Statement at an Open Meeting on Cross-Border Security-Based Swap Rules Regarding Activity in the United States and Pay Versus Performance Disclosures
Chair Mary Jo White
April 29, 2015
Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on April 29, 2015 under the Government in the Sunshine Act. The Commission today will consider two staff recommendations for rule proposals to implement two Dodd-Frank Act mandates. The first recommendation is from the Division of Trading and Markets for proposed rules relating to the application of Title VII requirements to non-U.S. persons that are engaged in certain dealer activity in the United States. The second recommendation is from the Division of Corporation Finance for proposed rules to require companies to disclose the relationship between compensation actually paid to executives and company financial performance.
Cross-Border Security-Based Swap Rules Regarding Activity in the United States
The first item on our agenda calls for the Commission to consider a central proposal for the cross-border regulatory framework for security-based swap activities under Title VII of the Dodd-Frank Act. The recommendation would apply certain Title VII requirements to transactions that a non-U.S. person – in connection with its dealing activity – arranges, negotiates, or executes using personnel located in a U.S. branch or office. These proposed rules are critical for the SEC’s regulation of the security-based swap market as they would help ensure that both U.S. and non-U.S. dealers are subject to our registration, reporting, public dissemination and business conduct requirements when they engage in security-based swap activity in the United States, resulting in increased transparency and enhanced stability and oversight.
In June 2014, the Commission adopted important final rules and guidance on cross-border issues arising under Title VII, specifying when market participants engaged in cross-border security-based swaps would be subject to SEC regulation as security-based swap dealers or major security-based swap participants. In the adopting release, the Commission deferred consideration of one key matter – the application of Title VII requirements to activity in the United States related to dealing by non-U.S. counterparties. We noted that, given the number of significant questions raised by commenters to our initial proposed approach, we would solicit additional public comment. The proposal before the Commission today seeks that additional public comment before we proceed to final rules.
In developing this proposal, we have been keenly aware of the important steps that the CFTC has already taken in this area and the compliance implications that differences in our final approaches may create for market participants. The staff has carefully considered not only comments submitted to us in response to our Cross-Border Proposing Release but also the views that the CFTC received regarding a November 2013 Staff Advisory that addressed similar issues.
The staff has also spent significant time with CFTC staff discussing how to address concerns raised by dealing activity in the United States. There are, of course, differences in our respective markets that could justify differences in our rules. But my hope is that this proposal for the security-based swap market represents a significant step in our efforts to address what activity in the United States is relevant in determining to what extent Title VII should apply to a transaction between two non-U.S. persons.
This proposal significantly improves on the approach originally proposed in 2013. It now centers on activity that is carried out by a non-U.S. person or its agent in the United States in connection with its dealing activity, rather than focusing on the activity of any counterparty to a security-based swap transaction. Because a considerable proportion of all security-based swap activity in our market is dealing activity, this approach should facilitate the ability of market participants to apply the proposed rule in practice while helping ensure that we are able to continue regulating the significant dealing activity that occurs within U.S. borders. Under today’s proposal, a non-U.S. dealer would need to look only to where its own personnel or its agent’s personnel engage in certain market-facing activity with respect to a particular security-based swap transaction. If those personnel are located in a U.S. branch or office, various Title VII requirements would and should apply to the transaction.
Under the proposal, for example, a transaction would count in the calculations made by non-U.S. persons to determine whether they need to register with the Commission as dealers, thus ensuring their dealing activity in the United States at levels above the threshold would be subject to appropriate oversight and provide the Commission access to their books and records. These measures are particularly important because some of the most significant non-U.S. dealers are in fact part of U.S.-based financial groups.
The trade reporting and public dissemination of transaction data requirements of Title VII would also apply to these transactions. These requirements should also enhance the Commission’s ability to monitor the market, including for abusive or manipulative conduct. And it should bring needed transparency, particularly to the inter-dealer market, to the benefit of all participants in the market -- dealer and non-dealer alike.
I want to commend the staff on their very thoughtful analysis and hard work on this proposal.
Before I ask Steve Luparello, Director of the Division of Trading and Markets, to discuss the proposed rules, I would specifically like to thank Steve and his Deputy Director, Gary Barnett, for their leadership in this rulemaking, as well as Steve’s counsels Malou Huth and Carl Emigholz. I would also like to especially commend the rulemaking team for their hard and exceptional work: Brian Bussey, Carol McGee, Richard Gabbert, and Margaret Rubin from the Office of Derivatives Policy, and Mark Flannery, Jennifer Marietta-Westberg, Vanessa Countryman, Narahari Phatak, and Charles Lin from the Division of Economic and Risk Analysis.
