Commissioner Daniel M. Gallagher
U.S. Securities and Exchange Commission
SIFMA Regional Conference, Charlotte, N.C.
Sept. 24, 2012
Thank you, Ken, for that kind introduction. It is a true honor to be here with you today.
As you all expect, I must tell you that my remarks today are my own, and they do not necessarily represent the views of the Commission or of any other Commissioner.
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I would like to talk today about regulatory distraction. By that, I mean a state of affairs in which a regulatory body is so inundated with external mandates that it risks losing focus of its core responsibilities. Given the mandates flowing from Congress, in particular those in the massive, 2319 page Dodd-Frank legislation, this is a condition that we at the Commission must be very careful to avoid.
As the newest Commissioner at the SEC – I started just over ten months ago, I knew I was coming back to the agency during an intensely regulatory and reactive period, given the Dodd-Frank mandates, the response to the Madoff and Stanford Ponzi schemes, and the reaction to allegations of policy failures leading up to the crisis. Indeed, I was on the Staff before and during the crisis, and later during the negotiation of what eventually became Dodd-Frank, so this was no surprise. I assumed I would be faced with two major tasks – evaluating and voting on regulations responsive to the financial crisis, and working to ensure that the Commission maintains a clear focus on its core responsibilities. To be sure, we are busy working on many of these activities, but the balance is not what you might have expected it to be.
Dodd-Frank was enacted to, among other things “promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail,” and to protect the American taxpayer by ending bailouts.” These are all extremely laudable goals. However, the statute's goals and its mandates are often unrelated.
All-told, Dodd-Frank contains approximately 400 specific mandates to be implemented by agency rulemaking. A conservative estimate assigns almost 100 Dodd-Frank mandates to the SEC for implementation by rule. Many of those have statutory deadlines. The SEC has adopted final rules implementing nearly a third of those statutory mandates. So while the SEC, like other financial sector agencies, will be busy implementing Dodd-Frank for a long time to come, it is equally true that one immediate effect of Dodd-Frank was to increase dramatically both the volume and pace of SEC rulemaking. It is not an exaggeration to say that the Commission is handling ten times the normal rulemaking volume. And “normal” was the post Sarbanes-Oxley normal, which was a marked increase from the pace before that law’s enactment. Any one of the rules we promulgated in the last three months would have been considered the “rule of the year” just five or six years ago. The pace is unrelenting, and the substance is critically important to the U.S. capital markets. We need to get a lot done fast – no question about it – but it’s even more important that we get it right.
Some Dodd-Frank mandates are more responsive to the financial crisis than others. Some are not responsive at all, derived instead from long-held ambitions of policymakers, bureaucrats, and special interest groups. For example, the mandate in Dodd-Frank Section 939A for federal agencies to remove references to credit ratings from their rulebooks may well be the clearest, most direct mandate we at the SEC have been given. It has the virtue of being responsive to one of the core problems underlying the financial crisis – over reliance on credit ratings by investors and regulators during a time when the rating agencies were falling down on the job.
On the other side of the coin, a majority of the Commission - which I was not part of - just approved final rules under Sections 1502 and 1504 of Dodd-Frank, which mandated unprecedented new disclosure rules relating to conflict minerals from the Congo, and extractive resource payments made by U.S. listed oil, gas and mining companies. These statutory provisions and the rules based on them were meant to serve laudable humanitarian and geo-political purposes. Specifically, they are aimed at curtailing armed violence in the Congo and increasing the accountability of governments worldwide to their citizens. I wholeheartedly support those goals, but I believe that the SEC is the wrong tool with which to accomplish them.
Even so, given the extreme costs associated with both these new rules, I very much hope they somehow have the desired effect. It is, nevertheless, undeniable that these two rules have nothing whatever to do with the goals of the Dodd-Frank Act, which I quoted to you earlier. These new rules don’t address the crisis; they don’t make a future crisis less likely. Indeed, these new rules have nothing to do with the SEC’s statutory mission. It is appropriate to be skeptical of our prospects in achieving objectives the SEC was not designed or staffed to achieve. But laws are laws, so we spent a very significant amount of time working on the final rules – certainly as much - and likely more - than we did on any other rules we have handled since I arrived.
