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From Securities Regulation Daily, April 29, 2014

White addresses a range of SEC priorities at budget hearing; says court went out of its way to uphold conflict minerals rule

By Jacquelyn Lumb

Chair Mary Jo White today testified before the House Committee on Financial services in support of the SEC’s fiscal year 2015 budget request. She pointed to the unprecedented growth and transformation in the securities markets and the significant new responsibilities to which the SEC is subject. She also reminded the committee that the SEC’s funding mechanism is deficit neutral and has no impact on the nation’s budget deficit. The budget request of $1.7 billion is fully justified by the SEC’s existing and growing responsibilities to investors, companies, and the markets, she advised.

Two dozen representatives questioned White for three hours about a range of topics, including high frequency trading, money market reform, the actions by the Financial Stability Oversight Council (FSOC), and a potential uniform fiduciary standard for investment advisers and broker-dealers. Several representatives berated the SEC for past lapses relating to the Madoff and Stanford frauds. Committee Chair Jeb Hensarling (R-Tex) noted that no other government agency has received the level of funding increases the SEC has received over the years, yet he said the SEC has been subject to mismanagement and has squandered its resources.

FSOC. Hensarling told White that he appreciated that she put the Office of Financial Research study of the asset management industry on the SEC’s website for comment. The study was done at the request of the FSOC. Hensarling referred to FSOC as part of a regulatory shadow process. Rep. Scott Garrett (R-NC) also criticized FSOC for its interference with the SEC’s money market fund reform initiative, and for its designation of significantly important financial institutions. White said it is extraordinarily important for FSOC to identify areas of systemic risk, but she agreed that it is also important for FSOC listen to the experts at the table.

In response to another question about the OFR study and the SEC’s role in it, White said the SEC did not participate in the study. The SEC provided its expertise and opinions; some of which were accepted and some were not. She noted later that the SEC is proceeding with its money market reform proposal independently. The proposal was robust and she said the final rule will be robust.

Fiduciary standard. Rep. Maxine Waters (D-Cal) noted that she has introduced legislation to implement a user fee to help fund additional examinations of registered investment advisers. As part of her testimony, White noted that the SEC was only able to examine 9% of the registered firms in the last fiscal year and that more resources are clearly needed. Waters asked if White believes that user fees would represent a scalable and workable way to enhance investor protection in the industry. White responded that her priority is to have the funding to carry out her job, which she does not have right now.

Waters also asked for a timeline on the SEC’s action with respect to a uniform fiduciary standard for investment advisers and broker-dealers. White assured Waters that it is a high priority item and she anticipates that a decision may be reached this year.

High frequency trading. Garrett asked White if the securities markets are rigged. She said they are not perfect, but they are not rigged. He asked if the information in Michael Lewis’ book on high frequency trading revealed anything that was not previously known. White said the SEC has focused on high frequency trading as the markets have developed. She added later the staff could not be doing a more extensive review than the one that has been undertaken.

Political spending. In response to why the SEC removed from its regulatory flexibility agenda an action related to the disclosure of political spending, White said she included items that she felt could be accomplished this year. The mandated rulemakings had priority so she removed the political spending item from the agenda.

Conflict minerals. Rep. Bill Huizenga (R-Mich) asked if there was any evidence that Dodd-Frank Act Section 1502 could actually stop the problems in the Democratic Republic of the Congo, especially given the significant costs associated with the SEC’s rulemaking and the recent finding by the District Court of Appeals that one of the disclosure provisions in the rule violated the First Amendment. White noted that the court went out of its way to uphold the rule, and only invalidated one provision.

Disclosure project. White was asked for a timeline on the SEC’s disclosure review project. She said it is a large project, but also a high priority. She would not provide a completion date but said some actions may be taken during the course of the review, and potentially something this year.

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