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The Current Regulatory Environment

Remarks by Joseph Seidel, Chief Operating Officer for SIFMA, as prepared for delivery at the 2024 SIFMA C&L Annual Seminar.

Good morning.  I’m Joe Seidel, COO at SIFMA and I am delighted to be with you here in Orlando to provide some SIFMA perspectives on the current regulatory environment. I hope you have enjoyed the program so far.

I’m truly struck each year by the breadth, diversity and complexity of topics covered at this conference – which is a direct reflection of the portfolio of issues compliance and legal professionals must adapt to and manage on a day-to-day basis.

And that portfolio is ever-changing and ever-expanding because our regulatory environment is also always evolving. Many of these changes are good and necessary to ensure we have healthy and efficient markets.

Smart regulation addresses a need and takes advantage of input from all sides. Typically, most rulemaking and regulatory processes are precipitated by a market failure or at the clear direction of Congress. Then, typically, the failure is analyzed and/or Congress takes on a thorough period of analysis and public engagement to understand all the issues at play and to collect feedback from crucial stakeholders – through rounds of concept releases, ANPRs, meetings, roundtables, hearings, etc.

This public engagement is crucial – all are best served by our regulators and policymakers engaging with relevant stakeholders early and often – before pen hits paper to draft the rules.

More recently, however, much of the regulatory activity we have seen has not been precipitated by a visible market failure nor has it been at the direction of Congress.

Rather, it appears many of the rule proposals we have been grappling with seem to be more rooted in classic economic theories, rather than real-world experience or need. And while some theories may be valid to consider, there are also real-world considerations that will be critical to the success of any new proposal.

This is where SIFMA provides an important role in the rulemaking process.  It is our job as a voice for the market to bring complex market reality to what are often well-intended legal and economic theories.

Today we are endeavoring to do just that across many different agencies including the SEC, the Prudential regulators, the CFTC and the states. Hopefully, via constructive engagement, we can work closely with regulators to improve the quality of regulation and ensure that markets evolve in a manner that works best for investors, end-users and all market participants.

SEC

Today’s SEC is the center of much of the rulemaking that will be impacting the industry for the next several years.  To give a sense of scope of what has come and is coming out of the SEC:  since 2021, 31 new rulemakings have been proposed and finalized. Two new rules were finalized just in the first week of March. According to their latest regulatory agenda, the SEC intends to finalize another 19 rule proposals this year and we certainly take them at their word that they will complete a large portion of these.

Regulators should ensure their rules keep pace with markets, but transformative changes built at times more on theory than experience, must be thoughtfully crafted and fully vetted for indirect costs and cumulative effects.  Markets are resilient, but they are not invincible ecosystems, and we remain concerned that the high volume and speed of regulatory change proposed by the Commission, while well-intentioned, could result in negative market consequences for investors, end-users, businesses, and government.

We currently have under consideration several major SEC proposals each of which in and of themselves will bring enormous changes to market practices. These include proposals on predictive data analytics, custody, liquidity, swing pricing, Reg SCI, Reg ATS, money market funds, a new auction process for equity securities, best execution, tick size reform, and volume-based discount reforms in equity markets. If or when these proposals become final, they will then be put alongside active and ongoing implementations of T+1, Treasury clearing, securities lending, short sales, private funds, Form PF, a new dealer/trader rule, new cyber rules and Reg M along with many others.  In addition, the cloud of litigation hangs over a subset of these rules where time and effort spent on implementation may ultimately be thrown out.

There are many, many moving pieces here and a great deal of interconnectedness as well as uncertainty across markets on what the impacts will be of this unprecedented regulatory change.

Take a look at this graphic, which shows the interplay and interconnected nature of rules proposed or finalized over the past three years.

Based upon a diagram originally published by the Committee on Capital Markets Regulation; Remarks by Joseph Seidel, Chief Operating Officer for SIFMA, as prepared for delivery at the 2024 SIFMA C&L Annual Seminar.

Based upon a diagram originally published by the Committee on Capital Markets Regulation

These rules are not the result of any major market crisis or recent passage of major legislation. Each of these proposals brings material changes in how the market does business, has profound outcomes and carries a good deal of implementation risk with some probability of unforeseen circumstances. Given today’s legal, compliance, and litigation environment, what could possibly go wrong?

