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From Securities Regulation Daily, June 14, 2016

Senate Banking Committee grills SEC chair on political spending, rulemaking efforts

By Anne Sherry, J.D.

In her first appearance before the Senate Banking Committee since fall 2014, SEC Chair Mary Jo White defended the agency's priorities and rulemaking agenda. Many committee members at the oversight hearing focused on political spending disclosure, despite a moratorium on rulemaking in the current appropriations law. Senators Schumer and Warren, in particular, blasted the SEC for putting big business ahead of investors.

In his opening statement, Chairman Richard Shelby (R-Ala) urged the SEC to keep to its core mission and stand up to special interests and encroachment by other regulators. He cited pressure on the Commission to mandate disclosure on climate change and political contributions as examples of the former, and the Department of Labor's fiduciary rule as an example of the latter. Ranking Member Sherrod Brown (D-Ohio) spoke about outstanding Dodd-Frank rulemaking, particularly around the derivatives provisions in Title VII. Both leaders' comments presaged key themes of the hearing.

Political spending disclosure. The current omnibus appropriations bill bars the SEC from using any of the funds to "finalize, issue, or implement" a rule on political contribution disclosure. Senator Bob Menendez (D-NJ) noted that the SEC received 1.2 million comments imploring action on this issue. Although the omnibus act is seen as preventing the SEC from taking this type of action, it does not speak to preparing a rule for the moment when that provision dies, and "I assure you that that provision will die," he said.

Several committee members also pressed the chair on this issue. Senator Jeff Merkley (D-Ore) commented that, if political spending is speech, investors deserve to know what they are saying. Undisclosed political contributions are more important to Sen. Chuck Schumer (D-NY) than anything else before the SEC; he lambasted the agency for "aiding and abetting" the imbalance of power. "Our country is being steered in an awful direction by a narrow few wealthy people. At the very least there ought to be disclosure," he concluded.

Chair White indicated that she is sensitive to this issue, and highlighted that the 1.2 million comments comprised 2,000 unique letters. But she reiterated that political spending disclosure is not on the agency's current Regulatory Flexibility Act agenda, even though it had been a discussion item prior to her tenure at the SEC. Senator Merkley commented that she unilaterally removed it from the rulemaking agenda, but she clarified that it was never there to support a proposed rule. The chair did note that investors have some power to move the needle on this issue via the shareholder proposal process. Over half of S&P 500 companies disclose their political spending, she said, and 80 percent have policies and procedures in place.

In response to Sen. Schumer's comment that the Koch brothers are one of the behemoths driving huge amounts of political spending, Chair White observed that the SEC could never reach the Koch brothers because their company is not public. "It's not like our rules are the solution to campaign finance reform," she said, adding that she took Sen. Schumer's point. The chair's priorities are to work on the Congressional mandates and other "mission critical" items.

The leadership of the committee remained divided along party lines. Ranking Member Brown joined Sen. Schumer's plea to move along on a disclosure rule. But Chairman Shelby said he hoped that the Commission would do what is best for the country, not react to "generated mail" from what amounts to one-third of 1 percent of the country's population.

DOL fiduciary rule. The chair fielded questions from several committee members about the Department of Labor's fiduciary rule. Senator Jon Tester (D-Mont) asked whether the SEC had any plans to promulgate its own rule. Chair White responded that she was committed to getting it done, but that it is a difficult and long road, "and," she emphasized, "I'm one vote." Senator Tester also asked who would be in charge of enforcing the DOL rule. "Independent agencies, independent rules," the chair responded, and the Commission has dealt with overlapping rules before. The DOL will enforce its rule, but the SEC will be available should issues arise.

Senator Mike Rounds (R-SD) cited disagreement between DOL and SEC staff during the rulemaking process and asked how the SEC can structure a uniform fiduciary rule when there are inherent disagreements about the rule's goals. Chair White noted that the Commission's goal was to give its best technical assistance to the DOL, not necessarily to reach an agreement, and that to some degree people will have to wait to see what happens as rules are implemented.

SEC falling behind? Ranking Member Brown raised the fiduciary rule as just one example of how the SEC has lagged behind other agencies. In addition to the DOL overtaking the Commission in that area, the CFTC has also made significantly more progress in derivatives regulation with far fewer resources. The senator acknowledged that the process was not perfect in either example, but said that at least the agencies were able to move forward.

Chair White pointed out that the Dodd-Frank and JOBS Act mandate, along with significant discretionary responsibilities, have meant the last few years show a historical level of complex regulatory activity. The fiduciary rule, in particular, was authorized but not mandated by Dodd-Frank. She reiterated her support for a uniform fiduciary rule from the SEC under that Dodd-Frank provision and acknowledged that the Title VII derivatives regulation is important to the markets.

Senator Tester asked the chair about the role understaffing plays in the Commission's process. The chair conceded that the SEC does not have the right amount of resources to support its responsibilities and, in response to Sen. Tester's inquiry about whether that would change if the agency were self-funded, said that it would. The senator acknowledged that he had been critical but said that the SEC is dealt a weak hand. He observed that if any one of the three commissioners walked away from a rule, the agency would lose a quorum, giving each commissioner "pretty good power." Chair White said that a commissioner could wield that power, but assured that they are all focused on getting the work done.

Disclosure effectiveness review. Senator Elizabeth Warren (D-Mass) slammed Chair White for prioritizing "a project you invented," the disclosure effectiveness initiative. The senator pressed the SEC leader for evidence that information overload was a real problem for investors: "Let's be honest, I cannot find, and you have not produced, a single investor who has complained to the SEC about having received too much information." Chair White reiterated that the disclosure effectiveness initiative is not necessarily about reducing disclosure, but is about effectiveness of disclosure. But the senator accused the SEC of putting big business interests, such as the Chamber of Commerce, at the top of the agenda. "A year ago I called your leadership at the SEC 'extremely disappointing,'" Sen. Warren concluded. "Today I am more disappointed than ever."

Business development and investment companies. Senator Pat Toomey (R-Penn) discussed a recent House bill that would, among other things, up the leverage ratio for business development companies from 1:1 to 1:2. To Chair White's point that the upside and downside potential are multiplied in such a case, Sen. Toomey responded that investors are able to buy securities on margin and invest in highly leveraged banks. The senator also asked about the proposed rule to govern the use of derivatives by investment companies, particularly the fact that aggregate notional amount is the measure used to cap the amount of derivatives. Chair White said that this is one of the comments that has come up in the proposal process and that the staff is considering all of the comments as part of that process.

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