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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Opening Statement at April 28, 2004 Open Meeting


Chairman William H. Donaldson

U.S. Securities and Exchange Commission

Washington, D.C.
April 28, 2004

Good afternoon, this is an open meeting of the Securities Exchange Commission. There are three items on this afternoon's agenda.

The first item is a recommendation from the Division of Investment Management that we propose a limited exception from the Investment Advisers Act for thrift institutions. Under the proposal, thrifts would be excepted from the Advisers Act to the extent that they provide investment advice to -

  • Fiduciary accounts in their capacity as trustee, executor, administrator, or guardian; and
  • Collective trust funds they sponsor.

The staff is also recommending that we propose a new rule under the Exchange Act to exempt thrifts' collective trust funds from the registration and reporting requirements of the Exchange Act.

Although banks have been statutorily excepted from the registration requirements of the Investment Advisers Act for many years, there is no parallel exception for thrifts. While the Gramm-Leach-Bliley Act of 1999 expanded the definition of "bank" in the Investment Company Act to include thrifts, it left the status of thrifts under the Investment Advisers Act unchanged. The staff's recommendation is designed to except thrifts from the Advisers Act when they perform investment advisory functions integral to trust activities that banks have historically provided and that thrifts are now authorized to provide.

I recognize that the thrift, banking, and investment adviser industries have competing concerns about this rule proposal, and I am glad to see that the staff has been mindful of these issues while developing its recommendation. While I believe that the recommended approach is true to the purposes of the Investment Advisers Act while balancing the interests of the various stakeholders, and providing appropriate deference to other federal regulators; I also recognize that these are difficult issues, and I look forward to hearing commenters' views.

Before turning the discussion over to Paul Roye, Director of the Commission's Division of Investment Management, I would like to take a moment to acknowledge the members of the staff who were instrumental in bringing this recommendation to the table: Bob Plaze, Jennifer Sawin, Jamey Basham, and Robert Tuleya. Congratulations on a fine piece of work.

* * *

The next item on our agenda is a package of proposals from the Division of Corporation Finance regarding the registration, reporting and disclosure requirements for asset-backed securities. In less than 25 years, the market for SEC-registered asset-backed securities has become a large and important segment of our fixed-income capital markets. Some estimate annual public issuance of up to $800 billion worth of these securities.

Asset-backed securities call for reporting and disclosure that differ from requirements for securities issued by operating companies. The Commission's existing disclosure and reporting requirements, which are designed primarily for corporate issuers, do not always fit well with the information that is material for most ABS transactions. Over time, Commission staff, through no-action letters and the filing review process, have developed a framework to address the different nature of ABS reporting and disclosure. However, the accumulated guidance is not as transparent as we would like. An ABS registrant or investor must review and assimilate a large body of no-action letters and other informal positions to understand applicable requirements. This time-consuming practice decreases efficiency and can lead to uncertainty.

Therefore, today's package of proposals includes:

  • updating the Securities Act registration requirements for offerings of asset-backed securities;
  • consolidating existing staff interpretive positions that allow modified Exchange Act reporting more suitable for asset-backed securities;
  • providing disclosure guidance and requirements relevant to asset-backed securities; and
  • codifying and streamlining existing staff interpretive positions that permit the use of additional written communications in a registered offering of asset-backed securities.

The Commission is fortunate to have been able to gather staff with the experience and judgment necessary to recommend a comprehensive package of rules like this. This significant step is in no small part attributable to the dedication and skill of the staff at the table today and the many others who work tirelessly behind the scenes. And now that a significant body of asset classes has developed in this market, it is appropriate for us to put this talent to good use to be proactive in providing clear guidance.

The staff has developed a package of rule proposals that attempts to enhance transparency, provide certainty and alleviate possible confusion for the overall ABS market. Because the proposal addresses the entire registration, reporting and disclosure process for asset-backed securities under the Securities and Exchange Acts, it is necessarily long, although it is designed primarily to codify current staff position and industry practice with incremental changes in certain areas. Feedback from commenters will be important in evaluating the proposal and any needed refinements. If the Commission approves the staff's recommendation, I look forward to hearing commenters' views, and strongly encourage investors, as well as all industry participants, to comment on the proposal.

* * *

The final item on our agenda today is a recommendation from the Division of Market Regulation that we adopt rules and rule amendments establishing a framework for voluntary group-wide supervision of broker-dealer holding companies. There are two parts to this framework, which we proposed last October.

First, the rules would create a group-wide supervision program for large broker-dealer holding companies, called "Consolidated Supervised Entities" or "CSEs." Participation in this program would enable the broker-dealer within the CSE to use an alternative risk-based approach to satisfy the Commission's regulatory capital requirements, instead of using the current net capital rule. In addition, a CSE that does not already have a principal regulator may be able to rely on the Commission's group-wide supervision to satisfy some European Union regulatory requirements.

The CSE rules begin to respond to industry comments that regulatory capital requirements should be linked more closely to the firm's internal risk management procedures. Additionally, for a CSE that does not already have a principal regulator, the rules may help it avoid overlapping or conflicting regulatory mandates in the different countries where it operates.

The second part of the framework would implement the Gramm-Leach-Bliley amendments to the Securities Exchange Act of 1934. A broker-dealer holding company could elect to be treated as a "Supervised Investment Bank Holding Company," or "SIBHC," if it is not affiliated with a bank or thrift. This would permit the SIBHC to become subject to group-wide supervision by the Commission, which, in turn, may enable the SIBHC to satisfy some European Union regulatory requirements and thereby avoid inconsistent or redundant obligations.

This rulemaking is an important step towards modernizing our regulatory approach to make capital requirements more risk sensitive. I believe that the CSE proposal, in particular, helps us move from a command-and-control regulatory model to a more efficient and goal-oriented approach.

Additionally, given the rapid and ongoing convergence of different kinds of financial services providers into consolidated entities with operations in multiple jurisdictions, and the globalization of competition, it is critically important that we formalize our program for supervising the large broker-dealer holding companies to ensure that firms are supervised on a group-wide basis and to avoid regulatory gaps in their oversight.

If we do this wisely, and we and our fellow regulators listen to and learn from each other, we will help the investing public by using the best available tools to manage risks to the health of our markets wherever they arise, and by allowing the market for financial services to continue to evolve. At the same time, we will help the financial services industry by removing regulatory obstacles that tilt the playing field or impose needless costs.

Nevertheless, there are real challenges for the Commission as we move towards formal consolidated supervision of broker-dealer holding companies. It is incumbent on the Commission and the staff to build expertise with the approaches taken by other financial services regulators, and to determine whether their techniques and philosophies can be adapted to improve the way we regulate the industries under our supervision. As the distinctions among the players and services in the financial arena become more and more artificial, there will have to be greater coordination of regulatory efforts, and cooperation among regulators, both domestically and internationally.

In this regard, I would like to commend the Division of Market Regulation on their consultation and cooperation with the Federal Reserve, the Department of Treasury and other financial services regulators in developing the recommendations the Division brings to us today.

As always, my thanks to Annette Nazareth for her leadership and advice and to the members of the Market Regulation staff for their hard work on these complex and thoughtful proposals. I particularly want to acknowledge some of the people who were instrumental in developing the recommendations before us today: Bob Colby, Mike Macchiaroli, Caite McGuire and Tom McGowan.



Modified: 04/28/2004