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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks Before the PLI 42nd Annual Institute on Securities Regulation


Commissioner Elisse B. Walter

U.S. Securities and Exchange Commission

New York, NY
November 10, 2010


Thank you so much, Colleen, for that lovely introduction. It’s a real pleasure to be here with you and a particular honor to give the opening keynote at this conference, which is always viewed as the place to be in early November. This year’s agenda is packed with useful information.

Or course, before I begin my remarks, please let me remind you that they represent my own views, and not necessarily those of the Commission, my fellow Commissioners, or members of the staff.1

Given the relatively early hour, I thought I would ease you into the conference with a bit of historical trivia. One hundred and fifteen years ago this week, Wilhelm Roentgen hunkered in his laboratory to continue his investigation into the effects of passing an electrical charge through vacuum tubes. He noticed a faint shimmering and speculated that a new type of ray might be responsible. Based on the mathematical designation for something unknown, he later called them “X-rays.” Six years after his discovery, Roentgen was recognized for his work with the first Nobel Prize in Physics.

Dodd-Frank Act

In effect, the current state of play in financial regulatory reform is the inverse of this bit of trivia. X-rays enable us to look through the outer framework of our bodies to the bones below. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or the “Act”) provides a good image of the internal structure — or “bones” — of the new financial regulatory system. Yet, it is only through the implementation process that we will put flesh on the bones and the Act and its import will be fully determined and appreciated.

Today, we are actively working with other regulators on the process of statutory implementation. The Commission provides critical perspective, particularly because of our unique investor protection mission. In a testament to our Chairman’s leadership, the Act recognizes this and provides the SEC with enhanced tools to carry out this mission.

I would like to highlight some of these tools today, through a look at key areas of Dodd-Frank that apply to the SEC. As you will hear a lot about this new legislation throughout the program, from CFTC Chairman Gensler and many others, I will only touch briefly upon the main components and where things stand in the implementation process.

Systemic Risk

First, systemic risk. The financial crisis demonstrated that the regulatory regime then in place could not adequately identify and address systemic risks. One of the weaknesses of the regime was a siloed structure that failed to provide regulators with all the authority and real-time information they needed.2

The Act’s Title I seeks to address systemic risk by identifying and regulating financial firms that are so large, interconnected, or risky that their collapse could threaten the entire financial system. It empowers financial regulators, through the creation of a new Financial Services Oversight Council (the “Council”), to break down the previously-siloed regulatory framework and address systemic risks on a more coordinated basis. This Council is composed of the heads of federal financial regulatory bodies, including the SEC.

The Council must consult with the primary regulators, including the SEC, of firms it seeks to designate as systemically important. These firms would be subject to increased oversight and regulation, including stricter capital and other prudential standards. In certain circumstances, the Council could even force a systemically significant firm to discontinue or place limits on certain activities or force it to divest business units or other assets.

The Council met for the first time last month and took a number of important steps to fulfill its mandate under Dodd-Frank. It approved solicitation of public comment regarding the designation of nonbank financial companies, and a roadmap that outlines a timeline of goals of the Council and its independent member agencies to implement the Act.3

In addition to Title I, the Act also contains provisions on systemic risk in Title VIII, which addresses the risks associated with possible contagion among financial firms and markets. The provisions there hone in on financial market utilities and entities that are part of the clearance and settlement process. To implement them, we are working with the CFTC and the Federal Reserve Board to develop a new framework to supervise systemically important financial market utilities, including clearing agencies registered with the SEC.

OTC Derivatives

Next, Dodd-Frank filled a significant regulatory gap with respect to OTC derivatives. These derivatives, such as credit default swaps (“CDS”), played an important role in the recent market crisis. However, the SEC and CFTC were unable to regulate OTC derivatives markets because the Commodity Futures Modernization Act of 2000 explicitly prohibited them from doing so. Title VII of the Dodd-Frank Act steps into that breach. It brings previously unregulated swaps and security based swaps, swap dealers and security-based swap dealers, major swap participants and security-based swap participants, and swap data repositories and security-based swap data repositories under a comprehensive regulatory framework. In doing so, it should improve transparency and facilitate the standardization and centralized clearing of swaps, helping, among other things, to reduce counterparty risk, which was a major source of instability in our financial system.

