House Appropriations Hearing on the SEC Budget with Chair White
House Appropriations Committee
Subcommittee on Financial Services and General Government
“Budget Hearing – Securities and Exchange Commission
Tuesday, March 22, 2016
Key Topics & Takeaways
- Impact of Regulations: Chairman Ander Crenshaw (R-Fla.) asked if White believes decreased liquidity has been an unintended consequence of new regulations. White replied that all regulators must be focused on the unintended consequences at all times and stressed the importance of liquidity to the proper functioning of markets. However, she said determining whether there has been a reduction of liquidity or if regulations have had a negative impact is hard to determine.
- Fiduciary Rule: Rep. Mark Amodei (R-Nev.) asked about the SEC’s jurisdiction in a fiduciary rulemaking and how it would work in conjunction with a DOL rule. White replied that the SEC has the authority to pursue a fiduciary rulemaking and repeated her belief that it should do so. She said the SEC would work to make its rule as compatible with the DOL’s as possible, “but they don’t always land identically.”
- NMS Governance: Rep. Steve Womack (R-Ark.) noted a discussion draft from Rep. Robert Hurt (R-Va.) that would install broker-dealer representation on the operating committees of NMS plans. He asked what the downside of broader industry participation would be. White responded that this is an issue for the SEC’s Equity Market Structure Advisory Committee, and that she would not want to “get ahead” of the Committee or SEC staff.
Witness
- Mary Jo White, Chair, Securities and Exchange Commission
Opening Statements
In his opening statement, Chairman Ander Crenshaw (R-Fla.) said that just as investors expect markets to be fair and efficient, the regulator that oversees them should also be fair and efficient. He stressed the importance of congressional oversight in keeping the Securities and Exchange Commission (SEC) accountable. Crenshaw lauded the work of the Department of Economic and Risk Analysis (DERA) in studying the micro- and macro-economic effects of regulations. He then turned to concerns he has with the designation process of the Financial Stability Oversight Council (FSOC), which he said is not flexible enough, and liquidity in fixed income markets, which he said may have been diminished by the cumulative impact of regulations.
Crenshaw cautioned White against any action towards an eventual rulemaking regarding the disclosure of political contributions for public companies, reminding that the omnibus spending bill included a provision that keeps the SEC from releasing any rule. He also called on the Senate to take action on H.R. 3784, the SEC Small Business Advocate Act.
Ranking Member Jose Serrano (D-N.Y.) said the SEC is fighting an “uphill battle” with fewer resources than it needs, and insisted on the importance of a strong and vigilant regulator to protect investors and the economy. He stated that it is up to Congress to ensure that the SEC has the resources needed to carry out the intent of the law. However, he also warned against riders to appropriations bills that could “open up loopholes” in the Dodd-Frank Act.
Testimony
Mary Jo White, Chair, Securities and Exchange Commission
In her testimony, White said the SEC has made great strides to strengthen its operations and programs in recent years and warned that she does not want the process to “stall” because of a lack of funding. She highlighted the finalization Jumpstart Our Business Startups (JOBS) Act rulemakings, and the near completion of Dodd-Frank mandates, as well as continued reviews of equity market structure, disclosure effectiveness, and the regulatory regime for asset managers.
In defending her proposal for an increased budget, White noted the growing size and complexity of the markets the SEC oversees and reminded that the SEC’s budget is deficit-neutral.
Questions
Budget
Crenshaw asked about the SEC’s carry over balance of $51 million. White explained that the SEC has “no-year funds” that it is permitted to carry over. She said this flexibility allows the agency to better financial planning and smarter contracting and hiring.
Crenshaw asked how the SEC prioritizes when it does not receive as much as it requests for its budget. White answered that it depends on what the SEC’s most pressing needs are, and its allocated spending through a thorough process to best meet priorities.
DERA and Impact of Regulations
Crenshaw asked about the helpfulness of DERA. White called DERA one of the SEC’s greatest success stories and pointed out that it is the SEC’s fastest-growing division. She said DERA’s importance to the quality of rulemaking cannot be overstated and that DERA is becoming increasingly integrated with the rest of the agency.
Crenshaw noted that DERA was required in the omnibus spending bill to produce a report on the impact of regulation of market liquidity. He asked if White believes decreased liquidity has been an unintended consequence of new regulations. White replied that all regulators must be focused on the unintended consequences at all times and stressed the importance of liquidity to the proper functioning of markets. However, she said determining whether there has been a reduction of liquidity or if regulations have had a negative impact is hard to determine.
