House Approps with SEC Chair White
House Appropriations Subcommittee on Financial Services
“Budget Hearing – Securities and Exchange Commission”
Wednesday, April 15, 2015
Key Topics & Takeaways
- Uniform Fiduciary Rule: Chair Mary Jo White called the fiduciary standard “an extraordinarily important area” and commented that it should not be considered a violation, “per se,” of any fiduciary standard to charge a commission.
- Market Structure: White said that ensuring market resiliency of critical market infrastructures is a major priority and that she was very pleased to implement Regulation SCI last year to make technology rules mandatory across critical market infrastructures.
- Regulation and Market Liquidity: White stated that the SEC would measure the Volcker Rule’s impact on markets once it has gone into effect in July by completing an economic analysis of the market before and after the rule was adopted.
- FSOC and Systemic Risk: White stated that once a firm is designated as a SIFI there is should be a way for it to be de-designated.
- SEC Rulemakings: White stated that the SEC still needs to complete rulemakings under Title VII of Dodd-Frank and executive compensation. She also noted that crowdfunding rulemaking is “enormously important” adding that it is the last significant remaining rulemaking from the JOBS Act.
Speakers
- Mary Jo White, Chair, Securities and Exchange Commission
Opening Statements
In his opening statement, Chairman Ander Crenshaw (R-Fla.) said the Securities and Exchange Commission (SEC) plays an important role in encouraging capital formation, maintaining the capital markets, and protecting consumers, and added that a well-functioning SEC is critical to keeping the markets sound and operating efficiently. He stated that discussions of budget are not just about the amount of money appropriated to the SEC, but how it would be allocated, and noted that the SEC’s budget has increased by over 255 percent since 2001.
Crenshaw expressed interest in hearing what the SEC is doing to increase market liquidity. He said he hears about “burdensome and overlapping regulations” creating a lack of liquidity that can lead to damaging volatility with far reaching impacts on economic growth. He was also critical of the Financial Stability Oversight Council (FSOC), saying there should be more focus on giving firms the opportunity to de-risk prior to being designated for enhanced prudential regulation, adding that the FSOC should not be in the business of mitigating risk in this way.
On the issue of a uniform fiduciary standard, Crenshaw noted that he sent a letter to Office of Management and Budget (OMB) Director Shaun Donovan together with Sen. John Boozman (R-Ark.) stressing that the SEC should take the lead on the fiduciary standard. He stressed that the Dodd-Frank Act specifically assigned this responsibility to the SEC, not the Department of Labor (DOL).
In his opening statement, Ranking Member Jose Serrano (D-N.Y.) said the SEC’s budget should continue to grow because the markets it oversees have grown larger and more complex. He said he was pleased to increase the agency’s budget last year, but that the appropriations process as a whole was a source of concern to him. He was very critical of the cromnibus bill for including controversial riders that “opened up loopholes in Dodd-Frank” and called them an impediment to bipartisan agreement.
Testimony
In her testimony, SEC Chair Mary Jo White stressed that the SEC budget must enable the agency to keep pace with U.S. securities markets that are complex and constantly evolving. She said key priority areas would be: 1) increasing examination coverage of investment advisors and key entities; 2) further leveraging technology to improve efficiency; 3) expanding enforcement programs and investigative capabilities; 4) strengthening economic and risk analysis functions; and 5) hiring the experts necessary to meet the SEC’s vast responsibilities.
Question and Answer
Uniform Fiduciary Rule
Crenshaw repeated his earlier statement that the Dodd-Frank Act gave the SEC the responsibility to develop a uniform fiduciary definition and that the SEC should act in this area before the DOL. He asked if the SEC and the DOL are coordinating.
White called the fiduciary standard “an extraordinarily important area” that the SEC has been looking into for many years. She said she has “intensely studied” the issue and decided that the Commission should proceed under Section 913 of Dodd-Frank, which contained a number of parameters addressing the existing marketplace and current broker-dealer model. She commented that it should not be considered a “per se” violation of the standard for any fiduciary to charge a commission. White stated that achieving the right balance on a rule will be very difficult, and said a standard that would deprive investors of reliable, reasonably priced advice would be a failure.
Rep. Jaime Herrera Beutler (R-Wash.) asked if the SEC’s involvement in the fiduciary standard is the first step in a broader effort to harmonize the registered investment adviser (RIA) and broker dealer industries, or if it is simply to rectify the individual issue of investor confusion. White explained that the SEC is focused on the uniform fiduciary standard as set forth by Section 913 of Dodd-Frank.