And now the key difference between the 939A credit rating removal and 1502 and 1504 social mandates is that the latter are completed, while the former remains substantially unfinished over a year after the congressional deadline. This raises the question of whether our priorities are as they should be. Given that the Commission has been analyzing the removal of rating agency references since former Chairman Cox and the Commission proposed removing them in 2008, I hope the staff will put forward a recommendation soon on the two most significant SEC rules embedded with such references - the so-called net capital rule, and the money market fund rule. Action on these matters would not only satisfy a Dodd-Frank congressional mandate, but it would be a long-delayed and much needed step towards addressing a core problem infecting the U.S. financial markets and regulatory system. More than any other action the Commission has taken since Congress took bold action to give the SEC formal oversight authority over credit rating agencies, fulfillment of the 939A mandate, if done properly, would serve to protect investors and markets alike from the failures of the credit rating agency industry.
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There are, of course, several other similarly stark comparisons one could just as readily draw from among the SEC’s Dodd-Frank mandates. We have Title VII mandates that require us to create a regulatory regime for OTC derivatives, and at the same time we have a Title IX mandate to create, along with the MSRB, an entirely new regulatory program for municipal advisors. One of these things is not like the other. While there is a debate about whether OTC derivatives were a cause of the financial crisis, few would doubt that they exacerbated many of the problems faced by regulators and market participants during the crisis. In particular, because of the opacity of those markets, they presented a significant unknown to regulators. Putting aside the wisdom of some of the more complicated Title VII mandates, moving towards transparency in this area makes good sense. Regulation of municipal advisors, on the other hand, is an area wholly outside the context of the crisis. I support efforts by the Commission to gain a more sophisticated understanding of the municipal securities markets - directly as well as through MSRB efforts. I am skeptical, however, that a mandated set of rulemakings to regulate a broad category of municipal advisors is the most appropriate use of regulatory resources at this time.
It’s all about priorities and relative priorities. Because of these disparate statutory mandates, many of which are not grounded in the crisis, the SEC is left with a long list of decisions to make. Decisions about how to prioritize and sequence the rulemakings, decisions about how to give effect to each separate mandate as we tackle them, and decisions about the utility of pursuing certain mandates instead of going back to Congress to seek reconsideration when the mandates simply don’t make sense given our statutory mission.
At the same time, it is important that we recognize that there are areas that are crisis-related, but are not addressed or even referenced in Dodd-Frank. They nevertheless warrant Commission time and resources – perhaps on a considerably more pressing basis than certain of the Dodd-Frank mandates. The number one issue at the SEC that falls into that bucket is – still today – money market fund reform. Believe it or not, money markets funds, despite being called by some the third rail of systemic risk, and despite featuring prominently in the financial crisis, were not addressed in 2319 pages of financial crisis legislation. And now this, as most of you have probably seen, has become a highly contentious issue at the Commission. Despite recent headlines, I hope and expect that the Commission will make a decision on appropriate reforms in this area soon after our economists have conducted an analysis of the key issues Commissioners Aguilar, Paredes, and I have raised. Acting without the benefit of such an analysis - in the context of a $2.5 trillion industry critical to investors, municipalities, and other issuers - would, quite frankly, be irresponsible.
There are, in addition, other areas within the SEC’s jurisdiction that were subjected to stresses during the crisis, but certainly were not, in any sense, causes of the crisis. They, too, beg for our attention. In that bucket, a primary concern for me is the Securities Investor Protection Act, or SIPA. As many of you know, SIPA, which authorized the creation of SIPC, was enacted by Congress after the back office crisis of the late ‘sixties. Although it is relatively young compared to some of the statutes we are charged with implementing, SIPA is in serious need of reconsideration given problems that have arisen following the failure of Lehman Brothers, the Madoff Ponzi scheme, the Stanford Ponzi scheme, and still other, lesser failures. As it stands now, SIPA is a mystery not only to investors, but arguably even for SIPC members.
