Senate Banking Hearing on SEC Oversight with Chair White
Senate Banking Committee
“Oversight of the U.S. Securities and Exchange Commission”
Tuesday, June 14, 2016
Key Topics & Takeaways
- Fiduciary Rule: Sen. Mike Rounds (R-S.D.) discussed a report that seemingly found “extensive disagreement” between DOL and SEC staff regarding the DOL’s fiduciary rule, and questioned how a uniform rule can be developed when the two agencies have fundamental disagreements about its goal. He asked if it is fair to say there are concerns about the availability of investment advice for small investors under the DOL rule. White answered that certain changes were made to the rule in response to such concerns, but that “to some degree, you need to see what happens as rules are implemented.”
- Title VII: Responding to a question from Sen. Sherrod Brown (D-Ohio), White said the SEC published a policy statement setting forth a sequence in which the SEC would propose and finalize rules, and that she has been following that roadmap. She stressed that there is no higher priority for the Commission, and she expressed her hope that the SEC would finalize its rules for reporting and registration mechanisms by the end of 2016.
- NMS Governance: Sen. Jerry Moran (R-Kan.) asked if National Market System Plan governance models should be reformed to add more participants as voting members, and whether the SEC has the authority to approve the addition of new market experts as participants. White explained that this is subject to the SEC’s self-regulatory organization (SRO) rule process, and added that the EMSAC is developing recommendations on this issue.
- Disclosure Effectiveness Review: Sen. Elizabeth Warren (D-Mass.) was very critical of White and the SEC, arguing that while “countless” investors are pushing the SEC to move forward with additional disclosure requirements for registered companies, the SEC has “moved in the opposite direction” with its disclosure effectiveness review. She argued that the SEC is putting the interests of big business ahead of investors, and stated that she is “more disappointed than ever” in White’s leadership.
Witness
- Mary Jo White, Chair, Securities and Exchange Commission
Opening Statements
In his opening statement, Chairman Richard Shelby (R-Ala.) warned that excessive and unnecessary regulation can endanger the status of the U.S. as the world’s preferred financial center. He called on the Securities and Exchange Commission (SEC) to “focus on its core mission” and resist special interests calling for mandates on climate change or political spending disclosures. He also encouraged the SEC to periodically review the appropriateness of its existing rules and to “take very seriously” the importance of economic analysis when promulgating new rules. He commented that an agency such as the SEC with thousands of employees should be able to analyze in detail the impact of its rules on the economy, and that this is especially important today “given the cumulative impact and unintended consequences of the myriad new rules stemming from the financial crisis.”
Shelby then declared that because the SEC has the primary expertise in capital markets, it should be the lead agency in their regulation. He discussed his concern with other federal agencies attempting to “erode the SEC’s jurisdiction,” such as the Department of Labor’s (DOL) fiduciary rule, the Financial Stability Oversight Council’s (FSOC) focus on asset managers, or the Federal Reserve’s targeting of broker-dealers “under the guise of reining in what it calls ‘shadow banking.'”
Ranking Member Sherrod Brown (D-Ohio), in his opening statement, noted that the SEC still has much work to do in finalizing and implementing Dodd-Frank Act rules six years after its passage. He specifically commented on the importance of finalizing derivatives rules under Title VII that would provide transparency to market data and rules on incentive compensation that would ensure senior executives are not rewarded for taking inappropriate risks.
Brown also voiced his disappointment with the SEC’s enforcement actions, stating that “time and again” repeat offenders are seen entering into “settlement after settlement.” He similarly lamented the granting of waivers to financial institutions after violations that would ordinarily result in the loss of certain privileges, and also called for the SEC to begin work towards a rule on political spending disclosures.
Testimony
In her testimony, Chair Mary Jo White said the SEC has been “very busy” since her last testimony before the Committee in 2014, with vigorous enforcement and examination programs and efforts towards “very consequential rulemakings and other measures” to protect investors, strengthen markets and open new avenues for capital raising. She added that Title VII is a major priority for 2016, and lauded the completion of Jumpstart Our Business Startups (JOBS) Act rulemakings and progress on mandates from the Fixing America’s Surface Transportation (FAST) Act.
