HFSC Hearing with SEC Chair Mary Jo White
House Financial Services Committee
“Examining the SEC’s Agenda, Operations, and FY 2017 Budget Request”
Wednesday, November 18, 2015
Key Topics & Takeaways
- Uniform Fiduciary Standard: Reps. Hensarling (R-Texas), Scott (D-Ga.) and Wagner (R-Mo.) urged the SEC to act to establish a uniform fiduciary standard in the investment advisory and brokerage industry, and reiterated concerns with the Department of Labor’s (DOL’s) proposed fiduciary standard. In contrast, Rep. Ellison (D-Minn.) expressed his support for the DOL’s proposed fiduciary standard, and stated that he prefers the SEC to follow the DOL’s lead on this issue. Chair White reiterated that SEC staff is “very, very actively working” on this issue, but cautioned that it is “long, complex exercise” imperative to “get[…] right.”
- Bond Market Liquidity: Hensarling asked if White has yet determined whether regulations like the Volcker Rule are contributing to decreased liquidity. White responded that while illiquidity is a concern, the SEC has not found a link to the Volcker Rule. Hensarling retorted that “the rest of the world is concluding otherwise.”
- Regulation of Asset Managers: Rep. Poliquin (R-Maine) asked whether White uses specific standards in assessing whether the designation of asset managers as systemically important financial institutions (SIFIs). White explained that the SEC is concerned about liquidity risk management and the ability of open-end funds to meet redemption demands, which is why they issued a proposal to address such risks, and she added that securities lending activities could also pose risks.
- SIPC Protection: Garrett asked whether the Securities Investment Protection Corporation (SIPC) is “rigged” and whether small investors know whether they have coverage or protection provided by SIPC. White responded that a broker should tell investors whether or not they are covered by SIPC, but she explained that if the broker is committing a “huge Ponzi scheme,” or never engaged in bona fide trades with the assets over which it has custody, SIPC would not provide coverage for losses.
Witness
- Mary Jo White, Chair, Securities and Exchange Commission
Opening Statements
In his opening statement, Chairman Jeb Hensarling (R-Texas) stressed the House Financial Services Committee’s responsibility to ensure that the Securities and Exchange Commission (SEC) is acting to satisfy its mission and to ensure that the SEC is a “good steward” of its appropriated resources. He noted that he has heard both “good news and bad news” from the SEC. He listed the positives as completed Jumpstart Our Business Startups (JOBS) Act rulemakings to implement Regulation A+ and crowdfunding provisions, as well as the SEC’s assertion of its jurisdiction over the Financial Stability Oversight Council in regulating asset managers.
“Regrettably,” Hensarling continued, the SEC pushed through a pay-ratio rule in a partisan vote that does nothing to protect investors and is now considering a political disclosure rulemaking that is not within its “core competency.” He also criticized the proposed universal proxy ballot, saying it “favors special interests and short-termism.”
Hensarling also called on the SEC “to act and stop” the Department of Labor (DOL) from making financial advice and retirement planning “less available and more expensive.”
Ranking Member Maxine Waters (D-Calif.), in her opening statement, said the SEC’s work is “hampered by harmful Republican cuts” to its budget requests, and insisted that Democrats are committed to fully funding the SEC. She then noted that five years after the passage of the Dodd-Frank Act, the SEC has yet to propose a uniform fiduciary standard. Waters said she was pleased to learn that while the DOL is “doing its part to create a rule that works,” the SEC is also working and should have a proposal “in the reasonable future.”
Waters said she is “deeply concerned” about the continued granting of waivers that “allow the worst actors in the financial system to continue business as usual,” and said she would like to hear about how these decision are made. She also called on Chair White to help the Committee craft language to improve a bill regarding business development companies (BDCs), H.R. 3868, the Small Business Credit Availability Act, recently approved by the Committee.
Rep. Scott Garrett (R-N.J.) lamented that the SEC is becoming “increasingly politicized,” and that rulemakings such as the pay-ratio rule and proxy ballot rules do little to make capital markets more competitive. He stated that the SEC only seems to pursue a capital formation agenda when specifically directed by Congress.
Rep. Carolyn Maloney (D-N.Y.) expressed interest in hearing Chair White’s opinion on how safeguards such as the limit up, limit down rules performed in their first real test on August 24.
In her testimony, SEC Chair Mary Jo White highlighted the SEC’s three-part mission of protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation. She noted that the SEC has advanced significant rulemakings in the eight months since her last appearance before the Committee, has continued to bring strong enforcement actions against wrongdoers, and has made significant progress on its initiatives involving the asset management industry, equity market structure, and disclosure effectiveness.
Going forward, White said the SEC plans to continue to focus on completing its mandatory rulemakings while pursuing other initiatives that are critical to its mission, including those relating to asset manager oversight, equity market structure, and disclosure effectiveness review. She said the proposed fiscal year 2017 budget reflects these priorities.
White’s written testimony also discussed Section 913 of the Dodd-Frank Act, which granted the SEC authority to adopt rules establishing a uniform fiduciary standard for broker-dealers and investment advisers. Her written testimony states that this is “a complex issue, and that there are significant challenges that will need to be addressed in proposing a uniform fiduciary standard, including how to define the standard, how it would affect current business practices, and the nature of the potential effects on investors, particularly retail investors.” It adds that the SEC staff is developing rulemaking recommendations for the Commission’s consideration.
Questions and Answers
Uniform Fiduciary Standard
Hensarling asked if the SEC staff will release an update to its 2011 study on the need for a uniform fiduciary standard. White said part of the work now being done by staff will be to assess economic impacts, though this does not necessarily mean the entire 2011 assessment would be updated. She said the analysis would likely be shared whenever a proposal is made.
Hensarling raised the United Kingdom’s Retail Distribution Review, noting that it imposed a similar rule that led to 310,000 clients’ services being cut off. He asked if the UK experience with a similar rule concerns White. White answered that a clear concern with the rulemaking is the impact it would have on retail investors’ abilities to access reasonably-priced advice.
Hensarling urged the SEC to “look very closely” at the UK experience and consider testimony the Committee has heard that the best interest contract (BIC) exemption is unworkable.
Rep. David Scott (D-Ga.) asked why the SEC is allowing the DOL to “take over [its] territory” by acting on a fiduciary rule when Dodd-Frank clearly gave the SEC authority in Section 913. White answered that she does not view the DOL’s efforts in this way, and that the DOL has a separate responsibility and statutory authority under the Employee Retirement Income Security Act (ERISA).
Scott insisted that the DOL’s rule will harm the ability of small investors to access financial advice, commenting that if the SEC is to “sit back and disavow” the authority given it by Section 913, this would be a “serious indictment on the SEC.” He asked White to be more aggressive and “seize your authority” on the fiduciary rule.
Rep. Keith Ellison (D-Minn.) stated that conflicted investment advice costs investors “a lot of money,” and expressed his concern about “hidden commissions” by brokers. He also expressed his support for the DOL’s proposed fiduciary standard, and stated that he prefers the SEC to follow the DOL’s lead on this issue. Ellison asked what role a best interest standard would play and what the process is for the SEC moving forward.
