Securities and Exchange Commission Chairman Mary Schapiro said it's "critical" for regulators to gain more access to information on derivative transactions to police market abuses.
Regulators need "information that allows us to construct an audit trail, so that we can find insider trading, manipulation and other concerns that can reverberate through the entire marketplace," Schapiro said in an interview. That ability "is really going to be critical."
Lawmakers are studying derivatives after price movements fueled concern last year that financial firms were approaching collapse. American International Group Inc.'s bets on credit-default swaps crippled the insurer, requiring a $182.5 billion bailout. In June, Schapiro told a Senate panel that inquiries were being "seriously complicated" by difficulties identifying derivatives investors and determining the size of their trades.
President Obama's proposed regulatory overhaul would impose higher capital and margin requirements, move most derivatives to regulated exchanges and clearinghouses and impose supervision over all dealers. The proposals go "quite far" toward improving oversight, Schapiro said in the interview.
"We can bring a lot more stability and soundness to this marketplace through the regulation of these instruments," she said. "The SEC should absolutely have a role in policing these instruments, particularly where these instruments are economic substitutes for securities."
Schapiro and Gary Gensler, the chairman of the Commodity Futures Trading Commission, have suggested a dual regulatory structure for derivatives. Primary responsibility for derivatives tied to securities, such as credit-default swaps, would go to the SEC. Other derivatives, including those related to interest rates and commodities, would be regulated by the CFTC.
Though lawmakers decided in 2000 to exempt derivatives from government oversight, the financial industry now recognizes there is broad consensus in Washington to regulate the instruments, Gensler said in an interview.
Schapiro also said she cannot predict how often the SEC may invoke a seven-year-old law forcing executives to pay back bonuses if their company has to restate earnings as a result of misconduct. The agency's five commissioners voted 3-2 to approve the law's first use last month against an executive who was not accused of wrongdoing, prompting some lawyers and academics to question how aggressively the SEC will apply the rule.
The law is intended to ensure top executives pay "careful attention to the financial statements and accounting issues," Schapiro said.
She said the SEC also is concerned that firms may violate rules by privately offering trading tips to preferred clients.
"There are lots of issues surrounding" such practices, and the SEC is looking "very closely" at them, she said.
One concern: a firm may privately share information with some clients that is inconsistent with its public research, she said.