The Commission is still early in the process of implementing Title VII, but we have already taken some important steps. In August, jointly with the CFTC, we sought public comment regarding key jurisdictional and market participant definitions.4 In the last two months, we have held a number of public roundtables with the CFTC on important areas, such as conflicts of interest, data repositories, reporting and dissemination of trade information, swap execution facilities, and the clearing of CDS.5

Moreover, in October we adopted a temporary rule concerning the reporting of security-based swaps and proposed Regulation MC to mitigate conflicts of interest at clearing agencies, swap execution facilities, and exchanges.6 Finally, just last week we proposed to supplement our existing antifraud authority with new rules to prohibit fraud, manipulation, and deception in connection with security-based swaps.7

In the coming months, you will see a number of other SEC rule proposals under Title VII. The status of these, and other, Dodd-Frank rules is available on the Commission’s website.8

Private Fund Adviser Regulation

In addition to OTC derivatives, Dodd-Frank filled another significant regulatory gap; this one relating to private fund advisers. Title IV of the Act did this primarily through the repeal of the 15-client exemption from Advisers Act registration. As a result, many advisers to private funds, including hedge funds, must register with the Commission. The Act creates exemptions from registration for advisers to venture capital funds and those managing less than $150 million in the United States, but subjects them to recordkeeping and reporting requirements. The Act also creates a new exclusion from “investment adviser” status for family offices. Last month we proposed rules to implement the family office provisions,9 and I expect that the Commission will soon be asking for comment on other rules implementing Title IV as well.

The Act also contains important provisions regarding the collection of systemic risk information from private funds. It authorizes the Commission to require registered advisers to maintain records and file reports with us and to share fund information with the Council in its assessment of systemic risk. We are currently working with the CFTC and other domestic and foreign regulators regarding the reporting of systemic risk information, in order to determine what should be covered and how comparable it would be among regulators.

Credit Rating Agencies

Moving on, Title IX of the Act contains a number of provisions designed to enhance investor protections and improve the regulation of securities. Among them are important provisions relating to credit rating agencies — many of which became effective immediately upon enactment. Dodd-Frank addresses credit rating agencies by providing for greater accountability for credit rating agencies registered with the SEC as nationally recognized statistical rating organizations, or “NRSROs,” and improving the SEC’s regulatory oversight.

For example, it requires rating agency boards to have independent members, and establishes a new SEC Office of Credit Ratings reporting directly to the Chairman. It also removes the agencies’ exemption from liability as experts in registration statements. And, it mandates improvement of internal controls, transparency of rating procedures and methodologies and management of conflicts of interest, reduces regulatory reliance on credit ratings, and enhances the SEC’s enforcement tools.

The Act clarifies that the limitation in the Credit Rating Agency Reform Act of 2006 prohibiting the Commission from regulating the substance of credit ratings or the procedures and methodologies used to determine credit ratings, is not a defense in a Commission proceeding to enforce the antifraud provisions. It also enables the Commission to sanction persons associated with NRSROs and eliminates the possibility of an NRSRO arguing that it could not be sanctioned for material misstatements in its application or required reports because they were “furnished to,” rather than “filed with,” the Commission.

Finally, the Act requires us to review and report to Congress on existing references to credit rating agencies in our rules and modify our regulations to remove any reference to or requirement of reliance on them.

Shortly after Dodd-Frank became law, we asked each NRSRO for information about how it plans to comply with the Act’s requirements and the impact of the Act’s repeal of the exemption from expert liability for ratings included in registration statements. I understand there are concerns about the upcoming expiration of the staff's no-action relief for ratings disclosure in ABS offerings. The staff is quite mindful of that date, and is busy considering that issue.

Also, we have already adopted a final rule revising Regulation FD to remove an exemption for entities whose primary business is the issuance of credit ratings,10 and we are working on other rules.

Executive Compensation

Another key area in Title IX is executive compensation. Last month, we proposed rules to implement the Dodd-Frank provisions that enable shareholders to cast non-binding, advisory votes on executive compensation and “golden parachute” arrangements.11 An advisory “say-on-pay” vote will be required for all public companies subject to our proxy rules — not just TARP companies — and will be required at least once every three years. Our proposed rules would also require companies to disclose whether the vote is non-binding and whether — and if so, how — companies have considered the results of previous say-on-pay votes.