White responded that it is important to establish a uniform fiduciary duty for brokers and investment advisors to act in the best interest of their client. She noted that the DOL is a separate agency with a separate statutory authority, but recognized that coordination between the two agencies will be important on this issue. White explained that the SEC’s authority to act on this issue stems from Section 913 of the Dodd-Frank Act which provides certain parameters on specific issues to be considered with regard to the broker model.
Rep. Patrick Murphy (D-Fla.) also asked White to elaborate on the distinction between the SEC’s and DOL’s responsibilities with regard to establishing a fiduciary standard. White explained that the SEC and DOL have two separate statutory regimes, and that the DOL regulates funds active in the ERISA space, which could capture brokers also subject to SEC rules. White reiterated that the SEC would proceed to establish a uniform fiduciary proposal. However, she cautioned that doing so is “complex” and “not a quick issue” to resolve. In response to Murphy’s concerns about potential duplication between SEC and DOL rules, White assured him that the SEC would try to write rules as consistent as possible with the DOL rules, but that the end result could not achieve perfect consistency because there are two different statutory obligations and two different markets they are serving.
Rep. Ann Wagner (R-Mo.) stated that she believes it is absolutely under the purview of the SEC to establish a uniform fiduciary rule, and inquired about the “full out focus” on this issue that Chair White mentioned at SIFMA’s annual meeting several weeks ago. White explained that SEC staff is “very, very actively working” on this issue, but reiterated that it is “long, complex exercise.” White added that she “cannot overstate the complexity” of establishing a uniform fiduciary standard and importance of “getting it right.” As such, White explained that the SEC is conducting extensive economic analysis to avoid ending up with a rule that could deprive retail investors of reliable investment advice.
In response to Wagner’s specific question with regard to potential conflicts between the DOL proposed rule and certain aspects of the Investment Adviser’s Act, White explained that she would have to examine the specific details and follow-up with the Congresswoman. Wagner also asked her to examine the DOL’s definition of “recommendation” and how it differs from existing Financial Industry Regulatory Authority (FINRA) rules.
Fixed Income Liquidity and the Volcker Rule
Hensarling noted that White saw no link between the Volcker Rule and concerns about illiquidity in bond markets when she last appeared before the Committee in March. He then cited several reports that suggested new regulations have limited the market-making abilities of bank holding companies. He asked if White has yet determined whether regulations like the Volcker Rule are contributing to decreased liquidity. White responded that while illiquidity is a concern, the SEC has not found a link to the Volcker Rule. Hensarling retorted that “the rest of the world is concluding otherwise.”
Rep. Randy Neugebauer (R-Texas) referenced the PWC study on the brittleness of market liquidity, and encouraged her to examine the conclusions of the study and dedicate more resources to this important issue.
Rep. Sean Duffy (R-Wis.) asked if White agrees that there is an issue of decreased liquidity in corporate bond markets. White replied that she agrees there is “concern” about liquidity.
Duffy asked what is causing the lack of liquidity if not the Volcker Rule. White answered that the SEC is “keeping a close eye” on liquidity.
When Duffy followed up by stating that many see the liquidity issue as having arisen with the implementation of the Volcker Rule and other regulations, White responded that the SEC staff judges the impact of every rule it considers.
Rep. Denny Heck (D-Wash.) noted that the Volcker Rule has been implemented but is not yet in force. He asked if the SEC is seeing any corresponding changes in market behavior or changes in risks to the financial system. White said it is hard to judge the impact of the Volcker Rule at this point, as the SEC is just beginning its exam for the compliance period. Asked whether she is confident that the rule will reduce risk in the financial system, White answered that this is the goal’s rule but she would have to wait to see data before answering.
SEC Funding
Waters asked whether the SEC is “hampered by inadequate funding” levels. White responded that the SEC has “responsibilities far beyond [its] resources,” including those prescribed by the Dodd-Frank and JOBS Acts, adding that “of course it slows down” regulatory actions.
Rep. Bill Huizenga (R-Mich.) commented that initiatives such as the conflict minerals rule take time and attention away from the SEC’s core objectives. Noting that the SEC’s budget has grown significantly over the past decade, he suggested that further budget increases may not be needed if the SEC can prioritize and focus more on its core mandates.
Rep. William Lacy Clay (D-Mo.) pointed out that the SEC’s budget is deficit neutral and asked about the consequences of maintaining level funding rather than increasing the agency’s resources. White answered that it is important to consider the new spaces the SEC is getting into and the complexity of markets, commenting that level funding means it cannot get skilled professionals for new spaces such as crowdfunding without hurting its enforcement activities.
Waiver Process
Waters also asked whether there should be additional transparency on the Commission’s waiver process. White responded that the Commission “very aggressively” pursues bad actors and clarified that waivers are “not enforcement remedies.” She explained that Commission staff “apply very vigorously” enforcement standards but apply waivers when recipients/defendants aim to pursue business in a “totally unrelated area” than where the enforcement action targeted. She assured the Committee that the SEC staff conduct “very deep dives” before making those decisions about granting waivers, and explained that when waivers are granted, they are publicly available on the SEC website. However, White acknowledged that the waivers that are not granted are not posted online to balance privacy concerns, and she admitted that it is a “key challenge” to balance privacy needs while providing public information to show that the SEC does not provide waivers every time they are requested.
BDC Bill
Waters also asked about White’s concerns with H.R. 3868, the Small Business Credit Availability Act, that aims to support small businesses by lifting restrictions on BDCs. White agreed that BDCs are designed to be an engine of growth for small businesses, which is a good thing. However, she reiterated the concerns about investor protection that were articulated in her recent letter to the Committee. Primarily, White explained she was concerned about the effects of: 1) increased leverage; 2) reductions in the rights of preferred stockholders; and 3) allowing BDCs to invest 50 percent of assets in financial institutions, up from 30 percent. White reiterated that the vast majority of investors in BDCs are retail investors, which she claimed “heightens” her investor protection concerns.
Rep. Mick Mulvaney (R-S.C.) noted White’s letter in which she listed concerns with H.R. 3868, and stated that he is “excited” to work with her to gain SEC support for the legislation. He specifically noted White’s concern about the bill requiring a rule to be written within a year and explained that this was included because of previous SEC rulemakings that took several years to craft. White replied that she is happy to work with Mulvaney’s staff on the legislation.
Garrett asked whether the Securities Investment Protection Corporation (SIPC) is “rigged” and whether small investors know that they do not have coverage or protection provided by SIPC. White responded that a broker should tell investors whether or not they are covered by SIPC, but she explained that the broker in question could be committing a “huge Ponzi scheme,” and explained that SIPC does not cover Ponzi schemes or fraud, such as if a broker never engaged in bona fide trades with the assets over which it has custody.
Regulation D
Garrett also asked whether an amendment to Reg. D on capital raising has a suppression effect, and whether the Commission could remove amendments so that the JOBS Act can have its intended effect. White responded that she heard proposed regulation may hamper those markets, but she explained that the feedback is mixed. She also clarified that the 506(c) market has been used, but not as much as the 506(b) market.
Puerto Rico
Rep. Nydia Velazquez (D-N.Y.) asked whether the 1940 Act should be amended to extend coverage to U.S. territories such as Puerto Rico, which are currently exempt from the Act. Velazquez also noted that H.R. 3610 would close this loophole. White agreed that the exemption was put into law many years ago due to practical and financial difficulties of being able to enforce U.S. law in the territories, however she agreed that the loophole should be closed in today’s markets.