SEC Budget
Crenshaw noted that the SEC got “a pretty generous increase” in its budget last year, and asked what the Commission looks in terms of being more efficient and cutting costs. White answered that she goes through a very thorough process to identify the agency’s most compelling needs so that the SEC can “pinpoint” in great detail where it needs more funding.
Serrano asked White to comment on the effects of sequestration and stated his belief that the lack of SEC oversight helped cause the financial crisis. White responded that sequestration had a very negative effect on the SEC, especially with respect to its technology projects that were underfunded and slowed in their progress.
MarketStructure
Rep. Steve Womack (R-Ark.) said trading glitches which had caused flash crashes have highlighted gaps in the SEC’s regulatory regime. He noted that two industry groups were formed to address such errors and developed their own sets of suggestions, and asked if the SEC would develop a core set of detailed policies across trading venues. White said market resiliency for critical market infrastructures is a major priority for her, and that she was very pleased to implement Regulation SCI last year to make SEC technology rules mandatory across critical market infrastructures. She further commented that suggestions received from DTCC and NASDAQ have been very helpful for the SEC.
Womack asked if the SEC is concerned that access fees and rebates are contributing to fragmentation in the equities market. White said the Division of Trading and Markets is undertaking a comprehensive market structure review that includes short-term initiatives to increase transparency in dark pools and enforcement actions meant to optimize markets for investors and companies looking to raise capital. She said the SEC is looking into whether access fees and rebates distort the market price discovery process and whether they should be reduced or eliminated.
Cross-Border Regulation
Rep. Sanford Bishop (D-Ga.) said the SEC and Commodity Futures Trading Commission (CFTC) are both required to implement rules to increase transparency in the swaps market. He noted the CFTC has heard concerns regarding the international reach of its rules, and asked about the SEC’s experience with foreign regulators. He asked if any foreign government has expressed concern, or if this is instead driven by the U.S. investment banking community.
White commented that the swaps market is “uniquely global” and that discussions are still going on between the SEC, CFTC, and foreign regulators on issues of recognition and substituted compliance. She stated that foreign regulators have expressed concern and have stated that consistency of regulation will be essential.
Regulation and Market Liquidity
Rep. Tom Graves (R-Ga.) explained that while the Volcker Rule has good intentions, the complexity of new rules and regulations puts pressure on markets. White stated that the SEC would measure the Volcker Rule’s impact once it has gone into effect by completing an economic analysis of the markets before and after the rule was adopted.
Herrera Beutler asked if the lack of liquidity in the financial markets is a concern or major risk and if the SEC should be examining the regulatory framework to address this risk. White stated that all of the U.S. financial regulators are focused on the lack of liquidity due to the potential of rising interest rates. She continued that the Volcker Rule cannot currently be impacting liquidity because it does not go into effect until July.
White mentioned that the SEC’s Investment Management Division has put out guidance to firms alerting them of the risk interest rate increases so firms can look at their own risk management and portfolios.
FSOCand Systemic Risk
Crenshaw asked White what her thoughts were regarding financial institutions de-risking their activities before being designated as SIFIs by the FSOC. White explained that a number of interested parties have made suggestions to improve the transparency of test results. She continued that there is a process for a designated firm to become undesignated.
Crenshaw then asked whether she believes funds are risky. White stated that FSOC is looking at activities within the asset management industry and is considering whether there needs to be a regulatory response.
SECRulemakings
Serrano asked White which Dodd-Frank rulemakings still need to be done by the SEC. White stated that the SEC still needs to complete work on Title VII rules for securities based swaps as well as rules on executive compensation.
Yoder asked White if the SEC plans to engage in a rulemaking on universal proxy ballots. White explained that the Investor Advisory Committee is interested in the issue, but that while it is under discussion, it is not on the agenda at the moment.
Yoder then asked if there was a timeline on crowdfunding rulemaking. White stated that this rulemaking is “enormously important” and is the last significant remaining rulemaking from the JOBS Act. She continued that staff is progressing on this.
Herrera Beutler asked White about the SEC finalizing the pay ratio rule this year, questioning whether it relates to the role of the SEC. White explained that it is a mandated rulemaking by Congress and therefore they are obligated to proceed.
For more information on this hearing, please click here.