We also proposed rules implementing Dodd-Frank’s requirement for a separate advisory vote on the frequency of presenting the “say-on-pay” resolution to shareholders.12 Shareholders will cast their non-binding “frequency” votes at least once every six years. Our proposals clarify that this vote has to give shareholders four choices on how frequently to conduct the vote — in other words, every 1, 2, or 3 years, or abstain. To ease the transition, we provided guidance that, pending completion of our new rules, we would not object to companies failing to provide an “abstain” choice, since reportedly it is challenging for service providers to change their systems to provide for four choices. But, keep in mind that failure to provide an “abstain” choice means that management cannot vote the card.

The say-on-pay and say-on-frequency votes are required starting at meetings beginning January 21, 2011, whether or not we adopt rules by then. But, I very much hope we can finalize our clarifying rules soon.

We have proposed rules to implement Dodd-Frank’s requirement that companies provide shareholders with a “say-on-parachutes,” an advisory vote on compensation arrangements and understandings in connection with mergers.13 Our proposed rules also implement the “golden parachute” disclosure requirements mandated by Dodd-Frank and expand beyond the statutory mandate to also cover similar transactions, such as going private transactions and third-party tender offers. Unlike the say-on-pay and say-on-frequency votes, the say-on-parachutes votes aren’t required until we adopt the new disclosure rules.

In addition, we issued a proposal to implement the Dodd-Frank requirement for disclosure rules applicable to institutional investment managers. Under Dodd-Frank, institutional investment managers subject to Exchange Act Section 13(f) are required to file annual reports that disclose how they voted on each of the “say-on” votes I just described.14

As I have said before, I believe that “say-on-pay” provisions can build investor trust because they promote increased shareholder involvement and increased board and management accountability.15 As our Chairman Mary Schapiro has said in a broader context, “[t]he SEC cannot and is not interested in determining the communications strategies of individual companies. But we are interested in breaking down barriers that may prevent effective engagement, and affect investor confidence and, ultimately, financial performance.”16 We value your active participation in the rulemaking process, so please send us your comments by November 18th.

Before I leave “say-on” votes, I want to touch briefly on section 957 of the Act, which eliminates broker discretionary voting on executive compensation matters. In September, we approved amendments to New York Stock Exchange Rule 452,17 with similar changes now approved for NASDAQ and the International Stock Exchange.18 As our NYSE order states, the changes cover all three “say-on” votes. Although we approved the NYSE Rule 452 changes on an accelerated basis, we are still requesting and want comments. As I have said in the past following our approval of the changes to Rule 452 to prohibit broker voting of uninstructed shares in director elections, I would very much like to see data and empirical evidence on how these changes have affected shareholders and the companies they own.

Of course, we have other work ahead of us in the executive compensation disclosure arena. Dodd-Frank also requires disclosure of: the relationship between corporate financial performance and executive compensation paid; the ratio, including its numerator and denominator, between a CEO’s compensation and the median annual total compensation for all other company employees; and compensation hedging by directors and employees. In addition, the Act requires us to adopt rules that direct the exchanges to prohibit listing by issuers that do not implement and disclose a policy requiring “clawback” of incentive-based compensation paid to current and former executive officers during any 3-year period preceding an accounting restatement due to material non-compliance with financial reporting requirements. There are no statutory deadlines in Dodd-Frank for our rulemaking in the areas I just highlighted, but July 2011 remains our target date for proposals.

You can expect to hear from us well before then, however, as we move forward to implement the new exchange listing standards required by Dodd-Frank relating to compensation committee independence and conflicts of interest for boards that retain compensation consultants. We will also need to revisit the disclosure rules we adopted last year on compensation consultants because Dodd-Frank requires new disclosures relating to compensation committees and their compensation consultants.19

Asset-Backed Securities

Title IX of the Dodd-Frank Act also requires us to rededicate our rulemaking efforts towards improvements in the asset-backed securitization (“ABS”) process. We are certainly doing that. Last month alone, we proposed rules to require an ABS issuer in a Securities Act registered transaction to perform a review of the underlying bundled assets and to disclose the nature, findings and conclusions of that review, and to require the issuer or underwriter for an ABS offering, whether registered or unregistered, to disclose the findings and conclusions of any review performed by a third party.