And there is a laundry list of other areas of basic “blocking and tackling” to which the Commission needs to pay considerably more attention. In that bucket, I would place updating our rules regarding transfer agents, final rules for the 17h broker-dealer risk assessment program, and hopefully soon a final rulemaking implementing the so-called Onnig amendments, which contain important net capital and customer protection rule amendments. And on a topic near and dear to this audience, I continue to believe that the Commission needs to provide guidance to the industry regarding failure to supervise liability for legal and compliance personnel, and I hope we can find the right vehicle to do that in the near future.
And, of course, we need to finally move forward with considering rules that will update and formalize the Automation Review Policy, or ARP. The ARP program has been voluntary since it was created in response to the 1987 market crash. Recent events in the equities markets have raised concerns about exchange controls, and it is my hope that the upcoming technology roundtable and related interaction with stakeholders will provide the Commission with sufficient data to thoroughly evaluate our options, and ultimately allow the Commission to make appropriate policy choices in an ARP rulemaking process.
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So we come back to the purpose of the SEC as an expert independent agency. The SEC’s mission is threefold: “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
And that brings us to the key question: Given that threefold mission, given the conditions we are actually experiencing four years after the 2008 crisis, is the SEC spending its time as it should? Do the priorities reflected in the SEC’s current rulemaking agenda stem from our expert appreciation of current market conditions and the most pressing problems within them? Do they, moreover, reflect the SEC’s proper situation in the regulatory constellation? By what criteria or standards do we seem to set our priorities? To what extent do our apparent priorities stem from other agencies’ policy preferences or institutional mandates?
Those questions seem to me well worth critical consideration. After all, the SEC can’t do everything. The Commission and its staff’s time and attention are more limited commodities than are policy options in Washington – especially if our solutions need not address any demonstrable problem. And we, as an agency, no less than individually, find ourselves surrounded with many superficially attractive ways to distract ourselves.
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Our agenda is necessarily shaped by legislation. Dodd-Frank and the JOBS Act are the current headline-grabbers. But, we must not forget the fundamentals; we must not lose sight of our core mission.
And when we engage in any rulemaking, we must heed the statutory requirements that seek to ensure that our rules are based on sound analytic foundations, rather than policy preferences alone. When we write rules, we are required to consider how the rule will protect investors, as well as whether it will promote efficiency, competition, and capital formation.” When the Commission engages in Exchange Act rulemaking, we must consider the “effect on competition” of the proposed rule, with the proviso that we may not adopt the rule if the burden it would impose on competition is not “necessary or appropriate in furtherance of the purposes of the act.” And we are subject to the generally applicable “notice and comment” rulemaking process established under the Administrative Procedure Act of 1946, which not only requires us to put out our proposed rules for public notice and comment, but also provides that our rules may be set aside if they are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.” The SEC is subject to a rigorous economic analysis requirement, and we must ensure that we, in turn, apply the same rigor to substantive SRO rule filings.
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So where does all this leave me? What lesson do I find in the Commission’s scatter-shot menu of short-term and reactive priorities? Largely this: It’s important for the SEC to prioritize the basics – the “blocking and tackling” under our original statutory mandate, but in the context of the new realities of our markets. And with respect to the JOBs Act, we must understand that each of the congressional mandates involves a core area of SEC oversight.
Where Congress has seen fit to send us to exercise discretion in novel areas, we should carefully assess the facts and all relevant data in their full context, including potential knock-on effects of our possible responses before we act. Where Congress gives us a simple direction to act in a precise manner not susceptible to discretionary quibbling – like removing the ban on general solicitation pursuant to section 201(a) of the JOBS Act – we should use our full procedural armory to do so without delay.
And all the while, let's not forget common sense: foreign policy should be left to the State Department, and economic analysis to economists. And, for that matter, environmental science to the scientists. The Commission should not be afraid to use its exemptive authority as necessary to ensure that our rules don’t have needlessly burdensome or counterproductive effects as applied. That is why Congress gave it to us. And where job creation and capital formation are at issue, the Commission should be doing everything in its power to fulfill its statutory obligation to facilitate positive change. That, too, is our job.
Thank you all for your attention. I wish you a successful and educational conference.