The historic success of U.S. capital markets has been bolstered by a regulatory framework focusing on investor protection, transparency, safety and soundness.
The U.S. market regulatory structure was first put in place over 85 years ago; Congress and policymakers have continually reviewed and supplemented it to keep pace with market and technological developments and a changing national and global economy.
At SIFMA, we believe that public policy and financial regulation should support these key tenets:
- Ensure high standards of market integrity and investor protection
- Encourage pools of capital through private and public pensions
- Promote financial literacy and a strong retail investor culture
- Calibrate supervision and regulation with robust capital formation and growth
What follows are our viewpoints on just some of the key issues facing the capital markets and financial industry today. To learn more about these and other topics, visit www.sifma.org/issues.
The need to finance a path to a sustainable future has never felt more urgent. It is estimated that $60 trillion is needed to meet the seventeen Sustainable Development Goals outlined by the United Nations. No single entity can achieve these goals alone.
Responsible investment is an approach to investment that explicitly acknowledges the relevance of environmental, social and governance (ESG) factors to the performance and profitability of investment and to the long-term health and stability of the market as a whole. It recognizes that the generation of long-term sustainable returns is dependent on stable, well-functioning and well governed social, environmental and economic systems.
ESG is increasingly shaping the way both individual and institutional investors choose to engage with companies and thus impacting how companies do business around the world. As investors have aligned their investments with their values, brokerage firms and mutual fund companies have significantly increased their offerings of exchange-traded funds (ETFs) and other financial products to support investor and client needs. Inflows into sustainable investment funds have outpaced all flows and, importantly, investors increasingly believe that sustainable investments offer greater returns than conventional investing.
Climate change is but one element of a sustainable future but poses significant economic and financial risks to the global economy. Efforts to mitigate against these risks and adapt to the changing climate will require a fundamental transformation of our global economy. The climate finance market structure must grow at an unprecedented scale, speed, and geographic scope, and this will require concerted and coordinated action by all stakeholders—the public sector, the real economy sectors, the financial sector, and the social sector.
In coordination with our global affiliate, GFMA, and member firms, SIFMA has provided a roadmap for how to accelerate the evolution of climate finance and define the roles capital market participants can play to facilitate this transition. Taken together, the recommendations enable the development of the climate finance market to grow to the $3-5 trillion+ of investment per year we estimate will be required to achieve the ambitions set out in the Paris Agreement. The banking and capital markets sector plays a critical role in this transformation as an intermediary between the supply and demand for capital—as a lender, arranger, and investor. Success in mobilizing both public and private capital by the sector to finance climate transition pathways will only be achieved by a holistic, complementary set of actions taken by the public sector, the social sector, the real economy, and the broader financial sector at an accelerated pace and large scale.
Moving to a Low-Carbon Economy
The transition to a low-carbon economy is critical to the fight against climate change. The financial services industry has been active on climate priorities for decades, helping clients reduce emissions and developing new business models. SIFMA, as a member of the U.S. Climate Finance Working Group, has published principles for a U.S. Transition to a Sustainable Low-Carbon Economy. The principles, developed in coordination with 10 other leading financial services trade associations representing the perspectives of banks, investment banks, insurers, asset managers, investment funds, pension funds and other financial intermediaries, build from that experience to create a useful policy framework for the transition to a low-carbon economy.
Scaling deep and liquid carbon markets will significantly accelerate carbon reduction. SIFMA’s global affiliate, GFMA, has published a report, Unlocking the Potential of Carbon Markets to Achieve Global Net Zero. The report finds that close to 80% of greenhouse gas emissions are not covered by regulated carbon pricing today. In order to meet the Paris Agreement goals, price levels need to increase to an estimated $50-150/tonne average by 2030 from the current global average of less than $5/tonne. To do this, the report highlights the role and importance of both compliance and voluntary carbon markets to the low-carbon transition.
Our Work Ahead
Today, SIFMA, SIFMA’s Asset Management Group and GFMA are engaged in discussions around the global on a multitude of issues including:
- How can we incentivize capital to move into those areas that need to transition?
- How can global guiding principles be used in the development of climate finance taxonomies? How to ensure
that climate taxonomies are consistent, common, and comparable? What disclosures may be required?
- What should we consider for our rapidly changing regulatory and legislative agendas?
- How can we encourage participation in important collective efforts including the Net Zero Asset Managers Initiative and Net Zero Banking Alliance?
Much work lies ahead. Through it, our industry has the power to help set the world on the path to a sustainable future.
Transitioning from LIBORwww.sifma.org/libor
The financial industry and global regulators are transitioning from the London Interbank Offered Rate (LIBOR) to more robust alternative reference rates. LIBOR is the most commonly used benchmark for short-term interest rates, often referenced globally in derivative, bond and loan documentation. It is estimated that $223 trillion of financial contracts and securities are tied to USD LIBOR and that matters to everyone – small businesses, corporations, banks, broker dealers, consumers, and investors. The transition from LIBOR to alternative interest rate benchmarks is well underway, but much work lies ahead.
