many lawyers and not enough financial experts. Schapiro admitted the agency is heavily lawyered, but said that is necessary since it is a law enforcement agency. However, she also said the SEC has been hiring individuals with broader talents and experiences. For example, many recent hires have worked at hedge funds and rating agencies. Schapiro mentioned that a lack of proper funding has long been a problem, but said funding was recently restored to 2005 levels. Nonetheless, she argued that the SEC should have independent sources of funding.
Schapiro explained that the reason she could not appear in person was because the SEC was going to release a statement later in the day about the May 6 meltdown. That was the day when the Dow suddenly lost 1,000 points on an intraday basis. Sure enough, the SEC announced a proposal to pause trading for five minutes on any stock that moves by 10% or more in a five minute period. It is hoped that such a pause would prevent high frequency, algorithmic, computer-driven trades from moving stock prices in a disorderly fashion. Click here to read the SEC press release regarding this proposal.