Thursday, June 07, 2018

Clayton, Giancarlo make case for bigger budgets

By John M. Jascob, J.D., LL.M.

SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo both cited U.S. market competitiveness and cybersecurity concerns in making their case for increasing their agencies’ budgets in FY 2019. In testimony before a subcommittee of the Senate Appropriations Committee. Clayton said that the SEC’s request of $1.658 billion for operations represented a modest increase that will allow the agency to leverage technology and lift a hiring freeze that has been in place since late in FY 2016. In defending the CFTC’s request for $281.5 million, an increase of $32.5 million, Giancarlo noted that adequate funding for his agency is necessary if the U.S. derivatives markets are to continue to be the world’s best regulated.

Clayton’s testimony. In his formal testimony, Clayton stated that the daily touchstone for the SEC staff is the long-term interests of the tens of millions of Americans who are invested in the securities markets. Clayton said that the level of funding requested for FY 2019 will enable the SEC to continue its work in a number of important areas, including: leveraging technology and enhancing cybersecurity and risk management; facilitating capital formation; protecting Main Street investors; and maintaining effective market oversight by expanding the agency’s depth of expertise. In particular, Clayton said that the Commission’s cybersecurity program will remain a top priority during FY 2019. Among other actions taken in this area, Clayton has directed the SEC staff to conduct a review of the sensitive personally identifiable information gathered by the Commission to make sure it does not take in more information than is needed to carry out its mission.

Giancarlo’s testimony. For his part, Giancarlo stressed that the well-regulated U.S. derivative markets are the world’s largest and most influential. As a result, many of the world’s most important commodities are priced in U.S. dollars in the U.S. derivatives markets, providing a tremendous advantage to American producers. Giancarlo cautioned against complacency, however, noting that the Chinese government has now opened up its domestic futures markets to international participation as part of a long-term strategy to expand China’s influence over the pricing of key industrial commodities. The best response for U.S. commodity market participants, Giancarlo said, is to ensure that derivatives markets in the U.S. continue to be of the highest quality, which requires an adequately funded regulator. Even though the agency has asked for an approximately 12 percent increase, Giancarlo defended the CFTC’s budget request as being “bare-bones, no waste, fiscally conservative, and mindful of taxpayer dollars.”

Cybersecurity. Returning to the topic of cybersecurity, Sen. Chris Van Hollen (D-Md) asked Clayton to consider taking another look at the SEC’s interpretive guidance designed to assist public companies in preparing disclosures about cybersecurity risks and incidents. In particular, Van Hollen questioned whether the concept of “materiality” may be too loosely defined. In response, Clayton emphasized the importance that he attaches to this issue, referencing the SEC’s recent enforcement action against Yahoo! for failing to properly inform investors about a cybersecurity breach, which resulted in a $35 million settlement. Clayton also reiterated his belief that it's “good corporate hygiene” for companies to have controls that prevent senior executives from trading, once a determination has been made about a material event.

Swaps reform. Asked about the CFTC’s recent decision against lowering the de minimis threshold required for swap dealer registration, Giancarlo said that he believes the current $8 billon threshold is still correct. He did, however, agree with Subcommittee Chair James Lankford (R-Okla) about the benefits of reviewing the threshold on a regular cycle, perhaps every four or five years. Giancarlo also expressed his continued overall support for the swaps reforms enacted by Title VII of the Dodd-Frank Act, saying that the legislation “got it right” and that the clearing mandate has worked well. According to Giancarlo, the question now is how to oversee swaps reporting, because regulators still do not have a clear picture of the extent of counterparty credit risk.