Puerto Rico
Serrano asked about the SEC’s role in the Puerto Rican fiscal crisis. White said the SEC put out a guidance update to make sure investors consider the losses they may face, but that it does not have a direct role in the crisis itself beyond attending to investors and holdings in funds.
Rep. Tom Graves (R-Ga.) asked about a report from Sen. Ron Johnson (R-Wis.) that “revealed discord” between the SEC and the Department of Labor (DOL) on its fiduciary rule. He asked if White is concerned that her staff’s concerns were not all addressed by the DOL. White answered that her staff provided the DOL with substantial technical assistance and expertise. She added that she believes the SEC should pursue its own rulemaking, but that it would not be an easy task and that if it deprives retail investors of reliable advice than the effort will have been a failure.
Crenshaw stated that Dodd-Frank gave the SEC the authority to act on a fiduciary rule, and asked why the Administration is having the DOL “move ahead” of the SEC. White retorted that while Dodd-Frank authorized the SEC to do a study but that the DOL has responsibility for the ERISA space.
Crenshaw asked how the SEC would harmonize its rule with the DOL’s. White answered that the agency will want to make the rules compatible, but that the fiduciary rule is a “hard and not quick” thing to do well.
Rep. Mark Amodei (R-Nev.) asked about the SEC’s jurisdiction in a fiduciary rulemaking and how it would work in conjunction with a DOL rule. White replied that the SEC has the authority to pursue a fiduciary rulemaking and repeated her belief that it should do so. She said the SEC would work to make its rule as compatible with the DOL’s as possible, “but they don’t always land identically.”
Small Business Capital Formation
Rep. Mike Quigley (D-Ill.) asked White about her stance on the Small Business Advocate Act. White said the SEC has not taken a position on the bill, but highlighted the agency’s ongoing work to promote the interest of small businesses, such as the work of the Small Business and Emerging Company Advisory Committee and the Division of Corporation Finance’s Office of Small Business Policy. She said her only concern about the bill is that it might fragment the efforts already underway.
Rep. Sanford Bishop (D-Ga.) asked what the SEC is doing to improve liquidity for small businesses. White noted the SEC’s tick-size pilot, which she said would begin in October, and added that the SEC is also looking into venture exchanges.
Advisor Misconduct
Quigley cited a study by researchers from the University of Chicago that showed 7 percent of all advisors have be disciplined for fraud and that 38 percent of these are repeat offenders. He asked what the SEC is doing on this front. White answered that this is an important focus, and that the SEC’s Office of Compliance Inspections and Examinations prioritizes looking at repeat offenders.
Cybersecurity
Rep. Nita Lowey (D-N.Y.) asked about cybersecurity and whether registered companies should have to disclose cyber-attacks. White said there is no greater risk to financial stability than cyber-attacks and that the SEC has put out guidance about the range of issues that would require disclosure. She added that the SEC is also looking at cyber preparedness of investment advisors and awareness of best practices.
FINRA Oversight
Rep. Kevin Yoder (R-Kans.) noted a pending SEC rule that would increase the number of firms that would have to register with the Financial Industry Regulatory Authority (FINRA). He asked how Congress have conduct oversight over FINRA and how the SEC can make sure FINRA is using its resources efficiently. White answered that the SEC has some oversight over FINRA, and pointed out that all FINRA rules have to be approved by the SEC.
Rep. Steve Womack (R-Ark.) noted a discussion draft from Rep. Robert Hurt (R-Va.) that would install broker-dealer representation on the operating committees of NMS plans. He asked what the downside of broader industry participation would be. White responded that this is an issue for the SEC’s Equity Market Structure Advisory Committee, and that she would not want to “get ahead” of the Committee or SEC staff.
FSOC
Crenshaw commented that the FSOC seems to be putting more emphasis on designation institutions that pose systemic risks rather than on mitigating those risks. He then asked if designations are based on size or activities. White said bank designation has largely been based on size, but pointed out that there have not been many designations outside of banking.
Crenshaw then asked about potential “off-ramps” for designated firms, suggesting that it would give firms flexibility and would be a better way of mitigating risk. White said there has been increased engagement between FSOC staff and the companies it is considering for designation, and that the reasoning behind decisions is “quite detailed.” She said firms are free to change their business models before designation, and that each designated entity then undergoes annual reviews.
Crenshaw said it is good to hear that the process is becoming more transparent, and argued that the systemic risk posed by non-banking firms such as asset managers are up for argument.
Flash Crashes
Rep. Sanford Bishop (D-Ga.) asked what the SEC is doing to prevent flash crashes. White said the volatility episode of August 24 showed the resilience of critical market infrastructures, and that an SEC study of the day put a number of issues “under the microscope,” including limit up-limit down rules.