Hedge Fund Transparency
Velazquez also asked whether disclosure requirements should be introduced to improve transparency over hedge funds’ use of derivatives and debt securities, to benefit investors and the public. Velazquez noted that she introduced a bill, H.R. 3921, to do so. White claimed that there are “pros and cons to that approach,” and while she agreed that transparency is important, it could lead to front-running. White concluded that she needed to study the particular bill in further detail to understand its effects.
Online Lending
Velazquez referenced her recent letter sent to Chair White requesting information on small business online lending and asked whether White had any preliminary comments. White assured her that she will respond in due course, but also explained that the SEC does not regulate loans extended to borrowers by online companies. Instead, she explained, the SEC regulates online companies when they sell securities to fund those lending activities. White noted that the SEC at times requires those lenders to register their offerings or register as broker-dealers, and she noted that the Commission has brought enforcement cases against some of those entities.
Shortened Settlement Cycle
Neugebauer also asked whether Chair White agreed with the effort underway to shorten the settlement cycle in the U.S. from T+3 to T+2 in the third quarter of 2016. White affirmed that she agreed with that initiative.
August 24 and LULD
Maloney noted the extreme market volatility experienced on August 24 and asked where the SEC’s review stands on this event. White shared that the SEC’s review is “well along” and indicated that she hoped to share the initial results of the study in the “near term.” White explained that the SEC is studying the effect of limit up-limit down’s (LULD’s) trading pauses on exchange-traded funds (ETFs), the complications around opening auctions, as well as whether any modifications or calibrations are necessary to the LULD pilot. When pressed on the timeline for sharing the study, White indicated that she hopes it will be ready by the end of the year but cannot commit to doing so.
Rep. Stephen Lynch (D-Mass.) asked what can be done to prevent volatility episodes such as August 24 happening again. White responded that the SEC is studying LULD and looking at how to recalibrate it to make it more effective.
Lynch asked if there was any evidence that high-frequency traders had a hand in the August 24 volatility. White said she would have to wait to see the results of the SEC’s analysis, but that high-frequency traders “don’t pop out.”
Asset Manager Regulation
Maloney also asked what the Commission will pursue next in its efforts to enhance regulation of asset managers. White indicated that the next rulemaking will likely be on funds’ use of derivatives, followed by transition rules and stress testing, which she said is “really five separate areas.” White indicated that she hopes the rule on transition planning will be proposed early next year, and the stress testing rules thereafter.
Administrative Proceedings
Maloney inquired about the SEC’s use of administrative proceedings, in particular whether it offers the Commission a “home court advantage” or deprives defendants of due process. White explained that the administrative proceedings have been used by the SEC and other federal agencies for many years to handle enforcement cases. She argued that the SEC’s administrative law judges are “impartial” and have “unique” due process rights, and also noted that the SEC proposed changes to enhance rights for defendants.
Rep. Blaine Luetkemeyer (R-Mo.) asked whether White uses specific standards in assessing whether the designation of insurers as systemically important financial institutions (SIFIs) is necessary. White explained that FSOC’s guidance is available publicly and identifies certain criteria, however when pressed she explained that she used her “independent judgment” to conclude that designating insurers was necessary.
Luetkemeyer also asked whether there should be an off-ramp for SIFIs to de-designate. White explained that an off-ramp exists in the annual review process, but when pressed, she explained that designated firms will receive a detailed analysis of what factors contributed to their designation. She then agreed that FSOC could be “clearer” about what gets firms designated and de-designated.
Luetkemeyer asked whether FSOC simply rubber stamps the international actions when designating firms, despite objections of its own in-house insurance expert. White refuted the idea that FSOC is a rubber stamp, claiming its decision was independent.
Luetkemeyer asked about the SIFI designation process for asset managers, and White explained that the FSOC’s pivot to focus on products and activities “makes sense.” White conveyed her belief that “ordinarily” an asset manager’s business model would not inherently present systemic risk, but added that securities lending activities, for instance, could create systemic risk.
Duffy expressed concern that the FSOC is not sufficiently using the expertise of the SEC in its deliberations regarding asset managers, and that the FSOC may be making decisions contrary to the recommendations of SEC experts.
Rep. Al Green (D-Texas) asked White if it is beneficial to have a $50 billion asset threshold for SIFI designation. White replied that this is hard to judge, but that given the resources the FSOC spends to look at institutions, the trigger is “logically” a good thing.
Rep. Bruce Poliquin (R-Maine) also expressed concern that asset managers are being designated as SIFIs, and asked what activities the SEC is concerned about could give rise to systemic risk. White explained that the SEC is concerned about liquidity risk management and the ability of open-end funds to meet redemption demands, which is why they issued a proposal to address such risks. She added that securities lending activities could also pose risks. Poliquin urged Chair White to stand up to international regulators on the systemically important designation issue to protect American funds’ interests.
Rep. Scott Tipton (R-Colo.) also asked whether the FSOC’s focus on asset managers’ activities and products is important. White agreed that the pivot from an entity approach to focusing on products and activities “makes sense” to the SEC staff, and explained that she sees the FSOC’s work as “complementary” to the SEC’s independent initiatives.
Political Contribution Disclosures
Rep. Michael Capuano (D-Mass.) focused on the SEC’s inaction over creating a disclosure regime for political contributions, claiming that it was important to the American public as evidenced by the 1.2 million comment letters that the Commission received on the issue. White agreed that there were “very strong views” conveyed on both sides of the issue, but also explained that the Commission is focusing on congressional mandates as well as “mission critical” initiatives such as equity market structure, disclosure effectiveness, and rulemakings pertaining to asset managers. White also noted that companies are voluntarily disclosing political contributions, but Capuano rejected that by stating that there will “always be a handful of players that are bad actors” that do not voluntarily disclose, and urged the SEC to focus on this issue to compel them to do so.
Duffy commented that rules regarding corporate political spending are not material to investors’ decision making and encouraged White to “push back” on the rulemaking.
Murphy asked when the SEC would respond to the letter sent to her by members of the Committee regarding the proposed disclosure requirements for companies making political expenditures, as well as what the SEC’s plans are for moving forward on this issue. White explained that the she expects the SEC to respond “very shortly” to committee members on these issues, and acknowledged that there is clearly a lot of interest in the issue, as indicated by the volume of consultation responses received on the proposal. She also reiterated that an increased number of companies are making voluntary disclosures on their political activities.
Executive Compensation
Capuano asked why the Commission has not focused on Section 956 of the Dodd-Frank Act pertaining to incentive-based compensation arrangements. White assured him that the Commission and other financial regulators are “very actively” working on this issue, and that she expected the re-proposal to come together in the “very near future.” Capuano urged Chair White to prioritize this issue or let him know if further Congressional action was needed.
Ellison claimed that the gap between CEO and median worker pay is now 300 to one, and asked what impact this has on the economy at large. He also pointed to a graphic that illustrated that stock options encourage executives to prioritize short-term results over the long-term performance of the firm. White responded that the SEC is “very active” in enhancing disclosure of executive compensation, and reiterated that the Commission staff is working hard to ensure incentive-based compensation arrangements do not induce excessive risk taking. However, she explained that the broader questions do not fall under the SEC’s remit.
