Thursday, November 17, 2016

House Republicans ask White not to pass any ‘midnight rulemaking’

By Jacquelyn Lumb

In opening remarks at the House Financial Services Committee hearing to consider the SEC’s 2018 budget request, Chair Jeb Hensarling (R-Tex) strongly urged Chair Mary Jo White to resist the temptation to finalize any regulations, including Dodd-Frank Act Title VII regulations, in deference to the right of the incoming administration to set its own priorities. He said whenever there is a transfer of power from one administration to another, federal agencies are often tempted to rush pending rulemaking to implement policies of the outgoing administration. This type of “midnight rulemaking” is neither conducive to sound policy nor consistent with principles of democratic accountability, he warned.

Agenda already established. In subsequent questioning on the same topic, White assured committee members that the Commission does not intend to rush through any rules. The SEC’s agenda for this year was announced in February 2016, she said, and she does not anticipate any last minute additions. One committee member mentioned reports that regulators wanted to finalize executive compensation rules before the administration change. White said there is no benefit from being rushed. She said she was sensitive to committee concerns, but the executive compensation initiative has been proceeding apace all year and she could not provide a commitment that it would not come before the Commission prior to inauguration.

When asked what she would like to finish before her announced departure at the end of the Obama administration, White said the agenda includes the adoption of a consolidated audit trail, the Title VII capital and margin rules, the derivatives proposal in the asset management space, and the delivery of electronic mutual fund reports under Rule 30e-3.

Hensarling’s criticisms. Hensarling thanked White for appearing at hearings without requesting artificial time limits, for always submitting her testimony on a timely basis, and for always making division and office directors available at Capital Markets Subcommittee meetings. He then laid out a series of issues on which he was not satisfied, including what he saw as the lack of a capital formation agenda, the failure to act on recommendations by the Small Business Capital Formation Forum, and the simplification of the SEC’s disclosure regime. As for the 2018 budget request, he said claims that the agency is underfunded are not supported by the facts, given that its budget has increased by 325 percent since 2000. The SEC’s authorization request is for $2.227 billion, a $445 million increase over its 2017 request.

In her prepared testimony, White presented an extensive list of actions and accomplishments since she became chair in April 2013. She also pointed out that the SEC’s responsibilities have increased significantly to include new and expanded responsibilities for securities-based swaps, hedge fund and other private advisers, credit rating agencies, municipal advisers, clearing agencies, and crowdfunding portals. White reminded the committee that the budget is offset by matching collections of fees on securities transactions, so it has no impact on the deficit or the amount of funding available for other agencies.

Fixed income markets. Hensarling raised concerns that the next financial crisis could be triggered by illiquidity in the bond markets and urged White to focus significant resources in that area, an issue of concern that was raised by a number of other committee members as well. White was asked whether the Volcker and Basel rules were contributing factors to the decrease in liquidity in the fixed income markets. White said there was no evidence to support that belief, but SEC economists and the Financial Stability Oversight Council continue to study it.

FAST Act and EMSAC. Scott Garrett (R-NJ), chair of the Subcommittee on Capital Markets, who was defeated in his reelection bid, asked White about the status of a report the SEC is required to submit under the FAST Act and about the expiration of the Equity Market Structure Advisory Committee’s charter early next year. With respect to the FAST Act study on modernizing and simplifying Regulation S-K requirements, White said the staff report is under review by the Commission and she expects that it will be submitted by the deadline of November 28. As for EMSAC, in White’s opinion, its charter should be renewed. In response to Garrett’s question about Regulation NMS, White said it is front and center in the SEC’s equity markets review.

Fintech initiatives. A couple of the committee members asked about the next steps following the SEC’s first Fintech Forum. White said the staff continues to engage in significant outreach efforts which, along with the forum discussions, will help inform the SEC’s working group recommendations. Those recommendations are not imminent, she said, but may be ready in the coming months. She assured the members that the SEC does not have the mindset that regulation is needed. The SEC does not want to thwart innovation, but wants to protect investors, she advised.

Request to stay. In response to a question of whether White had made her decision to leave the Commission prior to the election, she said she had, which is the normal course of action when there is a change in administrations. Rep. Brad Sherman (D-Cal) agreed that it was the traditional thing to do, but added that the tradition began before Congress started obstructing so many presidential appointments, including two pending Commission seats. He noted that White is part of FSOC and asked her to consider staying on, since her spot on the Council should not be unrepresented.