Despite its budget woes, the Securities and Exchange Commission's rulemaking frenzy will maintain its frenetic pace in the months ahead, according to recent remarks by its chairman.

While the Commission's rulemaking agenda was busy before the July passage of the Dodd-Frank Act, the new law has thrown it into overdrive, as detailed in a Feb.4 speech by its chairman, Mary Schapiro. In connection with the Act, the SEC has already proposed 24 rules, adopted six final and two interim rules, and approved two proposals from the self-regulatory organizations, and there's still lots more to come in the months ahead, she told attendees at a Practising Law Institute event in Washington D.C.

One item on the Commission agenda is additional rulemaking to revamp the current market structure, in response to both a January 2010 market structure concept release and the subsequent May 6th flash crash. The SEC already adopted rules to trigger circuit breakers for certain individual stocks, prohibit stub quotes in the U.S. equity markets and bar broker-dealers from providing unfiltered access to exchanges. The agency is considering further rulemaking, including moving from the current circuit breaker system to limit-up/limit-down style trading parameters, where trades would have to be executed within a range tied to recent prices for the security, Schapiro said. The market would pause if no trades naturally occur within those parameters for a preset period of time.

The SEC is also eyeing the obligations of de facto market makers, high-frequency traders who account for more than half of daily trading volume and supply much of the market's liquidity.  “We are asking if these firms should be subject to an appropriate regulatory structure, including with respect to their quoting and trading activities,” she said. “Given the potential for trading algorithms to cause severe trading disruptions and shake investor confidence, we also are considering whether they should be subject to appropriate rules and controls.” Rules to enhance the transparency of trading venue practices and the practices of broker-dealers acting as agents for investors are also being considered.

The SEC will also continue its work with the Commodity Futures Trading Commissions to shape the regulatory regime for over-the-counter derivatives, including defining terms, developing requirements for new trading and clearing platforms, crafting reporting regulations, carving out end-user exemptions and other tasks. The agency is also working with banking regulators, to craft risk-retention requirements for asset backed securities transactions. As required by Dodd-Frank, ABS issuers will have to perform reviews of their bundled assets and disclose the nature, findings and conclusions of those reviews. The SEC is working to sync up its earlier ABS proposals with those adopted under Dodd-Frank. Also on the agenda: Consideration of rules stemming from an SEC study recommending that financial professionals who provide personalized investment advice about securities adhere to a fiduciary standard similar that imposed on investment advisers.

Noting that the SEC will also finalize its controversial proposed rules to reward whistleblower in the coming months, Schapiro said, “I believe that once the Commission clarifies the contours of this program, we will see an even greater influx of helpful whistleblower tips than we have already witnessed,” Schapiro said.

Of course, how quickly that will all get done is likely to be significantly impacted by the agency's budget constraints. The Commission, which lobbied unsuccessfully for self-funding under the Dodd-Frank Act, is currently operating under a continuing resolution that has frozen its budget at 2010 levels until at least March 4. “It is a strain that is already having an impact on our core mission — separate and apart from the new responsibilities that Congress gave us to regulate derivatives, hedge fund advisers and credit rating agencies,” Schapiro said. “It is a strain that will intensify the longer the budget remains at existing levels.” The agency has already delayed work on some of its Dodd-Frank mandates due to the budget uncertainty, including the creation of several new offices required under the law.

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