SEC tightens rules on investment advisers, corporate transparency
Thursday, December 17, 2009
The Securities and Exchange Commission on Wednesday put in place two new policies aimed at avoiding a repeat of the Bernard L. Madoff fraud and addressing concerns that excessive compensation and ineffective oversight by corporate boards fueled the financial crisis.
The first measure, passed unanimously by the commission, requires new oversight, including outside audits, of financial advisers. Some advise clients about where to invest their assets and also control those assets, as Madoff did. The rules seek to ensure that clients' assets are where advisers say they are. In Madoff's case, of course, the assets were gone.
The second measure, which passed over the objection of one of the agency's five commissioners, requires that companies disclose more information about how they pay employees -- in particular, in ways that could create incentives for risk-taking -- and the qualifications of people who sit on corporate boards. The measure is a response to criticism that boards, particularly at Wall Street firms, allowed executives to make unseemly bets, netting short-term profit but putting the firms at risk in the long run.
The new policies, which were proposed earlier this year, are the first to be made official under SEC Chairman Mary L. Schapiro. A bevy of other high-profile proposals -- including new restrictions on short selling and new powers for shareholders to nominate directors -- have been long delayed. SEC officials expect to finalize a rush of proposals early next year.
The new investment adviser rule has been dramatically scaled back from what was proposed earlier this year. Although more than 9,000 advisers would have been subject to enhanced oversight under the original proposals, fewer than 2,000 will face surprise exams and other audits. The change came after the advisers' lobby argued that most advisers -- often small businesses -- have an independent firm that holds clients' assets, making the need for another layer of oversight unnecessary.
"The Madoff Ponzi scheme and other frauds have caused investors to question whether their assets are safe when they entrust them to an investment adviser," Schapiro said Wednesday in a statement. "These new rules will apply additional safeguards where the safeguards are needed most -- that is, where the risk of fraud is heightened by the degree of control the adviser has over the client's assets."
The SEC also is requiring public companies to make a slew of new disclosures in their proxy statements, which are distributed annually to investors. The SEC is requiring that firms write a narrative about how their compensation policies could create risks. The requirement will apply only to large public companies.
Under the new rules, public companies will also have to give more details about the backgrounds of directors on corporate boards and nominees for directors and how their experiences and skills would be valuable to the board.
The SEC is also requiring more information about how boards are organized, revising compensation disclosures to make clearer the value of stock options and requiring that companies report the outcome of shareholder votes more quickly.
"Good corporate governance is a system in which those who manage a company -- that is, officers and directors -- are effectively held accountable for their decisions and performance. But accountability is impossible without transparency," Schapiro said.