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From Securities Regulation Daily, September 9, 2014

Chairs White, Massad give updates on agency rulemaking

By Lene Powell, J.D.

In a Senate Banking Committee hearing examining progress on Wall Street reform, SEC Chair Mary Jo White and CFTC Chairman Timothy Massad responded to questions about current priorities in agency rulemaking. Chair White said the SEC is focused on completing its mandated Dodd-Frank rulemaking, and in particular plans to finish the CEO pay ratio rule by the end of the year.

Dodd-Frank progress. Chair White said the Dodd-Frank Act included some 90 provisions that required SEC action, and the agency has made “quite substantial progress” in implementing these rules while it has continued to carry out its core responsibilities. Since April 2013, the agency has proposed or adopted nearly 20 significant Dodd-Frank rules, and in total thus far, has proposed or adopted rules addressing about 90 percent of the required rulemaking.

Specifically, the SEC has created a new regulatory framework for municipal advisors; advanced significant new standards for clearing agencies; and implemented new restrictions on the proprietary activities of financial institutions through the Volcker Rule. The agency has also finalized rules to strengthen the integrity of credit ratings; increased disclosures for asset-backed securitizations; completed reforms to address investor runs in money market funds; pushed forward new rules regarding previously unregulated derivatives; begun implementing additional executive compensation disclosure; and put in place strong new controls for broker-dealers.

CEO pay ratio. Sen. Robert Menendez (D-N.J.) pressed Chair White about the proposed rule regarding CEO pay ratio disclosure, mandated by Dodd-Frank, which would require public companies to disclose the ratio of the compensation of its CEO to the median compensation of its employees. White replied that it was her “hope and expectation” that the rule would be finalized by the end of the year, and staff is currently going through the comments, which were extensive. The senator said, “I hope there will be more expectation and less hope.”

Sen. Menendez also asked whether the SEC had any plans to do a rulemaking requiring disclosure of corporate political spending, given that the agency had recently received a record one millionth comment on the subject. White said there are currently two rulemaking petitions pending concerning the topic, but despite the high interest, the SEC is “very focused” on its JOBS Act and Dodd-Frank rulemaking, and is not currently working on a rule in this area.

Other SEC rules. In response to a question from Sen. Jack Reed (D-R.I.) about the approximately 18 rules left regarding swaps, Chair White said it is a “very high priority” to get them done as quickly but also as well as possible. However, agency resources are thin, and after the rules are finished, the SEC has to implement and enforce them, and that takes resources.

Chair White also said the SEC is looking at transparency in the marketplace and complexity of order types, as well as a possible rulemaking on leverage levels at broker-dealers. Cybersecurity is also a priority for the agency, and a cybersecurity working group was recently instituted. One area that is not currently under consideration for rulemaking at this time is Bitcoin, said the chair in reply to a query from Sen. Joe Manchin (D-W. Va.). Despite recent enforcement action in a Ponzi scheme and two investor alerts, the SEC has not concluded that Bitcoin is a security rather than currency, so is not currently looking at rulemaking on this topic.

CFTC update. Chairman Massad said the CFTC is particularly concerned that the agency’s Dodd-Frank rules do not place undue burdens on commercial end users, who were not responsible for the crisis and who depend on the markets to hedge risks. The CFTC will hold a meeting next week to vote on rules for special entities, and to consider margin requirements for uncleared swaps.

Global coordination is essential, said the chairman, and he has been strongly focused on this since he took office. In addition, in the implementation phase of rulemaking, strong compliance and enforcement efforts are vital. Finally, technology is a priority for the agency, and it is leading an international effort in coordinating data standards for swaps reporting. However, the CFTC is resource-constrained. Chairman Massad said current agency resources are “insufficient to fulfill our responsibilities.”

In response to Committee Chairman Johnson’s question about what one rule the CFTC expects to finish by the end of the year, Chairman Massad noted that the CFTC’s rules are mostly done, so the agency is focused on looking at the rules and making sure staff is taking account of end user concerns. However, as mentioned, the CFTC expects to act next week on a rule for special entities, and also on a re-proposal of margin requirements.

Lack of criminal prosecution. Senator Elizabeth Warren (D-Mass.) grilled Federal Reserve Gov. Daniel Tarullo about why, although a three major banks have admitted to breaking the law and paid $35 billion in fines to the government, not a single senior executive at these banks has been criminally prosecuted. As observed by Judge Rakoff of the federal district court for the Southern District of New York, no corporation can break the law unless an individual within that corporation has broken the law.

The senator asked how many senior executives at those three banks have been referred by the banking regulators to the Department of Justice for criminal prosecution. Gov. Tarullo said he didn’t know the answer to that question, but the Fed has shared all the necessary information with the DOJ. Also, the Fed has the power to insist that individuals be terminated from employment, and has done so in the past couple of cases. Senator Warren said deterrence is important, and these civil settlements don’t provide that, because shareholders pay the settlement, not senior management. In fact, she said, Jamie Dimon, CEO of JPMorgan Chase, got an $8.5 million raise for concluding a negotiated settlement of charges against the bank.

“Without criminal prosecutions, the message to every Wall Street banker is loud and clear. If you break the law, you are not going to jail, but you might end up with a much bigger paycheck,” said Sen. Warren.

MainStory: TopStory ExchangesMarketRegulation DoddFrankAct ExecutiveCompensation PublicCompanyReportingDisclosure

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