White stressed the importance of providing the SEC with enough resources to meet its responsibilities, particularly as the agency faces a “growing and ever-more sophisticated financial services industry.” She warned that proposed cuts to the budget would hurt the ability of the SEC to fulfill its mission to protect investors, preserve the integrity of our markets, and promote capital formation.
Questions and Answers
Delegation of Commission Responsibility
Shelby raised the ability of the Commission to delegate certain authorities to SEC staff, and asked how the Commission holds accountability. White explained that the Commission has delegated many responsibilities such as day-to-day operations, but not rulemakings. She continued that as a safeguard, the Commission has the right to review any staff action at the request of any one commissioner.
Shelby then asked if White would support a review of existing delegations. White replied that this is a matter she has discussed with the other commissioners, and that she has encouraged them to come to her with any concerns about existing delegations.
Partisan Votes
Shelby pointed to the many party line votes under her chairmanship and asked if there are any areas where unanimous decisions can be made. White responded that about 65-70 percent of votes are unanimous, while adding that the controversy from the Dodd-Frank Act has continued into the implementation of its mandated rulemakings.
FSOC
Shelby noted that in 2013 the SEC posted for comment a study of asset management conducted by the Office of Financial Research (OFR) at the request of the FSOC. He asked if the SEC would post other such studies of its regulated entities. White said there is enormous benefit to the notice and comment process, and that the Commission would consider doing so again.
Sen. Mike Crapo (R-Idaho) noted that several hearings have been held on FSOC transparency and accountability, and that witnesses have called for a designation “off-ramp” and actionable guidance for firms. He asked if White agrees that the FSOC should improve its transparency, accountability and communications. White replied that the FSOC is committed to enhancing the transparency of its processes, and that she understands desires for greater clarity on an off-ramp.
Enforcement and Waivers
Shelby commented that there have been concerns raised about repeated violations by SEC-regulated entities, and asked when it is appropriate for the SEC to de-register an entity. White said this is an “enormous power” and that the SEC must look carefully at all violations. She added that there “can certainly come a point” where an entity should no longer be registered.
Brown noted that Democratic members of the Committee have taken a close look at the policies and practices surrounding the SEC’s granting of waivers to financial institutions, and that he hopes the SEC will cooperate with any future requests for assistance. He asked what the SEC can do to make the process transparent for Americans. White said this has been of focus of hers since the start of her tenure, and that the SEC has already implemented changes to enhance the robustness and transparency of the waiver process. She said the criteria considered are made public, but that she is open to considering changes to the process.
Dodd-Frank Repeal
Brown stated that some members of the Committee seem to have “collective amnesia” about the financial crisis as they push for the repeal of Dodd-Frank. He asked whether White is concerned by such efforts. White answered that Dodd-Frank reforms have been “enormously important” in strengthening the financial system, and that she would not want them repealed.
SEC Pace of Implementation
Brown commented that the SEC is “far behind” other agencies that are working on similar rules, and specifically pointed to the Commodity Futures Trading Commission’s (CFTC) progress on Title VII and the DOL’s recent finalization of its fiduciary rule. He asked why the SEC is moving so slowly. White explained that the SEC has vast responsibilities, and that while she is committed to finalizing mandated requirements, “they have to be done well.”
FiduciaryRule
In response to a question from Brown, White said the SEC was given authority to promulgate a fiduciary rule but not a mandate. She expressed her own position that the SEC should implement a uniform fiduciary rule under Section 913 of Dodd-Frank, and that staff is working on recommendations, but that it is up to the Commission as a whole to decide whether to move forward.
Sen. Mike Rounds (R-S.D.) discussed a report that seemingly found “extensive disagreement” between DOL and SEC staff regarding the DOL’s fiduciary rule, and questioned how a uniform rule can be developed when the two agencies have fundamental disagreements about its goal. He asked if it is fair to say there are concerns about the availability of investment advice for small investors under the DOL rule. White answered that certain changes were made to the rule in response to such concerns, but that “to some degree, you need to see what happens as rules are implemented.”
