In Securities and Exchange Commission Chairman Mary Schapiro’s testimony before the Senate Banking Committee on Thursday, she said the SEC would consider reinstating a version of the uptick rule, and called for an integrated capital-markets regulator as well as corporate-governance change.

She also defended the SEC’s actions and emphasizes that the agency has made progress in keeping up with and monitoring the financial system since she has been the head of the agency.

Uptick Rule

In her only mention of the uptick rule in he written testimony, Schapiro said the SEC “will consider proposals to re-institute the uptick rule, or something much like it” next month.  The uptick rule, which was repealed in July 2007, mandated that short sales could occur on stocks only after a tick up in the price. It was designed to prevent short sellers, those who bet that the price of a stock will fall, from being able to drive down the price of a stock too far. In recent months, many market participants have called for reinstatement of the rule, saying that some stocks, in particular those of financial firms, are vulnerable to attack without it.

Corporate Governance

Speaking on corporate governance, Schapiro said she intends “to make proxy access -- meaningful opportunities for a company’s owners to nominate its directors -- a critical part of the Commission’s agenda in the coming months.” She added that investors need “accurate and comprehensive information” about election of directors, compensation plans and more.

Regulatory Authority

Schapiro’s testimony also calls for an integrated, independent capital markets regulator that “focuses on investor protection.” She said that regulator must complement “the role of a systemic risk regulator, resulting in a more effective financial oversight regime.”

“There is a need for system-wide consideration of risks to the financial system and for the creation of mechanisms to reduce and avert systemic risks,” Schapiro said, adding that she is “convinced that regulatory reform must be accomplished without compromising the quality of our capital markets or the protection of investors. 

Schapiro maintained that the SEC “must continue to be the primary regulator of important market functions, and would be a critical party to any systemic risk regulator’s evaluation of risks.” But she said that “there is a need to identify or create the appropriate systemic regulatory regime; determine how such a regime can identify systemic risks without creating additional ones; and determine how much and how heavily any systemic risk regulator should touch the other participants in the financial system.”

Schapiro noted that “we are convinced that accounting standard-setting should be the product of an independent, expert body that is organized to act in the public interest and with appropriate due process.” The Financial Accounting Standards Board, which works with other regulators to set accounting standards, has in recent months been criticized particularly over mark-to-market rules, which say that assets in general should be priced at the level the market can bear. Opponents of MTM say that it has contributed to the meltdown in the financial industry by facilitating a downward death spiral on bank balance sheets. 

The testimony stated that the SEC may recommend legislation that may be “needed to fill other gaps in regulatory oversight, including those related to credit default swaps and municipal securities.“

Schapiro said she wants to give those who buy the municipal securities “that are critical to state and local funding initiatives” access to the same quality and quantity of information as those who buy corporate securities.

Broker-Dealers and Investment Advisers

Schapiro addressed the issue of broker-dealers and those with control over investor funds, an issue which has come into full focus with the Bernard Madoff Ponzi-scheme revelations that have cost investors something in the range of $50 billion. The SEC might consider legislation to break down the statutory barriers that require a different regulatory regime for investment advisers and broker-dealers, she said.

“It is essential that” brokers, advisers and credit-rating firms and the people who work in them “be held to the highest standards expected of professionals,” Schapiro declared.

She said that “to ensure that all broker-dealers and investment advisers with custody of investor funds carefully review controls for the safekeeping of those assets, I expect the staff to recommend that the Commission consider requiring a senior officer from each firm to attest to the sufficiency of the controls they have in place to protect client assets.”

Schapiro added that the SEC is looking into rules that would require “investment advisers with custody of client assets to undergo an annual third-party audit, on an unannounced basis, to confirm the safekeeping of those assets,” as well as require “certain advisers to have third-party compliance audits to review their compliance with the law.” The SEC might also seek legislation to require registration of investment advisers who advise hedge funds, and possibly the hedge funds themselves.

• READ: SEC Chairman Mary Schapiro's Testimony

She noted that the SEC’s focus in regulations “is not to insulate broker-dealers from competition and the risks of failure, but to protect investors in the event that failures do occur.”

Schapiro said that in order for the SEC to “stay one step ahead of the predators and sharp practices that prey on investors,” she plans to seek “authority to compensate whistleblowers who bring us well-documented evidence of fraudulent activity,” noting that “currently, we have the authority of compensate sources in insider-trading cases.”

Money-Market Mutual Funds

Money-market mutual funds were a focus of the testimony as well, and Schapiro said the SEC will focus on strengthening “the regulation of money market funds by considering ways to improve the credit quality, maturity and liquidity standards applicable to these funds. These efforts will be aimed at shoring up money market fund investments and mitigating the risk of experiencing a decline in its normally constant $1.00 net asset value, a situation known colloquially as ‘breaking the buck.’”

Money-market mutual funds became a big story during the credit crisis last fall, when the failure of Lehman Brothers led the Reserve Primary Fund to break the buck -- something that had happened only once before. Investors in MMMFs started to panic because the investment vehicle they had previously thought of as completely safe suddenly looked much riskier. The government acted quickly to offer backing for all MMMFs, but that event is often cited as one of the closest points to a complete freeze in the credit markets that the U.S. economy has experienced throughout this entire crisis.

“If there were ever a time when investors need and deserve a strong voice and a forceful advocate in the federal government, the time is now,” Schapiro declared.