HFSC Hearing on the SEC with Chair White
House Financial Services Committee
Examining the SEC’s Agenda, Operations, and FY 2018 Budget Request
Tuesday, November 15, 2016
Key Topics & Takeaways
- Midnight Rulemaking: ChairmanHensarling (R-Texas) stated that as presidential administrations change, there is often a rush to finish rulemakings. He and other Republicans strongly urged SEC Chair White to resist this temptation to finalize any regulations in deference to the rights of the coming Trump presidency.
- Liquidity: White stated that the SEC has not yet found regulations to be causing problems with liquidity, but that it continues to study the issue. She added that by most measures, there has been no serious deterioration in liquidity.
- Equity Market Structure: Asked by Rep. Garrett (R-N.J.) about the SEC’s review of equity market structure, White said the SEC is undertaking a comprehensive review of fundamental structural issues, and that Regulation NMS is “front and center.”
Witness
- Mary Jo White, Chair, Securities and Exchange Commission
Opening Statements
In his opening statement, Chairman Jeb Hensarling (R-Texas) noted Securities and Exchange Commission (SEC) Chair Mary Jo White’s recent announcement that she would step down at the end of the Obama Administration. He lauded her distinguished service and independent judgement, and praised her as “one of the few” witnesses from the Administration that has never requested an “artificial time limit” for a hearing and for always making herself and her staff available to the Committee.
However, Hensarling pointed out that he and White still have many policy disagreements. He was critical of the SEC’s “ongoing failure” to develop a capital formation agenda and its refusal to act on recommendations from its own Small Business Capital Formation Forum. He also lamented the SEC’s “languishing” efforts to simplify its disclosure regime, and its requests for higher funding given the growing national debt. Hensarling further called increasing user fees to fund the SEC a “tax on capital formation.”
In closing, Hensarling stated that as presidential administrations change, there is often a rush to finish rulemakings. He strongly urged White to resist this temptation to finalize any regulations in deference to the rights of the coming Trump presidency.
Ranking Member Maxine Waters (D-Calif.) commented that she was “appalled” that the reaction on Wall Street to the election of Donald Trump was record-high bank stocks, stating this was the result of expectations that financial regulations that made investors and consumers safer would be weakened. However, she opined that Trump does not have clear positions “on anything,” and claimed that it is unclear what positions he will take on financial regulation. She said she would be curious to see how House Republicans will react to his “wide-ranging, sometimes progressive” agenda.
Rep. Scott Garrett (R-N.J.) also thanked White for her work, but echoed concerns that the SEC has not “organically developed” a capital formation agenda, instead waiting for congressional mandates to modernize securities laws. He also said the SEC has not done an adequate job asserting its authority when other regulatory bodies, such as the Financial Stability Board (FSB) and Financial Stability Oversight Council (FSOC), enter its space.
In her testimony, SEC Chair Mary Jo White said the SEC is a critical independent agency in charge of overseeing the strongest markets in the world, and that it has built important new regulatory regimes for capital raising, asset managers, critical market infrastructures, and enforcement. She highlighted that in the past year, the Commission has moved a series of consequential measures, including rules for the transparency of alternative trading systems (ATSs) and order handling, mutual funds and exchange-traded funds, local and regional securities offerings, and security-based swaps and clearing standards.
However, White said significant challenges remain to overseeing the increasingly complex securities industry. She stressed the need for adequate funding, cautioning that current resources are insufficient to fulfill the SEC’s responsibilities and that cuts would imperil progress already made.
Questions and Answers
Liquidity and the Impact of Regulations
Hensarling noted that significant attention has been given to concerns about liquidity in fixed income markets, and that many experts have pointed to the impact of post-crisis regulations as a factor. He asked whether the SEC has been able to determine whether regulations such as the Volcker Rule and Basel III have affected market liquidity. Rep. Andy Barr (R-Ky.) similarly commented that he continues to see evidence of regulatory impacts on liquidity.
White replied that the SEC has not yet found regulations to be causing problems with liquidity, but that it continues to study the issue. She added that by most measures, there has been no serious deterioration in liquidity.
Rep. Ed Royce (R-Calif.) stated that European regulators have raised concerns about how post-crisis regulations fit together, with former Commissioner Jonathan Hill concluding that the various layers of regulations could have been better aligned. White explained that the SEC’s economists are studying the impact of regulations and will be reporting to Congress about their effect on liquidity and capital formation next year.
