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Statement at an Open Meeting on the Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants and Applications for Relief from Statutory Disqualifications

Commissioner Michael S. Piwowar

Aug. 5, 2015

Thank you, Chair White.

I join my fellow Commissioners in thanking the staff for the dedication and hard work that went into each of these releases. In the five years that have passed since the Dodd-Frank Act[1] became law, the Commission’s agenda has been filled with dozens of rulemakings mandated by that statute. Given the large number of staff recommendations reviewed and approved by the Commission, it would be easy to lose sight of the fact that each individual rulemaking is an enormous undertaking unto its own. I do not take for granted the fact that each time we gather in this auditorium to vote, the document under consideration represents countless hours of staff time spent researching issues, meeting with the public, resolving thorny technical issues, and striving to present complex regulatory concepts in a clear and concise way. And so I join my fellow Commissioners in thanking you not out of habit or routine, but in real appreciation for your efforts to advance the core mission of this agency.

SBS Entity Registration Adopting Release

The adopting release for the registration of security-based swap dealers and major security-based swap participants (together, “SBS entities”) is an excellent example of thoughtful staff work resulting in a strong final rule. It is a testament to the quality work of staff on this release that the document we are voting on today is largely the same as the first draft they circulated for our consideration. There are undoubtedly aspects of this release that I disagree with and would have liked to change. However, I am sure that each of my fellow Commissioners could say the same. As a whole, the document reflects a consensus approach that should be commended as a model for how to develop our rules for Title VII of the Dodd-Frank Act moving forward.

My concerns with this release include the repeated use of certifications as part of the registration process. I disagree with these provisions in part because I am not convinced that they actually increase compliance with our rules. Instead, they seem most effective at increasing the personal liability faced by the senior officers of our registrants. As noted in the economic analysis of this release, increasing the personal liability of executives may ultimately lead registrants to spend more resources on liability insurance and higher compensation for these individuals to account for their heightened risk exposure. These resources could otherwise be used to promote actual compliance with the securities laws, or for other productive business purposes. Given the lack of clearly evidenced benefits to certifications, I generally do not believe they are appropriate in this context.

Despite these reservations, I am ultimately able to support the new rules based on a number of positive changes staff made to the original proposal. In particular, I am pleased that staff recommended, and we are adopting today, an approach to the senior officer certification that stands in stark contrast to the deeply flawed approach originally proposed. The proposed certification related to the “operational, financial, and compliance capabilities” of a security-based swap dealer, but did not define what such “capabilities” entailed. As my predecessor and good friend Commissioner Troy Paredes noted in his dissent on the proposal, the novel senior officer certification contained in that release created an “unduly vague and indeterminate standard” and gave rise to “an unacceptable risk of after-the-fact second-guessing by the Commission.”[2]

In developing the final rules, staff clearly heeded Commissioner Paredes’s warning and listened to the concerns communicated by commenters. As a result, the rule we are adopting today includes a much more straightforward and reasonable senior officer certification that focuses on the policies and procedures of a registrant, rather than amorphous concepts like “capabilities.”

The rules also require the registrant’s chief compliance officer (“CCO”) to certify that no person associated with it who effects or is involved in effecting security-based swaps on its behalf is subject to a statutory disqualification. As proposed, the signatory of this certification would have been strictly liable for inaccuracies related to an employee’s disqualification status, even if intentionally misled by an employee. I am pleased that the rules we are adopting include a modified CCO certification with a reasonableness qualifier that appropriately protects CCO’s from unwarranted liability.

These two examples highlight the middle-of-the-road approach taken throughout the rulemaking. Overall, the process set forth in these rules strikes me as a fair, reasonable, and balanced way to register SBS entities, which I am pleased to support.

Statutory Disqualification Proposing Release

Unfortunately, the balanced approach taken in the SBS entity registration adopting release was not extended to the proposing release on statutory disqualifications that we are also considering at today’s meeting. The Commission could have chosen a number of different methods for handling statutory disqualifications, yet in the end, the majority has selected a misguided position that I cannot support.

When charting a path forward on this issue, the Commission could have followed the advice frequently given by commenters to our Dodd-Frank Title VII releases: conform to the Commodity Futures Trading Commission (“CFTC”). Over and over again we hear this refrain as market participants struggle to apply the unique rules promulgated by each agency. While in some cases the different markets and products overseen by the SEC and CFTC justify divergent rules, the process surrounding statutory disqualifications is not one of these situations. Despite certain differences in our respective statutes, the CFTC faced essentially the same set of issues as the SEC regarding statutory disqualifications, and yet with this proposal we are landing in vastly different places.

The CFTC ultimately chose to limit the application of statutory disqualifications to natural persons, and not to extend these prohibitions to entities. The SEC could have adopted the same approach, which would have created consistency between the agencies and prevented significant potential disruptions caused by each agency treating a single entity differently for the same underlying conduct. Instead, the majority has rejected the benefits of consistency and chosen to apply statutory disqualifications to both individuals and entities in a way that injects unnecessary complexity, uncertainty, and inconsistency into the market.

As an alternative to aligning our proposal with the CFTC, I could also have supported a proposed rule that applied statutory disqualifications to both individuals and entities, if the recommendation had set forth a clear process for requesting relief from statutory disqualifications, culminating in a definitive vote by the Commission before any statutory disqualification would take effect. Yet, that is not the approach supported by the majority.

This flawed proposal took what should have been a straightforward process rule and turned it into another complicated waiver process that is sure to confound future Commissions if adopted as proposed. I find it particularly egregious that the proposal would not even require the Commission to respond to an SBS entity’s request for relief before the statutory disqualification would take effect. Thus, an SBS entity may be forced to re-organize its entire security-based swap business, even where legitimate grounds for relief from disqualification exist, merely because the Commission fails to meet an arbitrary, self-imposed deadline to respond. This approach becomes even more indefensible when considered in context with the broad reach of the statutory disqualification provision itself, which could be triggered by any number of actions that may have no connection to securities activities or the ability of an SBS entity to operate in conformance with our rules and regulations.

I suspect that the majority will make much of the fact that the proposal includes a provision giving deference to determinations made by the CFTC, a self-regulatory organization, or a registered futures association regarding the matters giving rise to a statutory disqualification. Nevertheless, I view this type of comity among regulatory authorities as a necessary good government principle on all multijurisdictional rulemakings, and not a sufficient reason for supporting this particular proposal. Failing to give deference could lead to arbitrary inconsistencies in the treatment of market participants, as well as profound uncertainty and unnecessary burdens for registrants, all without providing any discernable benefits. Thus, the inclusion of the deference provision, as a single sensible component in an otherwise ill-advised proposal, cannot salvage this release.

I hope that commenters will provide us with detailed feedback on the potential impacts of the new waiver process supported by the majority, and that the same process that helped moderate the extreme positions taken in the original SBS entity registration proposal will come to bear on this proposal. However, hope alone is not enough for me to support publishing a proposal for public comment that took the wrong path on nearly every major decision point. Thus, I respectfully dissent.

[1] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203 (Jul. 21, 2010).

[2] Commissioner Troy A. Paredes, Statement at Open Meeting to Propose Rules Regarding Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants (Oct. 12, 2011), available at

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