Sen. Jon Tester (D-Mont.) asked if the SEC will have to enforce the DOL’s rule. White answered that it is the DOL’s responsibility to enforce its own rules.
Tester commented that enforcing rules for investment advisors and broker-dealers is traditionally the SEC’s job, and he questioned how the DOL would accomplish this. White stated that the SEC will watch as the DOL goes forward, and that if issues arise the SEC will be available to coordinate.
Title VII and Derivatives
Responding to a question from Brown, White said the SEC published a policy statement setting forth a sequence in which the SEC would propose and finalize rules, and that she has been following that roadmap. She stressed that there is no higher priority for the Commission, and she expressed her hope that the SEC would finalize its rules for reporting and registration mechanisms by the end of 2016.
Sen. Pat Toomey (R-Pa.) stated that within the SEC’s proposal on the use of derivatives by registered investment companies, he is concerned that the exposure used to cap the amount of derivatives is based on the aggregate notional amount of derivatives, which he called a “terrible proxy for risk.” White replied that the SEC is still in the comment process on the proposal.
Market Structure
Mike Crapo stated that modernizing market structure is a complicated but necessary task, and asked what White’s top objectives for the year in this area are. White said she is giving high priority to both short-term reforms and the comprehensive review of equity market structure. She stated that she is pleased with the work of the Equity Market Structure Advisory Committee (EMSAC) and that it is expected to have a teleconference meeting to make specific recommendations on a maker-taker pilot on July 8. White added that she expects “rather imminently” to propose a rule to provide greater transparency on order routing by institutional investors, as well an enhancing existing disclosures on the retail side.
Sen. Jerry Moran (R-Kan.) asked if National Market System Plan governance models should be reformed to add more participants as voting members, and whether the SEC has the authority to approve the addition of new market experts as participants. White explained that this is subject to the SEC’s self-regulatory organization (SRO) rule process, and added that the EMSAC is developing recommendations on this issue.
Sen. Mark Warner (D-Va.) stressed the need to move forward with a maker-taker pilot and urged that all venues be included. White repeated that the SEC is expecting a recommendation from the EMSAC on July 8.
Section 621
Sen. Jeff Merkley (D-Ore.) said one of the most egregious things in the lead up to the crisis was firms putting together securities and selling them while privately taking bets that the securities would fail. He expressed disappointment that there is still no final rule stemming from Section 621 of the Dodd-Frank Act. White explained that this has proven to be a much more complicated endeavor than the Commission has envisioned, and that staff is working to finish a reproposal.
Merkley called this “one of the most direct examples of unacceptable Wall Street behavior,” and that Wall Street wants desperately for the SEC to never finish a rule. He was critical that the SEC has gone “year after year failing to get this done,” calling it “absolutely unacceptable.”
Corporate Political Spending Disclosure
Merkley stressed the importance of registered companies disclosing their political spending as a basic right of shareholders, and questioned why White removed a rulemaking to require this from the SEC’s agenda. White said she understands the deep interest in this issue on both sides, but retorted that it was never on the SEC’s agenda to actually develop a rule, but rather only to study the matter.
Sen. Robert Menendez (D-N.J.) similarly argued the importance of political spending disclosures, noting that 1.2 million Americans have written to the SEC calling for such requirements as well as 96 Members of Congress. He admitted that the SEC is prevented from issuing, implementing or finalizing a rule this year by the omnibus spending bill, but asked whether the SEC would at least start preparing to move forward. White replied that this is not on the SEC’s agenda as it is focusing on its congressionally-mandated rulemakings and mission-critical objectives.
Shelby commented that 1.2 million people may have written to the SEC, but that over 300 million live in the U.S. He urged that the SEC should not react to “generated mail” but rather do what is best for the country, and added that this should be under the jurisdiction of the Federal Election Commission.
