| Regulators |    2899 VIEWS  |
| Regulators | |
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Thank you Jason [Healey] for that
kind introduction.[1]
For many, December is a time to
reflect on the past year and to look forward to what the New Year may bring. I
believe organizations also should mark milestones, take stock of what has been
done and what needs to be done, and adjust course accordingly.
My colleagues at the Commission and
I go through this exercise relatively frequently, including to fulfill
statutory reporting requirements—yes, like the public companies we regulate, we
too have disclosure obligations. It makes me happy, and it is important, that
we strive to approach our reporting with the same care and candor we expect
from our public companies.
In the past few months, we published
a new, four year strategic plan and our annual report for fiscal year 2018.[2] We
also participate in the annual report process for the Financial Stability Board
and the Financial Stability Oversight Council.[3] In
addition, our divisions and offices undertake similar reviews and, in some
cases—notably, the Division of Enforcement and the Office of Compliance
Inspections and Examinations—publish an annual report and exam priorities,
respectively.[4]
Today, I would like to go through
this exercise with respect to our rulemaking efforts. I will review our
progress on the agenda for 2018, then discuss the agenda for 2019, and close
with observations on certain of the key risks that we are monitoring—namely,
Brexit, the LIBOR transition and cybersecurity risks.
We are required to publish a
regulatory agenda on a semi-annual basis pursuant to the Regulatory Flexibility
Act.[5] One
year ago, I spoke about my perspective on this process, including the
observation that the near-term portion of our “Reg Flex” agenda—in essence, the
rulemaking expected to be completed in the coming year—had become too
aspirational.[6] For
example, 32 rules were listed as to-be-adopted in 2016, but less than 30
percent of the listed rules were adopted in that year. I believe this
aspirational approach was driven in large part by the more than 80 rulemakings
and the more than 30 reports and studies that the Dodd-Frank Act required the
SEC to complete.[7] I
thank my predecessors for tackling the lion’s share of those.[8]
Recognizing the opportunity to
recalibrate, the 2018 Reg Flex agenda was more focused than in the past—a
change made to increase transparency and accountability, as well as to provide
greater clarity to our dedicated staff.[9] The
agenda embodied a collective effort, benefiting from the input of my fellow
Commissioners, our division and office heads and many members of our staff on
key questions, including: (1) what initiatives the agency could reasonably
expect to complete over the next 12 months and (2) of those initiatives, which
ones would have the most positive impact on our Main Street investors. This
exercise produced a tailored yet ambitious 2018 agenda, encompassing 26 different
initiatives covering a broad array of topics.
During the last year, the Commission
advanced 23 of the 26 rules in the near-term agenda, a good result on both a
percentage basis (88percent) and an absolute basis.[10]
In addition, the Commission
responded to major events and changes in the broader regulatory landscape by
advancing several other initiatives not in the original agenda. For example, we
issued guidance to public companies about disclosures of cybersecurity risks
and incidents.[11] During
the 2018 fiscal year, we also responded to a new congressional mandate by
expanding a key registration exemption used by non-reporting companies to issue
securities pursuant to compensatory arrangements,[12] and
we provided relief for those affected by Hurricane Florence.[13]
To be sure, statistics often fail to
tell more than a narrow story. Main Street investors—the market participants we
have at the front of our minds—will not assess our work by the number or
percentage of rules and initiatives we complete, but rather will be looking at
what our efforts substantively do for them. With this metric—the interests of
our long-term Main Street investors—in mind, I will discuss a few examples of
our work in 2018.
In April, the Commission proposed
for public comment a collection of rules and interpretations applicable to
investment professionals—both broker-dealers and investment advisers.[14] These
proposals, individually and collectively, are designed to enhance retail
investor protection and decision making by elevating the broker-dealer standard
of conduct and reaffirming—and in some cases clarifying—the fiduciary standard
for investment advisers, as well as requiring more candid and plain language
disclosures.
Using plain language, we are
bringing the regulation of conduct and communications in line with the
reasonable expectations of our Main Street investors. More specifically, the
proposed rules seek to accomplish three things:
Importantly, the proposed rules are
designed to preserve retail investor access—in terms of choice and cost—to a
variety of types of investment services and investment products, while giving
investors the tools to select the type of relationship that is appropriate for
their needs and in line with their expectations.
This is a very important and long
overdue initiative.