Volcker Rule
Hensarling said that during the adopting phase of the Volcker Rule, the five agencies involved published conflicting guidance. He asked what efforts are being made to correct this. White answered that the regulators have working groups and are coordinating enforcement to be as consistent as possible.
Equity Market Structure
Garrett noted that the term of the Equity Market Structure Advisory Committee (EMSAC) is slated to end in early 2017, and asked if White intends to renew its mandate. White answered that she believes it should be renewed, and that she will be discussing this with the other commissioners.
Garrett then asked if any other industry representatives should be added to the EMSAC. White said the goal of the makeup of the EMSAC was balance, but that retail brokerages and exchanges should be better represented.
Asked by Garrett about the SEC’s review of equity market structure, White said the SEC is undertaking a comprehensive review of fundamental structural issues, and that Regulation NMS is “front and center.”
Rep. Stephen Lynch (D-Mass.) recalled that he had offered a proposal to address the maker-taker model and conflicts of interest, and asked if anything might come to fruition in the space in White’s closing months with the SEC. White said the SEC is doing a comprehensive pilot on access fees, and has a proposal out on greater transparency for order routing, but that she cannot say something will be finalized before she leaves.
Rep. Robert Pittenger (R-N.C.) asked what the most significant issues are that small companies have with the current market structure. White answered that the availability of secondary market liquidity is a concern, but that the tick-size pilot is meant to address this. She also stated that the SEC is looking at all its regulations to determine whether they are unnecessarily inhibiting smaller companies from going public.
Rep. French Hill (R-Ark.) asked White if she has any opinion on former Commissioner Daniel Gallagher’s doubts that exchanges should remain self-regulatory organizations. White said the SEC continues to consider this, but that she has not yet formed an opinion.
Dealer Registration
Rep. Carolyn Maloney (D-N.Y.) noted that most active dealers in the inter-dealer market for government securities are high-frequency trading firms, and asked why these principal trading firms are not registered with the SEC as dealers. White said the SEC’s staff is working on whether public guidance is needed on the line between dealers and traders.
Financial Technology
Rep. Randy Neugebauer (R-Texas), noting that the SEC had just held its first ever forum on financial technology (fintech), asked what the SEC’s next steps will be. White answered that the SEC has formed a fintech working group to make specific recommendations on what next steps should be, and is looking at new and existing regulations to appropriately foster innovation while protecting investors. She added that the areas of focus will be distributed ledger technology in the settlement and clearing space; robo-advisors and fiduciary duties; and marketplace lending.
Neugebauer commented that in addition to regulation, the SEC should be considering how it can facilitate greater innovation, and that it should include industry experts in its working groups.
Rep. Nydia Velazquez (D-N.Y.) asked whether the SEC should be the primary regulator for fintech. White said she does believe the SEC should take the lead and be proactive, as it is uniquely involved in the set of fintech issues.
Rep. Randy Hultgren (R-Ill.) asked when the SEC’s working group on fintech issues will make recommendations and what kinds of questions they are considering. White declined to give a timeline, but explained that she asked the working group to make concrete recommendations on what the SEC needs to do to support innovation, whether it is through rulemaking or other avenues such as clarifications, concept releases, guidance, and messaging.
Midnight Rulemakings
Rep. Blaine Luetkemeyer (R-Mo.) asked whether the Obama Administration has made any requests or if White is considering any “midnight rules” to release before the start of the Trump presidency. White denied that there are any such intentions, and explained that the SEC’s agenda for 2016 was set out in February.
Rep. Bill Huizenga (R-Mich.) called to mind reports that regulators might try to rush to finalize incentive compensation rules prior to the start of the Trump presidency. He asked if White would commit to staying any vote on the rules until after the inauguration. White replied that the staff is working through comments. She said rulemaking does not benefit from being rushed, but she would not commit to the timing on any vote and that the incentive compensation rules have been “proceeding apace” all year.
Rep. Sean Duffy (R-Wis.) expressed similar concerns regarding a rush on new rules, and said it would be better to wait until the Trump presidency begins. He then asked what rules White would like to see finalized before the end of the year. White listed capital margin segregation, rules for derivatives use by asset managers, and Rule 30e-3 on the provision of mutual fund reports electronically.
Duffy suggested that White “hold off as much as possible” on advancing rulemakings.