Sen. Charles Schumer (D-N.Y.) said the issue of corporate political spending disclosures is more important to him than anything else currently before the SEC, and that he is disappointed that White chose not to move forward with a rule. Responding to White’s insistence that this is not on the SEC’s agenda for the year, Schumer said White’s priorities “are out of line” with what America needs.
Investor Protection and Private Offerings
Rounds suggested that as the SEC tries to protect individual investors, it also limits their opportunities to invest. He noted that private offerings of stock have outstripped public issuance and asked if White is concerned that small investors are unable to invest in such offerings. White said the concept of the ‘accredited investor’ definition is meant to protect investors who may not be able to protect themselves. She added that the SEC must be responsible in ensuring that its rules are not unnecessarily driving away public offerings.
Puerto Rico
Menendez stated that neither the SEC nor the Municipal Securities Rulemaking Board (MSRB) have paid much attention to the Puerto Rico debt crisis. He said he wants to know whether municipal advisors, underwriters and broker-dealers have been operating in Puerto Rico in the best interest of the island’s people. White explained that within its own jurisdiction, the SEC has closely looked at various funds and brought enforcement actions against brokers who misled investors about the riskiness of Puerto Rican bonds.
BDCs
Toomey noted that legislation introduced by Rep. Mick Mulvaney (R-S.C.), H.R. 3868, the Small Business Credit Availability Act, would streamline regulations for business development companies (BDCs) and make them better able to provide loans to small and medium-sized companies that cannot get bank loans due to the Dodd-Frank Act. He recalled that White has concerns about the bill increasing leverage limits for BDCs, and asked why. White said she appreciates some changes made to the bill, but that doubling leverage multiplies the downside risk for investors. She was also critical of a provision allowing BDCs to invest more in financial institutions.
Toomey responded that investors have many other opportunities to take on leverage, but that at least under this bill the leverage would be professionally-managed by highly-regulated companies.
FINRA Oversight
Sen. Tom Cotton (R-Ark.) asked a series of questions about the Financial Industry Regulatory Authority’s (FINRA) structure, governance, and oversight. White explained that the SEC oversees and inspects FINRA on various issues, and has some authority over its rules.
Moran asked how Congress can satisfy the need for congressional oversight over FINRA, given that it is not subject to any confirmation or appropriations process. He commented that FINRA’s role is growing and Congress has little oversight authority over it. White answered that Congress has oversight over the SEC, which in turn oversees FINRA. She added that the SEC has enhanced its oversight of FINRA since she began her tenure, and continues to do so.
Moran suggested that White could use her oversight authority to encourage FINRA to be cooperative with the Committee.
SEC Resources
Tester pointed out that the SEC has only had three commissioners for the past six months. He asked if it is true that if any commissioner objects to a Commission action, he can simply stay away from a meeting to prevent a quorum. White said this is a possibility, but that the three commissioners “are focused on getting work done.”
Tester then asked if the SEC has adequate staff, and if the SEC would get more work done with additional staff and a full slate of commissioners. White said the SEC is under-resourced and that she tries to make a good case for adequate funding. She said the SEC would be more productive with greater resources.
Disclosure Effectiveness
Sen. Elizabeth Warren (D-Mass.) was very critical of White and the SEC, arguing that while “countless” investors are pushing the SEC to move forward with additional disclosure requirements for registered companies, the SEC has “moved in the opposite direction” with its disclosure effectiveness review. She attacked White’s characterization that investors are faced with “information overload” and said there is no evidence that investors feel they have too much information.
White defended the disclosure effectiveness review, stating that it was not only meant to eliminate disclosures, but to make them more meaningful for investors. She said Warren was describing the review as a much narrower way than it is intended.
Warren said she is frustrated that the SEC has spent two years on this review, trying to fix a problem that does not exist. She argued that the SEC is putting the interests of big businesses ahead of investors, and stated that she is “more disappointed than ever” in White’s leadership.
White answered that she “can’t disagree more” with Warren’s view of the SEC’s efforts to improve disclosure effectiveness.