WKSI Waivers
Lynch was critical of the SEC’s granting of well-known seasoned issuer (WKSI) waivers to firms that have been convicted on felonies or securities fraud, saying the SEC is not doing enough to discourage bad behavior. White defended the SEC’s record of enforcement and explained that waiver decisions are based on whether the SEC believes a firm’s disclosures can be relied upon going forward.
Lynch reiterated that firms convicted of felonies should lose their WKSI designation.
Tick-Size Pilot
Duffy noted the SEC’s five month delay of its tick-size pilot, and expressed hope that this would not be “death by a thousand delays.” White answered that this would not be the case, and the SEC calibrated the extension to ensure that it can get reliable data from the pilot.
LEI
Rep. Ed Royce (R-Calif.) noted that the Committee last month approved H.R. 3738, the Office of Financial Research Accountability Act, which requires the Office of Financial Research (OFR) to provide an annual update on the adoption of the Legal Entity Identifier (LEI). Royce commented that if the OFR were to publish its report today, the SEC “would lag behind.” He asked if the SEC can be expected to require greater use of LEIs in the future or if anything is holding it back from requiring LEIs in its rulemakings. White replied that nothing is holding the SEC back, and that she sees the LEI system as an “enormously important tool.” She said the SEC is always looking for opportunities to use it more and it moves forward with rules.
REITS and Housing Finance Reform
Royce urged White to take an interest in bringing more private sector risk sharing to the government sponsored enterprises (GSEs), and suggested that real estate investment trusts (REITs) are logical investors in risk transfer transactions. He said it does not make sense to prevent private capital from being deployed in housing finance.
Accredited Investor Definition
Heck asked about the status of the SEC’s review of the ‘accredited investor’ definition. White answered that the SEC’s staff is studying the definition “intensively” and is “coming to a conclusion.” She further explained that the SEC is looking beyond the traditional tests of net worth and income and considering experience, sophistication and other qualifications for the designation.
Equity Market Structure
Rep. Robert Hurt (R-Va.) said he has concerns with the governance of National Market System (NMS) plans, explaining that they lack a broad base of participation in making sure the Securities Information Processors (SIPs) are “the best they can be” and that SROs face conflicts of interest regarding investments in SIPs because of how revenue is shared. White stated that the SEC is pursuing specific rulemakings to optimize markets, as well as conducting a comprehensive review of equity market structure. She said it is “enormously important” that SIPs provide timely information, and noted that the work of the Equity Market Structure Advisory Committee demonstrates that this is at the front of the SEC’s attention.
Potential for Overregulation
Rep. Robert Pittenger (R-N.C.) asked whether the SEC is diverging from its tripartite mission and such “bureaucratic entrenchment” resulted in overregulation or “death by a thousand cuts” and therefore adversely impacted capital markets and economic growth, more broadly. White expressed support for the SEC’s tripartite mission, but claimed that the Commission has an obligation to carry out specific tasks that are mandated by Congress. She also explained that the SEC is not trying to create “gratuitous” disclosure requirements, and is actively conducting a disclosure effectiveness review to ensure that is not the case.
Cybersecurity
Murphy inquired about the SEC’s role in cybersecurity, to which White responded that it is “one of the biggest risks” facing markets. She explained that the Commission issued Regulation Systems Compliance and Integrity (SCI) in November 2014 which would require critical market infrastructures to raise the bar on cyber resiliency, and that the SEC issued guidance to registered brokers and investment advisors, as well as brings enforcement actions against institutions that do not comply with those rules on cyber resilience.
Role as Primary Markets Regulator
Tipton asked whether the Federal Reserve’s attempt to map transactions within capital markets could lead to them encroaching on the SEC’s jurisdiction as the markets regulator. White agreed, however admitted that some jurisdictional barriers have changed by statute under the Dodd-Frank Act.
Small Business Capital
Tipton expressed concern about capital formation and small businesses’ access to capital. White explained that the SEC’s annual forum on small business capital formation will be held the following day. She also shared that there is a lot of interest in crowd funding, so the SEC proposed to amend rules 147 and 504 to allow access to those financing vehicles.
Accounting Treatment of Last In, First Out Method
Rep. Roger Williams (R-Texas) expressed concern about the treatment of last-in, first-out accounting under the International Financial Reporting Standards (IFRS), which he believed would take a toll on small businesses. White clarified that her priority is for the Commission to take a stance on the application of IFRS domestically. Williams also cautioned that some aspects of this would impact U.S. tax policy, and White agreed that it “clearly” has implications for the Internal Revenue Service but clarified that the SEC has no interest in setting tax policy.
Paper vs. Electronic Statements
Poliquin expressed concern that the SEC was moving away from paper statements in favor of electronic access and distribution. In particular, he reiterated the importance of investors receiving paper statements unless they opt out. White explained that the SEC has an open comment period until January on this issue and promised to seriously consider his concerns as well as the comments received from other concerned citizens.
Composition of Equity Market Structure Committee
Rep. French Hill (R-Ark.) expressed concern about the composition of the SEC’s Equity Market Structure Advisory Committee, which he said intends to have subcommittees meet in private without transparency. In addition, he questioned why the committee does not include NASDAQ, NYSE, and retail broker dealers. White explained that the SEC went through a “lengthy process” of vetting to try to ensure a range of expertise would be represented on the 17-person committee. She noted that several representatives on the committee were formerly at primary listing exchanges, and that one member represents the retail brokerage point of view. White agreed that the SEC wants diversity in the perspectives represented on the committee and agreed that they structure committee to get input from others including NASDAQ and NYSE. White also explained that the subcommittees do not make decisions and can host public meetings if they so choose.
Primary Objective of Fund Managers
Hill inquired about whether the principal obligation of fund managers is to maximize returns for beneficiaries, and White responded that it should be to “serve the best interest of their client.” Hill expressed concern that the Secretary of Labor Tom Perez recently issued guidance encouraging institutional managers to equate environmental, social and governance concerns to economic performance in making investment decisions, which he did not think is in the best interest of defined benefit plans which are not fully funded and are “underperforming.”
Commission Vacancies
Hill expressed concern about vacancies on the Commission and asked White not to bring “controversial” elements up until she has a fully functioning Commission with bipartisan appointees. White explained that the Commission had to proceed with their work, and that she was not sure how fast confirmations will occur, but that she will be mindful of his concerns.
Rep. David Schweikert (R-Ariz.) also expressed concern that the Commission currently lacks full Republican input and asked White to use the “greatest prudence” in determining which rules would be brought until that vacancy is filled. White reiterated that the Commission tries to do rulemakings on the “merits” and agreed to be “sensitive” to those concerns in moving forward.
Modernizing Rules for Transfer Agents
Rep. Keith Rothfus (R-Pa.) asked about the SEC’s progress in modernizing rules for transfer agents, which he said have not been updated since the 1980s. White affirmed that they are “quite focused” on transfer agent issues, and signaled that the SEC could issue something “quite soon” in the next “couple of months.”
Crowdfunding
Schweikert asked what was holding the Commission back from finalizing rules on crowdfunding. White explained that the rulemaking is complicated because the statute is prescriptive in some areas and crowdfunding portals are complicated. With that, she affirmed that her goal is to make the rule workable to safeguard investors in the new marketplace.” White also pointed to the SEC’s proposed amendments to rules 147 and 504 which also will help address crowdfunding.