LIBOR is referenced by approximately $223 trillion of financial products. Today’s LIBOR is informed primarily (and sometimes entirely) by “expert judgement” from estimates of transactions, not actual transactions. As a result, LIBOR doesn’t necessarily reflect the true cost of bank funding and is vulnerable to volatility and manipulation.
Global regulators saw the problem with placing the foundation for global financial markets on such a construct nearly a decade ago, and they began to examine how more robust alternative reference rates could be identified or developed to replace LIBOR. As such, the regulatory community continues to believe that LIBOR is not a suitable rate and market participants must transition to alternative reference rates.
LIBOR Will End, Have No Doubt
LIBOR is ending, make no mistake about it. Most non-U.S. Dollar LIBOR tenors will cease on December 31, 2021.
For U.S. Dollar denominated LIBOR, which includes the largest and most important tenors of LIBOR, cessation will occur on June 30, 2023. Federal banking regulators have issued guidance that regulated entities should cease executing new LIBOR transactions by the end of 2021 and expeditiously transition existing contracts to new reference rates, noting that “the agencies believe entering into new contracts that use USD LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and will examine bank practices accordingly” and have reiterated the “intense” supervisory focus on this issue. This regulatory posture has been echoed in the U.K and Europe and regulators are demanding in no uncertain terms that their regulated institutions move away from LIBOR this year. In October, the five federal financial institution regulatory agencies issued a joint statement to emphasize expectations that supervised institutions with LIBOR exposure continue to progress toward an orderly transition away from LIBOR. They noted, “failure to adequately prepare for LIBOR’s discontinuance could undermine financial stability and institutions’ safety and soundness and create litigation, operational, and consumer protection risks.”
The Uptake on SOFR
Through the Alternative Reference Rates Committee (ARRC), the Federal Reserve Board and New York Federal Reserve gather over 300 institutions, including SIFMA, to work on issues including legacy transactions, implementation of robust fallback provisions, and development of term rates in support of a successful transition to alternative reference rates. In 2017, the ARRC issued a recommendation that the Secured Overnight Financing Rate (SOFR) would be the preferred, robust alternative to LIBOR. SOFR is a fully transaction-based rate, referencing the previous day’s activity in the repurchase markets. SOFR is based on approximately $1 trillion of daily transactions from a wide range of market participants and is administered by the New York Fed. SOFR is, by intent and construction, a reliable and representative indicator of market interest rates; it is published on a daily basis by the New York Fed. The ARRC followed this milestone with the development and publication of numerous recommendations, guidance documents, and reference materials to promote a steady progression towards a successful transition away from LIBOR in line with its Paced Transition Plan, which lays out goals and milestones for this important work. The market has broadly accepted this work, as shown by the usage of ARRC recommended fallback language in new transactions, the issuance of significant amounts of debt referencing SOFR and the execution of trillions of dollars of SOFR-based swaps and futures contracts.
Federal Legislation for Tough Legacy Problems
SIFMA believes federal legislation is necessary to facilitate a smooth transition away from LIBOR for “tough legacy” contracts to an alternative reference rate. There are currently trillions of dollars of existing contracts and instruments that, as a practical matter, cannot be amended to utilize an alternative rate. SIFMA is supportive of federal legislation aligned with recommendations from the ARRC to address these situations where contracts cannot be easily transitioned from LIBOR due to legal or regulatory reasons. We believe such legislation would benefit all market participants including LIBOR’s end users, who range from investors to companies to consumers. The legislation would provide four key benefits: (1) certainty of outcomes; (2) fairness and equality of outcomes; (3) avoidance of years of paralyzing litigation; and (4) preservation of liquidity and market resilience.
Improving Capacity and Resiliency in US Treasury Marketswww.sifma.org/treasury-market-structure
Recent events highlighted longer-term structural questions in the Treasury markets, particularly the growing mismatch between the volume of Treasury issuance and the capacity of the system to intermediate the trading of those instruments. How Treasury market liquidity can be maintained, even during periods of stress, is the subject of significant study and debate.
U.S. Treasuries are debt instruments issued by the U.S. government to finance its activities. Owing to the United States’ creditworthiness and status as the world’s leading economy, the U.S. Treasury market (comprised of the cash market as well as the repurchase agreement (“repo”) and futures markets) has been described as the “biggest, deepest and most essential bond market on the planet.” Investors view Treasuries historically as risk-free or near-cash assets i.e., assets that retain their value and can be easily sold during both normal and stressed market periods. Unsurprisingly then, Treasuries have tended to be viewed as safe havens for investors during market crises. Owing to their stability, U.S. Treasuries also often serve as benchmarks for other fixed-income securities and hedging positions; as a result, U.S. Treasury yields have an impact on the rates that consumers, businesses, and governments across the globe pay to borrow money. In addition, the U.S. Treasury repo market is a key transmission mechanism for U.S. monetary policy, and vital to the liquidity of the cash Treasury market. Put simply, the U.S. Treasury market is a bedrock of the global financial system.
