America’s Capital Markets are Too Important to Be Put at Risk

Testimony on the Unintended Consequences of the SEC’s Agenda

The U.S. House of Representatives Financial Services Committee Subcommittee on Capital Markets recently held a hearing, entitled “Examining the SEC’s Agenda: Unintended Consequences for U.S. Capital Markets and Investors.” SIFMA, which represents a broad range of financial services firms that are active in our capital markets, was offered the opportunity to testify and I was pleased to share our views.

The U.S. securities markets are the deepest and most liquid in the world. They are also the envy of the world. They are among the most regulated sectors of the U.S. economy. Unique to the U.S., 75% of commercial activity is financed through our markets. Our markets allow for investors to put their savings to work spurring job creation and economic growth.

Therefore, it is critical that regulators tailor policies to address legitimate market failures without unnecessarily harming or disrupting markets, especially when our economy faces serious headwinds. However, the high volume and speed of regulatory change proposed by the Securities and Exchange Commission could result in negative consequences for the real economy.

Throughout the last two years, stakeholders, academics and members of Congress from both sides of the aisle have expressed concerns with the volume and pace of new rule proposals from the SEC. The data[1] demonstrates that these concerns are well-founded.

In addition to concerns regarding the unprecedented volume, commenters, including SIFMA, have expressed concern that truncated timelines for multiple overlapping rule proposals limit stakeholder’s ability to analyze the collective impact of the proposals. Failure to do so, can result in conflicting and poorly drafted rules with the potential for negative impacts on capital markets and, importantly, investors and issuers.

There may be justification for certain rules, such as the transition of the securities settlement cycle from two days to one, which SIFMA and the industry strongly support, or those mandated by the Dodd-Frank Act. We remain concerned that the SEC has not sufficiently prioritized its agenda, and in several cases is acting without clear evidence of market failure or direction from Congress.

Lack of prioritization and pursuit of novel proposals has crowded other important mandates, such as the pending data security rule for the Consolidated Audit Trail (CAT), the largest securities transaction database ever created which collects trade data and customer personally identifiable information, or PII, on every stock and option transaction. That proposed rule has been pending for over three years.

In addition, there is much more to implementing market rules than simply promulgating new regulatory text. In most cases, the industry must develop programs and processes, often with significant technology builds, as well as policies and procedures to comply with the new rules. The industry will face an unprecedented implementation situation.

Rushing to implement dozens of complex and far-reaching new regulations simultaneously absent prioritization, coordination, and robust cost-benefit analysis is not conducive to effective, enduring policymaking.

Perhaps most controversial and least considered are the SEC’s equity market structure proposals.[2] These proposals would dramatically overhaul U.S. equity market structure and potentially undermine the recent expansion of market access that investors enjoy today.

Going back to the late 1990s, Congress and in particular this Committee studied and proposed various changes to our equity market structure.  In response, multiple Commissions undertook a methodical and deliberate approach to developing proposals and receiving public comment that culminated in Regulation National Market Structure (Reg NMS) in 2005. In developing Reg NMS, the Commission sought and received significant public and stakeholder feedback over a period of years before proceeding, including multiple public hearings, concept releases, and rule proposals to receive input from stakeholders.

There has not been the same deliberative process with these substantial proposals.

The proposals also lack clear direction from Congress. As recently as 2021, this Committee held three hearings in response to the GameStop/meme stock phenomenon. The Committee issued a detailed report[3] proposing several policy recommendations for the SEC, FINRA and DTCC to undertake. None of the Commission’s proposals are among those Congressional recommendations.

There is almost no analysis as to how the proposals relate to, or would operate with, each other and the anticipated cumulative effects on markets, intermediaries and investors if more than one proposal is adopted.

Stakeholders from all corners of the markets have voiced opposition to the proposals. The one exception is the proposal to update Rule 605, which has not been substantively updated since its adoption in 2000. SIFMA supports this proposed update and believes it is a natural starting point for the path forward.

While we support some of the Commission’s proposals, we believe others fail to identify a market failure and lack clear direction from Congress. The agenda also lacks prioritization and sufficient cost-benefit analysis, particularly the cumulative impact.

My full testimony highlights the industry’s concerns with several specific SEC proposals, including:

  • Equity Market Structure
  • Securities-Based Swaps Large Position Reporting (10B-1)
  • Rule 192 – Conflicts of Interest in Securitizations
  • Custody Rule
  • Treasury Market Clearing
  • Swing Pricing and Open-End Fund Liquidity Risk Management Programs
  • Predictive Data Analytics
  • Reg SCI
  • Reg ATS
  • Dealer Definition
  • SPAC

Just as the Commission has a duty to ensure fair, orderly and efficient markets, rushing to do too much too quickly could result in poor policy outcomes and overwhelm market infrastructure.

Kenneth E. Bentsen, Jr. is President and CEO of SIFMA. From 1995 to 2003, he served as a Member of the United States House of Representatives from Texas. Prior to his service in Congress, Mr. Bentsen was an investment banker specializing in municipal and housing finance.