In addition, as required by Dodd-Frank, we also recently proposed regulations to require ABS issuers, and credit rating agencies that rate ABS, to provide investors with new disclosures about representations, warranties, and enforcement mechanisms.20 And, of course, we are continuing our review of the thoughtful comments we received on our April ABS rulemaking proposals to revise the disclosure, reporting and offering process for ABS;21 and we will assure that our rules and the statutory requirements apply harmoniously.

Interestingly, some of the Dodd-Frank ABS provisions — and some of our recent Regulation AB proposals — extend beyond registered offerings to the private market. Some have suggested that this type of private offering regulation — whether by Congress or by the SEC — is a radical revision of prior philosophy with respect to sophisticated investors.

It is true that historically we have not mandated specific disclosure to sophisticated investors where we believed that they had the ability to obtain access to the information they needed. But, that does not mean sophisticated investors are excluded from under the SEC’s umbrella of investor protection. As a public comment on our April rulemaking stated with respect to public-style disclosure on ABS issues: “A ‘sophisticated’ investor is only as sophisticated as the quality of information to which it has access.”22 I have re-learned in the aftermath of the recent market crisis that sophisticated investors in structured finance private placements did not always have access to the information they needed. And I don’t believe that we should refrain from addressing that problem just because, in the past, we haven’t mandated specific information for our private offering safe harbors.

Qualified institutional buyers may be well-heeled, but they are still investors we are charged to protect. To date, we haven’t proposed to mandate specific disclosures for other types of Rule 144A offerings, and that would be a significant change and require careful thought. But, if we learn that our assumption about investor access to information is flawed, I think it is reasonable — indeed, it is our responsibility — to consider how to improve investor protection.

Enforcement Powers

Title IX of the Act also addresses the Commission’s enforcement powers. The financial crisis has reinforced the vital importance that enforcement plays in the fair and proper function of financial markets. Through vigorous and even-handed enforcement, we can hold accountable those whose violations of law caused severe hardship, recoup investor losses, and deter others from engaging in wrongdoing.

Dodd-Frank gives the Commission additional tools that will enhance our enforcement program. Significantly, the Act provides for a new award program for whistleblowers providing original information that leads to successful enforcement actions, and requires that we establish an office to administer our rules in this area. Last week we proposed rules to implement the new program,23 and I am particularly interested in your thoughts on this area. Lest I steal any thunder from your Friday panel, I will only mention briefly that other important tools provided by the Act in this area include collateral bars, the nationwide service of subpoenas, aiding and abetting authority, and civil penalties in cease-and-desist proceedings.

Municipal Securities

The last of the main topic areas I will mention today is municipal securities, but to me it certainly is not the least. This large, highly-diverse market is critically important to our economy and national infrastructure—both for investors specifically and also for each and every U.S. resident who relies on the roads, schools, sewers, fire houses and police stations the municipal securities market finances. And, retail investors dominate the market: through direct holdings and mutual funds, they hold roughly 70% of municipal securities.24 Despite these facts, to date the municipal securities market generally has been thinly regulated.

Dodd-Frank does address municipal securities in some important ways, in particular by creating a new regulatory regime for municipal advisors. It requires that a majority of the Municipal Securities Rulemaking Board must be public. It provides for independent funding for the Governmental Accounting Standards Board and requires that we establish an Office of Municipal Securities, which, like the Office of Credit Ratings, must report directly to the Chairman.

Notwithstanding these developments, I believe that investor protection in this area could — and should — be strengthened. We are conducting a series of field hearings across the country to elicit the analyses and opinions of municipal market participants on a broad range of issues, including the timeliness and quality of disclosure and market structure. At the conclusion of those hearings, the Commission staff will prepare a report concerning what we have learned, including their recommendations for further action that could be pursued, which may include legislation, rulemaking and changes in industry practice. Given the press of time and my past extensive statements on the muni market,25 however, I won’t go into these issues further.

Studies and Reports

Turning away from rulemaking, Dodd-Frank requires that we conduct a significant number of studies and issue numerous reports, some of which are being done jointly with other regulators. I would like to mention two reports for which we have primary responsibility and that have rapidly-approaching deadlines.

First, section 913 of the Act requires that we study the effectiveness of legal and regulatory standards for investment advisers and broker-dealers providing personalized investment advice and recommendations about securities to retail customers.

We have moved quickly to undertake this study, particularly given its January deadline, requesting public comment just a few days after President Obama signed the Act into law.26 The response has been significant, and we have received over 3,000 comment letters. Our staff is working hard on the study, principally through an internal working group comprised of staff from different divisions and offices.

