Statement at Open Meeting on Regulation SBSR, the Disclosure of Order Handling Information, and Disclosure Update and Simplification
Chair Mary Jo White
July 13, 2016
Good Morning. This is an open meeting of the U.S. Securities and Exchange Commission on July 13, 2016, under the Government in the Sunshine Act.
Today, the Commission will consider three recommendations on the discussion agenda — two from the Division of Trading and Markets and one from the Division of Corporation Finance. We will separately consider and vote on each of these three items.
- First, the Commission will consider a recommendation under Title VII of the Dodd-Frank Act to adopt amendments and guidance relating to Regulation SBSR, which governs regulatory reporting and public dissemination of security-based swap transactions.
- Second, we will consider a recommendation to propose enhanced disclosures by broker-dealers to institutional and retail customers about the routing and execution of customer orders.
- Third, we will consider a recommendation to issue a proposal to amend certain redundant, duplicative, overlapping, outdated, or superseded disclosure requirements, and a related request for comment.
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Before we turn to these recommendations, we have one item on the summary agenda — amendments to our rules of practice for administrative proceedings. Unless there are any questions, we will proceed to a vote on this summary item.
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We begin our discussion agenda today with the first item from the Division of Trading and Markets, a recommendation to adopt additional provisions for the regulatory reporting and public dissemination of security-based swap transaction information. These rules, proposed under Title VII of the Dodd-Frank Act, will address the remaining issues related to the Commission’s framework for regulatory reporting and public dissemination, which we adopted last year.
Completing Derivatives Reform in the Security-Based Swap Market
Title VII of the Dodd-Frank Act establishes a new regulatory framework for swaps that is critical for addressing the significant risks of such products, as we observed during the financial crisis when the derivatives markets were largely unregulated. Title VII assigned the Commission responsibility for security-based swaps, and fully implementing the framework for these products is a key priority for all of the Commissioners and staff. This year, we have continued to finalize these significant rules. In February, we adopted the last set of rules for cross-border dealer activity; in April, we finalized the rules governing the business conduct of security-based swap dealers; and last month, we completed rules for acknowledging and verifying security-based swap transactions.
Today’s action marks the last significant step in adopting rules for transparency in security-based swap transactions. Next in line will be to finalize the remaining substantive requirements for dealers — in particular, their requirements for capital, margin, and asset segregation, as well as recordkeeping and statutory disqualification. Our goal is to have completed the regulations for both dealer activity and reporting by the end of this year.
Completing the Framework for a Transparent Market
Transparency is at the heart of the Title VII reforms. And, in February 2015, the Commission took major actions to promote transparency in the derivatives markets by adopting final rules for security-based swap data repositories (SDRs) and adopting Regulation SBSR to govern regulatory reporting and public dissemination of security-based swap transaction data. These measures defined the role of SDRs in the reporting and public dissemination process, established the data elements that must be reported for each transaction and life cycle event, set duties to report for a range of market participants, and required public dissemination of transaction reports.
The recommendation for final rules before us today builds on that core transparency framework by addressing three remaining issues. First, it clarifies the reporting obligations for certain transactions, ensuring that the entities that are best suited to accurately and efficiently report transactions have that responsibility. Second, in an important safeguard against abuses and to promote transparency, it prohibits SDRs from imposing fees or usage restrictions on transaction information that they are required to disseminate publicly. And third, it makes more transaction information available publicly by clarifying and expanding the reporting duties for cross-border transactions. These measures will bring much-needed transparency to the global swaps market and ensure that the public has the access it deserves to transaction information.
The staff’s recommendation also includes a final compliance schedule for Regulation SBSR’s reporting and public dissemination requirements. It is critical that these requirements, as they are put into practice, work to deliver clear, usable information to regulators and the market. Achieving this goal requires careful calibration of all of the aspects of our rules, as well as significant investments from market participants — including intermediaries, repositories, clearing agencies, trading venues, and others — to build systems to comply with those rules.
With all of these considerations in mind, and in a change from the proposal, the staff has recommended that reporting for newly executed security-based swaps commence a short time after security-based swap data repositories and security-based swap dealers have registered with the Commission. This recommendation aligns dealer registration, SDR registration, and transaction reporting in a sensible, cost-efficient way, and should create the best foundation for reporting data that is reliable and useful for both regulators and market participants. And, importantly, it should not involve any significant delay in operationalizing both the reporting and dealer registration regimes following the completion of our rules this year.
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Before I ask Steve Luparello, Director of the Division of Trading and Markets, to discuss the staff recommendation, I would like to thank Steve; his Deputy Director, Gary Goldsholle; and Steve’s counsels, Malou Huth, Carl Emigholz, and Moshe Rothman for their leadership on these rulemakings. I also would like to thank Mark Flannery, Scott Bauguess, and Vanessa Countryman for their leadership of the effort by the Division of Economic and Risk Analysis.