Broker-dealers and investment
advisers both provide investment advice to their customers, but have different
relationships and are subject to various different regulatory regimes. However,
many retail investors do not have a firm grasp of the important differences
between broker-dealers and investment advisers—(1) differences in the variety
of services that they offer; (2) how investors pay for those services; and (3)
the regulatory frameworks that govern their relationship. This is a complex set
of issues, no doubt, but we must also recognize that access to investment
advice is increasingly important to our society. And we must recognize that
while the current framework needs improvement, it is extensive and in many
areas functions well for our Main Street investors, particularly as compared to
other jurisdictions.
Second, with respect to capital
formation, the Commission took several meaningful steps throughout 2018 to help
companies—including small companies—participate in our capital markets, while
maintaining or improving important investor protections. For example, the
Commission expanded the definition of “smaller reporting company.”[15] The
amended definition will allow nearly 1,000 additional companies to take
advantage of scaled disclosure requirements, reflecting the principle that a
one-size regulatory structure does not fit all public companies.
The Commission also adopted final
rules that eliminate requirements that are outdated, overlapping, or
duplicative of other Commission rules or U.S. GAAP. These amendments will
reduce costs for companies. Importantly, they will not adversely affect the
availability of material information and, in many cases, they will enhance the
quality of information available to investors. Combined, our capital formation
initiatives make the option for issuers to join our public markets more
attractive, ultimately to the benefit of Main Street investors, many of whom
are searching for additional investment options.
We also have been monitoring our
markets and market structure to evaluate whether they are meeting the needs of
our Main Street investors.
For example, I have long believed
that there should be greater regulatory focus on our fixed income markets,
particularly the corporate and municipal bond markets.[16] These
markets are particularly significant to retail investors, as well as American
companies and our national infrastructure. To facilitate that effort, we stood
up the Commission’s Fixed Income Market Structure Advisory Committee—or
“FIMSAC” as many people call it.[17]FIMSAC—which
is made up of a diverse group of experts from across the country—had a highly
productive first year. The Committee held four insightful public meetings and
has provided the Commission with five thoughtful recommendations on ways to
improve our fixed income markets.[18] I
look forward to an equally successful second year for the FIMSAC.
We are also focusing on other
aspects of our securities markets. Our Division of Trading and Markets held
three roundtables this year to explore key markets issues, particularly: (1)
the market structure for the securities of smaller, more-thinly traded
companies; (2) regulatory approaches to combating retail fraud; and (3) access
to markets and market data. The roundtables were candid and constructive, and
staff in our Division of Trading and Markets is busy analyzing issues raised at
the roundtables.
Speaking of our markets, we know
that transparency is a bedrock of healthy and vibrant markets. I am pleased to
report that we have also taken significant steps to make our markets more
transparent.
For example, in July, we adopted
amendments that enhance the transparency requirements governing alternative
trading systems, commonly known as “ATSs.”[19] These
amendments provide investors, brokers and other market participants—and the
Commission—with increased visibility into the operations of these important
marketplaces for equity trading.[20]
These amendments are a credit to our
staff’s careful attention to market developments and needs and reflect my view
that, since markets are constantly changing, we must regularly and critically
evaluate our approach to regulation.[21]
Whatever our accomplishments in the
past year, our work is far, far from complete. That reality comes with the
territory of ever changing capital markets. The near-term agenda for completion
in 2019 is now publicly available.[22] Continuing
with the themes of transparency, accountability and clarity of mission, the
“Reg Flex” agenda for 2019 focuses on the initiatives we reasonably expect to
complete.[23] I
hope to have a blackline similar to the 2018 agenda—with 80 percent or more
strikethroughs—a year from now. I will now discuss a few priority items for
2019.
Completing our rules relating to the
standards of conduct for financial professionals is a key priority.
Since the April 2018 proposal, we
have engaged with Main Street investors across the United States to discuss
their experiences. SEC staff organized a series of seven roundtables around the
country, providing Main Street investors an opportunity to speak directly with
me, my fellow Commissioners and senior SEC staff—all in an effort to improve
the proposed rules.[24]
It is clear, based on these
discussions, that we have the right perspective, namely, that the core
obligations of investment professionals—and mandatory plain language
disclosures—should match reasonable investor expectations.
The efforts of the SEC staff to
deliver for Main Street investors in this important area have been exemplary.
In addition to the investor roundtables, we launched a new webpage where
investors can view samples of the proposed disclosure form and submit feedback.[25]
The SEC’s Office of the Investor
Advocate engaged the RAND Corporation to conduct investor testing of the
proposed disclosure form and has made the report available for review and
public comment.[26] Our
staff has been carefully reviewing all of this information, and the more than
6,000 comment letters,[27] as
they work diligently to develop final recommendations.
