Robert W. Cook
Director, Division of Trading and Markets
U.S. Securities and Exchange Commission
Robert W. Cook, Director of the Division of Trading and Markets at the U.S. Securities and Exchange Commission, told the audience that the SEC has “already undertaken extensive implementation planning” in a “commission-wide effort” to prepare for the next phase of financial regulatory reform.
Mr. Cook identified four regulatory issue areas in which the SEC will play a key role: 1) OTC derivatives; 2) a standard of conduct for Financial Advisors; 3) private fund advisors; and 4) credit rating agencies.
In regards to the mechanics of implementation for OTC derivative regulations, the first of its kind for these products, Mr. Cook described the ultimate goal as to create a “single integrated regulatory structure.” A task force has already been created to map out a road to implementation, and will include the SEC’s new division, Risk Strategy and Financial Innovation.
Of particular interest is the collaboration of regulators within the same markets. The SEC will coordinate with prudential regulators, who will have a role in setting capital and margin for bank entities. The CFTC and SEC will share primary jurisdiction over swaps. The SEC will have authority over security-based swaps, defined as a single security or narrow based group or index, including credit default swaps. They will also retain anti-fraud authority. The CFTC will have authority over all other swaps, including energy swaps, interest rate swaps, security-based swap agreements and broad based security group or index swaps. “Eliminating the potential for regulatory arbitrage would demand close collaboration between the CFTC and the SEC, including joint rulemaking regarding key definitions,” stated Mr. Cook.
The SEC will conduct a six month study on the standards of conduct for broker-dealer activities with retail customers, culminating in a report to Congress. The legislation provides the SEC with rulemaking authority after this fiduciary issue study is delivered, and requires that any harmonized standard be no less stringent than the standards already applicable to investment advisers under the Investment Advisers Act of 1940. The SEC is also charged with facilitating “the provision of simple and clear disclosures to investors regarding the terms of their relations with broker dealers and investment advisers, including any material conflicts of interest.”
“Through the twin levers of adviser registration and reporting, the legislation would open a long closed window into the activities of hedge funds, private equity funds and other private investment vehicles,” said Mr. Cook. “The ability to look through that window would enable the commission to better protect investors and would facilitate the assessment of systemic risks these funds might pose.” The concept of registration is central to managing systemic risk throughout the markets. The legislation e eliminates the exemption from registration – known as the 15 Client Rule. New records and reports will need to be kept by the newly-registered adviser, detailing business aspects such as counterparty risk and trading practices (proprietary information would be considered confidential). A one-year transition period will be in effect for these new regulations.
The SEC’s oversight of credit rating agencies would expand considerably under the Dodd-Frank bill, hoping to remedy “an over-reliance on credit rating agencies [that] was a significant contributor to the explosive growth and then violent contraction of the securitization market.” The Commission has already adopted several new rules over the past few years in order to increase transparency, but their authority will be further expanded. Over the next year, the SEC will focus rulemakings on three major areas within the operations of credit rating agencies: 1) internal controls and procedures; 2) transparency and consistency of ratings; and 3) conflicts of interest. They will also study the feasibility of a public or private entity that would be responsible for the assignment of a credit rating to the credit rating agencies themselves.
The SEC will also be immersed in rulemakings throughout the financial markets, including asset-backed securities, municipal securities clearing agencies and short sales. They will also be involved in aspects of the legislation that are meant to enhance investor confidence through corporate governance, such as say on pay rules.
Mr. Cook noted another benefit of the legislation will be it strengthens the SEC’s Enforcement Division.
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