Many thanks as well to Annie Small, Lori Price, Brooks Shirey, Bob Bagnall, Cynthia Ginsberg, and Mykaila DeLesDernier, from the Office of the General Counsel. They have provided invaluable assistance in developing and fine-tuning the release.
In addition, I would like to thank many other staff throughout the agency for their contributions, including Paul Dudek, Amy Starr, and Andrew Schoeffler from the Division of Corporation Finance; Reid Muoio, Charlotte Buford, and Kerry Knowles from the Division of Enforcement; Sara Crovitz, Michael Didiuk, and Rachel Loko from the Division of Investment Management; Michael Hershaft and Carrie O’Brien from the Office of Compliance Inspections and Examinations; Eric Pan, Kathleen Hutchinson, and Katherine Martin from the Office of International Affairs, and Kim Allen, Peter Curley, Joe Furey, Michael Gaw, George Gilbert, Wenchi Hu, Paula Jenson, Caite McGuire, Tom McGowan, David Michehl, Jeffrey Mooney, Randall Roy, Nancy Sanow, Heather Seidel, JoAnne Swindler, Josephine Tao, and Haime Workie from the Division of Trading and Markets.
Finally, I would like to express my gratitude to my fellow Commissioners and all of our counsels for their very hard work and comments on these and related rules over these past months.
Now I’ll turn the meeting over to Steve Luparello and his team to provide additional information on the Division’s recommendations today.
Pay Versus Performance
The second item on our agenda is a recommendation from the Division of Corporation Finance to propose amendments under Section 14(i) of the Exchange Act, as mandated by Section 953(a) of the Dodd-Frank Act, to require companies to disclose in a clear manner the relationship between executive compensation actually paid and the financial performance of the company.
This mandate, often referred to as pay-versus-performance, would give shareholders a new metric for assessing a company’s executive compensation relative to its financial performance. Having a description of how the executive compensation actually paid relates to the financial performance of the company can assist shareholders in assessing a company’s executive compensation practices and policies. The disclosure resulting from the proposed requirements may also help to inform shareholders when voting in an election of directors and in connection with a shareholder’s advisory vote on executive compensation.
As with other Dodd-Frank Act rulemakings, we received comment from the public prior to this proposal, and we have considered those comments as we developed today’s proposed rules. The proposal before us would require disclosure that can be compared across companies, while also continuing to allow companies flexibility in how they set forth their pay-versus-performance relationship and how they supplement their disclosure to reflect their specific situation.
I am very interested in receiving public comment on the proposal and the questions raised in the release regarding the choices made and potential alternatives to those choices. For example, is total shareholder return the optimal measure of financial performance, as the rule proposes? Are there other measures that would provide useful information to shareholders and that would be consistent with the statutory mandate to take into account changes in the stock value and any distributions?
The proposal would also require pay-versus-performance disclosure for all companies other than foreign private issuers, registered investment companies, and emerging growth companies, which are statutorily exempted from the requirement. Smaller reporting companies would be subject to the requirements, but the proposal includes scaled disclosure requirements for these companies and the requirements for them would be phased-in over time.
I am interested in views about how the information will be used, and whether shareholders are likely to use the information with respect to investments or voting decisions and/or whether they are likely to use this information to compare the companies in which they invest. I am particularly interested in views about how investors in smaller reporting companies will use this information and the costs to these companies of providing this information. This feedback would help inform us about the tradeoffs we should consider relating to the comparability of the information and the flexibility and costs associated with providing the information.
Under the proposal, companies would be required to provide information in an interactive data format, XBRL, a requirement that would be phased-in for smaller reporting companies. Requiring the disclosure in interactive data format could increase the comparability and usefulness of the disclosures. I also encourage shareholders, companies, and other interested parties to weigh in on this and all aspects of the proposed rules.
Before I turn the proceedings over to Keith Higgins, the Director of the Division of Corporation Finance, to discuss the recommendations, I would like to thank the staff for their hard work on this proposal. Specifically, I would like to thank Keith Higgins, Betsy Murphy, Felicia Kung, Eduardo Aleman, Steven Hearne, Jennifer Riegel, Anne Krauskopf, Joel Levine, and Austin Lee in the Division of Corporation Finance; Annie Small, Rich Levine, Bryant Morris, and Dorothy McCuaig in the Office of the General Counsel; Mark Flannery, Scott Bauguess, Vanessa Countryman, Simona Mola Yost, Tara Bhandari, Walter Hamscher, Matthew Slavin, and Bradley Coleman in the Division of Economic and Risk Analysis; Michael Pawluk and Diane Blizzard in the Division of Investment Management; and Blair Petrillo in the Office of Chief Accountant. I again thank my fellow Commissioners and their counsels for their work on this proposal.