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Senate Banking Committee
“Oversight of the U.S. Securities and Exchange Commission”
Tuesday, June 14, 2016
Key Topics & Takeaways
- Fiduciary Rule: Sen. Mike Rounds (R-S.D.) discussed a report that seemingly found “extensive disagreement” between DOL and SEC staff regarding the DOL’s fiduciary rule, and questioned how a uniform rule can be developed when the two agencies have fundamental disagreements about its goal. He asked if it is fair to say there are concerns about the availability of investment advice for small investors under the DOL rule. White answered that certain changes were made to the rule in response to such concerns, but that “to some degree, you need to see what happens as rules are implemented.”
- Title VII: Responding to a question from Sen. Sherrod Brown (D-Ohio), White said the SEC published a policy statement setting forth a sequence in which the SEC would propose and finalize rules, and that she has been following that roadmap. She stressed that there is no higher priority for the Commission, and she expressed her hope that the SEC would finalize its rules for reporting and registration mechanisms by the end of 2016.
- NMS Governance: Sen. Jerry Moran (R-Kan.) asked if National Market System Plan governance models should be reformed to add more participants as voting members, and whether the SEC has the authority to approve the addition of new market experts as participants. White explained that this is subject to the SEC’s self-regulatory organization (SRO) rule process, and added that the EMSAC is developing recommendations on this issue.
- Disclosure Effectiveness Review: Sen. Elizabeth Warren (D-Mass.) was very critical of White and the SEC, arguing that while “countless” investors are pushing the SEC to move forward with additional disclosure requirements for registered companies, the SEC has “moved in the opposite direction” with its disclosure effectiveness review. She argued that the SEC is putting the interests of big business ahead of investors, and stated that she is “more disappointed than ever” in White’s leadership.
Witness
- Mary Jo White, Chair, Securities and Exchange Commission
Opening Statements
In his opening statement, Chairman Richard Shelby (R-Ala.) warned that excessive and unnecessary regulation can endanger the status of the U.S. as the world’s preferred financial center. He called on the Securities and Exchange Commission (SEC) to “focus on its core mission” and resist special interests calling for mandates on climate change or political spending disclosures. He also encouraged the SEC to periodically review the appropriateness of its existing rules and to “take very seriously” the importance of economic analysis when promulgating new rules. He commented that an agency such as the SEC with thousands of employees should be able to analyze in detail the impact of its rules on the economy, and that this is especially important today “given the cumulative impact and unintended consequences of the myriad new rules stemming from the financial crisis.”
Shelby then declared that because the SEC has the primary expertise in capital markets, it should be the lead agency in their regulation. He discussed his concern with other federal agencies attempting to “erode the SEC’s jurisdiction,” such as the Department of Labor’s (DOL) fiduciary rule, the Financial Stability Oversight Council’s (FSOC) focus on asset managers, or the Federal Reserve’s targeting of broker-dealers “under the guise of reining in what it calls ‘shadow banking.'”
Ranking Member Sherrod Brown (D-Ohio), in his opening statement, noted that the SEC still has much work to do in finalizing and implementing Dodd-Frank Act rules six years after its passage. He specifically commented on the importance of finalizing derivatives rules under Title VII that would provide transparency to market data and rules on incentive compensation that would ensure senior executives are not rewarded for taking inappropriate risks.
Brown also voiced his disappointment with the SEC’s enforcement actions, stating that “time and again” repeat offenders are seen entering into “settlement after settlement.” He similarly lamented the granting of waivers to financial institutions after violations that would ordinarily result in the loss of certain privileges, and also called for the SEC to begin work towards a rule on political spending disclosures.
Testimony
In her testimony, Chair Mary Jo White said the SEC has been “very busy” since her last testimony before the Committee in 2014, with vigorous enforcement and examination programs and efforts towards “very consequential rulemakings and other measures” to protect investors, strengthen markets and open new avenues for capital raising. She added that Title VII is a major priority for 2016, and lauded the completion of Jumpstart Our Business Startups (JOBS) Act rulemakings and progress on mandates from the Fixing America’s Surface Transportation (FAST) Act.