The resiliency of the Treasury markets has been called into question by a series of market disruption events in which market price volatility increased dramatically and/or where the depth of the market (i.e., the amount of liquidity available) decreased precipitously. These include the “Flash Rally” in October 2014, stresses in the Treasury-backed repo markets in September 2019, and the “Dash-for-Cash” in March 2020. While these events have differed in their scope and magnitude, collectively they have highlighted a variety of underlying structural problems in the Treasury markets. This has led to calls for reforms.
Emerging Policy Proposals
Although by no means exhaustive of the ideas circulating in public debate around Treasury market reform, it does seem that there are four broad categories of reform currently being debated. These are:
- Greater use of centralized clearing and “all-to-all” trading platforms;
- Expanded access to the Federal Reserve’s recently created standing repurchase (“repo” facility (“SRF”);
- Changes to banking regulation (such as reform of the SLR requirement); and
- Improved data and disclosure by market participants.
While each of these approaches have been discussed on a standalone basis and most had been suggested prior to the market events in March and April 2020, some have argued that these reforms ought to be considered holistically as a single package.
Some of the reforms appear more feasible to implement than others; for example, modifications to the Supplemental Leverage Ratio (SLR) would be relatively straightforward. In regard to central clearing, it appears that the relative benefits in the repo market are greater than in the dealer-to-customer cash market. Mandating central clearing in the cash market could impede market functioning and diversity while simultaneously failing to provide the same capacity benefits that are seen in the repo market.
Twin Goals for Reforms
What is certain is that more study is needed to determine the impact of many of these proposals, both individually and collectively, on the Treasury markets. Moreover, we are likely to see other reform ideas emerge over the coming months as the FSB, U.S. Treasury, and others continue to study recent events and collect data on the markets.
The goals of any reforms in the Treasury market should be to enhance the liquidity resiliency in the market and to increase the market-making capacity of market participants in order to meet the growing demand for, and supply of, Treasury securities. These twin goals must be top-of-mind as policymakers and market participants assess the costs and benefits of any reforms.
Ensuring Deep and Liquid Equity Marketswww.sifma.org/equity-market-structure
There has never been a better time to be an investor. The U.S. equity markets continue to be among the deepest, most liquid and most efficient in the world, with investors enjoying narrow spreads, low transaction costs and fast execution speeds. Investors also benefit from zero commissions which has helped to democratize the equity markets by providing access to new investors as evidenced by the growth in retail trading. Not only do retail investors benefit from inexpensive access to the markets, but they also enjoy price and size improvement when compared with the National Best Bid or Offer (NBBO).
Efficient and resilient market structure is key to sustaining investor confidence and participation in the equity markets. Equity markets are the public face of finance and are often seen as a barometer of the overall health of the economy. In that sense, a thriving market for new issues of publicly offered equity securities, including the initial public offering (IPO) market and direct listings, is perhaps the most direct and tangible evidence of an economy where new businesses have confidence in their future prospects. Businesses most often seek to access a larger pool of public capital to allow for the next stage of their growth and, ideally, job creation follows.
Why Market Structure and Liquidity Matter
Market structure can drive liquidity and trade costs. Therefore, market participants continually strive to create the most efficient markets. This includes adapting new technologies to achieve operational efficiencies, searching
for new ways to transact and, generally, sculpting optimizing market structure to maximize efficiencies.
Market liquidity is the ability to efficiently buy/sell securities without causing a substantial change in the price of the asset and is important as it impacts trade costs and therefore affects returns to investors. When routing an order, whether directly to an exchange or to an executed off-exchange market center, firms balance the likelihood of execution against price/size improvement. Market makers exist to provide liquidity in securities and execute customer trades, playing an important role in equity market structure by enabling liquidity and balancing buy and sell demand.
Efficient and resilient market structure is key to sustaining investor confidence and participation in the equity markets. The evolution of equity market structure – including capital formation, market data and self- regulatory organization (SRO) structure – is a key priority for SIFMA.
As the U.S. Securities and Exchange Commission considers significant changes to equity and options market structure, we look forward to continued engagement on these issues to ensure we meet the shared goal of regulators and market participants: to promote market resiliency and ensure the U.S. equity markets continue to benefit investors and play an essential role in capital formation.
Some of the specific market structure regulations currently under discussion include:
- Order Execution: Order routing is the process by which an order goes from the end user customer through execution (or cancellation). It has become more complex in recent years due to the proliferation of execution venues. By law, brokers are obligated to provide best execution for their customers and must consider numerous factors as part of their rigorous best execution analysis.