For more information on this hearing, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:General,Hearing Summaries Agency:House Financial Services Committee,Publish Year:2015
House Financial Services Committee
“Examining the SEC’s Agenda, Operations, and FY 2017 Budget Request”
Wednesday, November 18, 2015
Key Topics & Takeaways
- Uniform Fiduciary Standard: Reps. Hensarling (R-Texas), Scott (D-Ga.) and Wagner (R-Mo.) urged the SEC to act to establish a uniform fiduciary standard in the investment advisory and brokerage industry, and reiterated concerns with the Department of Labor’s (DOL’s) proposed fiduciary standard. In contrast, Rep. Ellison (D-Minn.) expressed his support for the DOL’s proposed fiduciary standard, and stated that he prefers the SEC to follow the DOL’s lead on this issue. Chair White reiterated that SEC staff is “very, very actively working” on this issue, but cautioned that it is “long, complex exercise” imperative to “get[…] right.”
- Bond Market Liquidity: Hensarling asked if White has yet determined whether regulations like the Volcker Rule are contributing to decreased liquidity. White responded that while illiquidity is a concern, the SEC has not found a link to the Volcker Rule. Hensarling retorted that “the rest of the world is concluding otherwise.”
- Regulation of Asset Managers: Rep. Poliquin (R-Maine) asked whether White uses specific standards in assessing whether the designation of asset managers as systemically important financial institutions (SIFIs). White explained that the SEC is concerned about liquidity risk management and the ability of open-end funds to meet redemption demands, which is why they issued a proposal to address such risks, and she added that securities lending activities could also pose risks.
- SIPC Protection: Garrett asked whether the Securities Investment Protection Corporation (SIPC) is “rigged” and whether small investors know whether they have coverage or protection provided by SIPC. White responded that a broker should tell investors whether or not they are covered by SIPC, but she explained that if the broker is committing a “huge Ponzi scheme,” or never engaged in bona fide trades with the assets over which it has custody, SIPC would not provide coverage for losses.
Witness
- Mary Jo White, Chair, Securities and Exchange Commission
Opening Statements
In his opening statement, Chairman Jeb Hensarling (R-Texas) stressed the House Financial Services Committee’s responsibility to ensure that the Securities and Exchange Commission (SEC) is acting to satisfy its mission and to ensure that the SEC is a “good steward” of its appropriated resources. He noted that he has heard both “good news and bad news” from the SEC. He listed the positives as completed Jumpstart Our Business Startups (JOBS) Act rulemakings to implement Regulation A+ and crowdfunding provisions, as well as the SEC’s assertion of its jurisdiction over the Financial Stability Oversight Council in regulating asset managers.
“Regrettably,” Hensarling continued, the SEC pushed through a pay-ratio rule in a partisan vote that does nothing to protect investors and is now considering a political disclosure rulemaking that is not within its “core competency.” He also criticized the proposed universal proxy ballot, saying it “favors special interests and short-termism.”
Hensarling also called on the SEC “to act and stop” the Department of Labor (DOL) from making financial advice and retirement planning “less available and more expensive.”
Ranking Member Maxine Waters (D-Calif.), in her opening statement, said the SEC’s work is “hampered by harmful Republican cuts” to its budget requests, and insisted that Democrats are committed to fully funding the SEC. She then noted that five years after the passage of the Dodd-Frank Act, the SEC has yet to propose a uniform fiduciary standard. Waters said she was pleased to learn that while the DOL is “doing its part to create a rule that works,” the SEC is also working and should have a proposal “in the reasonable future.”
Waters said she is “deeply concerned” about the continued granting of waivers that “allow the worst actors in the financial system to continue business as usual,” and said she would like to hear about how these decision are made. She also called on Chair White to help the Committee craft language to improve a bill regarding business development companies (BDCs), H.R. 3868, the Small Business Credit Availability Act, recently approved by the Committee.
Rep. Scott Garrett (R-N.J.) lamented that the SEC is becoming “increasingly politicized,” and that rulemakings such as the pay-ratio rule and proxy ballot rules do little to make capital markets more competitive. He stated that the SEC only seems to pursue a capital formation agenda when specifically directed by Congress.
Rep. Carolyn Maloney (D-N.Y.) expressed interest in hearing Chair White’s opinion on how safeguards such as the limit up, limit down rules performed in their first real test on August 24.
In her testimony, SEC Chair Mary Jo White highlighted the SEC’s three-part mission of protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation. She noted that the SEC has advanced significant rulemakings in the eight months since her last appearance before the Committee, has continued to bring strong enforcement actions against wrongdoers, and has made significant progress on its initiatives involving the asset management industry, equity market structure, and disclosure effectiveness.
Going forward, White said the SEC plans to continue to focus on completing its mandatory rulemakings while pursuing other initiatives that are critical to its mission, including those relating to asset manager oversight, equity market structure, and disclosure effectiveness review. She said the proposed fiscal year 2017 budget reflects these priorities.
White’s written testimony also discussed Section 913 of the Dodd-Frank Act, which granted the SEC authority to adopt rules establishing a uniform fiduciary standard for broker-dealers and investment advisers. Her written testimony states that this is “a complex issue, and that there are significant challenges that will need to be addressed in proposing a uniform fiduciary standard, including how to define the standard, how it would affect current business practices, and the nature of the potential effects on investors, particularly retail investors.” It adds that the SEC staff is developing rulemaking recommendations for the Commission’s consideration.
Questions and Answers
Uniform Fiduciary Standard
Hensarling asked if the SEC staff will release an update to its 2011 study on the need for a uniform fiduciary standard. White said part of the work now being done by staff will be to assess economic impacts, though this does not necessarily mean the entire 2011 assessment would be updated. She said the analysis would likely be shared whenever a proposal is made.
Hensarling raised the United Kingdom’s Retail Distribution Review, noting that it imposed a similar rule that led to 310,000 clients’ services being cut off. He asked if the UK experience with a similar rule concerns White. White answered that a clear concern with the rulemaking is the impact it would have on retail investors’ abilities to access reasonably-priced advice.
Hensarling urged the SEC to “look very closely” at the UK experience and consider testimony the Committee has heard that the best interest contract (BIC) exemption is unworkable.
Rep. David Scott (D-Ga.) asked why the SEC is allowing the DOL to “take over [its] territory” by acting on a fiduciary rule when Dodd-Frank clearly gave the SEC authority in Section 913. White answered that she does not view the DOL’s efforts in this way, and that the DOL has a separate responsibility and statutory authority under the Employee Retirement Income Security Act (ERISA).
Scott insisted that the DOL’s rule will harm the ability of small investors to access financial advice, commenting that if the SEC is to “sit back and disavow” the authority given it by Section 913, this would be a “serious indictment on the SEC.” He asked White to be more aggressive and “seize your authority” on the fiduciary rule.
Rep. Keith Ellison (D-Minn.) stated that conflicted investment advice costs investors “a lot of money,” and expressed his concern about “hidden commissions” by brokers. He also expressed his support for the DOL’s proposed fiduciary standard, and stated that he prefers the SEC to follow the DOL’s lead on this issue. Ellison asked what role a best interest standard would play and what the process is for the SEC moving forward.