White stressed the importance of providing the SEC with enough resources to meet its responsibilities, particularly as the agency faces a “growing and ever-more sophisticated financial services industry.” She warned that proposed cuts to the budget would hurt the ability of the SEC to fulfill its mission to protect investors, preserve the integrity of our markets, and promote capital formation.
Questions and Answers
Delegation of Commission Responsibility
Shelby raised the ability of the Commission to delegate certain authorities to SEC staff, and asked how the Commission holds accountability. White explained that the Commission has delegated many responsibilities such as day-to-day operations, but not rulemakings. She continued that as a safeguard, the Commission has the right to review any staff action at the request of any one commissioner.
Shelby then asked if White would support a review of existing delegations. White replied that this is a matter she has discussed with the other commissioners, and that she has encouraged them to come to her with any concerns about existing delegations.
Partisan Votes
Shelby pointed to the many party line votes under her chairmanship and asked if there are any areas where unanimous decisions can be made. White responded that about 65-70 percent of votes are unanimous, while adding that the controversy from the Dodd-Frank Act has continued into the implementation of its mandated rulemakings.
FSOC
Shelby noted that in 2013 the SEC posted for comment a study of asset management conducted by the Office of Financial Research (OFR) at the request of the FSOC. He asked if the SEC would post other such studies of its regulated entities. White said there is enormous benefit to the notice and comment process, and that the Commission would consider doing so again.
Sen. Mike Crapo (R-Idaho) noted that several hearings have been held on FSOC transparency and accountability, and that witnesses have called for a designation “off-ramp” and actionable guidance for firms. He asked if White agrees that the FSOC should improve its transparency, accountability and communications. White replied that the FSOC is committed to enhancing the transparency of its processes, and that she understands desires for greater clarity on an off-ramp.
Enforcement and Waivers
Shelby commented that there have been concerns raised about repeated violations by SEC-regulated entities, and asked when it is appropriate for the SEC to de-register an entity. White said this is an “enormous power” and that the SEC must look carefully at all violations. She added that there “can certainly come a point” where an entity should no longer be registered.
Brown noted that Democratic members of the Committee have taken a close look at the policies and practices surrounding the SEC’s granting of waivers to financial institutions, and that he hopes the SEC will cooperate with any future requests for assistance. He asked what the SEC can do to make the process transparent for Americans. White said this has been of focus of hers since the start of her tenure, and that the SEC has already implemented changes to enhance the robustness and transparency of the waiver process. She said the criteria considered are made public, but that she is open to considering changes to the process.
Dodd-Frank Repeal
Brown stated that some members of the Committee seem to have “collective amnesia” about the financial crisis as they push for the repeal of Dodd-Frank. He asked whether White is concerned by such efforts. White answered that Dodd-Frank reforms have been “enormously important” in strengthening the financial system, and that she would not want them repealed.
SEC Pace of Implementation
Brown commented that the SEC is “far behind” other agencies that are working on similar rules, and specifically pointed to the Commodity Futures Trading Commission’s (CFTC) progress on Title VII and the DOL’s recent finalization of its fiduciary rule. He asked why the SEC is moving so slowly. White explained that the SEC has vast responsibilities, and that while she is committed to finalizing mandated requirements, “they have to be done well.”
FiduciaryRule
In response to a question from Brown, White said the SEC was given authority to promulgate a fiduciary rule but not a mandate. She expressed her own position that the SEC should implement a uniform fiduciary rule under Section 913 of Dodd-Frank, and that staff is working on recommendations, but that it is up to the Commission as a whole to decide whether to move forward.
Sen. Mike Rounds (R-S.D.) discussed a report that seemingly found “extensive disagreement” between DOL and SEC staff regarding the DOL’s fiduciary rule, and questioned how a uniform rule can be developed when the two agencies have fundamental disagreements about its goal. He asked if it is fair to say there are concerns about the availability of investment advice for small investors under the DOL rule. White answered that certain changes were made to the rule in response to such concerns, but that “to some degree, you need to see what happens as rules are implemented.”