Another significant initiative for
2019 is improving the proxy process. Last month, the SEC staff held a proxy
roundtable to discuss: (1) the proxy solicitation and voting process; (2)
shareholder engagement through the shareholder proposal process; and (3) the
role of proxy advisory firms.[28] I
was pleased with this solutions-oriented event, which included a diverse group
of panelists representing the views of investors, companies and other market
participants. While we heard a wide range of views, we saw more agreement than
disagreement, and I believe that we should act to improve each of these areas.
There was consensus among the
panelists that the proxy “plumbing” needs a major overhaul. I encourage market
participants to explore what such an overhaul would entail and to consider how
technology, including distributed ledger technology, could improve the proxy
plumbing. I realize a major overhaul could take time. So, I believe we should
focus on what the Commission can do in the interim to improve the current
system. The comment box for the roundtable remains open, and I encourage all
those interested in improving the proxy plumbing to share their thoughts,
particularly regarding actionable, interim improvements.
I also believe it is clear that we
should consider reviewing the ownership and resubmission thresholds for
shareholder proposals. The current $2,000 ownership threshold was adopted 20
years ago, and the resubmission thresholds have been in place since 1954. A lot
has changed since then. We need to be mindful of these changes, and make sure
our approach to the very important issue of shareholder engagement reflects the
realities of today’s markets and today’s investors. As I have said before, when
looking at the ownership and resubmission thresholds, we need to consider the
interests of the long-term retail investors who invest directly in public
companies and indirectly through mutual funds, ETFs and other products. With
these long-term, retail investors in mind, we also should consider whether
there are factors, in addition to the amount invested and the length of time
shares are held, that reasonably demonstrate that the proposing shareholder’s
interests are aligned with those of a company’s long-term investors.
For proxy advisory firms, I believe
there is growing agreement that some changes are warranted. For example, there
should be greater clarity regarding the division of labor, responsibility and
authority between proxy advisors and the investment advisers they serve. We
also need clarity regarding the analytical and decision-making processes
advisers employ, including the extent to which those analytics are company- or
industry-specific. On this last point, it is clear to me that some matters put
to a shareholder vote can only be analyzed effectively on a company-specific
basis, as opposed to applying a more general market or industry-wide policy.
Finally, there were other issues
raised at the roundtable that we should consider, including: (1) the framework
for addressing conflicts of interests at proxy advisory firms and (2) ensuring
that investors have effective access to issuer responses to information in
certain reports from proxy advisory firms.
The staff is looking at these and
other issues, and I have asked them to formulate recommendations for the
Commission’s consideration. On timing, it is clear to me that the these issues
will not improve on their own with time, and I intend to move forward with the
staff recommendations, prioritizing those initiatives that are most likely to
improve our markets for our long-term Main Street investors.
Main Street investors, now more than
ever before, are responsible for saving for retirement. Earlier this year,
staff in our Office of Investor Education and Advocacy issued a bulletin to
warn investors of risks associated with self-directed Individual Retirement
Accounts, or IRAs.[29] With
the shift away from traditional defined benefit pension plans, American workers
are increasingly relying primarily on defined contribution plans, such as
401(k) plans and IRAs, to save for retirement.[30]
We owe it to these investors to make
sure they have access to a broad mix of investment opportunities to save for
retirement and to achieve other financial goals. Accordingly, we are looking at
initiatives to facilitate access to capital for issuers and to make sure Main
Street investors have the best possible mix of investment opportunities.
Several of these initiatives
parallel congressional legislation that received substantial bipartisan
support. For example, the so-called JOBS Act 3.0 includes provisions to expand
testing-the-waters and study our quarterly reporting regime.[31] Both
of these initiatives are included on the agenda for 2019 rulemaking—in addition
to other Congressionally-directed rulemakings relating to expanding Regulation
A for public reporting companies.
To explore further whether we can
improve the mix of investment opportunities for Main Street investors, the
Division of Corporation Finance is looking at the private offering framework.
Our “patchwork” private offering system is complex and it is time to take a
critical look to see how it can be improved, harmonized and streamlined. The
staff is working on a concept release to solicit input about key topics,
including whether our accredited investor definition—a principal regulatory
threshold for participation in private offerings—is appropriately tailored to
address both investment opportunity and investor protection concerns.