White responded that it is important to establish a uniform fiduciary duty for brokers and investment advisors to act in the best interest of their client. She noted that the DOL is a separate agency with a separate statutory authority, but recognized that coordination between the two agencies will be important on this issue. White explained that the SEC’s authority to act on this issue stems from Section 913 of the Dodd-Frank Act which provides certain parameters on specific issues to be considered with regard to the broker model.
Rep. Patrick Murphy (D-Fla.) also asked White to elaborate on the distinction between the SEC’s and DOL’s responsibilities with regard to establishing a fiduciary standard. White explained that the SEC and DOL have two separate statutory regimes, and that the DOL regulates funds active in the ERISA space, which could capture brokers also subject to SEC rules. White reiterated that the SEC would proceed to establish a uniform fiduciary proposal. However, she cautioned that doing so is “complex” and “not a quick issue” to resolve. In response to Murphy’s concerns about potential duplication between SEC and DOL rules, White assured him that the SEC would try to write rules as consistent as possible with the DOL rules, but that the end result could not achieve perfect consistency because there are two different statutory obligations and two different markets they are serving.
Rep. Ann Wagner (R-Mo.) stated that she believes it is absolutely under the purview of the SEC to establish a uniform fiduciary rule, and inquired about the “full out focus” on this issue that Chair White mentioned at SIFMA’s annual meeting several weeks ago. White explained that SEC staff is “very, very actively working” on this issue, but reiterated that it is “long, complex exercise.” White added that she “cannot overstate the complexity” of establishing a uniform fiduciary standard and importance of “getting it right.” As such, White explained that the SEC is conducting extensive economic analysis to avoid ending up with a rule that could deprive retail investors of reliable investment advice.
In response to Wagner’s specific question with regard to potential conflicts between the DOL proposed rule and certain aspects of the Investment Adviser’s Act, White explained that she would have to examine the specific details and follow-up with the Congresswoman. Wagner also asked her to examine the DOL’s definition of “recommendation” and how it differs from existing Financial Industry Regulatory Authority (FINRA) rules.
Fixed Income Liquidity and the Volcker Rule
Hensarling noted that White saw no link between the Volcker Rule and concerns about illiquidity in bond markets when she last appeared before the Committee in March. He then cited several reports that suggested new regulations have limited the market-making abilities of bank holding companies. He asked if White has yet determined whether regulations like the Volcker Rule are contributing to decreased liquidity. White responded that while illiquidity is a concern, the SEC has not found a link to the Volcker Rule. Hensarling retorted that “the rest of the world is concluding otherwise.”
Rep. Randy Neugebauer (R-Texas) referenced the PWC study on the brittleness of market liquidity, and encouraged her to examine the conclusions of the study and dedicate more resources to this important issue.
Rep. Sean Duffy (R-Wis.) asked if White agrees that there is an issue of decreased liquidity in corporate bond markets. White replied that she agrees there is “concern” about liquidity.
Duffy asked what is causing the lack of liquidity if not the Volcker Rule. White answered that the SEC is “keeping a close eye” on liquidity.
When Duffy followed up by stating that many see the liquidity issue as having arisen with the implementation of the Volcker Rule and other regulations, White responded that the SEC staff judges the impact of every rule it considers.
Rep. Denny Heck (D-Wash.) noted that the Volcker Rule has been implemented but is not yet in force. He asked if the SEC is seeing any corresponding changes in market behavior or changes in risks to the financial system. White said it is hard to judge the impact of the Volcker Rule at this point, as the SEC is just beginning its exam for the compliance period. Asked whether she is confident that the rule will reduce risk in the financial system, White answered that this is the goal’s rule but she would have to wait to see data before answering.
SEC Funding
Waters asked whether the SEC is “hampered by inadequate funding” levels. White responded that the SEC has “responsibilities far beyond [its] resources,” including those prescribed by the Dodd-Frank and JOBS Acts, adding that “of course it slows down” regulatory actions.
Rep. Bill Huizenga (R-Mich.) commented that initiatives such as the conflict minerals rule take time and attention away from the SEC’s core objectives. Noting that the SEC’s budget has grown significantly over the past decade, he suggested that further budget increases may not be needed if the SEC can prioritize and focus more on its core mandates.
Rep. William Lacy Clay (D-Mo.) pointed out that the SEC’s budget is deficit neutral and asked about the consequences of maintaining level funding rather than increasing the agency’s resources. White answered that it is important to consider the new spaces the SEC is getting into and the complexity of markets, commenting that level funding means it cannot get skilled professionals for new spaces such as crowdfunding without hurting its enforcement activities.
Waiver Process
Waters also asked whether there should be additional transparency on the Commission’s waiver process. White responded that the Commission “very aggressively” pursues bad actors and clarified that waivers are “not enforcement remedies.” She explained that Commission staff “apply very vigorously” enforcement standards but apply waivers when recipients/defendants aim to pursue business in a “totally unrelated area” than where the enforcement action targeted. She assured the Committee that the SEC staff conduct “very deep dives” before making those decisions about granting waivers, and explained that when waivers are granted, they are publicly available on the SEC website. However, White acknowledged that the waivers that are not granted are not posted online to balance privacy concerns, and she admitted that it is a “key challenge” to balance privacy needs while providing public information to show that the SEC does not provide waivers every time they are requested.
BDC Bill
Waters also asked about White’s concerns with H.R. 3868, the Small Business Credit Availability Act, that aims to support small businesses by lifting restrictions on BDCs. White agreed that BDCs are designed to be an engine of growth for small businesses, which is a good thing. However, she reiterated the concerns about investor protection that were articulated in her recent letter to the Committee. Primarily, White explained she was concerned about the effects of: 1) increased leverage; 2) reductions in the rights of preferred stockholders; and 3) allowing BDCs to invest 50 percent of assets in financial institutions, up from 30 percent. White reiterated that the vast majority of investors in BDCs are retail investors, which she claimed “heightens” her investor protection concerns.
Rep. Mick Mulvaney (R-S.C.) noted White’s letter in which she listed concerns with H.R. 3868, and stated that he is “excited” to work with her to gain SEC support for the legislation. He specifically noted White’s concern about the bill requiring a rule to be written within a year and explained that this was included because of previous SEC rulemakings that took several years to craft. White replied that she is happy to work with Mulvaney’s staff on the legislation.
Garrett asked whether the Securities Investment Protection Corporation (SIPC) is “rigged” and whether small investors know that they do not have coverage or protection provided by SIPC. White responded that a broker should tell investors whether or not they are covered by SIPC, but she explained that the broker in question could be committing a “huge Ponzi scheme,” and explained that SIPC does not cover Ponzi schemes or fraud, such as if a broker never engaged in bona fide trades with the assets over which it has custody.
Regulation D
Garrett also asked whether an amendment to Reg. D on capital raising has a suppression effect, and whether the Commission could remove amendments so that the JOBS Act can have its intended effect. White responded that she heard proposed regulation may hamper those markets, but she explained that the feedback is mixed. She also clarified that the 506(c) market has been used, but not as much as the 506(b) market.
Puerto Rico
Rep. Nydia Velazquez (D-N.Y.) asked whether the 1940 Act should be amended to extend coverage to U.S. territories such as Puerto Rico, which are currently exempt from the Act. Velazquez also noted that H.R. 3610 would close this loophole. White agreed that the exemption was put into law many years ago due to practical and financial difficulties of being able to enforce U.S. law in the territories, however she agreed that the loophole should be closed in today’s markets.
