The SEC Commissioners Speak: Part I
The SEC Speaks conference has traditionally been a forum in which the agency reviewed significant recent undertakings and indicated its future direction. This year was no different. Four of the five Commissioners addressed conference participants, discussing recent significant undertakings and sketching the future direction of the SEC. This article reviews the comments of Chair Mary Jo White and Commissioner Stein. An article tomorrow will review the remarks of Commissioners Piwowar and Gallagher.
Chair Mary Jo White: Ms. White reviewed recent significant rule making initiatives by the agency before turning to a discussion of the enforcement efforts last year and future undertakings. Last year the Commission focused on three key rule making initiatives tied to the risks exposed by the financial crisis. First, the SEC reformed money market funds. New rules were promulgated regarding institutional prime money markets funds. Those funds will be required to maintain a floating net asset value, for the first time. At the same time non-government money market funds will have new tools to address runs on the fund while all money market funds will be subject to enhanced diversification, disclosure, reporting and stress testing requirements.
Second, the agency moved forward with its mandate under Title VII of Dodd-Frank regarding the swaps market. The SEC has now proposed all of the required rules. Last June it adopted the threshold rules that create the foundation for the regulatory regime for these products. Early this year the SEC adopted two sets of rules which will add transparency to these markets.
Finally, last year the Commission adopted what Chair White called a “strong, comprehensive package of reforms for the regulation and oversight of credit rating agencies, implementing over a dozen rulemaking requirements under the Dodd-Frank Act. The SEC also proposed additional rules to enhance oversight of clearing agencies and requiring companies to disclose their hedging policies.
Enforcement set records last year, bringing 755 actions and obtaining over $4.1 billion in monetary relief, accord to Ms. White. She then reviewed a series of “first of a kind” cases, summarizing the SEC’s earlier press release on enforcement. OCIE complemented these efforts by conducting over 1,850 examinations, an increase of 15% compared to the prior year.
For 2015 Ms. White highlighted three core initiatives. First, the “staff is developing recommendations to enhance the transparency of alternative trading system operations, expand investor understanding of broker routing decisions, address the regulatory status of active proprietary traders, and mitigate market stability concerns through a targeted anti-disruptive trading rule.” Those efforts will be aided by the formation of the new Market Structure Advisory Committee.
Second, the staff is developing three sets of initial recommendations to address the increasing complexity of portfolio composition and the operations of the asset management industry. Those initiatives center on improving data reporting, requiring funds to have controls in place to more effectively identify and manage risks and on planning for market stress events.
Finally, in 2015 the Commission will focus on capital formation for smaller issuers. The final two major mandates of the JOBS Act will be a key focus as well as the pilot program to widen tick sizes for the stocks of smaller companies.
Commissioner Kara Stein delivered remarks which centered on three key topics. First, the Commissioner noted that the agency should “be reimagining disclosure and [the use of] data to keep pace with the digitized and data-centric market.” Now is the time to consider a “fundamental shift in disclosure.” Commissioner Stein mentioned two potential initiatives. One would involve updating EDGAR. A second would focus on making data “available more quickly and in a format that is more usable . . .” In this regard data could be made available so that investors could “click” their way through to “deeper and more extensive information.”
Ms. Stein then turned to the question of over complexity in financial products. Once of the lessons of the great crash of 1929 was the pyramiding of leverage and complexity that ultimately played a role in the crash of the market. That lesson was reiterated in the last financial crisis when innovation created very complex financial instruments that ultimately imploded. It is imperative that everyone learn the lesson that innovation in financial products can lead to a level of over-complexity.
Finally, turning to enforcement, Commissioner Stein focused on what she called “bad actor bars,” a topic which is becoming of increasing concern. Here Ms. Stein began by stating “Let me be clear, bad actor bars, including partial bars or conditional waivers, are not intended to be used as ‘punishment.’” The critical question is whether these tools are being properly and effectively applied.
The building blocks for the application of these provisions are recidivism and deterrence. This begins with tone at the top of the organization: “The degree to which those at the top knew or should have known about a violation or a failed culture of compliance is an important factor in analyzing whether an automatic bad actor bar should occur. I have been urging the Commission to adopt and use this factor in the context of evaluating these bars. And if a firm is so sprawling and large that the top simply cannot manage it at all isn’t that a problem in and of itself . . .” Commissioner Stein noted.
The critical question in applying these provisions is not whether the reason for the automatic disqualification is “unrelated” to the waiver. Rather, “If you manipulate LIBOR, enable offshore tax evasion, or launder drug money, should we wait for you to defraud a pension fund before barring you from raising money outside of strict Commission oversight?” the Commissioner asked. The point here should be to continue developing a consistent and transparent process for the application of bad actor bars.
Tomorrow: Commissioners Piwowar and Gallagher