This is where Regulators need to understand the cumulative and overlapping nature of the proposed rules with each other and with existing rules across the regulatory regime.

If not thoughtfully considered this can easily lead to conflicts, duplication and fragmentation, which is a nightmare for professionals like those in the room. All of this eventually lands on your desk to figure out how to navigate on the implementation and compliance front for your firms.

Please know we at SIFMA are actively engaging, and using every lever available to prompt the SEC to thoughtfully and comprehensively consider their approach on each of these proposals.

Prudential Regulators

We also regularly engage with prudential regulators on many issues, but one in particular – the Basel III Endgame – is top of mind and will directly and massively hit the capital markets. It will impact banks and broker-dealers and ultimately have severe negative downstream effects on asset managers, investors, and corporates – not to mention the broader economy.

The Basel Endgame’s proposed bank capital reforms would significantly increase capital requirements, particularly for banks’ capital markets and trading activities.  In fact, the latest industry quantitative impact study estimates that capital for large banks’ trading activities would increase by 129% over their current historically high levels.  As you know, the U.S. capital markets are critical to U.S. economic activity, funding three-quarters of equity and debt financing for corporations and facilitating prudent business risk management by end-users.  Given this, the result of these sweeping capital increases would be less choice and higher transaction costs for businesses, consumers, and government entities, a fact that has been highlighted in the hundreds of critical comments on the proposal submitted by non-bank and non-financial organizations.

SIFMA has been working tirelessly to raise alarm bells on this issue with the prudential regulators and all relevant policymakers. We are somewhat hopeful the loud chorus of concerned stakeholders – including bipartisan voices in Congress – will make an impact on regulators as they re-examine the proposal and consider a formal re-proposal.

CFTC

The CFTC is also addressing a number of issues – areas such as trading and transaction reporting, market structure and operational resiliency. Whether addressing questions regarding transparency and liquidity, or how new requirements fit into existing enterprise-wide programs subject to US and foreign supervisory frameworks and/or other market regulations, we value the engagement with the Commission and staff, as well as its advisory committees.

NASAA  

And while we are a federally regulated market system – by design – we have important working relationships with policymakers at the state level across the country. One workstream that is certainly near and dear to those in the audience: state-level best interest standards that may conflict with the SEC’s Regulation Best Interest.

There appears to be significant evidence that Reg BI is well-functioning and has been an effective tool in protecting investors. We now have more than three years of closely watched regulatory examinations, enforcement actions, and an ever-growing body of regulatory guidance. We have concerns that state-level regulations under consideration may both conflict with Reg BI and also undermine the regulatory regime’s future development and progress.

In doing so, these proposals could negatively impact retail investors and undercut the primary objective of Reg BI, namely, to robustly protect investors while preserving investor choice among brokerage products and services and preserving investor access to full-service and self-directed brokerage and investment advisory accounts.   Further complicating this situation, the Department of Labor has also proposed and is in the process of finalizing yet another conflicting, controversial fiduciary standard.

Conclusion 

I just threw a lot out there – and I barely scratched the surface. Simply put, you and your firms are all navigating a spiderweb of regulation. And every single new proposal reverberates through the web – interacting with countless other federal regulations and at the state level in some cases. Nothing is in a silo.

And those in this room, as leaders in legal and compliance, will face implementation of all of these new possible rules, as well as understanding how they interplay with your existing programs and regimes.

That is why our next panel is going to be so interesting and informative – hearing from three of our leading federal regulators and one of their counterparts representing regulators at the state level.

As I noted at the top – collaboration and coordination from start to finish always produce a better regulatory environment, whether that be in exploring new rules or enforcing and evaluating today’s complex framework.

We are very appreciative of this group and their willingness to substantively and thoughtfully engage with us.

And with that, I am delighted to welcome our next panel to the stage diving deeper into “Regulatory Perspectives and Priorities,” which will be moderated by my colleague, SIFMA President and CEO Ken Bentsen.

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Joseph L. Seidel is Chief Operating Officer of SIFMA. He manages the day-to-day operations of the Association, including core legal, regulatory, business practices, public policy and communications activities.

 

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