Aug. 28 (Bloomberg) -- U.S. Securities and Exchange Commission Chairman Mary Schapiro said it’s “critical” for regulators to gain more access to information on derivative transactions in order 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 for Bloomberg Television’s “Conversations with Judy Woodruff” airing tonight. 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 swap crippled the insurer, requiring a $182.5 billion U.S. bailout. In June, Schapiro told a Senate panel inquiries were being “seriously complicated” by difficulties identifying derivatives investors and determining the size of their trades.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather. Credit- default swaps insure investors against bond defaults and can be used to speculate on a company’s creditworthiness.

Obama’s Regulatory Revamp

President Barack 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. Such 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 Commodity Futures Trading Commission Chairman Gary Gensler have suggested a dual regulatory structure for derivatives. Primary responsibility for derivatives tied to securities, such as credit-default swaps, should go to the SEC, Schapiro told lawmakers on June 22. Other derivatives, including those related to interest rates and commodities, should be regulated by the CFTC, Gensler said at the time.

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 yesterday.

Clawbacks Eyed

Schapiro also said she can’t 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 wasn’t 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, noting that each case depends on “individual facts and circumstances.”

She also said the SEC is concerned that firms may violate rules by privately offering trading tips to preferred clients. The Wall Street Journal reported Aug. 24 that Goldman Sachs Group Inc.’s research analysts give short-term tips to the New York-based bank’s own traders, and later to its major clients.

“There are lots of issues surrounding” such practices, and the SEC is looking “very closely” at them, she said, without referring specifically to Goldman Sachs. One concern is that a firm may privately share information with some clients that is inconsistent with its public research, she said.

To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net; David Scheer in New York at dscheer@bloomberg.net.

Last Updated: August 28, 2009 00:01 EDT