- Payment For Order Flow: PFOF is generally understood as the practice of exchanges and market makers either directly or through exchange-sponsored programs providing payment to brokers in return for the brokers routing their customer order flow to them. PFOF is governed by several regulatory requirements that are designed to ensure investors receive best execution and transparency, including FINRA Rule 5310, SEC Rule 10b-10, and SEC Rule 606.
- Short Selling: The terms “short selling” or “shorting” generally refer to transactions whereby a person sells securities that they does not own. It is a critical tool used, for instance, by market makers to facilitate liquidity in the market. Many regulations currently govern short selling, including notably Rules 201, 203(b)(1) and 204 of Regulation SHO and SRO short interest reporting.
- Securities Lending: SIFMA is also actively engaged with the U.S. Securities and Exchange Commission on their proposed rule to increase transparency in the securities lending market, specifically by increasing the availability of information regarding securities lending transactions both to regulators and the public.
- Net Capital Requirements: Net capital is a measure of a broker-dealer’s liquidity. Two notable SEC rules cover broker-dealer financial responsibility requirements: SEC Rules 15c3-1 and 15c3-3.
- Buying on Margin: Buying on margin means borrowing money from a brokerage firm to purchase a security. A “margin account” is a type of brokerage account in which the broker-dealer lends the investor cash, using the securities in the account as collateral, to purchase securities. Notable margin requirements include Federal Reserve Board Regulation T as well SRO rules, including the rules of FINRA.
Market Data Reform
Market data is information about current stock prices, recent trades, and supply-and-demand levels at national securities exchanges. Access to this information is essential to America’s world-leading capital markets because retail investors and market professionals need the most complete and up-to-date market information possible to make informed investing and order routing decisions. Because exchanges control that information, they have enormous pricing power over the cost to access the data.
Market data reform should focus on promoting competition, supporting efficient markets, and providing a transparent and fair system for all investors. SIFMA has long argued that exchange market data fee increases are inconsistent with the exchanges’ actual costs in collecting and distributing market data and thus constitute an excessive mark-up over costs. In August 2021, the SEC approved a new single national market system plan governing the public dissemination of real-time consolidated equity market data for national market system (NMS) stocks. Known as the CT Plan, this new plan consolidates the three current market data plans into a single plan to govern the distribution of equity market data, reducing duplication between the plans, and eliminating exchanges’ conflicts of interest as operators of the SIPs by making other structural changes to the distribution of market data. In addition, the SEC in December 2020 adopted rules to modernize the infrastructure for the collection, consolidation, and dissemination of market data for NMS stocks. Modernization of this infrastructure has been a SIFMA priority for many years as it has not been significantly updated since its initial implementation in the late 1970s. The Market Data Infrastructure rule significantly expands the content of NMS market data to better meet the needs of retail and institutional investors in today’s equity markets.
Helping More Americans Reach Their Financial Goalswww.sifma.org/retirement-savings-legislation
The U.S. capital markets are where people – individually and collectively through pension funds and mutual funds – invest their savings to seek a return. Working with our members in the wealth management space, SIFMA seeks to raise awareness of how financial advice and financial literacy programs can positively impact the financial health of Americans working to reach their financial goals, including purchasing a home, sending children to college and saving for retirement.
Research shows that a wide universe of Americans today own stocks. Federal Reserve data from 2019 shows 52.6% of Americans own stocks, or 65 million households and a Gallup poll conducted in March/April 2020 indicates this number may now be even higher at 55%. On the flip side, 2019 Federal Reserve data shows a median value of $40k for a household’s stock holdings. This clearly tells us that many American families are invested in the market – but to address retirement needs these numbers should be higher, both in terms of account holdings and number of households.
Saving for Retirement
Helping Americans build savings for a secure retirement is among the most important roles of the U.S. capital markets. There is a significant amount of data showing that too many Americans struggle to save enough for retirement, and policymakers have long worried the U.S. is facing a looming retirement crisis. People are living longer, and certain sources of guaranteed retirement income that were relied on in the past, like pensions, are increasingly uncommon. The challenge is even greater for particular segments of the American population, including women, Black and Hispanic Americans as well as small business owners and those who work in the agricultural sector. Today, U.S. workers are increasingly relying on individually funded retirement plans, such as 401k’s and IRA’s. Defined contribution plans account for $7.4 trillion in assets, growing at a 7% compound annual growth rate over the last decade. Both through their employers and individually, Americans today are largely responsible for building their retirement accounts themselves. Over 56% of total retirement assets are individually funded through defined contribution retirement plans and IRAs.
SIFMA is committed to increasing retirement security for all Americans and has identified three primary pillars to reach this goal:
- Expanding access to plans,
- Increasing participation and decreasing leakage, and
- Enhancing education.
