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Statement at the Open Meeting - Municipal Advisors and Pay Ratio Disclosure

Chair Mary Jo White

Sept. 18, 2013

Good morning.   This is an open meeting of the U.S. Securities and Exchange Commission on September 18, 2013, under the Government in the Sunshine Act.

I want to begin by welcoming our two newest Commissioners – Commissioner Kara Stein and Commissioner Michael Piwowar – who will be participating in their first open rulemaking meeting.

Both Commissioner Stein and Commissioner Piwowar bring experience and expertise that will significantly enhance the Commission, and they understand and appreciate the importance of our mission.  Commissioner Stein has nearly two decades of experience working on Capitol Hill, including as staff director of the Senate Banking Committee’s Subcommittee on Securities, Insurance, and Investment.  She is a Yale law graduate and her understanding of securities law and financial regulation will be a tremendous asset to the Commission in the busy months and years ahead. 

Commissioner Piwowar is embarking on his second tour of duty at the Commission.  During his first tour, he served as a visiting scholar and senior financial economist in the Office of Economic Analysis, the predecessor to our Division of Economic and Risk Analysis.  He has a PhD in economics from Pennsylvania State University and served as a senior economist at the President’s Council of Economic Advisors.  He has also spent time on Capitol Hill as a senior staff member during the debate and adoption of both the Dodd-Frank and JOBS Acts – also highly relevant and helpful knowledge. 

These are just a couple of highlights of the wealth of experience that our new Commissioners bring to bear on their new positions. We are excited to have them as colleagues and warmly welcome them and the energy and talent.

Today we are considering two important rulemakings mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

First, we will consider whether to adopt final rules regarding the registration and regulation of municipal advisors.

Next, we will consider whether to propose rules required by the Dodd-Frank Act, commonly known as the “pay ratio” rules.

Municipal Advisors

We will begin with proposed final rule on municipal advisors.         

In the wake of the financial crisis, many municipalities suffered significant losses from complex derivatives and other financial transactions.  They entered into these transactions, in many cases, after receiving advice from a group of largely unregulated intermediaries known as “municipal advisors.”  These advisors generally were not required to comply with any particular standard of conduct, they did not have to meet any particular training requirements, and they did not have to disclose any potential conflicts of interest.  The investors in this market were largely left unprotected from these risks, and suffered losses when municipalities went bankrupt or were otherwise unable to meet their obligations. 

Protecting our municipal securities markets and investors must be a priority. 

To address this issue, Congress – in the Dodd-Frank Act – created a new regulatory regime for municipal advisors intended to protect municipalities and investors participating in the municipal securities market.  The Dodd-Frank Act provided that these advisors are required to register with the SEC, act in the best interests of their municipal clients, and – for the first time – be overseen by both the SEC and the Municipal Securities Rulemaking Board.

The final rules that the Commission is considering today set forth clear, workable requirements and guidance for municipal advisors and other market participants, which will provide needed protections for this market.

In general, under the final rules, a municipal advisor would be required to register with the Commission if it:

  • Provides advice on the issuance of municipal securities.
  • Provides advice on certain “investment strategies” – specifically investments of the proceeds of municipal securities and related municipal escrow investments in refinancings.
  • Provides advice on municipal derivatives.

The final rule would include a number of exemptions for certain activities – in many cases, already regulated activities – and professional services.  The approach to these exemptions focuses on appropriate activities, rather than the status of market participants, and limits potential unnecessary duplicative regulation where other regulatory regimes provide adequate safeguards.

Because of statutory deadlines, the SEC put in place a temporary registration regime for municipal advisors shortly after the passage of the Dodd-Frank Act.  To facilitate an orderly transition from that regime to a permanent one, the final rule would provide a phase-in period for compliance, with permanent registrations starting on July 1, 2014.  The Commission will soon extend the temporary registration rules until the permanent program is fully operational.

I want to thank the Commission staff for their hard work on this rulemaking.  This was a true team effort.