Hedge Fund Transparency
Velazquez also asked whether disclosure requirements should be introduced to improve transparency over hedge funds’ use of derivatives and debt securities, to benefit investors and the public. Velazquez noted that she introduced a bill, H.R. 3921, to do so. White claimed that there are “pros and cons to that approach,” and while she agreed that transparency is important, it could lead to front-running. White concluded that she needed to study the particular bill in further detail to understand its effects.
Online Lending
Velazquez referenced her recent letter sent to Chair White requesting information on small business online lending and asked whether White had any preliminary comments. White assured her that she will respond in due course, but also explained that the SEC does not regulate loans extended to borrowers by online companies. Instead, she explained, the SEC regulates online companies when they sell securities to fund those lending activities. White noted that the SEC at times requires those lenders to register their offerings or register as broker-dealers, and she noted that the Commission has brought enforcement cases against some of those entities.
Shortened Settlement Cycle
Neugebauer also asked whether Chair White agreed with the effort underway to shorten the settlement cycle in the U.S. from T+3 to T+2 in the third quarter of 2016. White affirmed that she agreed with that initiative.
August 24 and LULD
Maloney noted the extreme market volatility experienced on August 24 and asked where the SEC’s review stands on this event. White shared that the SEC’s review is “well along” and indicated that she hoped to share the initial results of the study in the “near term.” White explained that the SEC is studying the effect of limit up-limit down’s (LULD’s) trading pauses on exchange-traded funds (ETFs), the complications around opening auctions, as well as whether any modifications or calibrations are necessary to the LULD pilot. When pressed on the timeline for sharing the study, White indicated that she hopes it will be ready by the end of the year but cannot commit to doing so.
Rep. Stephen Lynch (D-Mass.) asked what can be done to prevent volatility episodes such as August 24 happening again. White responded that the SEC is studying LULD and looking at how to recalibrate it to make it more effective.
Lynch asked if there was any evidence that high-frequency traders had a hand in the August 24 volatility. White said she would have to wait to see the results of the SEC’s analysis, but that high-frequency traders “don’t pop out.”
Asset Manager Regulation
Maloney also asked what the Commission will pursue next in its efforts to enhance regulation of asset managers. White indicated that the next rulemaking will likely be on funds’ use of derivatives, followed by transition rules and stress testing, which she said is “really five separate areas.” White indicated that she hopes the rule on transition planning will be proposed early next year, and the stress testing rules thereafter.
Administrative Proceedings
Maloney inquired about the SEC’s use of administrative proceedings, in particular whether it offers the Commission a “home court advantage” or deprives defendants of due process. White explained that the administrative proceedings have been used by the SEC and other federal agencies for many years to handle enforcement cases. She argued that the SEC’s administrative law judges are “impartial” and have “unique” due process rights, and also noted that the SEC proposed changes to enhance rights for defendants.
Rep. Blaine Luetkemeyer (R-Mo.) asked whether White uses specific standards in assessing whether the designation of insurers as systemically important financial institutions (SIFIs) is necessary. White explained that FSOC’s guidance is available publicly and identifies certain criteria, however when pressed she explained that she used her “independent judgment” to conclude that designating insurers was necessary.
Luetkemeyer also asked whether there should be an off-ramp for SIFIs to de-designate. White explained that an off-ramp exists in the annual review process, but when pressed, she explained that designated firms will receive a detailed analysis of what factors contributed to their designation. She then agreed that FSOC could be “clearer” about what gets firms designated and de-designated.
Luetkemeyer asked whether FSOC simply rubber stamps the international actions when designating firms, despite objections of its own in-house insurance expert. White refuted the idea that FSOC is a rubber stamp, claiming its decision was independent.
Luetkemeyer asked about the SIFI designation process for asset managers, and White explained that the FSOC’s pivot to focus on products and activities “makes sense.” White conveyed her belief that “ordinarily” an asset manager’s business model would not inherently present systemic risk, but added that securities lending activities, for instance, could create systemic risk.
Duffy expressed concern that the FSOC is not sufficiently using the expertise of the SEC in its deliberations regarding asset managers, and that the FSOC may be making decisions contrary to the recommendations of SEC experts.
Rep. Al Green (D-Texas) asked White if it is beneficial to have a $50 billion asset threshold for SIFI designation. White replied that this is hard to judge, but that given the resources the FSOC spends to look at institutions, the trigger is “logically” a good thing.
Rep. Bruce Poliquin (R-Maine) also expressed concern that asset managers are being designated as SIFIs, and asked what activities the SEC is concerned about could give rise to systemic risk. White explained that the SEC is concerned about liquidity risk management and the ability of open-end funds to meet redemption demands, which is why they issued a proposal to address such risks. She added that securities lending activities could also pose risks. Poliquin urged Chair White to stand up to international regulators on the systemically important designation issue to protect American funds’ interests.
Rep. Scott Tipton (R-Colo.) also asked whether the FSOC’s focus on asset managers’ activities and products is important. White agreed that the pivot from an entity approach to focusing on products and activities “makes sense” to the SEC staff, and explained that she sees the FSOC’s work as “complementary” to the SEC’s independent initiatives.
Political Contribution Disclosures
Rep. Michael Capuano (D-Mass.) focused on the SEC’s inaction over creating a disclosure regime for political contributions, claiming that it was important to the American public as evidenced by the 1.2 million comment letters that the Commission received on the issue. White agreed that there were “very strong views” conveyed on both sides of the issue, but also explained that the Commission is focusing on congressional mandates as well as “mission critical” initiatives such as equity market structure, disclosure effectiveness, and rulemakings pertaining to asset managers. White also noted that companies are voluntarily disclosing political contributions, but Capuano rejected that by stating that there will “always be a handful of players that are bad actors” that do not voluntarily disclose, and urged the SEC to focus on this issue to compel them to do so.
Duffy commented that rules regarding corporate political spending are not material to investors’ decision making and encouraged White to “push back” on the rulemaking.
Murphy asked when the SEC would respond to the letter sent to her by members of the Committee regarding the proposed disclosure requirements for companies making political expenditures, as well as what the SEC’s plans are for moving forward on this issue. White explained that the she expects the SEC to respond “very shortly” to committee members on these issues, and acknowledged that there is clearly a lot of interest in the issue, as indicated by the volume of consultation responses received on the proposal. She also reiterated that an increased number of companies are making voluntary disclosures on their political activities.
Executive Compensation
Capuano asked why the Commission has not focused on Section 956 of the Dodd-Frank Act pertaining to incentive-based compensation arrangements. White assured him that the Commission and other financial regulators are “very actively” working on this issue, and that she expected the re-proposal to come together in the “very near future.” Capuano urged Chair White to prioritize this issue or let him know if further Congressional action was needed.
Ellison claimed that the gap between CEO and median worker pay is now 300 to one, and asked what impact this has on the economy at large. He also pointed to a graphic that illustrated that stock options encourage executives to prioritize short-term results over the long-term performance of the firm. White responded that the SEC is “very active” in enhancing disclosure of executive compensation, and reiterated that the Commission staff is working hard to ensure incentive-based compensation arrangements do not induce excessive risk taking. However, she explained that the broader questions do not fall under the SEC’s remit.