I am deeply grateful to the SBSR rulemaking team for all of its hard work on this rule and since the passage of the Dodd-Frank Act, in particular:
- John Roeser, Michael Gaw, Sarah Albertson, Yvonne Fraticelli, Kathleen Gross, David Michehl, and Geoffrey Pemble from the Division of Trading and Markets; and
- Hari Phatak and Y.C. Loon from the Division of Economic and Risk Analysis.
Many thanks, as always, also to Annie Small, Meridith Mitchell, Lori Price, Bob Bagnall, Mykaila DeLesDernier and Maureen Johansen from the Office of the General Counsel.
In addition, I would like to thank many other staff throughout the agency for their contributions to this project, including John Polise, Connie Kiggins, Christine Sibille, and Michael Hershaft from the Office of Compliance Inspections and Examinations; Amy Starr, and Andrew Schoeffler from the Division of Corporation Finance; Katherine Martin, Kathleen Hutchinson, Natasha Cowen, and Laura Compton from the Office of International Affairs; Sara Crovitz, Michael Didiuk, and Rachel Loko from the Division of Investment Management; Reid Muoio, Charlotte Buford, and Kerry Knowles from the Division of Enforcement; and Brian Bussey, Christian Sabella, Tom Eady, Justin Pica, and Richard Gabbert from the Division of Trading and Markets. It does take an agency to build a strong Title VII regime.
Finally, I would like to express gratitude to my fellow Commissioners and all of our counsels for their engagement and comments on this recommendation, and all of our work on Title VII.
Now, I will turn the meeting over to Steve Luparello for the Division’s recommendation.
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As a final comment, I think we are all united--Chair, Commissioners, and staff--about the high priority of completing the Title VII rules for the security-based swap market, and doing so promptly.
As I indicated in my statement, [the requirements for capital, margin, and asset segregation] are next in line.
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Disclosure of Order Handling Information
We turn now to the recommendation to propose rules that would enhance the transparency of broker-dealer handling of customer orders, a key market structure initiative designed to provide investors with more information about modern intermediary practices. Investors expect — and deserve — to know how their orders are treated. At its core, this proposal should provide investors with an important new tool to better assess whether a broker-dealer’s order routing practices are consistent with their investment objectives.
This proposal would amend key elements of our market structure regulatory framework. Rule 605 currently requires market centers that trade national market system securities to disclose on a monthly basis electronic reports regarding order execution information for retail-sized orders. Rule 606 currently requires broker-dealers to publicly disclose, on a quarterly basis, certain statistical order routing information for retail-sized orders relating to their most significant execution venues.
Since those rules were adopted in 2000, technology has transformed our markets. Institutional-sized orders are no longer executed by manual order handling practices of exchange floor brokers or “upstairs” block positioners. Today, both institutional and retail-sized orders are handled automatically, using complex order execution algorithms and routing systems that can work effectively within a national market system now characterized by a diversity of trading venues, technology interfaces, and pricing models. In most cases, for example, broker-dealers break up institutional orders into smaller orders and send them to multiple venues. In addition, financial arrangements or corporate affiliations can often incentivize broker-dealers to route retail orders to over-the-counter market makers.
Today’s proposal is intended to bring more transparency to order handling and bring disclosures into line with modern technology and market practice, providing valuable information to investors about how their orders are treated. As the staff will detail shortly, today’s recommendation would, for the first time, require broker-dealers to disclose standardized, customer-specific order handling information with respect to institutional orders. These disclosures would provide a range of metrics related to routing, execution, fees, and rebates, for each venue to which the broker-dealer routed orders for the institutional customer. Importantly, these disclosures would be provided to customers in the aggregate and by specific order routing strategy. With this information, customers should be able to evaluate how broker-dealers address conflicts of interest and manage the risks of information leakage.
In addition to this valuable customer-specific transparency, the proposed rules would also provide for enhanced market-wide transparency of broker-dealer institutional and retail order routing practices. That enhanced transparency should foster innovation and competition between and among broker-dealers and market participants by empowering investors and market participants to better compare the quality of routing services of multiple broker-dealers.
All of this information — customer-specific and market-wide — would complement the additional disclosures from alternative trading systems proposed by the Commission last year, and investors should be able to us it to more effectively monitor broker-dealer order handling practices. Transparency in how orders are handled and executed is vital for investors, and today’s proposal marks a strong step forward in the Commission’s ongoing effort to bolster such transparency in the modern equity market structure.