Sen. Jon Tester (D-Mont.) asked if the SEC will have to enforce the DOL’s rule. White answered that it is the DOL’s responsibility to enforce its own rules.
Tester commented that enforcing rules for investment advisors and broker-dealers is traditionally the SEC’s job, and he questioned how the DOL would accomplish this. White stated that the SEC will watch as the DOL goes forward, and that if issues arise the SEC will be available to coordinate.
Title VII and Derivatives
Responding to a question from Brown, White said the SEC published a policy statement setting forth a sequence in which the SEC would propose and finalize rules, and that she has been following that roadmap. She stressed that there is no higher priority for the Commission, and she expressed her hope that the SEC would finalize its rules for reporting and registration mechanisms by the end of 2016.
Sen. Pat Toomey (R-Pa.) stated that within the SEC’s proposal on the use of derivatives by registered investment companies, he is concerned that the exposure used to cap the amount of derivatives is based on the aggregate notional amount of derivatives, which he called a “terrible proxy for risk.” White replied that the SEC is still in the comment process on the proposal.
Market Structure
Mike Crapo stated that modernizing market structure is a complicated but necessary task, and asked what White’s top objectives for the year in this area are. White said she is giving high priority to both short-term reforms and the comprehensive review of equity market structure. She stated that she is pleased with the work of the Equity Market Structure Advisory Committee (EMSAC) and that it is expected to have a teleconference meeting to make specific recommendations on a maker-taker pilot on July 8. White added that she expects “rather imminently” to propose a rule to provide greater transparency on order routing by institutional investors, as well an enhancing existing disclosures on the retail side.
Sen. Jerry Moran (R-Kan.) asked if National Market System Plan governance models should be reformed to add more participants as voting members, and whether the SEC has the authority to approve the addition of new market experts as participants. White explained that this is subject to the SEC’s self-regulatory organization (SRO) rule process, and added that the EMSAC is developing recommendations on this issue.
Sen. Mark Warner (D-Va.) stressed the need to move forward with a maker-taker pilot and urged that all venues be included. White repeated that the SEC is expecting a recommendation from the EMSAC on July 8.
Section 621
Sen. Jeff Merkley (D-Ore.) said one of the most egregious things in the lead up to the crisis was firms putting together securities and selling them while privately taking bets that the securities would fail. He expressed disappointment that there is still no final rule stemming from Section 621 of the Dodd-Frank Act. White explained that this has proven to be a much more complicated endeavor than the Commission has envisioned, and that staff is working to finish a reproposal.
Merkley called this “one of the most direct examples of unacceptable Wall Street behavior,” and that Wall Street wants desperately for the SEC to never finish a rule. He was critical that the SEC has gone “year after year failing to get this done,” calling it “absolutely unacceptable.”
Corporate Political Spending Disclosure
Merkley stressed the importance of registered companies disclosing their political spending as a basic right of shareholders, and questioned why White removed a rulemaking to require this from the SEC’s agenda. White said she understands the deep interest in this issue on both sides, but retorted that it was never on the SEC’s agenda to actually develop a rule, but rather only to study the matter.
Sen. Robert Menendez (D-N.J.) similarly argued the importance of political spending disclosures, noting that 1.2 million Americans have written to the SEC calling for such requirements as well as 96 Members of Congress. He admitted that the SEC is prevented from issuing, implementing or finalizing a rule this year by the omnibus spending bill, but asked whether the SEC would at least start preparing to move forward. White replied that this is not on the SEC’s agenda as it is focusing on its congressionally-mandated rulemakings and mission-critical objectives.
Shelby commented that 1.2 million people may have written to the SEC, but that over 300 million live in the U.S. He urged that the SEC should not react to “generated mail” but rather do what is best for the country, and added that this should be under the jurisdiction of the Federal Election Commission.