WKSI Waivers
Lynch was critical of the SEC’s granting of well-known seasoned issuer (WKSI) waivers to firms that have been convicted on felonies or securities fraud, saying the SEC is not doing enough to discourage bad behavior. White defended the SEC’s record of enforcement and explained that waiver decisions are based on whether the SEC believes a firm’s disclosures can be relied upon going forward.
Lynch reiterated that firms convicted of felonies should lose their WKSI designation.
Tick-Size Pilot
Duffy noted the SEC’s five month delay of its tick-size pilot, and expressed hope that this would not be “death by a thousand delays.” White answered that this would not be the case, and the SEC calibrated the extension to ensure that it can get reliable data from the pilot.
LEI
Rep. Ed Royce (R-Calif.) noted that the Committee last month approved H.R. 3738, the Office of Financial Research Accountability Act, which requires the Office of Financial Research (OFR) to provide an annual update on the adoption of the Legal Entity Identifier (LEI). Royce commented that if the OFR were to publish its report today, the SEC “would lag behind.” He asked if the SEC can be expected to require greater use of LEIs in the future or if anything is holding it back from requiring LEIs in its rulemakings. White replied that nothing is holding the SEC back, and that she sees the LEI system as an “enormously important tool.” She said the SEC is always looking for opportunities to use it more and it moves forward with rules.
REITS and Housing Finance Reform
Royce urged White to take an interest in bringing more private sector risk sharing to the government sponsored enterprises (GSEs), and suggested that real estate investment trusts (REITs) are logical investors in risk transfer transactions. He said it does not make sense to prevent private capital from being deployed in housing finance.
Accredited Investor Definition
Heck asked about the status of the SEC’s review of the ‘accredited investor’ definition. White answered that the SEC’s staff is studying the definition “intensively” and is “coming to a conclusion.” She further explained that the SEC is looking beyond the traditional tests of net worth and income and considering experience, sophistication and other qualifications for the designation.
Equity Market Structure
Rep. Robert Hurt (R-Va.) said he has concerns with the governance of National Market System (NMS) plans, explaining that they lack a broad base of participation in making sure the Securities Information Processors (SIPs) are “the best they can be” and that SROs face conflicts of interest regarding investments in SIPs because of how revenue is shared. White stated that the SEC is pursuing specific rulemakings to optimize markets, as well as conducting a comprehensive review of equity market structure. She said it is “enormously important” that SIPs provide timely information, and noted that the work of the Equity Market Structure Advisory Committee demonstrates that this is at the front of the SEC’s attention.
Potential for Overregulation
Rep. Robert Pittenger (R-N.C.) asked whether the SEC is diverging from its tripartite mission and such “bureaucratic entrenchment” resulted in overregulation or “death by a thousand cuts” and therefore adversely impacted capital markets and economic growth, more broadly. White expressed support for the SEC’s tripartite mission, but claimed that the Commission has an obligation to carry out specific tasks that are mandated by Congress. She also explained that the SEC is not trying to create “gratuitous” disclosure requirements, and is actively conducting a disclosure effectiveness review to ensure that is not the case.
Cybersecurity
Murphy inquired about the SEC’s role in cybersecurity, to which White responded that it is “one of the biggest risks” facing markets. She explained that the Commission issued Regulation Systems Compliance and Integrity (SCI) in November 2014 which would require critical market infrastructures to raise the bar on cyber resiliency, and that the SEC issued guidance to registered brokers and investment advisors, as well as brings enforcement actions against institutions that do not comply with those rules on cyber resilience.
Role as Primary Markets Regulator
Tipton asked whether the Federal Reserve’s attempt to map transactions within capital markets could lead to them encroaching on the SEC’s jurisdiction as the markets regulator. White agreed, however admitted that some jurisdictional barriers have changed by statute under the Dodd-Frank Act.
Small Business Capital
Tipton expressed concern about capital formation and small businesses’ access to capital. White explained that the SEC’s annual forum on small business capital formation will be held the following day. She also shared that there is a lot of interest in crowd funding, so the SEC proposed to amend rules 147 and 504 to allow access to those financing vehicles.
Accounting Treatment of Last In, First Out Method
Rep. Roger Williams (R-Texas) expressed concern about the treatment of last-in, first-out accounting under the International Financial Reporting Standards (IFRS), which he believed would take a toll on small businesses. White clarified that her priority is for the Commission to take a stance on the application of IFRS domestically. Williams also cautioned that some aspects of this would impact U.S. tax policy, and White agreed that it “clearly” has implications for the Internal Revenue Service but clarified that the SEC has no interest in setting tax policy.
Paper vs. Electronic Statements
Poliquin expressed concern that the SEC was moving away from paper statements in favor of electronic access and distribution. In particular, he reiterated the importance of investors receiving paper statements unless they opt out. White explained that the SEC has an open comment period until January on this issue and promised to seriously consider his concerns as well as the comments received from other concerned citizens.
Composition of Equity Market Structure Committee
Rep. French Hill (R-Ark.) expressed concern about the composition of the SEC’s Equity Market Structure Advisory Committee, which he said intends to have subcommittees meet in private without transparency. In addition, he questioned why the committee does not include NASDAQ, NYSE, and retail broker dealers. White explained that the SEC went through a “lengthy process” of vetting to try to ensure a range of expertise would be represented on the 17-person committee. She noted that several representatives on the committee were formerly at primary listing exchanges, and that one member represents the retail brokerage point of view. White agreed that the SEC wants diversity in the perspectives represented on the committee and agreed that they structure committee to get input from others including NASDAQ and NYSE. White also explained that the subcommittees do not make decisions and can host public meetings if they so choose.
Primary Objective of Fund Managers
Hill inquired about whether the principal obligation of fund managers is to maximize returns for beneficiaries, and White responded that it should be to “serve the best interest of their client.” Hill expressed concern that the Secretary of Labor Tom Perez recently issued guidance encouraging institutional managers to equate environmental, social and governance concerns to economic performance in making investment decisions, which he did not think is in the best interest of defined benefit plans which are not fully funded and are “underperforming.”
Commission Vacancies
Hill expressed concern about vacancies on the Commission and asked White not to bring “controversial” elements up until she has a fully functioning Commission with bipartisan appointees. White explained that the Commission had to proceed with their work, and that she was not sure how fast confirmations will occur, but that she will be mindful of his concerns.
Rep. David Schweikert (R-Ariz.) also expressed concern that the Commission currently lacks full Republican input and asked White to use the “greatest prudence” in determining which rules would be brought until that vacancy is filled. White reiterated that the Commission tries to do rulemakings on the “merits” and agreed to be “sensitive” to those concerns in moving forward.
Modernizing Rules for Transfer Agents
Rep. Keith Rothfus (R-Pa.) asked about the SEC’s progress in modernizing rules for transfer agents, which he said have not been updated since the 1980s. White affirmed that they are “quite focused” on transfer agent issues, and signaled that the SEC could issue something “quite soon” in the next “couple of months.”
Crowdfunding
Schweikert asked what was holding the Commission back from finalizing rules on crowdfunding. White explained that the rulemaking is complicated because the statute is prescriptive in some areas and crowdfunding portals are complicated. With that, she affirmed that her goal is to make the rule workable to safeguard investors in the new marketplace.” White also pointed to the SEC’s proposed amendments to rules 147 and 504 which also will help address crowdfunding.
For more information on this hearing, please click here.