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House Appropriations Subcommittee on Financial Services
“Budget Hearing – Securities and Exchange Commission”
Wednesday, April 15, 2015
Key Topics & Takeaways
- Uniform Fiduciary Rule: Chair Mary Jo White called the fiduciary standard “an extraordinarily important area” and commented that it should not be considered a violation, “per se,” of any fiduciary standard to charge a commission.
- Market Structure: White said that ensuring market resiliency of critical market infrastructures is a major priority and that she was very pleased to implement Regulation SCI last year to make technology rules mandatory across critical market infrastructures.
- Regulation and Market Liquidity: White stated that the SEC would measure the Volcker Rule’s impact on markets once it has gone into effect in July by completing an economic analysis of the market before and after the rule was adopted.
- FSOC and Systemic Risk: White stated that once a firm is designated as a SIFI there is should be a way for it to be de-designated.
- SEC Rulemakings: White stated that the SEC still needs to complete rulemakings under Title VII of Dodd-Frank and executive compensation. She also noted that crowdfunding rulemaking is “enormously important” adding that it is the last significant remaining rulemaking from the JOBS Act.
Speakers
- Mary Jo White, Chair, Securities and Exchange Commission
Opening Statements
In his opening statement, Chairman Ander Crenshaw (R-Fla.) said the Securities and Exchange Commission (SEC) plays an important role in encouraging capital formation, maintaining the capital markets, and protecting consumers, and added that a well-functioning SEC is critical to keeping the markets sound and operating efficiently. He stated that discussions of budget are not just about the amount of money appropriated to the SEC, but how it would be allocated, and noted that the SEC’s budget has increased by over 255 percent since 2001.
Crenshaw expressed interest in hearing what the SEC is doing to increase market liquidity. He said he hears about “burdensome and overlapping regulations” creating a lack of liquidity that can lead to damaging volatility with far reaching impacts on economic growth. He was also critical of the Financial Stability Oversight Council (FSOC), saying there should be more focus on giving firms the opportunity to de-risk prior to being designated for enhanced prudential regulation, adding that the FSOC should not be in the business of mitigating risk in this way.
On the issue of a uniform fiduciary standard, Crenshaw noted that he sent a letter to Office of Management and Budget (OMB) Director Shaun Donovan together with Sen. John Boozman (R-Ark.) stressing that the SEC should take the lead on the fiduciary standard. He stressed that the Dodd-Frank Act specifically assigned this responsibility to the SEC, not the Department of Labor (DOL).
In his opening statement, Ranking Member Jose Serrano (D-N.Y.) said the SEC’s budget should continue to grow because the markets it oversees have grown larger and more complex. He said he was pleased to increase the agency’s budget last year, but that the appropriations process as a whole was a source of concern to him. He was very critical of the cromnibus bill for including controversial riders that “opened up loopholes in Dodd-Frank” and called them an impediment to bipartisan agreement.
Testimony
In her testimony, SEC Chair Mary Jo White stressed that the SEC budget must enable the agency to keep pace with U.S. securities markets that are complex and constantly evolving. She said key priority areas would be: 1) increasing examination coverage of investment advisors and key entities; 2) further leveraging technology to improve efficiency; 3) expanding enforcement programs and investigative capabilities; 4) strengthening economic and risk analysis functions; and 5) hiring the experts necessary to meet the SEC’s vast responsibilities.
Question and Answer
Uniform Fiduciary Rule
Crenshaw repeated his earlier statement that the Dodd-Frank Act gave the SEC the responsibility to develop a uniform fiduciary definition and that the SEC should act in this area before the DOL. He asked if the SEC and the DOL are coordinating.
White called the fiduciary standard “an extraordinarily important area” that the SEC has been looking into for many years. She said she has “intensely studied” the issue and decided that the Commission should proceed under Section 913 of Dodd-Frank, which contained a number of parameters addressing the existing marketplace and current broker-dealer model. She commented that it should not be considered a “per se” violation of the standard for any fiduciary to charge a commission. White stated that achieving the right balance on a rule will be very difficult, and said a standard that would deprive investors of reliable, reasonably priced advice would be a failure.
Rep. Jaime Herrera Beutler (R-Wash.) asked if the SEC’s involvement in the fiduciary standard is the first step in a broader effort to harmonize the registered investment adviser (RIA) and broker dealer industries, or if it is simply to rectify the individual issue of investor confusion. White explained that the SEC is focused on the uniform fiduciary standard as set forth by Section 913 of Dodd-Frank.