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Before I ask Steve Luparello, Director of the Division of Trading and Markets, to discuss the staff recommendation, I would like to again thank Steve, Gary Goldsholle, and Steve’s counsels for their leadership on this rulemaking. I would also like to thank Mark Flannery and Jennifer Marietta-Westberg for their leadership of the effort by the Division of Economic and Risk Analysis. I am also grateful to the rulemaking team for all of their hard work, in particular:
- David Shillman, Ted Venuti, Arisa Kettig, Steve Kuan, Amir Katz, Chris Grobbel, and Andrew Sioson from the Division of Trading and Markets.
- Amy Edwards, Hans Heidle, Shawn O’Donoghue, Lauren Moore, and Hermine Wong from the Division of Economic and Risk Analysis.
Many thanks again as well to Annie Small, Meridith Mitchell, Lori Price, and Bob Bagnall from the Office of General Counsel, as well as Robert Teply and Janice Mitnick.
In addition, I would like to thank Doug Scheidt, Sara Crovitz, Holly Hunter-Ceci, and Parisa Haghshenas from the Division of Investment Management for their contributions.
Finally, I would like to express again my gratitude to my fellow Commissioners and all of our counsels for their engagement and comments on the recommendation.
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Now, I will turn the meeting over to Steve Luparello for the Division’s recommendation.
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Disclosure Update and Simplification
Requiring intensive staff work, this recommendation is a modest — but important — step in the staff’s ongoing disclosure effectiveness review, which aims to improve the disclosure regime for the benefit of both investors and companies. Specifically, the staff recommends that the Commission propose to amend certain redundant, duplicative, overlapping, outdated, or superseded disclosure requirements, and issue a related request for comment.
The overall goal of the staff’s disclosure effectiveness review is to comprehensively review our disclosure requirements and to make recommendations to update those requirements to make disclosure more meaningful, accessible, and efficient for investors. In April, the Commission issued a concept release on Regulation S-K that forms a key foundation for this comprehensive review, providing a transparent forum for organizing the discussion and enabling the voices of all stakeholders to be heard. The concept release addresses a host of issues, from the substance of the business and financial disclosure requirements to the presentation and provision of companies’ disclosures to the role of disclosures about public policy and sustainability matters. It engages investors, companies, and the wider range of stakeholders in 340 sets of questions addressing what information investors find useful and how best it can be presented and delivered. The release asks about a number of areas (over 70) where additional disclosure may be appropriate, and raises questions about areas where disclosure requirements could be modified or eliminated. The feedback on these requests will be essential for charting the next steps for the initiative, and I again urge all parties, especially investors, to submit their views.
While we continue to learn from these comments, the Commission has also sought to identify and address discrete areas where our disclosure requirements can be updated without waiting on a broader effort. In June, for example, we proposed rules to modernize the Commission’s disclosure requirements and policies for mining properties by aligning them with current industry and global regulatory practices and standards. Last September, we sought comment on the financial disclosure requirements in Regulation S-X for certain entities other than the issuer. I strongly encourage comments from all stakeholders on the issues raised in these releases as well.
The recommendation before us today, which is the product of hard and painstaking analysis by the staff, is designed to be a targeted update to our disclosure regime. A range of different stakeholders, including investors and issuers, have expressed support for removing redundancies and outdated provisions in certain disclosure requirements, a topic that was also highlighted again by the FAST Act. Accordingly, based on a thorough review of Commission rules, U.S. Generally Accepted Accounting Principles, and International Financial Reporting Standards, the staff has identified a number of areas where disclosure requirements may be redundant, duplicative, or overlapping — or where requirements may have been superseded by changes made previously.
In some cases, the staff recommends proposing changes to existing requirements; in other cases, the staff recommends seeking comment as to whether the requirements should be modified, eliminated, or referred to the Financial Accounting Standards Board for inclusion in U.S. GAAP. These recommendations are intended to streamline and update our disclosure system by addressing certain redundant, duplicative, overlapping — or simply outdated or superseded — requirements while continuing to require companies to provide investors with the same or reasonably similar information as they now receive to make informed investment and voting decisions.
But, as with any complex and detailed framework, we must carefully consider each aspect of the rules under review, and we will ultimately be informed by investors, companies, and other stakeholders on whether any particular change is appropriate. That is why we look forward to receiving robust input from all stakeholders — especially investors who are the primary users of issuer disclosure. And I urge institutional and retail investors (and their advisers and advocates) to participate actively in the comment process. As I have said repeatedly, good disclosure benefits everyone — investors, companies, and the markets generally — and it is the responsibility of everyone to work to preserve the high quality of the disclosure and transparency that makes American markets the envy of the world.
