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Williams & Jensen, Pllc WILLIAMS & JENSEN, PLLC CONGRESSIONAL HEARING REPORT DATE OF HEARING: November 18, 2015 SUBJECT: “Examining the SEC’s Agenda, Operations, and FY 2017 Budget Request” COMMITTEE: House Financial Services STAFF MEMBERS COVERING HEARING: Alex Barcham and Rebecca Konst Members Present Republicans: Chairman Jeb Hensarling (TX), Representative Ed Royce (CA), Representative Scott Garrett (NJ), Representative Randy Neugebauer (TX), Representative Michael Fitzpatrick (PA), Representative Lynn Westmoreland (GA), Representative Sean Duffy (WI), Representative Blaine Luetkemeyer (MO), Representative Bill Huizenga (MI), Representative Robert Hurt (VA), Representative Mick Mulvaney (SC), Representative Robert Pittenger (NC), Representative Ann Wagner (MO), Representative Keith Rothfus (PA), Representative David Schweikert (AZ), Representative Scott Tipton (CO), Representative Roger Williams (TX), Representative Bruce Poliquin (ME), Representative French Hill (AR) Democrats: Ranking Member Maxine Waters (CA), Representative Carolyn Maloney (NY), Representative Nydia Velazquez (NY), Representative Brad Sherman (CA), Representative Michael Capuano (MA), Representative William Lacy Clay (MO), Representative Stephen Lynch (MA), Representative David Scott (GA), Representative Al Green (TX), Representative Patrick Murphy (FL), Representative Denny Heck (WA) Witnesses The Honorable Mary Jo White, Chair, U.S. Securities and Exchange Commission Overview On November 18, the House Financial Services Committee held a hearing entitled “Examining the SEC’s Agenda, Operations, and FY 2017 Budget Request.” Topics discussed in the hearing included, but were not limited to: (1) Fiduciary Duty; (2) Bond Market Illiquidity; (3) the SEC Budget; (4) the Waiver Process; (5) Business Development Companies; (6) SIPC; (7) Regulation D; (8) Puerto Rico; (9) Small Business Online Lending; (10) Settlement Cycle; (11) the August 24 Market Event; (12) Asset Management; (13) Insurance; (14) Political Expenditure Disclosure; (15) Conflict Minerals; (16) Tick Size Pilot Program; (17) Page 1 of 15 701 8th Street, N. W., Suite 500 ● Washington, DC 20001 ● TELEPHONE 202.659.8201 ● FACSIMILE 202.659.5249 Regulatory Costs; (18) Merrill Lynch; (19) FSOC; (20) Legal Entity Identifiers; (21) REITS; (22) Volcker Rule; (23) Accredited Investor Definition; (24) SIPs; (25) FASB; (26) Crowdfunding; (27) Pay Ratio; (28) Disclosures; (29) Cybersecurity; (30) Small Business Forum; (31) Last In, First Out (LIFO) Accounting; (32) Equity Market Structure Advisory Committee; (33) SEC Commissioners; (34) Transfer Agents; and (35) New Markets. Member Statements Chairman Jeb Hensarling (R-TX) emphasized the importance of SEC oversight, noting that the SEC’s budget had increased by 64 percent in the last ten years. He noted that the SEC recently completed the JOBS Act rulemakings for Regulation A+ and crowdfunding. He commended the SEC for asserting its jurisdiction of the asset management industry in order to stop the Financial Stability Oversight Council (FSOC) from regulating asset managers like banks. He criticized the SEC for wasting resources on its pay ratio rule. Hensarling said the Citizens United decision does not implicate securities law. He said a political expenditures rule is outside of the SEC’s mission and would not be a good use of its resources. He expressed concern that a political expenditures rule would create opportunities for abuse, similar to the IRS’s targeting of conservative groups. He urged the SEC to focus on modernizing disclosures. He criticized the SEC’s actions on proxy access, suggesting that the “universal proxy ballot” favors special interests rather than benefiting the vast majority of public company shareholders. He urged the SEC to act to prevent the Department of Labor (DOL) from passing regulations which will impede access to financial advice. Ranking Member Maxine Waters (D-CA) said the SEC’s work has been impeded by budget cuts imposed by Republicans. She emphasized that Democrats are committed to fully funding the SEC. She noted that five years after the passage of the Dodd-Frank Act (DFA) the SEC has yet to pass a uniform fiduciary standard, urging them to work with the DOL moving forward. She expressed support for funding investment adviser examinations with a modest fee on advisers. She noted that the Committee drafted compromise legislation which would address most of Chair White’s concerns with Business Development Corporation (BDC) reform. She noted that White has raised concerns with allowing BDCs to own investment advisers. Representative Scott Garrett (R-NJ) suggested that the SEC has become increasingly politicized, noting the increased number of 3-to-2 votes. He criticized the SEC for moving forward with universal