House Financial Services Hearing on SEC Oversight with Mary Jo White
AT THE APRIL 29TH HOUSE FINANCIAL SERVICES COMMITTEE HEARING, Mary Jo White Chairman of the Securities and Exchange Commission (SEC) gave testimony and answered lawmakers’ questions on her agency’s operations and agenda.
Opening Remarks
In his opening statement Chairman Jeb Hensarling (R-Texas) noted that many on the committee feel the SEC does not have appropriate funding, but explained stated that the SEC budget has increased 80% over the last 3 years, and not many agencies have seen such a large increase over the same time period.
Hensarling also mentioned that in the years when the SEC budget has increased, there have been examples of wasted resources, saying that it is often not the amount of money you spend in Washington that matters “but how you spend it.” He noted that he is interested in the systemically important financial institution (SIFI) designations through the Financial Stability Oversight Council (FSOC) of which White is a member.
Ranking Member Maxine Waters (D-Calif.) noted in her opening statement that in the four years since the passage of Dodd-Frank, the SEC has completed critical work even in the face of near constant attempts by the Republicans on the committee to roll back the Dodd-Frank Act. However, Waters mentioned there was still critical work to be done, such as the final adoptions of the securities-based swap rules under the Dodd-Frank Act.
Waters also noted the need to finalize Rule 506 under the Jumpstart Our Business Startups Act (JOBS Act). Waters also expressed an interest in how the SEC Enforcement division selects which cases to pursue.
Rep. Scott Garrett’s (R-N.J.) opening statements focused on equity markets and he extended his appreciation of White’s data driven approach in reviewing the issue. Garrett stressed how complex the issue is, and while he appreciates the recent news coverage on the topic, he warned “newcomers” that the issue of equity markets does not “lend itself to quick fixes.”
Garrett also stressed that the committee must “rein in the FSOC” especially on the topic of asset management businesses.
Rep. Carolyn Maloney (D-N.Y.) echoed Garrett’s appreciation of the data driven approach the SEC has taken when reviewing market structures; including the new analytical tool MIDAS (Market Information Data Analytics Systems.) Maloney expressed concern that since 2001 the trading volume in equity markets has doubled to $71 trillion. She added that she would be interested in hearing how the SEC budget for overseeing the equity markets has kept pace with the growing market size.
Rep. David Scott (D-Ga.) expressed concern on how the SEC and the Commodity Futures Trading Commission (CFTC) are making progress with regard to Title VII of Dodd-Frank. He was also interested in hearing about the progress on the proposed fiduciary rules and issues between the SEC and the Department of Labor (DOL).
Witness Testimony
In her testimony, White called her agency’s mission “critical to investors, the markets, and capital formation, as well as our economy more broadly.” She said that now more than ever, the U.S. needs a “strong, vigilant, and adequately resourced SEC.” The president’s $1.7 billion budget request for FY 2015, White said, would allow the SEC to address its critical priorities.
White pointed out that the SEC now oversees over 25,000 registrants in a time of unprecedented growth and transformation in the marketplace. She said the SEC has accomplished a great deal in the past year, including adopting and proposing “more than 20 significant rulemakings across the regulatory spectrum, including many mandated by the Dodd-Frank and JOBS Acts.”
More aggressive enforcement of securities laws led to penalties totaling $3.4 billion in fiscal year 2013 alone, White said. She added that the SEC has intensified its data-driven, disciplined approach to analyzing and appropriately addressing complex market structure issues, including those related to high-frequency trading (HFT) and dark pools, has focused on completing the money market fund reform rulemaking proposed last year, and continues to work on completing rulemakings required by Dodd-Frank and the JOBS Act.
White said the budget request would permit the SEC to increase its examination and coverage of investment advisers, acknowledging that with limited resources the agency could examine just nine percent of advisers in the past year. It would also allow the SEC to expand its Division of Economic and Risk Analysis by adding financial economists to assists in rulemaking, she added.
“I am pleased with the agency’s accomplishment but much more remains to be done. I firmly believe that the funding we seek is justified by our progress and important and growing responsibilities to investors, companies and the markets,” White said.
