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Speech by SEC Commissioner:
Remarks before the SIFMA Compliance and Legal Fall Seminar


Commissioner Elisse B. Walter

U.S. Securities and Exchange Commission

SIFMA Compliance & Legal Society
Marriott Marquis
New York, New York
October 25, 2011

Good Morning. Thank you, Lauri, for that kind introduction and for inviting me here today. It is very nice to see so many familiar faces. I am reminded of the many earlier occasions when I attended C&L seminars while at FINRA. It is a great pleasure to be back here with you in my current role at the SEC, and to be able to engage in a dialog about the Commission’s work during this very busy time. Although there is a lot I could cover, I will try to be brief (a difficult task for me), and more than a little selective, so that there will be time to cover all the questions that I know my old friend Dave DeMuro is planning to pepper me with during the Q & A session.

I will begin by focusing on some of the Commission’s recent efforts to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), and then briefly discuss a few other important Commission initiatives. Before I go any further, however, let me just remind you that my remarks today represent my own views and not necessarily the views of the Commission, the individual Commissioners, or my colleagues on the Commission staff.1

Dodd-Frank Act

We are now well past the one year anniversary of the enactment of the Dodd-Frank Act. The Commission has accomplished a great deal, but there is, of course, much more yet to be done.

The Commission already has proposed or adopted rules for more than three-fourths of the more than 90 rulemaking provisions mandated by the Dodd-Frank Act. And, that figure doesn’t even take into account the rules under the dozens of other provisions in the Dodd-Frank Act that provide the Commission with discretionary rulemaking authority. The Commission also has completed approximately half of the more than twenty Dodd-Frank-required studies and reports.

In the interest of time, let me highlight just a few of our accomplishments. Just two weeks ago, on October 12th, the Commission released two important proposals for public comment—the so called “Volcker Rule,” which is often cited as one of the most crucial parts of the Dodd-Frank financial regulatory overhaul; and a proposal setting forth registration requirements for security-based swap dealers and major security-based swap participants.

Volcker Rule

Just a mention of the “Volcker Rule” proposal: it was issued jointly with the Federal banking agencies and eventually the CFTC, and would implement Section 619 of the Dodd-Frank Act to carry out Congress’ intent to curb proprietary trading of commercial banks and their affiliates.2 As you know, we have asked many questions in the release. It is my hope that we will receive many helpful comments in response, preferably supported by empirical data, to help the Commission determine whether, at the adoption stage, it should provide more clarity and specificity—especially in the exceptions to the rule permitting underwriting, market making-related, and risk-mitigating hedging activities—in order to strengthen our rule and effectively carry out the statute. Please give us the benefit of how you analyze our proposal and the conclusions you reach based on your analysis.

Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants

On the same day, the Commission voted to propose rules stemming from Title VII of the Dodd-Frank Act that would provide the framework within which security-based swap dealers and security-based swap participants must register with the Commission.3 The proposed registration program for security-based swap dealers largely mirrors the registration program applicable to broker-dealers, since the broker-dealer registration regime should be very familiar to many security-based swap dealers, who, in fact, may already be registered and regulated as broker-dealers or may be affiliated with broker-dealers.

Also borrowing from the broker-dealer and some other registration regimes, an entity seeking to register as a security-based swap dealer would be subject to an assessment (in this case, a self-assessment) of whether it possesses the basic capabilities to conduct its business in a registered capacity. In my view, this assessment is especially important for security-based swap dealers since their business involves a high degree of operational complexity, as well as significant financial resources and—with the enactment of the Dodd-Frank Act—compliance with a number of new statutorily-mandated requirements.

Specifically, the rule would require a Senior Officer Certification in which a senior officer must attest that, after due inquiry, he or she has reasonably determined that the security-based swap dealer has the operational, financial, and compliance capabilities to act as a security-based swap dealer and has documented the process by which he or she reached such determination. This, to me, is a critical part of the proposal, given how important it is for us to know whether a potential registrant can function properly without putting investors or the markets at undue risk.