The Act gives us the authority to establish a uniform standard of conduct applicable to broker-dealers and investment advisers when providing personalized investment advice to retail and other customers, and the information from the study should be helpful in formulating any rulemaking that the Commission might undertake. The Act provides that the standard will be to act in the best interest of the customers without regard to the financial interests of the professional, and contemplates that it will include the disclosure of material conflicts of interest and be no less stringent than that applicable under the Advisers Act.

To me, the question posed by this study is only the beginning of the work we really need to do in this area. Studies have already shown that retail investors, like my proverbial Aunt Millie, do not understand the differences among financial services professionals. And, in my view, the time those professionals waste worrying about what “hat” they are wearing could be put to much more productive use. What really matters is that the right rules and standards apply to the right conduct and that the best interests of the investing public are served by investment professionals. I hope that we can quickly move on to those questions.

The second report, required by section 914 of the Act, is also due to Congress in January, and involves our analysis of the need for enhanced examination and enforcement resources for investment advisers, including the number and frequency of examinations, whether a self-regulatory organization for investment advisers would augment our efforts, and the approaches to examining dual registrants.


In conclusion, you can see that we have made important headway in implementing Dodd-Frank, and there is also a great deal of work ahead of us. We need your help. Our rule-writing initiatives and studies are public-private partnerships and I think you all know that we rely heavily on information we gather through the notice-and-comment process. Our desire to receive public input on Dodd-Frank measures is particularly keen, because many of the rules address new areas, and because the Act imposes many short deadlines. So, we have set up — on our website — mailboxes to which public comments can be submitted even before we publish proposals.27 Please use them. I appreciate the opportunity to be here with you this morning and share my thoughts. Please know that my door is always open, and I hope to hear from you. Thank you.

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 See also Chairman Mary L. Schapiro, U.S. Securities and Exchange Commission, Testimony Concerning the Lehman Brothers Examiner's Report (April 20, 2010), available at http://www.sec.gov/news/testimony/2010/ts042010mls.htm.

3 http://www.treas.gov/press/releases/tg888.htm.

4 See http://www.sec.gov/rules/concept/2010/34-62717.pdf.

5 See, e.g., http://www.sec.gov/news/press/2010/2010-196.htm; http://www.sec.gov/news/press/2010/2010-166.htm.

6 See http://www.sec.gov/rules/proposed/2010/34-63107.pdf.

7 See http://www.sec.gov/rules/proposed/2010/34-63236.pdf.

8 See http://www.sec.gov/spotlight/dodd-frank.shtml.

9 See http://www.sec.gov/news/press/2010/2010-189.htm.

10 See http://www.sec.gov/rules/final/2010/33-9146.pdf.

11 See http://www.sec.gov/news/press/2010/2010-198.htm.

12 See id.

13 See id.

14 See id.

15 See http://sec.gov/news/speech/2009/spch021809ebw.htm.

16 See http://www.sec.gov/news/speech/2010/spch101910mls.htm.

17 See http://www.sec.gov/rules/sro/nyse/2010/34-62874.pdf.

18 See http://www.sec.gov/rules/sro/nasdaq/2010/34-62992.pdf and http://www.sec.gov/rules/sro/ise/2010/34-63139.pdf.

19 See http://www.sec.gov/rules/final/2009/33-9089.pdf.

20 See http://www.sec.gov/news/press/2010/2010-182.htm.

21 See http://sec.gov/rules/proposed/2010/33-9148.pdf.

22 See http://sec.gov/comments/s7-08-10/s70810-154.pdf.

23 See http://sec.gov/rules/proposed/2010/33-9117.pdf.

24 See Securities Industry and Financial Markets Association, Holders of U.S. Municipal Securities (quarterly data to Q2 2010), available at www.sifma.org/uploadedFiles/Research/Statistics/StatisticsFiles/Municipal-US-Municipal-Holders-SIFMA.xls.

25 See, e.g., http://www.sec.gov/news/speech/2010/spch102810ebw.htm; http://www.sec.gov/news/speech/2010/spch102910ebw.htm.

26 See http://www.sec.gov/rules/other/2010/34-62577.pdf.

27 See http://www.sec.gov/spotlight/regreformcomments.shtml.



Modified: 11/24/2010