For more information on this hearing, please click here.
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House Appropriations Committee
Subcommittee on Financial Services and General Government
“Budget Hearing – Securities and Exchange Commission
Tuesday, March 22, 2016
Key Topics & Takeaways
- Impact of Regulations: Chairman Ander Crenshaw (R-Fla.) asked if White believes decreased liquidity has been an unintended consequence of new regulations. White replied that all regulators must be focused on the unintended consequences at all times and stressed the importance of liquidity to the proper functioning of markets. However, she said determining whether there has been a reduction of liquidity or if regulations have had a negative impact is hard to determine.
- Fiduciary Rule: Rep. Mark Amodei (R-Nev.) asked about the SEC’s jurisdiction in a fiduciary rulemaking and how it would work in conjunction with a DOL rule. White replied that the SEC has the authority to pursue a fiduciary rulemaking and repeated her belief that it should do so. She said the SEC would work to make its rule as compatible with the DOL’s as possible, “but they don’t always land identically.”
- NMS Governance: Rep. Steve Womack (R-Ark.) noted a discussion draft from Rep. Robert Hurt (R-Va.) that would install broker-dealer representation on the operating committees of NMS plans. He asked what the downside of broader industry participation would be. White responded that this is an issue for the SEC’s Equity Market Structure Advisory Committee, and that she would not want to “get ahead” of the Committee or SEC staff.
Witness
- Mary Jo White, Chair, Securities and Exchange Commission
Opening Statements
In his opening statement, Chairman Ander Crenshaw (R-Fla.) said that just as investors expect markets to be fair and efficient, the regulator that oversees them should also be fair and efficient. He stressed the importance of congressional oversight in keeping the Securities and Exchange Commission (SEC) accountable. Crenshaw lauded the work of the Department of Economic and Risk Analysis (DERA) in studying the micro- and macro-economic effects of regulations. He then turned to concerns he has with the designation process of the Financial Stability Oversight Council (FSOC), which he said is not flexible enough, and liquidity in fixed income markets, which he said may have been diminished by the cumulative impact of regulations.
Crenshaw cautioned White against any action towards an eventual rulemaking regarding the disclosure of political contributions for public companies, reminding that the omnibus spending bill included a provision that keeps the SEC from releasing any rule. He also called on the Senate to take action on H.R. 3784, the SEC Small Business Advocate Act.
Ranking Member Jose Serrano (D-N.Y.) said the SEC is fighting an “uphill battle” with fewer resources than it needs, and insisted on the importance of a strong and vigilant regulator to protect investors and the economy. He stated that it is up to Congress to ensure that the SEC has the resources needed to carry out the intent of the law. However, he also warned against riders to appropriations bills that could “open up loopholes” in the Dodd-Frank Act.
Testimony
Mary Jo White, Chair, Securities and Exchange Commission
In her testimony, White said the SEC has made great strides to strengthen its operations and programs in recent years and warned that she does not want the process to “stall” because of a lack of funding. She highlighted the finalization Jumpstart Our Business Startups (JOBS) Act rulemakings, and the near completion of Dodd-Frank mandates, as well as continued reviews of equity market structure, disclosure effectiveness, and the regulatory regime for asset managers.
In defending her proposal for an increased budget, White noted the growing size and complexity of the markets the SEC oversees and reminded that the SEC’s budget is deficit-neutral.
Questions
Budget
Crenshaw asked about the SEC’s carry over balance of $51 million. White explained that the SEC has “no-year funds” that it is permitted to carry over. She said this flexibility allows the agency to better financial planning and smarter contracting and hiring.
Crenshaw asked how the SEC prioritizes when it does not receive as much as it requests for its budget. White answered that it depends on what the SEC’s most pressing needs are, and its allocated spending through a thorough process to best meet priorities.
DERA and Impact of Regulations
Crenshaw asked about the helpfulness of DERA. White called DERA one of the SEC’s greatest success stories and pointed out that it is the SEC’s fastest-growing division. She said DERA’s importance to the quality of rulemaking cannot be overstated and that DERA is becoming increasingly integrated with the rest of the agency.
Crenshaw noted that DERA was required in the omnibus spending bill to produce a report on the impact of regulation of market liquidity. He asked if White believes decreased liquidity has been an unintended consequence of new regulations. White replied that all regulators must be focused on the unintended consequences at all times and stressed the importance of liquidity to the proper functioning of markets. However, she said determining whether there has been a reduction of liquidity or if regulations have had a negative impact is hard to determine.
Puerto Rico
Serrano asked about the SEC’s role in the Puerto Rican fiscal crisis. White said the SEC put out a guidance update to make sure investors consider the losses they may face, but that it does not have a direct role in the crisis itself beyond attending to investors and holdings in funds.