Question and Answer
DOL Fiduciary
Waters asked about the extension of a uniform fiduciary rule to broker-dealers under Section 913 of Dodd-Frank, noting that the SEC’s Investor Advisory Committee submitted a recommendation that the commission move forward with such a rule. White acknowledged the importance of the issue and the fact that under Dodd-Frank her agency was given the authority to decide whether to impose a uniform fiduciary standard. She said it is a priority of hers to have the commission “reach this very important issue in this year.”
Scott talked about the rule on the definition of fiduciary and said his feeling has always been that this falls under the jurisdiction of the SEC, and asked why the Department of Labor (DOL) is “meddling.” White said the SEC is focused on the issue from the perspective of whether a uniform fiduciary duty should be imposed on brokers and investment advisers in its space, but added that she is in touch with DOL Secretary Perez and their staffs are also in communication with each other.
Rep. Gwen Moore (D-Wis.) discussed the implementation under Section 913 of the Dodd-Frank Act of the fiduciary duty rule, and said it seems that the DOL is “plowing ahead”. She asked White if she believes the SEC has more expertise for the final rule, and questioned whether the DOL taking the lead on the issue is “the tail wagging the dog.” White once again said that the SEC has been sharing its expertise and that she has “ratcheted up” interaction between the DOL and SEC staffs. She said she has spoken to Secretary Perez to ensure that her staff’s expertise is fully understood.
Rep. Gary C. Peters (D-Mich.) said any new regulatory framework for brokers, dealers and investment advisers must protect the interests of retail investors, retirement plan participants, and sponsors from unfair and deceptive practices without limiting access to investment education and information. He noted that the Dodd-Frank Act directed the SEC to study if having different standards for care for broker-dealers and registered investment advisers could create some confusion for investors, and asked if such a study was being conducted. White said the commission is “certainly looking at all of those issues” but could not say if there was a formal study taking place to look at this specific aspect of investor confusion.
Rep. Randy Hultgren (R-Ill.) asked if the SEC should consult and coordinate with other federal agencies and state regulators before deciding whether to move forward with rules to implement Section 913 of Dodd Frank, and whether White believes DOL should suspend its rulemaking until the SEC completes a Section 913 rulemaking. White said she does “not think [she] can tell DOL what to do.”
JOBS Act
Rep. Spencer Bachus (R-Ala.) said the JOBS Act was a bipartisan achievement and credited the SEC for translating its provisions into workable regulation. He then asked how the commission would approach implementation of the bill’s remaining provisions. White said completing the provisions is a high priority but the SEC wants the rules to be workable; so it is engaging in detailed economic analyses of its choices.
Rep. Nydia Velazquez (D-N.Y.) asked about crowdfunding under the JOBS Act and how the SEC plans to inform ordinary investors of the risks without burdening business and preventing access to capital. White said the comment period for the SEC’s crowdfunding proposal just recently closed and the commission is still considering all comments before adopting any rules.
Rep. Patrick McHenry (R-N.C.) asked White about her view of the JOBS Act and whether it was a prudent change to securities law. White said the objective of the JOBS Act “is one that we all should subscribe to.”
McHenry then asked White if the crowdfunding law within the JOBS Act is “a workable law.” White said the SEC’s objective is to make it workable, but to some extent “you can’t tell how workable things are until they’re actually rolled out.”
Asset Managers and Systemically Important Financial Institutions
Hensarling asked whether, in White’s view, asset managers are regulated and if the SEC has the authority needed to regulate the asset management industry. White replied that asset managers have been regulated for many years, and that she does “not believe we do lack that authority” to regulate this industry.
Next, Hensarling noted the FSOC has “moved already on several nonbank SIFI designations” and called the FSOC a “rather opaque organization.” He then asked how asset managers are different from banks and bank-holding companies. White said the two are different in many ways, but the most “fundamental difference” is that asset managers are agents that manage others’ money, and this must be taken into account when looking at systemic risk issues.
Designating a firm as a SIFI, Hensarling said, imposes an increased cost on the entity that can be passed down to investors. He asked if White believes that any evaluation of asset managers for a SIFI designation should take into account the potential costs for individual investors. White said that all facts, circumstances, and impacts should be taken into account, but the FSOC’s focus is to identify systemic risks to the broader financial system.