I also believe it is important to
consider ways to encourage long-term investment in our country. There is an
ongoing debate regarding the adequacy and appropriateness of mandated quarterly
reporting and the prevalence of optional quarterly guidance, and whether our
reporting system more generally drives an overly short-term focus. I encourage
all market participants to share their views to let us know if there are other
aspects of our regulations that drive short-termism.
Another area where the Commission
and staff have spent a significant amount of time relates to distributed ledger
technology, digital assets and initial coin offerings (ICOs).[32]I
expect that trend will continue in 2019. A number of concerns have been raised
regarding the digital assets and ICO markets, including that, as they are
currently operating, there is substantially less investor protection than in
the traditional equities and fixed income markets, with correspondingly greater
opportunities for fraud and manipulation.
I believe that ICOs can be effective
ways for entrepreneurs and others to raise capital. However, the novel
technological nature of an ICO does not change the fundamental point that, when
a security is being offered, our securities laws must be followed.
In an effort to centralize and
better coordinate the staff’s work on these important issues, the SEC recently
announced the formation of a new Strategic Hub for Innovation and Financial
Technology (“FinHub”) within the agency.
Staffed by representatives from
across the Commission, the FinHub serves as a public resource for
fintech-related issues at the SEC.[33] As
the FinHub and our other activities demonstrate, our door remains open to those
who seek to innovate and raise capital in accordance with the law.
Before closing, I want to briefly
discuss three of the risks we are monitoring: (1) the impact to reporting
companies of the United Kingdom’s exit from the European Union, or “Brexit”;
(2) the transition away from LIBOR as a reference rate for financial contracts;
and (3) the principal topic of the following panel, cyber-security.
First, the potential effects of
Brexit on U.S. investors and securities markets, and on global financial
markets more broadly, is a matter of increased focus for me and many of my
colleagues at the SEC. To be direct, I am concerned that:
To be clear, these are my personal
views, but it is appropriate to share them as they are reflective of the SEC’s
approach to Brexit. The SEC’s responsibility is primarily related to the
effects of Brexit on our capital markets. For example, I have directed the
staff to focus on the disclosures companies make about Brexit and the
functioning of our market utilities and other infrastructure.
We have seen a wide range of
disclosures, even within the same industry. Some companies have fairly detailed
disclosures about how Brexit may impact them, while others simply state that
Brexit presents a risk. I would like to see companies providing more robust
disclosure about how management is considering Brexit and the impact it may
have on the company and its operations.
With regard to market utilities and
infrastructure, following the 2016 Brexit vote, SEC staff commenced discussions
with other U.S. financial authorities, with our U.K. and E.U. counterparts, and
with market participants, all with an eye toward identifying and planning for
potential Brexit-related impacts on U.S. investors and markets. These
discussions are ongoing, and I expect their pace to increase.
The second risk that I want to
highlight relates to the transition away from LIBOR as a benchmark reference
for short-term interest rates. LIBOR is used extensively in the U.S. and
globally as a benchmark for various commercial and financial contracts, including
interest rate swaps and other derivatives, as well as floating rate mortgages
and corporate debt. It is likely, though, that the banks currently reporting
information used to set LIBOR will stop doing so after 2021, when their
commitment to reporting information ends. The Federal Reserve estimates that in
the cash and derivatives markets, there are approximately $200 trillion in
notional transactions referencing U.S Dollar LIBOR and that more than $35
trillion will not mature by the end of 2021.[36]
The Alternative Reference Rate
Committee (or “Committee”)—a committee convened by the Federal Reserve that
includes major market participants, and on which the SEC staff and other
regulators participate—has proposed an alternative rate to replace U.S. Dollar
LIBOR—the Secured Overnight Financing Rate, or “SOFR.” The Committee has
identified benefits to using SOFR as an alternative to LIBOR. For example, SOFR
is based on direct observable transactions. SOFR is based on a market with very
deep liquidity, reflecting overnight Treasury repurchase agreement transactions
with daily volumes regularly in excess of $700 billion.
A significant risk for many market
participants—whether public companies who have floating rate obligations tied
to LIBOR, or broker-dealers, investment companies or investment advisers that
have exposure to LIBOR—is how to manage the transition from LIBOR to a new rate
such as SOFR, particularly with respect to those existing contracts that will
still be outstanding at the end of 2021. Accordingly, although this is a risk
that we are monitoring with our colleagues at the Federal Reserve, Treasury
Department and other financial regulators, it is important that market
participants plan and act appropriately.
