Regulatory Turf War Gains Steam

By Riley McDermid, Deputy Editor

By Riley McDermid, Deputy Editor

The line between individual investor liberty and investor protection is subtly shifting after Securities and Exchange Commissioner Mary Schapiro implied the agency wants to remain independent, Josh Galper, managing principal of financial consulting firm Finadium, told Markets Media Friday.

Galper said Schapiro's testimony before a Senate Banking Committee hearing Thursday could be seen as a last-ditch effort to convince lawmakers that despite recent missteps, the agency should not be merged with the U.S. Treasury Department or the U.S. Commodity Futures Trading Commission.

“Emphasizing the investor protection role of the SEC seemed to be the main goal,” said Galper, a role the SEC continues to defend despite failing to recognize recent massive frauds, most notably Bernard Madoff's far-reaching Ponzi scheme.

“It's critical for average investors, non-retail investors, to have confidence in the market, and they have to feel protected,” said Galper.

That emphasis could signal a “new age” in how the market reacts to the agency, said Galper. He said that there had long a struggle to maintain a balance between individual investor liberty and investor protection.

“Since the Obama administration came into office, there's been a much more appropriate attention being paid to what that balance is,” said Galper, who added that an excessive touting of investor liberty began with the Reagan administration and is only now waning.

Investor protection was a hallmark of Schapiro's comments Thursday and included several reforms that could be well-received politically, including suggested future compensation for whistle-blowers and a closer look at how broker-dealers and investment advisers manage funds.

That could appease some market participants who have been frustrated by a lack of goals by the agency and have found it to be relatively non-responsive, a sentiment that has led the Obama administration to suggest the nation may need one, central “regulation czar.”

Galper said that, for now, financial players such as hedge funds, broker-dealers and institutional investors don't necessarily see a need for a primary regulator.

“There is sometimes a ‘universal regulator' in other countries, but I don't think it's an absolute necessity in U.S.,” said Galper, although he said he does like the Treasury Dept.'s proposal for one regulator to oversee systemic risk.

“That's been a hole in our regulatory framework,” said Galper.

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Posted on March 27, 2009