Rep. Randy Neugebauer (R-Texas) noted that FSOC recently designated Prudential Financial a non-bank SIFI, despite the objections of voting members who have insurance expertise. One of those members, John Hough, a state insurance commissioner, said “FSOC’s misguided overreliance on banking concepts is no more apparent than in the FSOC’s basis for the designation of Prudential Financial.” Neugebauer asked for White’s reaction to this comment. White said she is recused from this case, but that generally the voting members of FSOC should listen to the expertise within a particular industry.
Rep. Edward Royce (R-Calif.) said there seems to be a difference between the SEC and Office of Financial Research (OFR) regarding asset managers’ potential for SIFI designation. He asked whether the SEC took part in the OFR study on asset managers. White said that her staff offered some technical expertise and offered comments, not all of which were accepted.
Royce asked about the Federal Reserve’s insistence that the Collins Amendment does not allow it to tailor prudential rules for non-bank SIFIs that account for differing business models, despite Section 165 of Dodd-Frank requiring so. He asked if it would be prudent for FSOC to postpone any further SIFI designations until the Collins Amendment issue is resolved. White said that there has been discussion of the possibility.
Rep. Robert Pittenger (R-N.C.) noted that White said in a February speech that regulators should avoid taking a uniform regulatory approach based on the banking concept of safety and soundness and recognize the differences between prudential risk and other types of risk. White said the main concern is that capital markets are built on different structures, and that “one size doesn’t necessarily fit all.”
Rep. Steve Stivers (R-Ohio) mentioned the OFR study on asset managers and lamented that if “they don’t do their research correctly, it impacts the outcome of the FSOC.” If FSOC moves forward with the SIFI designation process without a proper education, Stivers said, it seems like a “designate first, ask questions later” approach.
High-Frequency Trading
Garrett, alluding to the media frenzy surrounding the book “Flash Boys” by Michael Lewis, asked “are the markets rigged?” White firmly replied that the markets are not rigged, and that U.S. markets are the strongest and most reliable in the world. While they are not perfect, she said, the SEC will always seek to increase market quality. HFT has been discussed and examined for years by the SEC, White continued, and the commission has been continuously looking at the issue as the market has developed. She said HFT is not unlawful insider trading.
Maloney continued the discussion of HFT and questioned the fairness of the current market structure, saying that because not everyone has equal access to market data at the same time, those who do have access enjoy an advantage. He asked whether participants who pay for faster data feeds create an unlevel playing field. White said again that the SEC is looking at the issue and reminded Maloney that the commission is very data-driven and disciplined in deciding what to do with a market structure that as a whole is working “quite well.”
Rep. Stephen F. Lynch (D-Mass.) on HFT, noted that one particular HFT firm boasted of having just one day of trading losses in over five years. Lynch said there seems to be a definite advantage for a firm that can operate for five-and-a-half years with only one day of trading losses.” White said the SEC “could not be doing a more intensive review of all issues.”
Rep. Denny Heck (D-Wash.), referring to HFT and the Michael Lewis book, asked White whether small investors are at a competitive disadvantage. White said most market metrics show that the current market structure, including the technology and speed issues, works to the benefit of the individual investor.
Stivers said that while the markets may not be rigged, it “certainly does what it’s told to do” and said that Regulation NMS has forced behaviors in markets. He asked whether the SEC is willing to take a serious look at Regulation NMS and study how it is impacting marketplace behavior. White said this is part of the commission’s comprehensive review in terms of all the impacts that regulation may have had.
Volcker Rule
Velazquez said the Volcker Rule provided the financial industry with many exemptions, including on certain collateralized loan obligations (CLO). She asked White how the Volcker Rule has affected the CLO market to date. White said the rule only became active on April 1 and that the conformance period does not “kick in” for some time.
Rep. Mick Mulvaney (R-S.C.) recalled a hearing in February where he tried to draw attention to possible overlap of jurisdiction under the Volcker Rule and where Governor Tarullo of the Federal Reserve and White agreed that whoever is the primary regulator of an entity retains regulatory authority in the case of overlap. Mulvaney asked if White still agreed with this. White said this is generally how the system should work, and added that there should be some consistency among agencies.