Derivatives
Rep. David Scott (D-Ga.) stated that he has been assessing the numerous rules surrounding derivatives. He asked about the status of agreeing to equivalence with European Union standards, and how Brexit might influence the issue. White said the SEC’s cross-border proposal is under the rubric of substituted compliance, and that the Commodity Futures Trading Commission has been more involved in discussions with the EU. She added that Brexit is “still sorting itself out.”
DOL Fiduciary Rule
Rep. Ann Wagner (R-Mo.) asked if White is concerned about the impact of the Department of Labor’s (DOL’s) fiduciary rule on the retirement savings market. White said she is concerned about anything that would limit access to retirement advice, and that the SEC is in discussions with the DOL about where their jurisdictions overlap and how to coordinate and minimize negative impacts.
FSOC Designations
Rep. Keith Rothfus (R-Pa.) asked why the FSOC has not taken an activities-based approach with insurers, as it has with the asset management industry. White said the FSOC has not ruled out revisiting its designation of insurance firms, but that “lots of analysis” of the insurance industry was done and the Council is confident about its determinations.
Rothfus raised concerns about the FSB “front running” the FSOC’s decisions on systemic risk designations, and whether the she has ever felt pressure on the FSOC to enact FSB policies. White said FSB and FSOC processes are separate, and that she has never felt such pressures.
Floating NAV
Rep. Gwen Moore (D-Wis.) asked White if she has changed her mind about the efficacy of the floating net asset value (NAV) rule for money market funds. White replied that the SEC continues to review the impact of all tis rules, but noted that the impacts of the floating NAV rule have occurred largely as predicted in cost-benefit analysis.
Rep. Bruce Poliquin (R-Maine) said the SEC is the primary regulator for asset managers, and asked why it does not simply suggest to the FSOC that it take the designation of asset managers off the table. White said that rather than stopping all consideration, the FSOC would “continue looking at it.”
Poliquin said the designation of an asset manager would bring on new regulations that would hurt returns for investors. He reiterated that it would be better to take the possibility out of consideration.
Municipal Disclosure
Moore recalled that the SEC in 2012 published a report that recommended allowing it to directly regulate municipal bond disclosures. She asked, in light of the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, whether Congress should act on this recommendation. White replied that MCDC “was enormously effective” and that the SEC tried to calibrate it to change conduct and disclosures.
For more information on this hearing, please click here.
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House Financial Services Committee
Examining the SEC’s Agenda, Operations, and FY 2018 Budget Request
Tuesday, November 15, 2016
Key Topics & Takeaways
- Midnight Rulemaking: ChairmanHensarling (R-Texas) stated that as presidential administrations change, there is often a rush to finish rulemakings. He and other Republicans strongly urged SEC Chair White to resist this temptation to finalize any regulations in deference to the rights of the coming Trump presidency.
- Liquidity: White stated that the SEC has not yet found regulations to be causing problems with liquidity, but that it continues to study the issue. She added that by most measures, there has been no serious deterioration in liquidity.
- Equity Market Structure: Asked by Rep. Garrett (R-N.J.) about the SEC’s review of equity market structure, White said the SEC is undertaking a comprehensive review of fundamental structural issues, and that Regulation NMS is “front and center.”
Witness
- Mary Jo White, Chair, Securities and Exchange Commission
Opening Statements
In his opening statement, Chairman Jeb Hensarling (R-Texas) noted Securities and Exchange Commission (SEC) Chair Mary Jo White’s recent announcement that she would step down at the end of the Obama Administration. He lauded her distinguished service and independent judgement, and praised her as “one of the few” witnesses from the Administration that has never requested an “artificial time limit” for a hearing and for always making herself and her staff available to the Committee.
However, Hensarling pointed out that he and White still have many policy disagreements. He was critical of the SEC’s “ongoing failure” to develop a capital formation agenda and its refusal to act on recommendations from its own Small Business Capital Formation Forum. He also lamented the SEC’s “languishing” efforts to simplify its disclosure regime, and its requests for higher funding given the growing national debt. Hensarling further called increasing user fees to fund the SEC a “tax on capital formation.”
In closing, Hensarling stated that as presidential administrations change, there is often a rush to finish rulemakings. He strongly urged White to resist this temptation to finalize any regulations in deference to the rights of the coming Trump presidency.
Ranking Member Maxine Waters (D-Calif.) commented that she was “appalled” that the reaction on Wall Street to the election of Donald Trump was record-high bank stocks, stating this was the result of expectations that financial regulations that made investors and consumers safer would be weakened. However, she opined that Trump does not have clear positions “on anything,” and claimed that it is unclear what positions he will take on financial regulation. She said she would be curious to see how House Republicans will react to his “wide-ranging, sometimes progressive” agenda.
