Meeting the Regulators


New York – Meetings with various staff at the Securities and Exchange Commission (SEC) last week indicated that research remains an important topic on the regulatory agenda despite the challenges the agency faces in  implementing the Dodd-Frank Act.

Last week Integrity met with SEC staff from various divisions, including  Trading and Markets, Investment Management and Enforcement, as well as the Office of Compliance Inspections and Examinations (OCIE).  It was clear from the meetings that the Dodd-Frank Act is placing extraordinary pressures on the SEC, which is mandated to pass 95 new rules in a twelve month period – – six times the volume of rulemaking required under Sarbanes Oxley.

Nevertheless, research remains an important topic throughout the Commission, as evidenced in part by the continued effort to bring insider trading enforcement actions.  Senator Chuck Grassley’s latest salvo requests details on what actions the SEC has taken regarding approximately 20 Financial Industry Regulatory Authority referrals relating to instances of suspicious trading by SAC Capital.  Grassley has a long history of prodding the SEC over the years..

The irony is that SEC Enforcement, along with their colleagues in the Justice Department, appear to have been extremely active in their attempts to build a case against SAC Capital, including bringing actions against external research providers used by SAC.  It’s possible that Grassley’s action will slow the regulators’ ability to pursue these actions with vigor.

The OCIE has begun hiring additional staff with industry experience to assist in its exams. It would not be surprising if examiners take an interest in asset managers’ use of external research, and the safeguards put in place to prevent  inside information from being passed from an external entity to a hedge fund or mutual fund.

Since the Division of Investment Management focuses on rule-making for investment advisers and investment companies, this Division has ongoing interest in research.  Of high priority right now is the regulation of hedge funds as mandated by Dodd-Frank.  The Division of Trading and Markets, which focuses on rulemaking for broker dealers, as well exchanges, NRSROs and other market participants, has historically been the epicenter for soft dollar commission rulemaking.  Like their other SEC colleagues, they have a lengthy Dodd-Frank ‘to-do’ list, which puts soft dollars in the background for now.

The SEC’s budget for 2011 is 12% higher than its 2010 budget, reflecting the new requirements being placed on the agency.  Walking the halls of the SEC, we saw empty offices waiting for new recruits.  Enforcement and OCIE are expected to receive the bulk of the incremental staffing, assuring that regulatory and compliance issues will continue to be avidly monitored for the foreseeable future.


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