SIFMA supports legislation including the Securing a Strong Retirement Act of 2021 (SECURE Act 2.0) and the Retirement Security and Savings Act of 2021, comparable bills which represent important steps toward enhancing the private retirement system and increasing retirement savings. Both include provisions to incentivize small business to offer retirement plans, expanding small business savings; enable older Americans to save more and hold on to their savings longer; and allow matching contributions for student loan payments.
With efforts such as these, we can boost retirement savings, enable Americans to save more, promote financial literacy and support a strong retail investor culture. Overall, the message needs to get out loud and clear – individuals of all income levels should be able to get started in investing, invest for the long-term, and consider working with a professional financial advisor for their financial health and stability.
The Move to Digitizationwww.sifma.org/digitization
U.S. capital markets have continued to innovate as technology has allowed for profound evolutions in market infrastructure, changing at times the very nature of American financial markets. At the peak of the pandemic, more than 90% of the financial services industry worked remotely, accelerating digital adoption through intensified focus and transition on priorities evident before the pandemic. As move through, and hopefully beyond COVID-19, industry efforts have shifted to returning to the office and we expect the pace of change to only increase. Just some of the developments ahead include:
- E-delivery: As the industry moves toward further shortening the settlement cycle, e-delivery will only become more necessary, and we are engaging with the SEC to make it easier for market participants to make this transition.
- Digital assets: Digital assets are at a pivotal point in our industry. We expect the increasing consumer and regulatory interest in crypto and digital assets to lead to new products, rules and requirements for broker dealers, banks, and asset managers.
- Distributed ledger technology (DLT): The potential benefit DLT could bring to the capital market ecosystem and infrastructure are a key topic of interest amongst market participants.
- Shedding legacy systems and manual processes: Financial services firms are embracing the cloud and other digital platforms to go paperless, increase operational efficiencies and speed to delivery.
- Transforming the customer experience: New capabilities are needed to anticipate customer expectations and better serve clients as they demand a more personal, immediate experience.
Modernizing the Delivery of Financial Communications
From health care explanations of benefits to income tax reporting, the trend toward electronic delivery is undeniable and for good reason: delivering materials electronically provides individuals with real-time, secure access to information in an environmentally-conscious manner.
SIFMA has long supported the electronic delivery of investor communications, including statements, confirmations, prospectuses and other disclosure documents. Investors from all demographics increasingly prefer to access information electronically making it easier to act on that information. Electronic delivery can also make information more accessible in other languages and in specialized formats for those with disabilities. For financial services, the interactive nature of electronic access via links and embedded information can make investor action and engagement easier and more likely to occur. In fact, studies have found that 401(k) participants who interact with their plans’ websites tend to have higher contribution rates. It is important to note that paper communications would remain an option for those who choose or for those without reliable internet service.
Adopting Digital Assets
DLT and digital assets, such as security tokens, can offer new and cost-efficient methods of capital formation. However, operational challenges for those hoping to adopt this technology exist and there are areas where regulatory clarity would be helpful in addressing these challenges.
Security tokens are securities issued solely on DLT that satisfy the applicable regulatory definition of a security or financial instrument under local law and/or a token that represents on DLT underlying securities/financial instruments issued on a different platform, where such representation itself satisfies the definition of a security/financial instrument under local law.
SIFMA is working with our member working groups to determine and identify the activities, requirements, and considerations for market participants engaging in operationalizing security tokens. There are a number of issues across the lifecycle of a security to consider, some of which must be addressed by stakeholders and regulators for the market to fully develop. The goal is to embrace innovation that creates efficient market structures while still providing the same investor protections that we have built up over decades.
As the industry moves forward with the broader adoption of these assets and their supporting technology, SIFMA believes dialogue between industry participants and regulators will help support the further growth of the
markets for the security tokens and the adoption of the technology that supports them.
Developing Cryptoasset Markets
There is a need and urgency for regulators to develop in the near term a clear regulatory framework for cryptoasset markets that strikes the right balance among innovation, growth and regulatory conservatism. SIFMA believes regulatory coordination – not only among prudential regulators but also between prudential and market regulators – is necessary to achieve this balance, to minimize market fragmentation and to help ensure bank uptake and competitive equity across the financial services marketplace. Ultimately, a properly balanced framework will help to ensure the capital markets will be able to continue to serve the needs of businesses and households as efficiently and comprehensively as possible.
We have urged the Basel Committee on Banking Supervision’s to revise its consultative document on the prudential treatment of cryptoasset exposures to help realize the benefits that distributed ledger technology (DLT) can deliver across the real economy, to facilitate regulated bank involvement in cryptoasset markets and to provide an appropriately regulated and level playing field across the globe through use of the existing prudential framework. The benefits will be realized most widely and transparently when regulated banks, with a long history of existing customer relationships and experience with regulatory compliance standards relative to newer entities are able to play a meaningful role. The international coordination efforts will need to run parallel to the concurrent development and coordination of these regulatory frameworks in individual jurisdictions.
