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From Securities Regulation Daily, June 27, 2017

SEC and CFTC chairmen testify in support of fiscal 2018 budget requests

By Jacquelyn Lumb

Chairmen of the SEC and the CFTC testified before a Senate Appropriations Subcommittee in support of their fiscal 2018 budget requests. The SEC is seeking $1.602 billion, which Chairman Jay Clayton described as essentially the same as its 2017 appropriation. The CFTC is requesting $281.5 million, an increase of $31.5 million over the 2017 level. CFTC Chairman Christopher Giancarlo assured the subcommittee that the additional funds did not reflect a formulaic or superficial number, but a number that will enable the agency to execute its mission based on a thorough and informed assessment of its needs. The CFTC’s current staff that is dedicated to economic analysis is inadequate to meet the standards required for its oversight of 35 to 45 percent of the global derivatives markets, he advised.

Decrease in public companies. Subcommittee Chairman Shelley Moore Capito (R-WV) asked Clayton to speak to concerns about the decreasing number of public companies and its impact on investing for retirement. Clayton said the lower number of public companies means fewer choices for Main Street investors for whom it is more difficult to invest in the private markets. Among the drivers of the decrease is the fixed and annual regulatory costs of being a public company and the ease of raising capital in the private markets, he said.

Unused office space. Capito also asked both chairmen about concerns with their agencies’ spending related to their leased spaces. The CFTC, for example, is spending tens of millions of dollars for vacant office spaces. Giancarlo said the leases were entered into at a time when there was an expectation that the CFTC would become a bigger agency. The leasing authority is being returned to the General Services Administration, he advised, and efforts are underway to fill the spaces with subtenants or otherwise. Clayton added that telework has increased, which in turn has reduced the footprint per employee. Giancarlo said the CFTC is in negotiations with its union regarding telework, but he sees value in having employees working together in one space.

Ranking member Christopher Coons (D-Del) cited reports that the Administration has directed agencies not to respond to Democrats’ requests for information and asked both chairmen if they would consent to respond to such requests, which both agreed to do. He then asked both chairmen to describe the setbacks they will face if their budget requests are not provided.

Need for economists. Giancarlo responded that the CFTC’s rules were drafted during a time when trading pits existed, and now the markets are virtual, online, and algorithm-driven. The CFTC’s proposed increase in staff economists will help the agency better understand the changing markets. He said the CFTC does not currently have the capacity to look forward and anticipate the impact of evolving technologies such as blockchain. The budget request includes $57 million for technology, which is critically needed, he advised.

Clayton said he is comfortable with the SEC’s requested funding level, but he is new to the Commission and said it is likely there will be things next year that he doesn’t know now but will need funding for next year. He said the SEC is also asking to continue to have access to a $50 million reserve fund which is used for information technology improvements. It is helpful to have a dedicated source of funds for technology, he explained.

Fiduciary rule. Senator Jerry Moran (R-Kan) asked about the level of coordination between the SEC and the Department of Labor on the fiduciary rule. Clayton said he has put out a request for information since the DOL moved forward on its fiduciary rule. The DOL’s rule will affect the markets the SEC regulates and vice-versa, he said. Clayton plans to move forward in a way that is coordinated with the DOL and that does not limit investors’ access to investment advice or investment products, he said.

Decrease in FCMs. Senator Steve Daines (R-Mont) asked Giancarlo to speak about the dramatic decrease in the number of futures commission merchants. Giancarlo said the decrease can be attributed to a number of factors, including fraud and mismanagement in the case of FCMs like MF Global and Refco, and a certain amount of misdesigned or over-regulation. Another concern is the cost associated with the supplementary leverage ratio which has contributed to the loss of services by smaller FCMs. Giancarlo has called for relief under these rules to significantly reduce capital costs for clearing members.

Reduced Commission. Daines also asked about the impact on the CFTC from the retirement of Commissioner Sharon Bowen. Giancarlo said a five-member Commission allows for a range of views when setting policy. In his view, it is vitally important to have five members. The work will get done, but it would be better to have a full commission, he advised.

Cybersecurity. Both chairmen also addressed the importance of cybersecurity and their respective whistleblower programs. Cybersecurity is the CFTC’s number one priority, according to Giancarlo. Cyber-attacks pose an enormously challenging threat, not only from rogue individuals but also from nation states, he said. Clayton said cybersecurity is an area of intense focus at the SEC as well.

Whistleblowers. With respect to whistleblowers, Giancarlo said they provide an important referral source for enforcement actions. Clayton noted that a whistleblower case is heading to the Supreme Court where it will decide whether the Dodd-Frank Act’s protections are only available to those who report misconduct to the SEC (Digital Realty Trust, Inc. v. Somers, cert. granted, June 26, 2017).

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