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Before I turn the proceedings over to Keith Higgins, the Director of the Division of Corporation Finance to discuss the proposing release, I would like to thank the SEC staff for their thoughtful, expert analysis of the many technical requirements discussed in this release. This has truly been a collaborative, agency-wide effort led by the Division of Corporate Finance and engaging staff from across our other major policy divisions, the Division of Economic and Risk Analysis, Office of the Chief Accountant, Office of Credit Ratings, Office of the General Counsel, Office of International Affairs, and Office of the Secretary.
Specifically, I would like to thank Keith, Nili Shah, Mark Kronforst, Craig Olinger, Betsy Murphy, Shelly Luisi, Raquel Fox, Ryan Milne, Mark Green, Jessica Barberich, Jamie Kessel, Lindsay McCord, Zach Fallon, Sebastian Gomez Abero, Felicia Kung, Rolaine Bancroft, Jill Davis, Steve Hearne, Kathy Hsu, Kevin L. Vaughn, Mary Beth Breslin, Jim Budge, Kim Calder, Karina Dorin, Todd Hardiman, Jay Ingram, Erin Jaskot, Robert Klein, Maryse Mills-Apenteng, Lauren Nguyen, Lilyanna Peyser, Ellie Quarles, Rob Shapiro and Katherine Wray in the Division of Corporation Finance.
Jim Schnurr, Wes Bricker, Brian Croteau, Jeff Minton, Jenifer Minke-Girard, Kevin Stout, Giles Cohen, Duc Dang and Joe Epstein in the Office of the Chief Accountant; Annie Small, Bryant Morris, Dorothy McCuaig and Luna Bloom in the Office of General Counsel; Mark Flannery, Hari Phatak, Simona Mola-Yost, Tanakorn Makaew, Natasha Burns and Tristan Chiappetti in the Division of Economic and Risk Analysis; Matt Giordano, Alison Staloch, Kristy Von Ohlen and Keith Carpenter in the Division of Investment Management; Valentina Deng, Malou Huth, Sharon Lawson, Matt Lee, Moshe Rothman, Mark Saltzburg, Rose Wells and Tim White in the Division of Trading and Markets; Harriet Orol, Patrick Boyle and Kevin O’Neill in the Office of Credit Ratings; Rick Fleming and Alex Ledbetter in the Office of the Investor Advocate; Linda Cullen in the Office of the Secretary and Paul Saulski in the Office of International Affairs. Finally, I would like to express again my gratitude to my fellow Commissioners and all of our counsels for their engagement and comments on the recommendation.
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Now, I will turn the meeting over to Keith Higgins for the Division’s recommendation.
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I just want to make a couple of other comments. One, I think the staff, both of my fellow Commissioners, and myself have teed up a number of important questions and urge commenters to respond to those and any others relating to our disclosure requirements. Sometimes many of our requirements are very technical--those are obviously part of this technical release--and that is why we are seeking broad-based comments from all constituents, especially investors. The staff in Corporation Finance and the Office of Investor Education and Advocacy would also make themselves available to anyone who would like further discussion or explication.
 See, e.g., Chair Mary Jo White, The SEC in 2014 (Jan. 27, 2014), available at https://www.sec.gov/News/Speech/Detail/Speech/1370540677500 (“We can all probably identify particular disclosure requirements that we might eliminate or modify, but that is not the kind of review and reform I am primarily focused on — and it certainly is not the kind of thoughtful and comprehensive review that I think our disclosure rules demand. I believe we should rethink not only the type of information we ask companies to disclose, but also how that information is presented, where and how that information is disclosed, and how we can take advantage of technology to facilitate investors’ access to information and make it more meaningful to them.”); Chair Mary Jo White, Chairman’s Address at SEC Speaks 2014 (Feb. 21, 2014), available at https://www.sec.gov/News/Speech/Detail/Speech/1370540822127 (“This year, the Corp Fin staff will focus on making specific recommendations for updating the rules that govern public company disclosure. Corp Fin will be broadly seeking input from companies and investors about how we can make our disclosure rules work better, and, specifically, investors will be asked what type of information they want, when do they want it and how companies can most meaningfully present that information.”).
 Business and Financial Disclosures Required by Regulation S-K, Release No. 33-10064 (Apr. 13, 2016), available at https://www.sec.gov/rules/concept/2016/33-10064.pdf.
 See Modernization of Property Disclosures for Mining Registrants, Release No. 33-10098 (June 16, 2016), available at https://www.sec.gov/rules/proposed/2016/33-10098.pdf.
 See Request for Comment on the Effectiveness of Financial Disclosures About Entities Other Than the Registrant, Release No. 33-9929 (September 25, 2015), available at https://www.sec.gov/rules/other/2015/33-9929.pdf.
 Pub. L. 114-94.