The Future of Workwww.sifma.org/the-future-of-work
Firms are thinking critically about the future of the workplace, with many already implementing hybrid or remote work arrangements for certain populations. There are benefits to such arrangements, including the ability to attract diverse talent by not being tied to a particular location and offering greater flexibility to manage work and personal obligations.
The securities industry operates in a highly regulated environment with rules governing the registration and supervision of office locations. Those rules are decades-old and were based on physical office locations. Even as regulators themselves have adapted successfully to remote working, there’s a hesitancy among some to modernize the regulatory regime to accommodate a remote or hybrid workforce.
SIFMA believes regulators must collaborate with the industry to transition to a “new normal” and to address any concerns. Firms of all sizes were already in a years-long process of investing in and upgrading their technological and supervisory capabilities and have found that those investments also support a remote workforce while complying with regulations designed for investor protection.
The industry continues to see the value in in-person interactions, especially the camaraderie and culture-building it offers; however, SIFMA believes that different models can coexist. The industry should be able to adapt to the needs of customers and the workforce, have regulations that reflect the workplace of the future, and have face-to-face requirements as the business wants and the risks warrant.
More IssuesOn behalf of our members, SIFMA works on a number of additional policy priorities that are critical to effective and resilient capital markets. To learn more about these issues and more, please visit www.sifma.org/issues.
Enhancing Money Market Fund Resilience
Following periods of market volatility and liquidity issues seen in 2020, efforts continue to ensure Money Market Funds (MMF) are resilient to credit and liquidity stresses. Regulators seem to be particularly concerned, that MMFs could have redemption concerns issues, finding themselves unable to sell assets during stressed situations. SIFMA’s Asset Management Group continues to engage with the U.S. Securities and Exchange Commission, the Financial Stability Board, and other global regulators as potential rulemakings develop. Among the proposals under consideration, SIFMA AMG members and many other market participants have argued that delinking liquidity from fees and gates would be helpful in counteracting any potential liquidity concerns; most of the other proposals under consideration should be further studied as they could harm the functioning of these vital markets without actually improving their resiliency.
Demonstrating Antitrust Needs for Aggregation Rules
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 requires companies to file pre-merger notifications with the Federal Trade Commission and the Antitrust Division of the Justice Department for certain acquisitions. Under current law, each individual mutual fund that owned more than 5% had to file. The FTC and DOJ have published proposed changes to the rules and interpretations implementing the Act; if the proposals are implemented, asset managers will be required to aggregate positions in an issuer across all funds when assessing filing thresholds.
SIFMA’s Asset Management Group has outlined significant concerns with the proposed aggregation requirement and the incorporation of the academic theory of common ownership, which asserts that the mere ownership of shares of competitor companies harms competition. The proposed aggregation rule would significantly increase the number of filings within the asset management industry. The filing fees and delay on investors’ acquisitions of securities would impair market efficiency and needlessly increase costs for retail investors, especially savers and retirees whose investments are their main source of income.
Enhancing Transparency in Fixed Income Markets
Fixed income markets are an integral component to economic growth, providing efficient, long term and cost-effective funding. They are also one of the most heavily regulated areas of the U.S. capital markets. Two regulatory proposals of note include those related to Rule 15c2-11 and Regulation ATS.
The U.S. Securities and Exchange Commission is considering applying Rule 15c2-11 to the fixed income markets. The Rule, which was implemented in 1971, amended in 1975, 1991, and again in 2020, is and always has been targeted at protecting retail investors from OTC equity market fraud and has never been enforced in fixed income markets. SIFMA members, including our investor members whom the Rule is nominally purported to protect, strongly believe this rule is not needed in or appropriate for fixed income markets. Nonetheless, if the Commission desires to apply this Rule to some portion of the fixed income markets, SIFMA members believe that the Rule should not apply to fixed income markets without the opportunity for the public to receive notice and provide comment on the proposed application of it, given the material policy change its application would represent, and should include a significant reduction in the proposed scope of coverage of the Rule. SIFMA has requested relief from the SEC and continues to discuss this important Rule with them. Failure to take these steps would threaten the continued expansion of liquidity and transparency in these markets and may increase transaction costs, harming investors.
The U.S. Securities and Exchange Commission has also proposed amendments to Regulation ATS under the Securities and Exchange Act of 1934 as they relate to government securities Alternative Trading Systems (ATS). SIFMA generally supports increased operational transparency related to the basic rules of operation of fixed income and government securities ATSs. There is value in operational transparency related to the basic rules of operation of the venue, the ability of priority or preferential treatment (if any) for certain desks or clients and information on risk controls. Among other things, more operational transparency would aid investors in conducting analysis of executions. SIFMA supports tailoring Form ATS disclosures in a manner that addresses the unique characteristics of the fixed income and other marketplaces to best serve investors.
