Securities and Exchange Commissioner Paul Atkins recently announced that he would be stepping down from his post when his replacement takes office sometime after his term ends on June 5. A Republican appointed by President Bush, he spoke with Directorship about his views on some of the key issues the commission has faced and the challenges that lie ahead.
What do you see as the primary issues facing the SEC as you prepare to leave?
We have a lot of things on our plate right now. One of the most important is trying to implement the summary mutual fund prospectus that we put out a few months ago (which would require funds to issue a user-friendly summary of fees, conflicts-of-interest, and other key facts). That proposal, together with the work that we are doing with the Labor Department on 401(k) disclosure, affects the most investors.
“With respect to Bear Stearns, that was a classic run on the bank. It’s tragic, when you think of the shareholders. Some people call it a bailout, but I’m not sure shareholders would see it that way. It was also another real body blow to New York as a world financial capital. It’s hard for employees; a lot of those jobs may not come back, or if they do they may go overseas.” -Paul Atkins, SEC
There’s also the whole fallout from subprime and the credit market issues. We have to get it right, especially with respect to the credit-rating agencies, which now fall squarely within our remit after the law Congress passed in 2006. We are in the midst of trying to take a studied approach. The Chairman [Christopher Cox] has talked about how we are conducting examinations regarding this issue. We should have results soon, maybe even next month.
We’re also working through the President’s Working Group with other financial services regulators on what happened in marketplace, and what adjustments must be made, especially in light of the Fed’s (Federal Reserve Board) opening up the discount window.
With respect to Bear Stearns, that was a classic run on the bank. It’s tragic, when you think of the shareholders. Some people call it a bailout, but I’m not sure shareholders would see it that way. It was also another real body blow to New York as a world financial capital. It’s hard for employees; a lot of those jobs may not come back, or if they do they may go overseas.
I do take seriously the problem of capital market competitiveness. That was happening even before the subprime crisis. A lot of the problem is geographic and related to time zones. You can interact with more people around the world during the business day from cities other than New York, such as London. So we in the U.S. have to be smart about regulation, and subject it to cost-benefit analysis, notice and comment rulemaking, and all that, so that imposing burdens is not just decided by the seat of the pants.
Do you see a need for more regulation?
Coming out of the subprime crisis, we’ve seen where a lot of people did not do what they should have done on the risk management side. A lot of risk management theories were not up to snuff. Investors were complacent in using the ratings of credit rating firms, both market professionals and a lot of other folks. Things perhaps got out of hand at the credit rating agencies as well. It seems that they couldn’t keep up with the deal flow. We can strengthen our regulatory oversight to avoid these problems in the future.
Do you mean more regulation specifically of the credit rating agencies?
Sean Egan (the co-founder of Egan-Jones Rating Co., a smaller rival to the major credit rating agencies) is talking of better disclosure, so investors can see the conflicts of interest. For example, they can see if the agency is issuer-paid or subscription-based. Maybe we should look at that. There are a lot of things that can let investors figure out what they are using and that not every rating is created equally. That is definitely something we need to look at.
But there’s no way we can have anything like what some Europeans want, which is to have government review ratings in a substantive way. They’ve been talking about that, about having an ability to appeal ratings downgrades to a government-sponsored tribunal. That would be unadvisable. Ratings are opinions, and the First Amendment applies. But clear disclosure of conflicts is one way to go about it.
More broadly, we need a real rethinking of what’s going on with ratings, especially on the structured-product side and with municipal securities. Investors were sometimes complacent about ratings, and would buy only on the basis of the yield and the rating. They did not always look behind to see what else is going on. It’s very different with corporate debt, where you can use the stock price to get another view. The conflict comes into play because the sponsors creating structured products often consult with the ratings agencies in advance. That can be problematic because the income stream that comes to the rating agency from the other end may create an incentive to rate the product highly.
How do you think investors will look back on the commission under Cox’s tenure, and yours? Many of them have been angry at what they saw as anti-investor decisions, like the one on access to the proxy?
It depends on which investors you’re talking about. There are politicized investors out there who want to use the proxy rules to game the situation. Some institutional investors look for added leverage to put pressure on issuers behind closed doors to get parochial interests advanced, to the detriment of other investors. I think sunshine is a great disinfectant. There’s a lot to be said for openness, especially if someone is purporting to speak on behalf of shareholders. Who are you and which shareholders do you represent? The proposals for proxy access are like this; the proponents see some investors as more equal than others.
That’s why we have proxy rules in the first place, so everyone knows who’s putting pressure on the company and can vote accordingly. It’s true that the 13D rules (requiring disclosure of ownership greater than 5 percent) and other rules may have had the unintended consequence of protecting management in some cases. That is unfortunate in some respects, but the solution is not less disclosure or greater “proxy access” for some. What keeps management on their toes is the threat of a takeover.
My druthers are on the side of a more transparent process. That’s why we’re trying to figure out ways to drive down the cost of proxy solicitation. Electronic solicitation has made it very inexpensive. Transparency could help to put an end to pressuring management behind closed doors, which is bad for most shareholders anyway.
Do you think the advocates of greater proxy access will prevail if a Democratic Administration comes to power next year?
Politicized investors will try to use political process to get what they want. But investors are not monolithic. You have politicized investors, and most retail investors, who don’t necessarily care about proxy access, and also corporate pension plans, insurance companies, and mutual funds. If we can get things adopted like the summary mutual fund prospectus, that would most likely be much better than so-called proxy access for the average investor out there.