In an ideal world, I believe that the assessment process should be conducted by regulators; thus, I would have preferred that the Commission be given the resources necessary to conduct a comprehensive evaluation of each potential registrant immediately after it files an application for registration. However, recognizing that practical realities necessitate an alternate approach here, I was happy to support the self-certification proposal as a good, practical solution for now, and am looking forward to receiving comments on our proposed registration program. In particular, please let us know how the certification process will work and whether, as proposed, it should be applied to major security-based swap participants, whose role is not the same as that of dealers.

I was also extremely pleased that the Commission, in the same release, publicly announced its intent to conduct a comprehensive review of its existing registration programs. Such a comprehensive review of the vetting process associated with registration should help the Commission reevaluate its existing registration programs for all Commission registrants to enhance their efficiency and consistency and to ensure that we only grant registration to market participants that have the requisite capabilities to perform their important market functions.

Uniform Fiduciary Duty and Harmonization

Shifting gears, let me turn now from swap dealers to broker-dealers and a topic that has long been near and dear to my heart—the need to protect retail investors seeking investment advice by harmonizing the regulation of investment advisers and broker-dealers. As you know, among the many important studies mandated by the Dodd-Frank Act is the study required under Section 913 of the Dodd-Frank Act (“913 Study”), which the Commission sent to Congress last January. The 913 Study, which I wholeheartedly joined, recommended that investment advisers and broker-dealers both be held to a uniform federal fiduciary standard when they are providing personalized investment advice about securities to retail investors. That standard would be “no less stringent” than the standard that is currently applied to investment advisers under the Investment Advisers Act of 1940. Specifically, the Study recommends that the Commission exercise its rulemaking authority to adopt a standard of conduct requiring every broker, dealer, and investment adviser, when providing personalized investment advice about securities to a retail customer (and any other customers identified by the Commission), to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.

Given how often I have spoken on this topic in speeches and in countless meetings with broker-dealers and investment advisers, you may be aware that adoption of a uniform fiduciary standard has long been a goal of mine. It is my firm belief that establishing a uniform fiduciary standard is crucial to protecting retail investors. The lines between investment advisers and broker-dealers continue to blur, with both sets of professionals providing investment advice to the retail investing public, including my Aunt Millie, and often “changing hats” when they do. Retail investors like Aunt Millie generally—and appropriately--expect investment professionals (including both investment advisers or broker-dealers) to act in their best interests, and the 913 Study correctly concludes that retail investors should not have to parse through legal distinctions to determine whether the advice they receive is provided in accordance with their expectations.

However, determining that a person should be subject to a fiduciary standard is only the beginning of the analysis in my opinion. We need to explain what that duty requires. Both investors and the industry deserve the clarity that Commission guidance and rulemaking would provide. The 913 Study recommends that the Commission address the components of the uniform fiduciary standard--the duty of loyalty and the duty of care—and I look forward to moving forward on this initiative.

In addition to establishing a uniform fiduciary standard, I would like to see us work towards harmonizing other aspects of the regulation of broker-dealers and investment advisers. When investment advisers and broker-dealers are performing the same or substantially similar functions, they should be subject to the same or similar regulations. Thus, I was particularly pleased to see the report's recommendations on that question, including that the Commission consider whether investment advisers should be subject to a substantive review prior to their registration with the Commission.

These are just a few of the many rulemakings and reports mandated by the Dodd-Frank Act that the Commission has completed. There are, of course, many more to come.

Beyond Dodd-Frank

As the Commission is working diligently to implement the provisions of the Dodd Frank Act, however, I am also pleased to report that we are also continuing work in other critical areas as part of our mission to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation. Let me just mention two of our important initiatives.

Consolidated Audit Trail

As part of the Commission’s efforts to improve market structure, we have proposed rules to establish a consolidated audit trail. Adopting final rules in this area is something that I am eagerly hoping the Commission will accomplish in the very near future.

Although the development of a consolidated audit trail is a major undertaking, it actually boils down to a simple issue: An agency with the mission to maintain fair, orderly, and efficient markets needs to understand what is going on in those markets—and currently, the Commission simply does not have the full scope of information that it needs at the time that it needs it. As order flow often moves from one marketplace to another, the Commission is not adequately equipped with the surveillance capabilities to gather and analyze cross-market data in a timely manner.