Financing Infrastructure for States and Municipalities
There is a clear pressing need to invest in our nation’s infrastructure. Municipal bonds finance the bridges, roads, schools and hospitals our communities rely on. We have an infrastructure spending shortfall and a critical need to address it. Further, there is a difference between funding and financing efforts. SIFMA’s priorities in this space are effective financing tools with that have been used by over 50,000 state and local governments for key infrastructure projects. Municipal finance tools, such as tax-exempt advance refundings, can ease the burden on the American taxpayer through lower borrowing costs while also bolstering investment in critical public needs, enhancing the quality of life of all Americans. Direct pay bonds and updating small issuer rules will attract more private capital to state and local government projects, and, combined with advance refundings, will serve as critical infrastructure funding tools. It is a missed opportunity to not include municipal bond provisions in the Build Back Better Reconciliation Bill. State and local governments, unlike virtually everyone else in America, are unable to take full advantage of historically low interest rates through advance refundings and generate cashflow to reinvest in their communities.
SIFMA and its member firms support the preservation of the tax exemption for municipal bonds as well as four main initiatives that would help state and local governments finance important infrastructure projects while also saving taxpayer dollars:
- Secure the passage of legislation permitting issuers to advance refund their municipal debt on a tax-exempt
- Authorize a new direct payment bond program on a permanent basis;
- Expand the volume cap and uses for Private Activity Bonds (PABs); and
- Increase the annual limit on the amount of tax-exempt obligations that may be issued to qualify for the small issuer exception to the tax-exempt interest expense allocation rules.
Helping Businesses and Investors Manage Risk
Derivatives are an important tool that businesses and investors use to manage risk exposure. Title VII of the Dodd Frank Act established a broad new regulatory regime for over-the-counter (OTC) derivatives, or swaps, which is profoundly affecting the financial markets and market participants. SIFMA believes that the Dodd-Frank Act took several important steps towards improving oversight and transparency in the swaps markets and supports the implementation of appropriate regulations that do not create undue costs or unduly limit the availability of these valuable risk management tools. In October 2021, an important step was achieved when the SEC’s security-based swap dealer (SBSD) regime went live and the first SBSD registrations were reported soon thereafter. SIFMA will continue to engage closely with the SEC as it works to complete Title VII rulemaking in 2022.
Looking forward, policymakers should continue to harmonize regulations between the SEC and CFTC; avoid overly broad application of Title VII in cross-border situations, including expanding the availability of bilateral regulatory recognition (substituted compliance); and continuously review and evaluate the impact of regulations on the swap markets and market participants, including end users such as asset managers and their clients.
Legal & Compliance
Protecting Data & Privacy
Personal financial information is invaluable and the financial industry is committed to ensuring the safety of the clients we serve at every turn. SIFMA believes a federal privacy and data breach standard is necessary to best protect the personal financial data of all Americans. Many of our members function regionally, nationally, and globally, and the current patchwork of conflicting state and federal laws and regulations further adds to the confusion and inefficiency. Adopting a federal preemptive standard for privacy and data breach – that takes into consideration existing policies under the Gramm-Leach-Bliley Act – would greatly improve customer protection by minimizing confusion and inequality.
Investors are increasingly looking for transparency as they determine how their data is being shared, used and protected. To that end, SIFMA has published a set of industry-wide principles, focusing on access; security and responsibility; transparency and permission; and scope of access and use, for protecting, sharing and aggregating customer financial information. SIFMA is also a founding member and serve on the Board of the Financial Data Exchange (FDX), a non-profit standards body tasked with developing technical solutions for permissioned data transfer between financial institutions and technology companies.
Operations and Technology
Implementing the Consolidated Audit Trail
The SEC established the Consolidated Audit Trail (the CAT) to enable regulators to track all order and trading activity throughout the U.S. markets for listed equities and options. While operated by 25 Self-Regulatory Organizations (SROs) including equity and options exchanges, under the supervision of the SEC, the securities industry has undertaken efforts to build and stand up systems necessary to comply with the CAT, working diligently through the coronavirus pandemic and the operational changes, priorities and demands it brought. The transaction database became fully implemented in December 2021.
The SROs and industry are now working on the design and development of the customer data base or CAIS which is projected to come online in mid-2022. The data within CAT has become a key regulatory tool as evidenced by the October 2021 SEC staff report on January 2021 market volatility which used CAT data to recreate and analyze the trading activity. Several critical issues remain, most importantly data security and funding. SIFMA has continually voiced concerns about the type and amount of personally identifiable information (PII) data to be reported to and maintained in the CAIS and has repeatedly offered viable alternatives that would serve the same purpose without the attendant data and privacy risk to investors. We continue to engage with the SEC on its August 2020 data security proposal which would, among other things, prohibit the bulk downloading of CAT data and would strictly and clearly prohibit the use of CAT data for any commercial purpose. We continue to advocate for a collaborative, equitable and transparent funding model for the CAT and recommended that the Commission disapprove the proposed model submitted by the SROs.