Rep. Scott Garrett (R-N.J.) also thanked White for her work, but echoed concerns that the SEC has not “organically developed” a capital formation agenda, instead waiting for congressional mandates to modernize securities laws. He also said the SEC has not done an adequate job asserting its authority when other regulatory bodies, such as the Financial Stability Board (FSB) and Financial Stability Oversight Council (FSOC), enter its space.
In her testimony, SEC Chair Mary Jo White said the SEC is a critical independent agency in charge of overseeing the strongest markets in the world, and that it has built important new regulatory regimes for capital raising, asset managers, critical market infrastructures, and enforcement. She highlighted that in the past year, the Commission has moved a series of consequential measures, including rules for the transparency of alternative trading systems (ATSs) and order handling, mutual funds and exchange-traded funds, local and regional securities offerings, and security-based swaps and clearing standards.
However, White said significant challenges remain to overseeing the increasingly complex securities industry. She stressed the need for adequate funding, cautioning that current resources are insufficient to fulfill the SEC’s responsibilities and that cuts would imperil progress already made.
Questions and Answers
Liquidity and the Impact of Regulations
Hensarling noted that significant attention has been given to concerns about liquidity in fixed income markets, and that many experts have pointed to the impact of post-crisis regulations as a factor. He asked whether the SEC has been able to determine whether regulations such as the Volcker Rule and Basel III have affected market liquidity. Rep. Andy Barr (R-Ky.) similarly commented that he continues to see evidence of regulatory impacts on liquidity.
White replied that the SEC has not yet found regulations to be causing problems with liquidity, but that it continues to study the issue. She added that by most measures, there has been no serious deterioration in liquidity.
Rep. Ed Royce (R-Calif.) stated that European regulators have raised concerns about how post-crisis regulations fit together, with former Commissioner Jonathan Hill concluding that the various layers of regulations could have been better aligned. White explained that the SEC’s economists are studying the impact of regulations and will be reporting to Congress about their effect on liquidity and capital formation next year.
Volcker Rule
Hensarling said that during the adopting phase of the Volcker Rule, the five agencies involved published conflicting guidance. He asked what efforts are being made to correct this. White answered that the regulators have working groups and are coordinating enforcement to be as consistent as possible.
Equity Market Structure
Garrett noted that the term of the Equity Market Structure Advisory Committee (EMSAC) is slated to end in early 2017, and asked if White intends to renew its mandate. White answered that she believes it should be renewed, and that she will be discussing this with the other commissioners.
Garrett then asked if any other industry representatives should be added to the EMSAC. White said the goal of the makeup of the EMSAC was balance, but that retail brokerages and exchanges should be better represented.
Asked by Garrett about the SEC’s review of equity market structure, White said the SEC is undertaking a comprehensive review of fundamental structural issues, and that Regulation NMS is “front and center.”
Rep. Stephen Lynch (D-Mass.) recalled that he had offered a proposal to address the maker-taker model and conflicts of interest, and asked if anything might come to fruition in the space in White’s closing months with the SEC. White said the SEC is doing a comprehensive pilot on access fees, and has a proposal out on greater transparency for order routing, but that she cannot say something will be finalized before she leaves.
Rep. Robert Pittenger (R-N.C.) asked what the most significant issues are that small companies have with the current market structure. White answered that the availability of secondary market liquidity is a concern, but that the tick-size pilot is meant to address this. She also stated that the SEC is looking at all its regulations to determine whether they are unnecessarily inhibiting smaller companies from going public.
Rep. French Hill (R-Ark.) asked White if she has any opinion on former Commissioner Daniel Gallagher’s doubts that exchanges should remain self-regulatory organizations. White said the SEC continues to consider this, but that she has not yet formed an opinion.
Dealer Registration
Rep. Carolyn Maloney (D-N.Y.) noted that most active dealers in the inter-dealer market for government securities are high-frequency trading firms, and asked why these principal trading firms are not registered with the SEC as dealers. White said the SEC’s staff is working on whether public guidance is needed on the line between dealers and traders.
