SEC Open Meeting August 23rd, 2023
US Securities and Exchange Commission
Open Meeting
Wednesday, August 23rd, 2023
Topline
- Both items were approved by a vote of 3-2, with Chair Gensler, Commissioner Crenshaw, and Commissioner Lizarraga voting yes and Commissioners Peirce and Uyeda in opposition.
ITEM 1: Exemption for Certain Exchange Members
The Commission considered whether to adopt rule amendments to narrow an exemption from the requirement under the Securities Exchange Act of 1934 that any Commission-registered broker-dealer become a member of a national securities association if it effects securities transactions elsewhere than an exchange where it is a member.
Staff Discussion
Haoxiang Zhu, Director, Division of Trading and Markets
Zhu recommended that the Commission consider the rule, noting it would require broker dealers to join a registered national security association. He added that the current state of security trading is highly automated and complex.
Michael Bradley, Attorney-Advisor, Division of Trading and Markets
Bradley explained how the proposed rule would replace the training exemption with two or more expectations for broker-dealers. He noted that when broker-dealers are not FINRA members, they do not have to follow FINRA rules. Bradley concluded that requiring all dealers to be FINRA members will result in a greater degree of autonomy.
Jessica Wachter, Chief Economist & Director of the Division of Economic and Risk Analysis
Wachter explained that the amendments would tighten the exemption for FINRA registration and that they would help Treasury overall. She noted the rules will impose additional costs, including a FINRA membership.
Commissioner Questions and Comments
Commissioner Hester Peirce
Peirce acknowledged that an established regulatory framework is important but said she cannot support a rule that rejects a commonsense approach. Peirce said that the rules of these exchanges can vary and don’t extend to all exchange trading. Peirce also expressed concerns about FINRA, increased costs for individuals, and how the rule could impact diversity. She asked Wachter how she views the relationship between consolidation and competition. Wachter said consolidation in general is expected to reduce competition and that a decrease in competition is not a concert at this time.
Commissioner Caroline Crenshaw
Crenshaw discussed how inconsistent oversight is exacerbated by varying rules. She emphasized her support for the rule, noting that the amendments will ensure that FINRA has membership-based oversight to broker-dealers.
Commissioner Mark Uyeda
Uyeda noted that the trading market has changed significantly, and highlighted FINRA’s status as the only securities association. He agreed that firms should have to join FINRA regardless of the cost of membership but said the Commission should not treat FINRA as the SEC’s deputy securities regulator.
Uyeda asked Zhu how the rule will impact regular broker-dealers. Zhu requested that the conversation be saved for a later date, explaining that it’s too soon to tell.
Uyeda closed by citing his disagreement with the rule due to its uncertainties.
Commissioner Jaime Lizarraga
Lizarraga agreed that the amendment would bring transparency and level the playing field between current FINRA members and non-members. Lizarraga concluded by expressing his support for the rule.
Chair Gary Gensler
Gensler began his remarks by expressing support for the rule, explaining that it will modernize the rule to enhance cross-market trading, which was last expanded in 1976. He said that the current, unmodified rule has led to regulatory gaps and discussed how the updated rule would allow for consistent and robust oversight of US Treasury markets and give FINRA requirements for post-trade activity.
Vote
Chairman Gensler called the role. The item was approved 3-2. Peirce and Uyeda voted no.
ITEM 2: Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews
The Commission considered whether to adopt rules and amendments under the Investment Advisers Act of 1940 (“Advisers Act”) for private fund advisers, and whether to adopt amendments to the compliance rule under the Advisers Act.
Staff Discussion
William A. Birdthistle, Director, Division of Investment Management
Birdthistle explained how these rules address the risks and harms identified by the Commission. He noted that the current rules have resulted in a lack of transparency and a conflict of interest between private advisers and investors. Birdthistle added that private fund investments are often opaque.
Tom Strumpf, Senior Counsel, Division of Investment Management
Strumpf discussed provisions regarding quarterly liquid fund assessment metrics. He explained that legacy status will only apply to the government agreements that are entered in writing and said there should be a financial audit for each private fund that’s advised.
Jessica Wachter, Chief Economist and Director of the Division of Economic and Risk Analysis
Wachter noted that private fund disclosures make it hard for investors to know what they are paying for and why. She emphasized that the final rules ensure more disclosure and transparency, which would encourage and help competition.
Commissioner Questions and Comments
Commissioner Hester Peirce
Peirce described the rulemaking as both illegal and harmful. She noted that the answer to the issues at hand is not an increase in regulation, and argued the rulemaking would create more challenges than intended or needed. Peirce concluded that the passage of this set of amendments and rules would ruin the framework that private funds follow.
Peirce asked Wachter if advisory fees will increase due to this rulemaking. Wachter said that funds will compete better under the rulemaking. Peirce also asked Wachter if this rulemaking would hurt smaller advisers. Wachter said it will help all advisers, regardless of their size.
Commissioner Caroline Crenshaw
Crenshaw noted that private funds play an important role in the US economy, while voicing her support for the rulemaking.
Commissioner Mark Uyeda
Uyeda disapproved of the rulemaking in his remarks, specifically voicing concerns regarding the rulemaking’s negative impact on minority and women-owned firms.
Commissioner Jaime Lizarraga
Lizarraga said the rulemaking will level the playing field for all investors of all sizes. He concluded that market transparency reduces investor harm and classified the rulemaking as a way to protect all investors.
Chair Gary Gensler
Gensler noted his support for the amendments and rule. He explained that the items under consideration would enhance investment advisers’ integrity and transparency and said their adoption would cause competition to flourish.
Vote
Chairman Gensler called the role. The item was approved 3-2. Peirce and Uyeda voted no.
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