Statement on Adoption of the Registration Process for SBS Dealers and Major SBS Participants and Proposal of Rules Regarding Statutorily Disqualified Associated Persons
Commissioner Daniel M. Gallagher
Aug. 5, 2015
Thank you, Chair White. At the outset, I would like to thank the staff in the Division of Trading and Markets for all of the hard work that went into today’s releases. I’d like to recognize the efforts of Heather Seidel, Paula Jenson, Joe Furey, Bonnie Gauch, Joanne Rutkowski, Natasha Vij Greiner and Jonathan Shapiro.
As with many Dodd-Frank mandated rulemakings, the adopting release we are considering today began as another example of regulatory overreach. In particular, the proposed rules would have required a security-based swap (“SBS”) dealer or participant to certify that, after due inquiry, he or she has reasonably determined that the SBS entity has the operational, financial and compliance capabilities to act as an SBS dealer or participant.
Fortunately, my former colleague and good friend Troy Paredes provided a roadmap in his October 2011 dissent on the proposal that has led to today’s much more restrained and thoughtful approach. Commissioner Paredes suggested an alternative approach to registration grounded in existing registration requirements for other registrants that would require the senior officer to certify that the SBS dealer or participant has implemented written policies and procedures reasonably designed to prevent violations of the federal securities laws.
Nearly four years later, I’d like to thank the staff for their thoughtful and wise consideration of Commissioner Paredes’ recommendation. The adopting rules require a senior officer of the applicant to certify that, after due inquiry, he or she has reasonably determined that the applicant has developed and implemented written policies and procedures reasonably designed to prevent violations of the federal securities laws and the rules thereunder.
Nevertheless, I would like to make clear that this certification requirement is unique to the circumstances of this release and should not be a model for new registration regimes. SBS dealers and participants, the majority of whom are already engaged in the swaps business, will have more than adequate time to review and comply with the other to-be-adopted rules governing their activities before they will be required to conditionally register. Registration, of course, will not be effective until the senior officer provides the certification required in today’s rule. When in the future the Commission must consider rules governing new registrants, I believe a much more sound, simplistic and less burdensome approach would be to drop the idea of certifications and simply require the registrant to adopt and implement written policies and procedures reasonably designed to prevent securities law violations.
With respect to the proposed process under Rule 194, I am able to support the recommendation, but it was a very close call for me. There are a number of problematic features in the process, but on balance, I am willing to support the proposal in the interest of getting robust public comment on a number of alternative approaches.
Dodd-Frank gives the Commission complete latitude on how to address the issue of Title VII statutory disqualifications. The statute is explicit; the disqualification applies only to the extent that the Commission has not said otherwise in a rule or order.
With this discretion, the Commission has a number of options available to it to help ensure both that those who should not be associated with SBS dealers and participants stay on the sidelines, and also that we not unduly hinder their participation in the markets or disrupt ongoing business operations. Make no mistake, with infinite options available to it, today proposal includes yet another waiver process at a time when other waiver processes have become bogged down.
That said, I am very pleased that the Commission is proposing to defer to the decisions of other regulators, namely FINRA, the CFTC and the NFA. With all that the SEC and its fellow regulators have on their plates, we should look for areas of common interests to rely on one another when feasible, as is the case here. Regulatory duplication makes no sense in this context and substituted compliance works domestically too.
As to the proposed deadline, I am concerned that the 180 day timeframe will not be a sufficient amount of time to allow for Commission action. Having been around the SEC for a long time, I know well that 180 days goes by in the blink of an eye. Embedded in every Commission action are hundreds and often thousands of hours of staff time developing a recommendation, memorializing that recommendation, consulting on that recommendation with other Divisions and Offices and running it through the process of Commission consideration. Dodd-Frank imposed a number of deadlines on Commission action in other contexts — including deadlines for self-regulatory organization’s proposed rule changes and advance notices filed by clearing agencies. The Commission has already had to adjust its processes to enable it to meet these deadlines.
Here, I believe the Commission is proposing an unnecessary deadline upon itself. Of course, the Commission could always by order extend the temporary exclusion. And, of course, nothing in this rule prevents the Commission from acting earlier than the 180-day deadline. In other words, while the 180-day deadline may provide a benchmark for SBS dealers and participants, it only has teeth when the Commission fails to act. Thus, I believe that coupling this 180-day deadline for action with a default that the prohibition applies is very likely the wrong approach.
I would have strongly preferred that the proposal contain as a full alternative — complete with rule text -- the approach instituted by the CFTC. That is, an exclusion for entities from the automatic disqualification. Although the CFTC approach is not a formal alternative proposal, I have been assured that the questions, if they receive substantial comment, will act as a “shadow proposal,” something I normally eschew, and this alternative could be adopted without a re-proposal. With that, I strongly encourage commenters to address the questions in the release regarding the process, timelines and default provisions. Commenters should pay particular attention to whether entities should be excluded entirely; whether there should be a deadline on Commission action; if there is a deadline, what it should be; and what should happen if the Commission does not act by that deadline.
I would again like to thank the staff for what I know has been a tremendous amount of work and I have no questions.
 See Daniel M. Gallagher and Harvey L. Pitt, When Rule-Makers Don’t Follow the Rules, Washington Times (June 9, 2014), available at http://www.washingtontimes.com/news/2014/jun/9/gallagher-pitt-when-ruler-makers-dont-follow-the-r/.