Rep. Tom Graves (R-Ga.) asked about a report from Sen. Ron Johnson (R-Wis.) that “revealed discord” between the SEC and the Department of Labor (DOL) on its fiduciary rule. He asked if White is concerned that her staff’s concerns were not all addressed by the DOL. White answered that her staff provided the DOL with substantial technical assistance and expertise. She added that she believes the SEC should pursue its own rulemaking, but that it would not be an easy task and that if it deprives retail investors of reliable advice than the effort will have been a failure.
Crenshaw stated that Dodd-Frank gave the SEC the authority to act on a fiduciary rule, and asked why the Administration is having the DOL “move ahead” of the SEC. White retorted that while Dodd-Frank authorized the SEC to do a study but that the DOL has responsibility for the ERISA space.
Crenshaw asked how the SEC would harmonize its rule with the DOL’s. White answered that the agency will want to make the rules compatible, but that the fiduciary rule is a “hard and not quick” thing to do well.
Rep. Mark Amodei (R-Nev.) asked about the SEC’s jurisdiction in a fiduciary rulemaking and how it would work in conjunction with a DOL rule. White replied that the SEC has the authority to pursue a fiduciary rulemaking and repeated her belief that it should do so. She said the SEC would work to make its rule as compatible with the DOL’s as possible, “but they don’t always land identically.”
Small Business Capital Formation
Rep. Mike Quigley (D-Ill.) asked White about her stance on the Small Business Advocate Act. White said the SEC has not taken a position on the bill, but highlighted the agency’s ongoing work to promote the interest of small businesses, such as the work of the Small Business and Emerging Company Advisory Committee and the Division of Corporation Finance’s Office of Small Business Policy. She said her only concern about the bill is that it might fragment the efforts already underway.
Rep. Sanford Bishop (D-Ga.) asked what the SEC is doing to improve liquidity for small businesses. White noted the SEC’s tick-size pilot, which she said would begin in October, and added that the SEC is also looking into venture exchanges.
Advisor Misconduct
Quigley cited a study by researchers from the University of Chicago that showed 7 percent of all advisors have be disciplined for fraud and that 38 percent of these are repeat offenders. He asked what the SEC is doing on this front. White answered that this is an important focus, and that the SEC’s Office of Compliance Inspections and Examinations prioritizes looking at repeat offenders.
Cybersecurity
Rep. Nita Lowey (D-N.Y.) asked about cybersecurity and whether registered companies should have to disclose cyber-attacks. White said there is no greater risk to financial stability than cyber-attacks and that the SEC has put out guidance about the range of issues that would require disclosure. She added that the SEC is also looking at cyber preparedness of investment advisors and awareness of best practices.
FINRA Oversight
Rep. Kevin Yoder (R-Kans.) noted a pending SEC rule that would increase the number of firms that would have to register with the Financial Industry Regulatory Authority (FINRA). He asked how Congress have conduct oversight over FINRA and how the SEC can make sure FINRA is using its resources efficiently. White answered that the SEC has some oversight over FINRA, and pointed out that all FINRA rules have to be approved by the SEC.
Rep. Steve Womack (R-Ark.) noted a discussion draft from Rep. Robert Hurt (R-Va.) that would install broker-dealer representation on the operating committees of NMS plans. He asked what the downside of broader industry participation would be. White responded that this is an issue for the SEC’s Equity Market Structure Advisory Committee, and that she would not want to “get ahead” of the Committee or SEC staff.
FSOC
Crenshaw commented that the FSOC seems to be putting more emphasis on designation institutions that pose systemic risks rather than on mitigating those risks. He then asked if designations are based on size or activities. White said bank designation has largely been based on size, but pointed out that there have not been many designations outside of banking.
Crenshaw then asked about potential “off-ramps” for designated firms, suggesting that it would give firms flexibility and would be a better way of mitigating risk. White said there has been increased engagement between FSOC staff and the companies it is considering for designation, and that the reasoning behind decisions is “quite detailed.” She said firms are free to change their business models before designation, and that each designated entity then undergoes annual reviews.
Crenshaw said it is good to hear that the process is becoming more transparent, and argued that the systemic risk posed by non-banking firms such as asset managers are up for argument.
Flash Crashes
Rep. Sanford Bishop (D-Ga.) asked what the SEC is doing to prevent flash crashes. White said the volatility episode of August 24 showed the resilience of critical market infrastructures, and that an SEC study of the day put a number of issues “under the microscope,” including limit up-limit down rules.
For more information on this hearing, please click here.