Money Mark Funds
Hultgren said he understands the SEC is close to finalizing new regulations on money market mutual funds, and said he is concerned about the impact of a floating net asset value (NAV). He said the proposed rule would exempt Treasury and other government funds from the floating NAV under the rationale that these funds did not exhibit major outflows during the crisis, and pointed out that municipal money market funds were also very stable. He asked if the SEC is considering treating municipal funds the same way as Treasury and other government funds. White said this is “one of the issues that we’re acutely focused on.”
Rep. Keith Rothfus (R-Pa.) asked where the SEC stands on money market fund reform with respect to a final rule, and when the rule might come out. White said there is still an active discussion between the staff and commissioners on the final rule, and that she expects it to reach a final stage in the “near term.” She declined to elaborate on what she meant by “near term.”
SEC Enforcement
Rep. Emanuel Cleaver (D-Mo.) expressed his disdain for the SEC’s inability to pursue criminal action against individuals guilty of fraud, but simply to fine such persons. White said the SEC cannot put anyone in jail, but it is the responsibility of prosecutors and civil enforcers to take evidence as far as it leads
Rep. Stevan Pearce (R-N.M.) criticized the commission’s handling of the Bear Stearns and Lehman Brothers collapses and controversies with Bernie Madoff, Allan Stanford, and MF Global. He asked how it would improve the SEC’s performance to “go 20 times your budget if you have a culture inside that turns and looks the other way.” White said she does not believe such a culture exists, but that such issues do pose serious concerns. She said that the SEC “before my time but hopefully as I continue, has addressed those issues.”
Rep. Steven Horsford (D-Nev.) noted that there is a common perception that the SEC pursues lesser violations of securities laws rather than major violations such as those that contributed to the financial crisis. White said the SEC has an “extraordinarily impressive” record of enforcement in terms of the complexity of cases and the names of institutions.
Cybersecurity
Horsford asked what the SEC is doing to mitigate cybersecurity risk. White said there are two primary areas. First, she said, the Division of Corporate Finance put out a disclosure guideline in terms of what issuers should be attending to in terms of their cyber event risk factor disclosures. Second, White said that the Regulation Systems Compliance and Integrity (Reg SCI) proposal would require self-regulatory organizations and alternative trading systems to enhance their systems security against all possible disruptions, including on the cyber side.
Disclosure Requirements
Rep. Shelley Capito (R-W.Va.) asked about disclosure guidelines for the mining industry, which have not been updated since 1982, and whether the SEC plans to update them. White replied that industry guides in general will fall under a comprehensive review of the commission’s disclosure program. White declined to offer a timeline for when the review would be completed.
Rep. Robert Hurt (R-Va.) asked about the SEC’s priorities in trying to scale disclosure requirements. White said the commission is seeking views from all constituents – issuers, lawyers, and investors – to make sure it has “maximum information.” She said they would focus on intelligibility and eliminating unnecessary redundancies, and that the overall goal is to make disclosures effective for investors but not overly costly for issuers.
SEC Budget
Waters mentioned her bill, H.R. 1627, the Investment Adviser Examination Improvement Act, which would authorize the SEC to levy user fees to cover the cost of an increase in the frequency of examinations of investment advisers. She asked whether user fees would be a workable way for the SEC to improve investor protection, to which White replied simply that her priority is to get the funding needed to accomplish the commission’s job.
Rep. Daniel T. Kildee (D-Mich.) asked whether the SEC has enough resources to carry out its obligations. White said she believes the commission is underfunded, and emphasized that it is unable to adequately cover the examination of investment advisers. She said the industry needs a strong SEC in order to promote confidence in the marketplace.
General
Rep. Michael Capuano (D-Mass.) criticized the SEC, saying it “really hasn’t done much” about issues such as HFT, finalizing rules, or pursuing enforcement actions against major Wall Street firms. He questioned the commissions focus and priorities and said he saw a “seeming constant erosion of confidence in the SEC to actually do the job it’s required to do.” White acknowledged that if that is the market’s perception it is a significant concern, but pointed out that, in recent months, retail investors have been returning to the markets.
Capito said she has a bill that would require regulatory agencies to look for duplicative regulatory efforts putting new rules in place. White said the SEC certainly “scrubs what’s out there” to avoid duplication and that cases of rules conflicting with one another should not be happening.
