Tuesday, December 06, 2011

Senate Banking Committee Hearings Examine Volcker Rule and Impending 404(b) Legislation

The Senate Banking Committee hearings on the implementation of the Dodd-Frank Act, focused on the Volcker Rule, resources and easing access to capital. Senator Richard Shelby (R-ALA), the Committee’s Ranking Member, noted that proposed regulations implementing the Volcker Rule has been marred by misconduct, ambiguity, and interagency discord. Drafts of the proposed rule were leaked to the press, he noted, prompting Inspectors General inquiries into whether agency personnel violated confidentiality rules. When regulators finally issued a proposed rule, it came in the form of a 298-page concept proposal with over 1,300 questions. While agreeing that banks should not be allowed to gamble with taxpayer guaranteed deposits, Senator Yet, the ambiguity in the proposed rule threatens to make compliance costly and difficult, especially for small banks. Further, the CFTC has not signed on to the Volcker proposal, and may opt to draft its own rule. The Financial Stability Oversight Council was established to ensure that regulators properly coordinate their rulemakings, but was unable to secure agreement on the Volcker rule.

In response to a question from Banking Committee Chair Tim Johnson on when the Senate can expect to see the CFTC’s Volcker Rule proposals, CFTC Chair said that this has been a capacity issue, and that the Commission expects to move forward on the Volcker regulation proposals in a way that is consistent with what the other regulars have done.

SEC Chair Mary Schapiro testified that the SEC was tasked with writing a large number of new rules and conducting over twenty studies and reports. Over the past 16 months, she noted, the SEC has made great progress towards completing those tasks. Of the more than 90 provisions in the Act that require SEC rulemaking, the SEC already has proposed or adopted rules for over three-fourths of those that are required. Additionally, the SEC has finalized twelve of the more than twenty studies and reports that the Act directs the agency to complete. The SEC continues to implement all provisions of the Act for which it has responsibility, she said, while also performing its longstanding core responsibilities of pursuing securities violations, reviewing public company disclosures and financial statements, inspecting the activities of investment advisers, investment companies, broker-dealers and other registered entities, and maintaining fair and efficient markets.

The SEC Chair recognizes that it is incumbent that the Commission use existing resources efficiently and effectively as the agency strives to fulfill statutory mandates and protect investors. That said, the Chair emphasized that the new responsibilities assigned to the SEC under the Dodd-Frank Act are so significant that they cannot be achieved solely by wringing efficiencies out of the existing budget without also severely hampering the ability to meet our existing responsibilities.

If the SEC does not receive additional resources, cautioned Chairman Schapiro, many of the issues highlighted by the financial crisis and which the Dodd-Frank Act seeks to fix will not be adequately addressed, as the SEC will not be able to build out the technology and hire the industry experts and other staff desperately needed to oversee and police these new areas of responsibility.

Noting that he will soon introduce bi-partisan legislation with Senator Warner (D-VA), Senator Jerry Moran (R-KN) said that Section 404(b) on auditor attestation of management’s +internal controls report remains an egregious deterrent to small businesses accessing capital. Chairman Schapiro said that she shares the Senator’s concern over market access for small companies. But she is also concerned about raising the 404(b) threshold above the $75 million market cap set by Dodd-Frank, which covers 60 percent of companies. She noted that going to, for example, a $1 billion market cap would be of concern.

The SEC Chair said that investors view the auditor report on internal controls as very important, adding that expanding the 404(b) exemption may not concomitantly save audit costs. Senator Moran said that Congress will need SEC expertise on this topic as it crafts legislation. The Senate will work with the SEC to find the right 404(b) exemptive threshold that properly balances investor protection with opening open the access to capital for small businesses and small companies.