Financial Technology
Rep. Randy Neugebauer (R-Texas), noting that the SEC had just held its first ever forum on financial technology (fintech), asked what the SEC’s next steps will be. White answered that the SEC has formed a fintech working group to make specific recommendations on what next steps should be, and is looking at new and existing regulations to appropriately foster innovation while protecting investors. She added that the areas of focus will be distributed ledger technology in the settlement and clearing space; robo-advisors and fiduciary duties; and marketplace lending.
Neugebauer commented that in addition to regulation, the SEC should be considering how it can facilitate greater innovation, and that it should include industry experts in its working groups.
Rep. Nydia Velazquez (D-N.Y.) asked whether the SEC should be the primary regulator for fintech. White said she does believe the SEC should take the lead and be proactive, as it is uniquely involved in the set of fintech issues.
Rep. Randy Hultgren (R-Ill.) asked when the SEC’s working group on fintech issues will make recommendations and what kinds of questions they are considering. White declined to give a timeline, but explained that she asked the working group to make concrete recommendations on what the SEC needs to do to support innovation, whether it is through rulemaking or other avenues such as clarifications, concept releases, guidance, and messaging.
Midnight Rulemakings
Rep. Blaine Luetkemeyer (R-Mo.) asked whether the Obama Administration has made any requests or if White is considering any “midnight rules” to release before the start of the Trump presidency. White denied that there are any such intentions, and explained that the SEC’s agenda for 2016 was set out in February.
Rep. Bill Huizenga (R-Mich.) called to mind reports that regulators might try to rush to finalize incentive compensation rules prior to the start of the Trump presidency. He asked if White would commit to staying any vote on the rules until after the inauguration. White replied that the staff is working through comments. She said rulemaking does not benefit from being rushed, but she would not commit to the timing on any vote and that the incentive compensation rules have been “proceeding apace” all year.
Rep. Sean Duffy (R-Wis.) expressed similar concerns regarding a rush on new rules, and said it would be better to wait until the Trump presidency begins. He then asked what rules White would like to see finalized before the end of the year. White listed capital margin segregation, rules for derivatives use by asset managers, and Rule 30e-3 on the provision of mutual fund reports electronically.
Duffy suggested that White “hold off as much as possible” on advancing rulemakings.
Derivatives
Rep. David Scott (D-Ga.) stated that he has been assessing the numerous rules surrounding derivatives. He asked about the status of agreeing to equivalence with European Union standards, and how Brexit might influence the issue. White said the SEC’s cross-border proposal is under the rubric of substituted compliance, and that the Commodity Futures Trading Commission has been more involved in discussions with the EU. She added that Brexit is “still sorting itself out.”
DOL Fiduciary Rule
Rep. Ann Wagner (R-Mo.) asked if White is concerned about the impact of the Department of Labor’s (DOL’s) fiduciary rule on the retirement savings market. White said she is concerned about anything that would limit access to retirement advice, and that the SEC is in discussions with the DOL about where their jurisdictions overlap and how to coordinate and minimize negative impacts.
FSOC Designations
Rep. Keith Rothfus (R-Pa.) asked why the FSOC has not taken an activities-based approach with insurers, as it has with the asset management industry. White said the FSOC has not ruled out revisiting its designation of insurance firms, but that “lots of analysis” of the insurance industry was done and the Council is confident about its determinations.
Rothfus raised concerns about the FSB “front running” the FSOC’s decisions on systemic risk designations, and whether the she has ever felt pressure on the FSOC to enact FSB policies. White said FSB and FSOC processes are separate, and that she has never felt such pressures.
Floating NAV
Rep. Gwen Moore (D-Wis.) asked White if she has changed her mind about the efficacy of the floating net asset value (NAV) rule for money market funds. White replied that the SEC continues to review the impact of all tis rules, but noted that the impacts of the floating NAV rule have occurred largely as predicted in cost-benefit analysis.
Rep. Bruce Poliquin (R-Maine) said the SEC is the primary regulator for asset managers, and asked why it does not simply suggest to the FSOC that it take the designation of asset managers off the table. White said that rather than stopping all consideration, the FSOC would “continue looking at it.”
Poliquin said the designation of an asset manager would bring on new regulations that would hurt returns for investors. He reiterated that it would be better to take the possibility out of consideration.
Municipal Disclosure
Moore recalled that the SEC in 2012 published a report that recommended allowing it to directly regulate municipal bond disclosures. She asked, in light of the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, whether Congress should act on this recommendation. White replied that MCDC “was enormously effective” and that the SEC tried to calibrate it to change conduct and disclosures.
For more information on this hearing, please click here.