For more information on this hearing and to view a webcast, please click here.
AT THE APRIL 29TH HOUSE FINANCIAL SERVICES COMMITTEE HEARING, Mary Jo White Chairman of the Securities and Exchange Commission (SEC) gave testimony and answered lawmakers’ questions on her agency’s operations and agenda.
Opening Remarks
In his opening statement Chairman Jeb Hensarling (R-Texas) noted that many on the committee feel the SEC does not have appropriate funding, but explained stated that the SEC budget has increased 80% over the last 3 years, and not many agencies have seen such a large increase over the same time period.
Hensarling also mentioned that in the years when the SEC budget has increased, there have been examples of wasted resources, saying that it is often not the amount of money you spend in Washington that matters “but how you spend it.” He noted that he is interested in the systemically important financial institution (SIFI) designations through the Financial Stability Oversight Council (FSOC) of which White is a member.
Ranking Member Maxine Waters (D-Calif.) noted in her opening statement that in the four years since the passage of Dodd-Frank, the SEC has completed critical work even in the face of near constant attempts by the Republicans on the committee to roll back the Dodd-Frank Act. However, Waters mentioned there was still critical work to be done, such as the final adoptions of the securities-based swap rules under the Dodd-Frank Act.
Waters also noted the need to finalize Rule 506 under the Jumpstart Our Business Startups Act (JOBS Act). Waters also expressed an interest in how the SEC Enforcement division selects which cases to pursue.
Rep. Scott Garrett’s (R-N.J.) opening statements focused on equity markets and he extended his appreciation of White’s data driven approach in reviewing the issue. Garrett stressed how complex the issue is, and while he appreciates the recent news coverage on the topic, he warned “newcomers” that the issue of equity markets does not “lend itself to quick fixes.”
Garrett also stressed that the committee must “rein in the FSOC” especially on the topic of asset management businesses.
Rep. Carolyn Maloney (D-N.Y.) echoed Garrett’s appreciation of the data driven approach the SEC has taken when reviewing market structures; including the new analytical tool MIDAS (Market Information Data Analytics Systems.) Maloney expressed concern that since 2001 the trading volume in equity markets has doubled to $71 trillion. She added that she would be interested in hearing how the SEC budget for overseeing the equity markets has kept pace with the growing market size.
Rep. David Scott (D-Ga.) expressed concern on how the SEC and the Commodity Futures Trading Commission (CFTC) are making progress with regard to Title VII of Dodd-Frank. He was also interested in hearing about the progress on the proposed fiduciary rules and issues between the SEC and the Department of Labor (DOL).
Witness Testimony
In her testimony, White called her agency’s mission “critical to investors, the markets, and capital formation, as well as our economy more broadly.” She said that now more than ever, the U.S. needs a “strong, vigilant, and adequately resourced SEC.” The president’s $1.7 billion budget request for FY 2015, White said, would allow the SEC to address its critical priorities.
White pointed out that the SEC now oversees over 25,000 registrants in a time of unprecedented growth and transformation in the marketplace. She said the SEC has accomplished a great deal in the past year, including adopting and proposing “more than 20 significant rulemakings across the regulatory spectrum, including many mandated by the Dodd-Frank and JOBS Acts.”
More aggressive enforcement of securities laws led to penalties totaling $3.4 billion in fiscal year 2013 alone, White said. She added that the SEC has intensified its data-driven, disciplined approach to analyzing and appropriately addressing complex market structure issues, including those related to high-frequency trading (HFT) and dark pools, has focused on completing the money market fund reform rulemaking proposed last year, and continues to work on completing rulemakings required by Dodd-Frank and the JOBS Act.
White said the budget request would permit the SEC to increase its examination and coverage of investment advisers, acknowledging that with limited resources the agency could examine just nine percent of advisers in the past year. It would also allow the SEC to expand its Division of Economic and Risk Analysis by adding financial economists to assists in rulemaking, she added.
“I am pleased with the agency’s accomplishment but much more remains to be done. I firmly believe that the funding we seek is justified by our progress and important and growing responsibilities to investors, companies and the markets,” White said.