Private Client and Wealth Management
Enhancing Investor Protection While Preserving Choice
Regulation Best Interest – finalized by the Securities and Exchange Commission in 2019 and fully enforceable as of June 2020 – significantly and meaningfully upgrades the existing regulatory regime for broker-dealers, and directly enhances investor protection. SIFMA advocated for the creation of such a standard for over a decade.
The rule is specific with respect to the obligations brokers owe to their clients and the steps they must take to comply, including the obligation to eliminate, disclose and mitigate certain conflicts of interest. It is enhancing investor protections, while also preserving investor choice and access to investment advice. Reg BI substantially exceeds the preceding FINRA suitability standard and is broader in scope than the now defunct DOL fiduciary rule. Reg BI applies across all customer accounts, not just retirement accounts, and will allow the SEC to enforce a common standard across the industry.
Protecting Senior Investors
By 2030, seniors aged 65 and over will make up 18% of the nation’s population. In the United States, seniors lose an estimated $2.9 billion every year in cases of financial exploitation reported by media outlets, while only an estimated 1 in 44 cases is even reported to authorities. It is vital that we are able to protect our senior investors from financial exploitation and the dangers of cognitive decline.
SIFMA is committed to working across the financial industry to protect senior investors and continues to seek new ways to fight against financial exploitation of older Americans. In addition to our Senior Investor Protection Toolkit, we work in partnership with AARP to distribute the BankSafe training program and with organizations including the Women’s Institute for a Secure Retirement (WISER), the National Adult Protective Services Association (NAPSA), FINRA and more.
Preserving the Independent Contractor Model
SIFMA supports preservation of the independent contractor status in the financial services industry where independent broker-dealer and independent financial advisors can provide services to their retail and institutional clients. Independent broker-dealers (IBDs) and the nearly 160,000 individuals that affiliate with them as independent financial advisors (IFAs) serve millions of clients across the U.S. by providing investment advice and education. IFAs provide crucial advice on retirement planning, educational funding, and other life events retail investors in addition to offering other services and products, such as insurance and tax planning, that address their clients’ financial well-being holistically.
Independent contractor status allows independent financial advisors to own and operate their own small business. Independent financial advisors also benefit from a decentralized business structure, which expands the accessibility of financial advice and planning in parts of the country that would otherwise not be served. Notably, independent financial advisors work in a highly regulated industry and are required by securities laws to associate with a broker-dealer to protect investors. We encourage lawmakers to exempt independent broker dealers and independent financial advisors from any legislation, such as the Protecting Rights to Organize Act (Pro Act), that would prevent financial services professionals from freely choosing to be independent contractors.
Prudential Regulation of Capital Markets
Prudential regulation requires financial firms to control risks, hold adequate capital and liquidity, and have in place workable recovery and resolution plans. It is essential that our regulatory regime accounts for the vital role the capital markets play in providing credit and financing the real economy, particularly as regulators consider the implementation of elements of the Basel III capital proposal in 2022, including the Fundamental Review of the Trading Book (FRTB) and Credit Valuation Adjustment (CVA). It is vital that those rules should be implemented in a manner that does not overly penalize banks’ capital markets activities, which in turn could reduce liquidity in vital corporate and other funding markets, thereby hurting growth in the real economy.
SIFMA supports appropriate regulation of the capital markets and their participants by both market regulators, who have decades of experience in promulgating rules and supervising the marketplace, as well as prudential regulators. U.S. prudential rules generally impose significantly higher capital and liquidity costs on banking entities with significant capital markets operations. This has increased costs to financial firms and the economy as a whole and reduced market depth for a wide variety of corporations and other end-users, particularly during periods of economic stress. This has also had another effect: transforming U.S. banking regulators into the most impactful supervisor of the capital markets superseding the oversight role traditionally played by the SEC and CFTC. This has created distortions in the capital and liquidity requirements between market and prudential regulators as well as lessened the efficiencies by increasing costs to end users. It is thus crucial to align and allow for mutual recognition, to the extent possible, the capital and liquidity standards set out by the U.S. banking regulators and the market regulators.
Tax Policy to Support Growth
Taxes impact the savings and investment decisions of individuals and corporations and are a necessary means for funding the government. SIFMA believes reasonable taxation and economic growth are not mutually exclusive and encourages policy makers to consider both when contemplating changes to the tax code. Many of SIFMA’s members are global taxpayers as well, therefore international standards for raising revenue should consider the highly regulated nature of the financial services industry. SIFMA’s member firms are willing and prepared to help policymakers wade through the nuances and goals of their respective tax policy.
SIFMA believes taxes impact savings and investments for both individuals and businesses, but remain necessary for government programs and support for domestic economic growth. We remain focused on international tax, capital gains and dividends as well as protecting investors and savers from taxes that could hurt their future savings.