Sen. Charles Schumer (D-N.Y.) said the issue of corporate political spending disclosures is more important to him than anything else currently before the SEC, and that he is disappointed that White chose not to move forward with a rule. Responding to White’s insistence that this is not on the SEC’s agenda for the year, Schumer said White’s priorities “are out of line” with what America needs.
Investor Protection and Private Offerings
Rounds suggested that as the SEC tries to protect individual investors, it also limits their opportunities to invest. He noted that private offerings of stock have outstripped public issuance and asked if White is concerned that small investors are unable to invest in such offerings. White said the concept of the ‘accredited investor’ definition is meant to protect investors who may not be able to protect themselves. She added that the SEC must be responsible in ensuring that its rules are not unnecessarily driving away public offerings.
Puerto Rico
Menendez stated that neither the SEC nor the Municipal Securities Rulemaking Board (MSRB) have paid much attention to the Puerto Rico debt crisis. He said he wants to know whether municipal advisors, underwriters and broker-dealers have been operating in Puerto Rico in the best interest of the island’s people. White explained that within its own jurisdiction, the SEC has closely looked at various funds and brought enforcement actions against brokers who misled investors about the riskiness of Puerto Rican bonds.
BDCs
Toomey noted that legislation introduced by Rep. Mick Mulvaney (R-S.C.), H.R. 3868, the Small Business Credit Availability Act, would streamline regulations for business development companies (BDCs) and make them better able to provide loans to small and medium-sized companies that cannot get bank loans due to the Dodd-Frank Act. He recalled that White has concerns about the bill increasing leverage limits for BDCs, and asked why. White said she appreciates some changes made to the bill, but that doubling leverage multiplies the downside risk for investors. She was also critical of a provision allowing BDCs to invest more in financial institutions.
Toomey responded that investors have many other opportunities to take on leverage, but that at least under this bill the leverage would be professionally-managed by highly-regulated companies.
FINRA Oversight
Sen. Tom Cotton (R-Ark.) asked a series of questions about the Financial Industry Regulatory Authority’s (FINRA) structure, governance, and oversight. White explained that the SEC oversees and inspects FINRA on various issues, and has some authority over its rules.
Moran asked how Congress can satisfy the need for congressional oversight over FINRA, given that it is not subject to any confirmation or appropriations process. He commented that FINRA’s role is growing and Congress has little oversight authority over it. White answered that Congress has oversight over the SEC, which in turn oversees FINRA. She added that the SEC has enhanced its oversight of FINRA since she began her tenure, and continues to do so.
Moran suggested that White could use her oversight authority to encourage FINRA to be cooperative with the Committee.
SEC Resources
Tester pointed out that the SEC has only had three commissioners for the past six months. He asked if it is true that if any commissioner objects to a Commission action, he can simply stay away from a meeting to prevent a quorum. White said this is a possibility, but that the three commissioners “are focused on getting work done.”
Tester then asked if the SEC has adequate staff, and if the SEC would get more work done with additional staff and a full slate of commissioners. White said the SEC is under-resourced and that she tries to make a good case for adequate funding. She said the SEC would be more productive with greater resources.
Disclosure Effectiveness
Sen. Elizabeth Warren (D-Mass.) was very critical of White and the SEC, arguing that while “countless” investors are pushing the SEC to move forward with additional disclosure requirements for registered companies, the SEC has “moved in the opposite direction” with its disclosure effectiveness review. She attacked White’s characterization that investors are faced with “information overload” and said there is no evidence that investors feel they have too much information.
White defended the disclosure effectiveness review, stating that it was not only meant to eliminate disclosures, but to make them more meaningful for investors. She said Warren was describing the review as a much narrower way than it is intended.
Warren said she is frustrated that the SEC has spent two years on this review, trying to fix a problem that does not exist. She argued that the SEC is putting the interests of big businesses ahead of investors, and stated that she is “more disappointed than ever” in White’s leadership.
White answered that she “can’t disagree more” with Warren’s view of the SEC’s efforts to improve disclosure effectiveness.
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