Question and Answer
DOL Fiduciary
Waters asked about the extension of a uniform fiduciary rule to broker-dealers under Section 913 of Dodd-Frank, noting that the SEC’s Investor Advisory Committee submitted a recommendation that the commission move forward with such a rule. White acknowledged the importance of the issue and the fact that under Dodd-Frank her agency was given the authority to decide whether to impose a uniform fiduciary standard. She said it is a priority of hers to have the commission “reach this very important issue in this year.”
Scott talked about the rule on the definition of fiduciary and said his feeling has always been that this falls under the jurisdiction of the SEC, and asked why the Department of Labor (DOL) is “meddling.” White said the SEC is focused on the issue from the perspective of whether a uniform fiduciary duty should be imposed on brokers and investment advisers in its space, but added that she is in touch with DOL Secretary Perez and their staffs are also in communication with each other.
Rep. Gwen Moore (D-Wis.) discussed the implementation under Section 913 of the Dodd-Frank Act of the fiduciary duty rule, and said it seems that the DOL is “plowing ahead”. She asked White if she believes the SEC has more expertise for the final rule, and questioned whether the DOL taking the lead on the issue is “the tail wagging the dog.” White once again said that the SEC has been sharing its expertise and that she has “ratcheted up” interaction between the DOL and SEC staffs. She said she has spoken to Secretary Perez to ensure that her staff’s expertise is fully understood.
Rep. Gary C. Peters (D-Mich.) said any new regulatory framework for brokers, dealers and investment advisers must protect the interests of retail investors, retirement plan participants, and sponsors from unfair and deceptive practices without limiting access to investment education and information. He noted that the Dodd-Frank Act directed the SEC to study if having different standards for care for broker-dealers and registered investment advisers could create some confusion for investors, and asked if such a study was being conducted. White said the commission is “certainly looking at all of those issues” but could not say if there was a formal study taking place to look at this specific aspect of investor confusion.
Rep. Randy Hultgren (R-Ill.) asked if the SEC should consult and coordinate with other federal agencies and state regulators before deciding whether to move forward with rules to implement Section 913 of Dodd Frank, and whether White believes DOL should suspend its rulemaking until the SEC completes a Section 913 rulemaking. White said she does “not think [she] can tell DOL what to do.”
JOBS Act
Rep. Spencer Bachus (R-Ala.) said the JOBS Act was a bipartisan achievement and credited the SEC for translating its provisions into workable regulation. He then asked how the commission would approach implementation of the bill’s remaining provisions. White said completing the provisions is a high priority but the SEC wants the rules to be workable; so it is engaging in detailed economic analyses of its choices.
Rep. Nydia Velazquez (D-N.Y.) asked about crowdfunding under the JOBS Act and how the SEC plans to inform ordinary investors of the risks without burdening business and preventing access to capital. White said the comment period for the SEC’s crowdfunding proposal just recently closed and the commission is still considering all comments before adopting any rules.
Rep. Patrick McHenry (R-N.C.) asked White about her view of the JOBS Act and whether it was a prudent change to securities law. White said the objective of the JOBS Act “is one that we all should subscribe to.”
McHenry then asked White if the crowdfunding law within the JOBS Act is “a workable law.” White said the SEC’s objective is to make it workable, but to some extent “you can’t tell how workable things are until they’re actually rolled out.”
Asset Managers and Systemically Important Financial Institutions
Hensarling asked whether, in White’s view, asset managers are regulated and if the SEC has the authority needed to regulate the asset management industry. White replied that asset managers have been regulated for many years, and that she does “not believe we do lack that authority” to regulate this industry.
Next, Hensarling noted the FSOC has “moved already on several nonbank SIFI designations” and called the FSOC a “rather opaque organization.” He then asked how asset managers are different from banks and bank-holding companies. White said the two are different in many ways, but the most “fundamental difference” is that asset managers are agents that manage others’ money, and this must be taken into account when looking at systemic risk issues.
Designating a firm as a SIFI, Hensarling said, imposes an increased cost on the entity that can be passed down to investors. He asked if White believes that any evaluation of asset managers for a SIFI designation should take into account the potential costs for individual investors. White said that all facts, circumstances, and impacts should be taken into account, but the FSOC’s focus is to identify systemic risks to the broader financial system.