proxy ballot and pay ratio disclosure rules. He said the SEC has failed to move forward with a capital formation agenda. He suggested that the SEC only addresses capital formation when directed to do so by Congress. He noted that tomorrow the SEC will hold its annual Government- Business Forum on Small Business Capital Formation, expressing concern that the SEC will ignore the recommendations created at the Forum. Representative Carolyn Maloney (D-NY) noted that the SEC recently finalized the pay ratio rule and two JOBS Act regulations. She said the August 24 event tested the SEC’s limit up-limit down (LULD) regime. She noted that many of the halts on August 24 were of exchange traded products (ETPs), rather than the underlying stocks. She said many of the halted products had trouble reopening. She expressed interest in whether the safeguards worked as intended on August 24. Testimony Page 2 of 15 701 8th Street, N. W., Suite 500 ● Washington, DC 20001 ● TELEPHONE 202.659.8201 ● FACSIMILE 202.659.5249 The Honorable Mary Jo White, Chair, U.S. Securities and Exchange Commission, said since she last testified before the Committee the SEC has advanced significant rulemakings, and continued to bring strong enforcement actions against wrongdoers. She noted the SEC’s significant progress on initiatives involving the asset management industry, equity market structure, and disclosure effectiveness. She noted that the Commission has adopted or proposed 17 substantive rulemakings in the past eight months, including rules required by the Dodd-Frank Act (DFA) and the JOBS Act. She said these efforts have included (1) final rules addressing over-the-counter derivatives; (2) new means for small businesses to access capital, including rules to update Regulation A and to permit securities-based crowdfunding offerings; (3) executive compensation disclosures; and (4) the removal of references to credit ratings from SEC rules. White noted that the SEC also approved a two-year tick size pilot program proposed by FINRA and the exchanges. She emphasized the strong results achieved by the SEC’s enforcement program. She said the SEC plans to continue to focus on completing its mandatory rulemakings while pursuing other initiatives that are critical to its mission, including those relating to asset manager oversight, equity market structure, and disclosure effectiveness review. She noted that in the afternoon the SEC would be considering a rule to enhance ATS disclosures. White said the SEC’s budget request reflects its priorities, focusing on the execution of its core programs and operations by: seeking to hire individuals with the skill sets necessary to enhance the agency’s oversight of increasingly complex securities markets; striving to build the significant new oversight programs assigned to the SEC in recent years; and continuing to enhance its technology, including its ability to analyze and assess large volumes of data. Question and Answer Fiduciary Duty Chairman Jeb Hensarling (R-TX) said White announced at a conference recently that the SEC is committed to creating its own fiduciary duty rule. He asked if the SEC has conducted an updated analysis of the impacts of uniform fiduciary duties. White said the staff has not updated the 2011 analysis, but will conduct deep analysis as the rulemaking move forwards. Hensarling asked if the analysis will be completed before a rule is proposed. White said some analysis will be completed before the proposal, with additional analysis being done throughout the process. Hensarling asked if this analysis will be made available to the Committee. White said the analysis is typically made public in the rulemaking process. Hensarling pointed to the adverse effects of a similar regulation in the UK, with retail investors being unable to access financial advice. White said one concern with the rulemaking is with the ability of retail investors to obtain access to high quality, affordable financial advice. Hensarling suggested that the best interest exemption is unworkable. Representative David Scott (D-GA) stated Section 913 of the DFA granted authority to the SEC to create a fiduciary standard. White stated Section 913 provides authority but does not mandate it. Scott asked why the SEC is letting the DOL take away their authority. White stated she does not see the DOL as taking authority as DOL has power under ERISA. Scott stated he helped write Section 913 and there was a reason the SEC was granted authority. He stated not one time did the DOL ask for authority during the DFA debate. He suggested this is a critical issue and the SEC needs to “stand up” and do their duty. He asked whether White realizes what the DOL is doing and the position it is putting the markets in. He stated requiring fee for service has
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