SEC Budget
Crenshaw noted that the SEC got “a pretty generous increase” in its budget last year, and asked what the Commission looks in terms of being more efficient and cutting costs. White answered that she goes through a very thorough process to identify the agency’s most compelling needs so that the SEC can “pinpoint” in great detail where it needs more funding.
Serrano asked White to comment on the effects of sequestration and stated his belief that the lack of SEC oversight helped cause the financial crisis. White responded that sequestration had a very negative effect on the SEC, especially with respect to its technology projects that were underfunded and slowed in their progress.
MarketStructure
Rep. Steve Womack (R-Ark.) said trading glitches which had caused flash crashes have highlighted gaps in the SEC’s regulatory regime. He noted that two industry groups were formed to address such errors and developed their own sets of suggestions, and asked if the SEC would develop a core set of detailed policies across trading venues. White said market resiliency for critical market infrastructures is a major priority for her, and that she was very pleased to implement Regulation SCI last year to make SEC technology rules mandatory across critical market infrastructures. She further commented that suggestions received from DTCC and NASDAQ have been very helpful for the SEC.
Womack asked if the SEC is concerned that access fees and rebates are contributing to fragmentation in the equities market. White said the Division of Trading and Markets is undertaking a comprehensive market structure review that includes short-term initiatives to increase transparency in dark pools and enforcement actions meant to optimize markets for investors and companies looking to raise capital. She said the SEC is looking into whether access fees and rebates distort the market price discovery process and whether they should be reduced or eliminated.
Cross-Border Regulation
Rep. Sanford Bishop (D-Ga.) said the SEC and Commodity Futures Trading Commission (CFTC) are both required to implement rules to increase transparency in the swaps market. He noted the CFTC has heard concerns regarding the international reach of its rules, and asked about the SEC’s experience with foreign regulators. He asked if any foreign government has expressed concern, or if this is instead driven by the U.S. investment banking community.
White commented that the swaps market is “uniquely global” and that discussions are still going on between the SEC, CFTC, and foreign regulators on issues of recognition and substituted compliance. She stated that foreign regulators have expressed concern and have stated that consistency of regulation will be essential.
Regulation and Market Liquidity
Rep. Tom Graves (R-Ga.) explained that while the Volcker Rule has good intentions, the complexity of new rules and regulations puts pressure on markets. White stated that the SEC would measure the Volcker Rule’s impact once it has gone into effect by completing an economic analysis of the markets before and after the rule was adopted.
Herrera Beutler asked if the lack of liquidity in the financial markets is a concern or major risk and if the SEC should be examining the regulatory framework to address this risk. White stated that all of the U.S. financial regulators are focused on the lack of liquidity due to the potential of rising interest rates. She continued that the Volcker Rule cannot currently be impacting liquidity because it does not go into effect until July.
White mentioned that the SEC’s Investment Management Division has put out guidance to firms alerting them of the risk interest rate increases so firms can look at their own risk management and portfolios.
FSOCand Systemic Risk
Crenshaw asked White what her thoughts were regarding financial institutions de-risking their activities before being designated as SIFIs by the FSOC. White explained that a number of interested parties have made suggestions to improve the transparency of test results. She continued that there is a process for a designated firm to become undesignated.
Crenshaw then asked whether she believes funds are risky. White stated that FSOC is looking at activities within the asset management industry and is considering whether there needs to be a regulatory response.
SECRulemakings
Serrano asked White which Dodd-Frank rulemakings still need to be done by the SEC. White stated that the SEC still needs to complete work on Title VII rules for securities based swaps as well as rules on executive compensation.
Yoder asked White if the SEC plans to engage in a rulemaking on universal proxy ballots. White explained that the Investor Advisory Committee is interested in the issue, but that while it is under discussion, it is not on the agenda at the moment.
Yoder then asked if there was a timeline on crowdfunding rulemaking. White stated that this rulemaking is “enormously important” and is the last significant remaining rulemaking from the JOBS Act. She continued that staff is progressing on this.
Herrera Beutler asked White about the SEC finalizing the pay ratio rule this year, questioning whether it relates to the role of the SEC. White explained that it is a mandated rulemaking by Congress and therefore they are obligated to proceed.
For more information on this hearing, please click here.