In particular, I want to thank John Cross and his team, including Jessica Kane, Rebecca Olsen, and Mary Simpkins, from the Office of Municipal Securities; John Ramsay, David Shillman, and especially the team led by Molly Kim, including Jennifer Dodd, Yue Ding, Ira Brandriss, Brian Baltz, Derek James, and Eugene Hsia from the Division of Trading and Markets for their extraordinary efforts; Annie Small, Meridith Mitchell, Michael Conley, Lori Price, Cathy Ahn, Jill Felker, and Mykaila DeLesDernier from the Office of General Counsel; Dan Kahl, Melissa Roverts, and Vanessa Meeks from the Division of Investment Management; Amy Starr from the Division of Corporation Finance; Mark Zehner from the Division of Enforcement; and Craig Lewis, Jennifer Marietta-Westberg, Vanessa Countryman, Sean Wilkoff, and Chris Meeks from the Division of Economic and Risk Analysis.

Finally, I want to express my gratitude to my fellow Commissioners and all of their counsels for their very hard work and comments on the final rules.  I want to again especially commend our two new Commissioners for hitting the ground running on this and other rulemakings before the Commission.

Now I will turn the meeting over to John Cross, the Director of the Office of Municipal Securities, to provide further explanation of the staff’s recommendations.

* * *

Commissioner Piwowar raised a concern about the timing for the Municipal Advisor rulemaking.  I am respectful of his concern.  I did defer consideration of both rules we are meeting about today for a few weeks in consideration of the appointment of our two new Commissioners, but I did not believe they should be delayed any further.  

We are trying to move quickly on rules, but we are being responsible.  The rules we are meeting on today are Dodd-Frank mandates and have been worked on and thought about by the staff for a long time, years in fact.  

I fully and personally understand that the work load here at the Commission is very heavy, but so is the responsibility we all have.  I recognize that we demand a lot of Commissioners and a lot of the staff, and I want to reiterate my appreciation to all of the Commissioners and the staff for their incredibly hard work and dedication.

* * *

Pay Ratio

Next, we will consider a proposal mandated by the Dodd-Frank Act that would amend our existing rules to require companies to disclose what is referred to as their “pay ratio.”   That is, the ratio of the total annual compensation of the median employee to the annual total compensation of the company’s CEO. 

As evidenced by the more than 20,000 public comment letters we received, this provision has generated significant interest.  Some commenters expressed support for the provision – assessing the importance of this disclosure to investors.  Others strongly questioned the need and utility of this type of information to investors and expressed significant concerns regarding the complexity of the statutory requirement as well as the potential costs. 

After carefully considering the statutory mandate of section 953(b) of the Dodd-Frank Act and all of the comments we received, the staff has drafted and recommended a proposal that would provide companies significant flexibility in complying with the disclosure requirement while still fulfilling the statutory mandate. The rules proposed would not require a specific methodology, but instead would provide a company with the flexibility to determine the median and calculate the annual total compensation for that employee in a way that best suits its particular circumstances.  In addition to hearing from the Division of Corporation Finance, I also would like to hear from the Division of Economic and Risk Analysis about the flexibility afforded by the proposed rules during the staff presentation.

We are very interested in receiving comments on the proposed approach and the flexibility it affords. 

Before I turn it 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 dedication and hard work on this proposal.  Specifically, I would like to thank Keith Higgins, Christina Padden, Felicia Kung and Anne Krauskopf in the Division of Corporation Finance; Annie Small, Rich Levine, David Fredrickson and Dorothy McCuaig in the Office of the General Counsel; Craig Lewis, Scott Bauguess, Vanessa Countryman, and Katie Moon in the Division of Economic and Risk Analysis; Susan Nash, Hunter Jones, Matt DeLesDernier, and Thoreau Bartmann in the Division of Investment Management; Laurita Finch, Sam Waldon, Kara Brockmeyer and David Mendel in the Division of Enforcement; Geoffrey Aronow, Eric Pan, Magdalena Camillo, and Kathleen Kelley in the Office of International Affairs.  I also would like to thank my fellow Commissioners and their counsels for their hard work on this proposal. 

* * *

As I have said previously, the Congressionally-mandated rulemakings, under both the Dodd-Frank Act and the JOBS Act, are a priority to complete.  We will continue our work to advance all of our rulemakings, and it remains my intent that the Commission will consider the rulemakings as they are ready.  Both of the rules we are considering today fall into that category.

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