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From Securities Regulation Daily, May 5, 2015

SEC and CFTC chairs tell appropriators that new demands justify budget increases

By Jacquelyn Lumb

SEC Chair Mary Jo White and CFTC Chair Timothy Massad testified this morning before the Senate Subcommittee on Financial Services and General Government in support of their fiscal 2016 budget requests. Subcommittee Chair John Boozman (R-Ark) noted that both agencies are seeking significant increases even though they received sizeable increases last year, and more generous increases than other agencies received. Ranking member Christopher Coons said it is critical that both agencies receive the resources necessary to oversee the markets and that shortchanging the agencies would be irresponsible.

Need for funding increases. White reviewed what she said is a compelling basis for funding the SEC at the $1.722 billion level, given the growth in the size and complexity of the SEC’s responsibilities, and reminded the subcommittee that the SEC’s funding mechanism is deficit-neutral and will have no impact on the nation’s budget deficit.

Massad said that even with the increase the CFTC received in 2015, its budget is not at a level that is commensurate with its responsibilities. The CFTC’s resources are stretched far too thinly to cover its many responsibilities, he said. The CFTC is seeking $322 million for fiscal 2016. Massad added that the CFTC has collected fines and penalties this year alone that amount to about 10 times its budget, which is turned over to the Treasury Department. Massad also emphasized the importance of having enough resources to perform timely examinations of critical market infrastructure, such as exchanges and clearinghouses.

Post-financial crisis actions. Coons asked both chairs to highlight some of the significant, tangible benefits from their oversight in the aftermath of the 2008 financial crisis. Massad noted that excessive risk related to swaps contributed to the crisis. The CFTC now has a regulatory framework to govern the swaps market. White mentioned money market reform, credit rating agency rules, enhancements to market resiliency, and improvements in collaboration with other regulators on the over-the-counter derivatives markets.

Remaining Dodd-Frank initiatives. Coons asked White about the remaining Dodd-Frank and JOBS Act rules that have not yet been implemented. She said that rulemaking related to swaps, executive compensation, and crowdfunding are among the SEC’s top priorities. Massad said the CFTC is working to harmonize its rules with the prudential regulators and its foreign counterparts with respect to margin for uncleared swaps. The CFTC is also in the process of fine-tuning the Dodd-Frank rules that it had to adopt under very tight deadlines, he advised.

Fallout from underfunding. Coons also asked about the repercussions if the agencies do not receive the funding they have requested. White said that all of the SEC’s priorities would be compromised. For example, she noted that the SEC currently examines only 10 percent of registered investment advisers, which poses a real investor protection issue. SEC examinations have resulted in returns of tens of millions of dollars based on findings such as inappropriate fee allocations. Massad said the CFTC must be able to examine clearinghouses more frequently to see what is occurring.

Definition of fiduciary. Senator Jerry Moran (R-Kan) expressed concern about the Department of Labor’s proposed definition of a fiduciary as it relates to pension plans and asked whether the SEC is providing any assistance in that initiative. White said the SEC has provided technical assistance, but noted that the two agencies have different mandates. With respect to the SEC’s plans for a uniform fiduciary standard for investment advisers and broker-dealers, she repeated her view that an agency has to think hard about regulating the same conduct differently. It is a complicated area, she advised, and the SEC will continue to consult with the DOL as it moves forward.

Cybersecurity. Moran also asked about cybersecurity issues, not only at the agencies, but at the entities they regulate. Massad said that cyber-attacks are a serious challenge, especially for critical infrastructure such as clearinghouses. The CFTC examiners try to ensure that these entities are doing adequate testing and that the right tone has been set at the top. It is important to continue to make investments in this area to stay apace, he said.

White said that cybersecurity is a nationwide priority and concern. The SEC has adopted Regulation SCI to require specified entities to establish written policies and procedures reasonably designed to ensure that their systems have levels of capacity, integrity, resiliency, availability, and security adequate to maintain their operational capability and promote the maintenance of fair and orderly markets. The SEC also examines for cyber preparedness, and has published guidance for both investment companies and issuers.

Retrospective rule reviews. Senator James Lankford (R-Okla) asked White how often the SEC conducts retrospective reviews, to which she replied, every year. The SEC probably looked at 50 rules last year, she advised, but it is also conducting a comprehensive review of the entire equity market disclosure regime.

Executive compensation. Lankford criticized Dodd-Frank Act Section 956, which requires agencies to prohibit incentive-based pay arrangements at covered institutions that may encourage inappropriate risks that could lead to a material financial loss. He views this provision as an attempt to shame companies into paying their executives less. The incentive is perverse, in his view, and he called on Congress to reevaluate the provision as soon as possible.

SEC’s administrative proceedings. Boozman asked White whether the SEC plans to publish guidelines on when it will choose to bring an enforcement action administratively rather than in federal district court. White said that 57 percent of its cases are still brought in federal court, but she acknowledged the importance of the appearance of fairness. The Commission is considering whether to publish guidelines, she advised.

Financial Stability Board. Boozman asked both chairs whether they had concerns that the Financial Stability Board is trying to inappropriately influence U.S. regulatory policy. The SEC is a member of FSB, but White said its reports are not binding on the agency. Massad replied that he does not even have a seat at the table at FSB meetings, even though he has asked to be included. White said she believes that FSB recognizes the need to hear the views of those with capital markets experience.

MainStory: TopStory SECNewsSpeeches CFTCNews DoddFrankAct ExecutiveCompensation

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