In order to do its job well, the Commission must have access to detailed, accurate, comprehensive and timely data regarding market participants and trading activities. In July, the Commission moved forward by adopting the large trader reporting requirements, which would provide the agency with more information about large traders and their trading activities. I believe that rule will further the Commission’s understanding of entities or individuals who qualify as large traders and help its analysis of the role they play in the marketplace, including the impact of their trading activities on the interests of long term investors. However, I continue to believe that the large trader reporting system alone does not provide a complete picture of the markets.

We must seek to further improve our access to information to effectively monitor the markets and detect and investigate illegal activity in a timely fashion. Valuable resources are wasted and time is lost when our staff is tasked with tracking down, sorting through, and aggregating disparate data from disparate sources. For the data to be relevant and meaningful, it must be comprehensive; for example, the identification of customers is critical. In addition, the data should be collected and categorized systematically and also be available promptly. A consolidated audit trail, coupled with the information provided by a large trader reporting system, would substantially enhance our ability to regulate effectively and comprehensively.

The Commission received many thoughtful and informative comments on the proposal, which addressed a wide variety of issues including the estimated cost of implementing a consolidated audit trail and possible alternatives for achieving the Commission’s goals in proposing a consolidated audit trail. The Commission staff is currently considering the comments, including alternatives suggested, and preparing recommendations for a final rule. My hope is that we move quickly to adoption, and in doing so, retain key elements of the proposal that I believe are crucial to an effective surveillance system. I also would like to see a scalable system in which the necessary building blocks are present so that we can move beyond NMS securities and expand the scope of the consolidated audit trail as soon as practicable to include additional products, giving SROs and the Commission access to a truly comprehensive consolidated audit trail for all securities traded in the U.S. markets.

Municipal Securities

Finally, let me just say a few words about another topic that is near and dear to my heart—municipal securities.

As you may know, Chairman Schapiro asked me to lead an effort to hold field hearings across the country to hear the views of investors and others who experience the municipal securities market from many different perspectives. Through the hearings and numerous meetings and conference calls, we have elicited the analyses and opinions of a broad array of municipal market participants. The SEC staff is currently writing a report that will describe the state of the municipal securities market and the input we received, as well as make recommendations for further action to improve the market—whether through legislation, regulation, or industry initiatives.

I do not want to prejudge the contents of the report, and there is too much to attempt any sort of “preview” here, but I can tell you that we have learned a great deal from market participants and others representing a lot of different constituencies. One constant refrain is a desire for more frequent, timely, useful and accurate disclosure, particularly post-issuance disclosure in the secondary market. Fortunately, we also heard that municipal issuers and investors are beginning to work together to identify the types of interim information that’s desirable and able to be provided. Another focus of market participants has been how – in both the short and the long term—to improve pre-trade price transparency. In fact, on a related side note, what I learned in this review has reinforced my view that the Commission should commence a review, seeking input on ways in which we could improve transparency in all of the fixed income markets.

Turning back to the municipal securities market, we also heard about a range of early warning signs of financial distress. We also heard about the need for training of municipal officials regarding their disclosure obligations. We heard about how differences in accounting standards along with many other factors may impact an investor’s ability to compare financial information among different municipal issuers. We heard that there are some significant conflicts of interest that affect pricing and appropriateness of swaps, and it was suggested that municipal officials may not understand fully swap transactions and the risks relating to swaps.

I look forward to moving toward the staff’s completion of the report, which, of course, is a multi-division and office effort. As I have said before, investors in municipal securities cannot be treated as second class citizens. I am hopeful that the staff’s recommendations will help to rectify this problem.


Let me end here. Although I have touched on only a few of the many important Commission rulemakings in the past year, I hope you found these remarks helpful. It at least gives you sense of what one Commissioner at the SEC finds interesting. If you have observations or opinions on these issues or other items that you would like to share with us, I would encourage you to do so. We really do value public input on all the issues that we face as regulators. I look forward to hearing from you, and now I look forward to your questions.

1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publications or statements by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, other Commissioners, or the staff.

2 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, Securities Exchange Act Release No. 65545 (Oct. 12, 2011), available at http://www.sec.gov/rules/proposed/2011/34-65545.pdf.

3 Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, Securities Exchange Act Release No. 65543 (Oct. 13, 2011), available at: http://www.sec.gov/rules/proposed/2011/34-65543.pdf.



Modified: 10/26/2011