For example, if a market participant
manages a portfolio of floating rate notes based on LIBOR, what happens to the
interest rates of these instruments if LIBOR stops being published? What does
the documentation provide; does fallback language exist and, if it exists, does
it work correctly in such a situation? If not, will consents be needed to amend
the documentation?
Consents can be difficult and costly
to obtain, with cost and difficulty generally correlated with uncertainty.
In the area of uncertainties, we
continue to monitor risks related to the differences in the structure of SOFR
and LIBOR. SOFR is an overnight rate, and more work needs to be done to develop
a SOFR term structure that will facilitate the transition from term-based LIBOR
rates.[37]
To be clear, a lot of progress has
been made to facilitate the transition from LIBOR to SOFR. We have started to
see more SOFR-based debt issuances, and we have seen promising developments in
the SOFR swaps and futures markets.[38] But
I want to make sure that market participants are aware of the need to plan for
this important transition, as a lot of the work will fall on them.
The third risk I want to touch on is
cybersecurity. Cybersecurity is something that we at the agency look at from a
number of perspectives.
From an issuer disclosure
perspective, it is important that investors are sufficiently informed about the
material cybersecurity risks and incidents affecting the companies in which
they invest. Earlier this year, the Commission issued interpretive guidance to
assist public companies in preparing these types of disclosures.[39] The
guidance also emphasized the importance of disclosure controls and procedures
that enable public companies to make accurate and timely disclosures about
material cybersecurity events, as well as policies that protect against
corporate insiders trading in advance of company disclosures of material cyber
incidents.
From a market oversight perspective,
we continue to prioritize cybersecurity in our examinations of market
participants, including broker-dealers, investment advisers and critical market
infrastructure utilities. In assessing how firms prepare for a cybersecurity
threat, safeguard customer information, and detect red flags for potential
identity theft, for example, we have focused on areas including risk
governance, access controls, data loss prevention, vendor management and
training, among others. And given the interconnectedness of our markets, we will
continue to work closely with our counterparts at other federal financial
regulatory agencies and the international community.
We also are focused on assessing and
improving our own cybersecurity risk profile. We now have a Chief Risk Officer
to help coordinate our risk management efforts across the agency. We have
worked to promote a culture that emphasizes the importance of data security
throughout our divisions and offices. The staff has also been engaging with
outside experts to assess and improve our security controls. We recognize,
however, that no system can be entirely safe from a cyber intrusion, and that
there is a lot of work that remains to be done.
From an enforcement perspective, our
Cyber Unit is dedicated to targeting cyber-related misconduct in our markets.
Among other things—in addition to looking at potential violations in some of
the areas I have just described—the Cyber Unit has focused on alleged
misconduct involving intrusions into retail brokerage accounts, the submission
of false regulatory filings and hacking to obtain material non-public
information.
And finally, from an investor
education perspective, our Office of Investor Education and Advocacy has worked
hard to inform investors about cybersecurity hygiene and red flags of cyber
fraud, in order to prevent investors from becoming victims in the first place.
Those are just some of the areas we are looking at, and I look forward to
discussing them further with today’s distinguished panel members.
I am very pleased with our
accomplishments in 2018, but much remains to be done and we are facing new
challenges—some known and some that we will come to know. That is why the
agenda for 2019 is ambitious. Yet it is pragmatic in the number of items, only
a handful of which I was able to cover today.
Thank you for the invitation to
speak to you.
Footnotes
Related News
1. SEC Nigeria Launches Green Bond Rules
2. Financial Stability Report and Stress Test Results (UK) - November 2018
3. Banks Accessed N956bn in Q3’18 Through CBN’s Standing Facilities Window to Square Up Their Positions
4. Effects of G20 Financial Reforms On Infrastructure Finance Come Second Relative To Other Factors
5. IOSCO Members Found Mostly Compliant With Principles for Commodity Derivatives Markets
6. FSB, Bodies Publish Final Report on Effects of Reforms on Incentives to Clear OTC Derivatives
7. Beginning Stress Testing’s New Chapter - An Intl’ Perspective On The Future Of Bank Stress Testing
8. No Bank Was Referenced By CBN as NOT being Compliant with 30% Minimum Regulatory Liquidity Ratio
9. CBN Reschedules November 2018 MPC Meeting to 21st and 22nd
10. NSE Proposes Amendments to Dealing Members Rule(s) 7.4 and 7.5
11. NSE Releases Sustainability Disclosure Guidelines
12. The Central Bank And The Regulators Of Fintech
13. SEC Nigeria Announces The Introduction of The Interpretive Guidance Note
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