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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Statement at Open Meeting to Propose Rules Regarding Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants


Commissioner Troy A. Paredes

U.S. Securities and Exchange Commission

Washington, D.C.
October 12, 2011

Thank you, Chairman Schapiro.

I join my colleagues in thanking the staff for your work on this rulemaking.

Section 764 of Dodd-Frank, which adds Section 15F to the Exchange Act, directs the SEC to provide for the registration of security-based swap dealers and major security-based swap participants (each an “SBS entity”). The Commission’s proposed registration regime centers on the novel approach of the “Senior Officer Certification.” Under the proposal, to register with the Commission, an SBS entity must have one of its senior officers certify that, after due inquiry, the officer has reasonably determined that the entity has the operational, financial, and compliance capabilities to act as a security-based swap dealer or major security-based swap participant, as applicable.

The proposed approach to registration is too flawed and problematic for me to support, even as a proposal. Accordingly, I respectfully dissent. Although there are many shortcomings with the proposal, I will only highlight my principal concerns.

* * * *

The proposed registration regime creates too much uncertainty and gives rise to an unacceptable risk of after-the-fact second-guessing by the Commission. It is not unheard of for the law to be unclear, if only because everything cannot be foreseen and because language only allows us to be so precise. But this cannot excuse the unduly vague and indeterminate standard of the Senior Officer Certification: “operational, financial, and compliance capabilities.” What it means to be “capable” in these respects is simply unknown. As the proposing release acknowledges, the key phrase – “operational, financial, and compliance capabilities” – is undefined. How, then, is a senior officer to know when the SBS entity has cleared the “capabilities” hurdle? How is a senior officer to know whether to sign the certification when the officer cannot determine what he or she is actually certifying to?

Furthermore, in failing to define what “capabilities” means, the release appears to countenance that an SBE entity’s compliance with the federal securities laws, including the rules and regulations that implement new Section 15F of the Exchange Act, may not be enough. In fact, in several instances, the release, as I read it, suggests that “capabilities” requires more than complying with applicable law — that complying with applicable law is necessary but not sufficient to have the requisite “operational, financial, and compliance capabilities.”1 It, therefore, appears that the Commission could use the Senior Officer Certification to impose on security-based swap dealers and major security-based swap participants substantive obligations that go beyond what Section 764 of Dodd-Frank provides for. One thing is certain: The release articulates no clear limits on what the Commission could require of an SBS entity in the name of enforcing the “capabilities” standard.

All of which leads to this: Because what the Commission proposes to require a senior officer to certify to is so vague and unpredictable, SBS entities and their senior officers are not provided fair notice of what the Commission’s registration regime demands. Relatedly, because “capabilities” is not defined or even cabined as a concept, the Commission is afforded too much discretion to ascribe to “operational, financial, and compliance capabilities” any meaning the Commission chooses and too much room for after-the-fact second-guessing. One cannot overlook the risk that the Commission, biased by 20-20 hindsight, will too readily conclude from an unintended (and undesirable) outcome that the SBS entity was not “capable” and thus that the Senior Officer Certification was false. This is particularly troubling because we know that unfortunate occurrences happen even at well-run operations and that there are no absolute assurances against bad results.

* * * *

The proposing release notes that Dodd-Frank requires the Commission to register several new categories of registrants, including security-based swap dealers and major security-based swap participants; and that, as a result, the “Commission is presently reviewing the various standards and processes it uses to facilitate registration of the many types of entities required to register with it.” The release goes on to explain: “In this regard, the Commission plans to issue a concept release designed to collect information and evaluate different aspects of these registration standards and processes. In particular, the Commission intends to consider the policy objectives of registration, how best to achieve those policy objectives through registration and other means, and the relative benefits and costs of the various means available.”

I support the concept release as a useful step toward ensuring that the Commission has comprehensively considered its approach to registration. My support for the concept release, however, introduces another objection I have to the proposed registration regime for SBS entities before us today — namely, the novel and untested approach of the Senior Officer Certification is premature. We should await what we learn from the concept release before forging ahead with this new approach to registration. Too many considerations have not been fully aired and vetted, as the need for the concept release itself indicates. For example, we need to explore how the type of uncertainty I’ve discussed is likely to erect entry barriers or otherwise chill competition and discourage market activity, as well as the risks that could arise if the Commission came to over-rely on senior officer assurances of registrant capabilities.

* * * *

At this time, a more prudent course would have been an approach to registration that the Commission and market participants have more experience with and better understand. Indeed, the proposing release asks about just such an approach. Question 21 provides: “The concept of developing and implementing written policies and procedures has often been used by the Commission to further its regulatory objectives. Should the Senior Officer Certification instead require that a senior officer certify that ‘to the best of his or her knowledge, after due inquiry, the security-based swap dealer or the major security-based swap participant has developed and implemented written policies and procedures reasonably designed to prevent violation of federal securities laws, the rules thereunder, and applicable self-regulatory organization rules?’” I am pleased that the release seeks comment on this specific alternative to the proposed Senior Officer Certification, and I encourage commenters to offer their own alternatives.

Although I am unable to support the recommendation, I still look forward to considering the comments we will receive, both in response to Question 21 and otherwise.


1 One example is this: When briefly discussing the concept of “financial capability,” the release explains that the Commission “will separately propose capital rules” for SBS entities pursuant to Dodd-Frank. The release goes on to say that an SBS entity’s capability to comply with the capital requirements that are adopted “would form a key foundation for the Senior Officer Certification” (emphasis added), although not necessarily the key foundation for the certification. This contemplates that an SBS entity’s “financial capability” is a function of, but not determined by, the entity’s ability to satisfy the capital requirements that the Commission adopts – that “financial capability” is a concept that is related to, but separate from, the Commission’s capital requirements. Might an SBS entity that meets the legally-required capital requirements still not possess the requisite “financial capability”?


Modified: 10/12/2011