Rep. Randy Neugebauer (R-Texas) noted that FSOC recently designated Prudential Financial a non-bank SIFI, despite the objections of voting members who have insurance expertise. One of those members, John Hough, a state insurance commissioner, said “FSOC’s misguided overreliance on banking concepts is no more apparent than in the FSOC’s basis for the designation of Prudential Financial.” Neugebauer asked for White’s reaction to this comment. White said she is recused from this case, but that generally the voting members of FSOC should listen to the expertise within a particular industry.
Rep. Edward Royce (R-Calif.) said there seems to be a difference between the SEC and Office of Financial Research (OFR) regarding asset managers’ potential for SIFI designation. He asked whether the SEC took part in the OFR study on asset managers. White said that her staff offered some technical expertise and offered comments, not all of which were accepted.
Royce asked about the Federal Reserve’s insistence that the Collins Amendment does not allow it to tailor prudential rules for non-bank SIFIs that account for differing business models, despite Section 165 of Dodd-Frank requiring so. He asked if it would be prudent for FSOC to postpone any further SIFI designations until the Collins Amendment issue is resolved. White said that there has been discussion of the possibility.
Rep. Robert Pittenger (R-N.C.) noted that White said in a February speech that regulators should avoid taking a uniform regulatory approach based on the banking concept of safety and soundness and recognize the differences between prudential risk and other types of risk. White said the main concern is that capital markets are built on different structures, and that “one size doesn’t necessarily fit all.”
Rep. Steve Stivers (R-Ohio) mentioned the OFR study on asset managers and lamented that if “they don’t do their research correctly, it impacts the outcome of the FSOC.” If FSOC moves forward with the SIFI designation process without a proper education, Stivers said, it seems like a “designate first, ask questions later” approach.
High-Frequency Trading
Garrett, alluding to the media frenzy surrounding the book “Flash Boys” by Michael Lewis, asked “are the markets rigged?” White firmly replied that the markets are not rigged, and that U.S. markets are the strongest and most reliable in the world. While they are not perfect, she said, the SEC will always seek to increase market quality. HFT has been discussed and examined for years by the SEC, White continued, and the commission has been continuously looking at the issue as the market has developed. She said HFT is not unlawful insider trading.
Maloney continued the discussion of HFT and questioned the fairness of the current market structure, saying that because not everyone has equal access to market data at the same time, those who do have access enjoy an advantage. He asked whether participants who pay for faster data feeds create an unlevel playing field. White said again that the SEC is looking at the issue and reminded Maloney that the commission is very data-driven and disciplined in deciding what to do with a market structure that as a whole is working “quite well.”
Rep. Stephen F. Lynch (D-Mass.) on HFT, noted that one particular HFT firm boasted of having just one day of trading losses in over five years. Lynch said there seems to be a definite advantage for a firm that can operate for five-and-a-half years with only one day of trading losses.” White said the SEC “could not be doing a more intensive review of all issues.”
Rep. Denny Heck (D-Wash.), referring to HFT and the Michael Lewis book, asked White whether small investors are at a competitive disadvantage. White said most market metrics show that the current market structure, including the technology and speed issues, works to the benefit of the individual investor.
Stivers said that while the markets may not be rigged, it “certainly does what it’s told to do” and said that Regulation NMS has forced behaviors in markets. He asked whether the SEC is willing to take a serious look at Regulation NMS and study how it is impacting marketplace behavior. White said this is part of the commission’s comprehensive review in terms of all the impacts that regulation may have had.
Volcker Rule
Velazquez said the Volcker Rule provided the financial industry with many exemptions, including on certain collateralized loan obligations (CLO). She asked White how the Volcker Rule has affected the CLO market to date. White said the rule only became active on April 1 and that the conformance period does not “kick in” for some time.
Rep. Mick Mulvaney (R-S.C.) recalled a hearing in February where he tried to draw attention to possible overlap of jurisdiction under the Volcker Rule and where Governor Tarullo of the Federal Reserve and White agreed that whoever is the primary regulator of an entity retains regulatory authority in the case of overlap. Mulvaney asked if White still agreed with this. White said this is generally how the system should work, and added that there should be some consistency among agencies.
Money Mark Funds
Hultgren said he understands the SEC is close to finalizing new regulations on money market mutual funds, and said he is concerned about the impact of a floating net asset value (NAV). He said the proposed rule would exempt Treasury and other government funds from the floating NAV under the rationale that these funds did not exhibit major outflows during the crisis, and pointed out that municipal money market funds were also very stable. He asked if the SEC is considering treating municipal funds the same way as Treasury and other government funds. White said this is “one of the issues that we’re acutely focused on.”
Rep. Keith Rothfus (R-Pa.) asked where the SEC stands on money market fund reform with respect to a final rule, and when the rule might come out. White said there is still an active discussion between the staff and commissioners on the final rule, and that she expects it to reach a final stage in the “near term.” She declined to elaborate on what she meant by “near term.”
SEC Enforcement
Rep. Emanuel Cleaver (D-Mo.) expressed his disdain for the SEC’s inability to pursue criminal action against individuals guilty of fraud, but simply to fine such persons. White said the SEC cannot put anyone in jail, but it is the responsibility of prosecutors and civil enforcers to take evidence as far as it leads
Rep. Stevan Pearce (R-N.M.) criticized the commission’s handling of the Bear Stearns and Lehman Brothers collapses and controversies with Bernie Madoff, Allan Stanford, and MF Global. He asked how it would improve the SEC’s performance to “go 20 times your budget if you have a culture inside that turns and looks the other way.” White said she does not believe such a culture exists, but that such issues do pose serious concerns. She said that the SEC “before my time but hopefully as I continue, has addressed those issues.”
Rep. Steven Horsford (D-Nev.) noted that there is a common perception that the SEC pursues lesser violations of securities laws rather than major violations such as those that contributed to the financial crisis. White said the SEC has an “extraordinarily impressive” record of enforcement in terms of the complexity of cases and the names of institutions.
Cybersecurity
Horsford asked what the SEC is doing to mitigate cybersecurity risk. White said there are two primary areas. First, she said, the Division of Corporate Finance put out a disclosure guideline in terms of what issuers should be attending to in terms of their cyber event risk factor disclosures. Second, White said that the Regulation Systems Compliance and Integrity (Reg SCI) proposal would require self-regulatory organizations and alternative trading systems to enhance their systems security against all possible disruptions, including on the cyber side.
Disclosure Requirements
Rep. Shelley Capito (R-W.Va.) asked about disclosure guidelines for the mining industry, which have not been updated since 1982, and whether the SEC plans to update them. White replied that industry guides in general will fall under a comprehensive review of the commission’s disclosure program. White declined to offer a timeline for when the review would be completed.
Rep. Robert Hurt (R-Va.) asked about the SEC’s priorities in trying to scale disclosure requirements. White said the commission is seeking views from all constituents – issuers, lawyers, and investors – to make sure it has “maximum information.” She said they would focus on intelligibility and eliminating unnecessary redundancies, and that the overall goal is to make disclosures effective for investors but not overly costly for issuers.
SEC Budget
Waters mentioned her bill, H.R. 1627, the Investment Adviser Examination Improvement Act, which would authorize the SEC to levy user fees to cover the cost of an increase in the frequency of examinations of investment advisers. She asked whether user fees would be a workable way for the SEC to improve investor protection, to which White replied simply that her priority is to get the funding needed to accomplish the commission’s job.
Rep. Daniel T. Kildee (D-Mich.) asked whether the SEC has enough resources to carry out its obligations. White said she believes the commission is underfunded, and emphasized that it is unable to adequately cover the examination of investment advisers. She said the industry needs a strong SEC in order to promote confidence in the marketplace.
General
Rep. Michael Capuano (D-Mass.) criticized the SEC, saying it “really hasn’t done much” about issues such as HFT, finalizing rules, or pursuing enforcement actions against major Wall Street firms. He questioned the commissions focus and priorities and said he saw a “seeming constant erosion of confidence in the SEC to actually do the job it’s required to do.” White acknowledged that if that is the market’s perception it is a significant concern, but pointed out that, in recent months, retail investors have been returning to the markets.
Capito said she has a bill that would require regulatory agencies to look for duplicative regulatory efforts putting new rules in place. White said the SEC certainly “scrubs what’s out there” to avoid duplication and that cases of rules conflicting with one another should not be happening.
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