[Senate Hearing 113-]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
YEAR 2014
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TUESDAY, JUNE 25, 2013
U.S. Senate,
Subcommittee of the Committee on Appropriations,
Washington, DC.
The subcommittee met at 3:11 p.m., in room SD-138, Dirksen
Senate Office Building, Hon. Tom Udall (chairman) presiding.
Present: Senators Udall, Coons, Johanns, and Moran.
COMMODITY FUTURES TRADING COMMISSION
STATEMENT OF HON. GARY GENSLER, CHAIRMAN
OPENING STATEMENT OF SENATOR TOM UDALL
Senator Udall. We are going to bring the subcommittee to
order. I am pleased to convene this hearing of the Financial
Services and General Government subcommittee to consider the
fiscal year 2014 funding request for two key Federal regulatory
agencies, the Commodity Futures Trading Commission (CFTC) and
the Securities and Exchange Commission (SEC).
I welcome my distinguished ranking member, Senator Mike
Johanns, and our colleagues here today with us, and others who
also may arrive in a little bit.
Joining us today are the Honorable Gary Gensler, the
Chairman of the Commodity Futures Trading Commission, and the
Honorable Mary Jo White, the Chairman of the Securities and
Exchange Commission. They will discuss the critical work of
their agencies, share how they have used the resources provided
over the past couple of years, and explain the details of their
budgetary needs for fiscal year 2014.
The subcommittee has received a statement for the record
from Colleen Kelley, President of the National Treasury
Employees Union, regarding the funding for the FCC. If there's
no objection, I'd ask it be included in the record of these
proceedings. Great. It will be included in the record.
[The statement follows:]
Prepared Statement of the National Treasury Employees Union
Chairman Udall, Ranking Member Johanns and members of the
Subcommittee on Financial Services and General Government
Appropriations, thank you for the opportunity to present this statement
on behalf of the National Treasury Employees Union (NTEU). Our union is
proud to represent the bargaining unit staff at the Securities and
Exchange Commission (SEC).
The employees of the SEC are among the most professional, hard
working and dedicated of any in the public or private sector. The
rapidly changing practices in the financial markets as well as new
forms of fraud and wrongdoing mean that SEC must continue to recruit
and retain employees with the highest level of skills. Commitment to
this goal will mean that fraud will be reduced and investors, savers,
retirees and others who participate in the market will not be
victimized by those who would do them financial harm.
NTEU supports the administration's overall request for $1.674
billion for fiscal year 2014 in funding for the SEC. This funding level
is critically important to allow the employees of the SEC to perform
their work in an effective and professional manner. With the Dodd-Frank
law and other legislation, Congress has given the SEC important new
duties in protecting investors and the public. For that reason, the
additional staffing called for in the administration's request is both
reasonable and needed. I would remind the subcommittee that SEC funding
is deficit neutral. While the appropriations process allows this
subcommittee to give important oversight to the SEC, the agency is not
funded by tax revenue but is fully funded by fees paid by the industry
which are adjusted to cause no negative impact on the Federal budget
deficit.
I want to particularly emphasize the importance of the
administration's request in two key areas that currently are
understaffed. While the SEC has proposed or adopted 80 percent of the
rules mandated under Dodd-Frank, work remains for 20 percent of the
mandated new rules, including some complex matters. NTEU supports the
administration's request for funding of 45 new positions in the
Division of Risk, Strategy and Financial Innovation. This is highly
skilled work and it is essential that SEC have the right number of
staff and that they be people of superior qualifications.
Second, the core of SEC's work is in enforcement and examination.
This is where the bad actors are caught and punished and the innocent
protected. The administration's request is for an additional 131 FTEs
in the Division of Enforcement. No less than this should be funded. But
this is not just a matter of staffing levels. Two other actions would
enhance the effectiveness of SEC's enforcement and examination
functions. First is training. The fiscal year 2014 budget request asks
for a meaningful increase in its training budget with a priority on
training for employees engaged in examinations and investigations. NTEU
strongly supports this. SEC's employee training program falls behind
the other Federal financial regulatory agencies where NTEU represents
the employees. It needs to be brought up to par.
Also of importance is how SEC is structured. In March 2011 SEC
management began looking at ways of restructuring field operations.
Contrary to proposals that there be office consolidation, NTEU found
that the evidence is SEC would actually benefit from an increased
number of field offices, specifically in the midwest, southwest,
northwest and mid-Atlantic areas. Not only could this be economical due
to more moderate office space costs in these places, but NTEU members
at SEC strongly believe that geographical proximity of SEC staff to
situations of fraud and wrongdoing has a strong impact on enforcement
and discovery. SEC should give serious consideration to the opening of
new field offices in parts of the country that are underserved or
suffer from investment fraud above the norm.
Limitations on employee investigatory travel budgets also harm the
ability of SEC front line employees to do their job in an effective and
professional manner. Employees at the SEC believe the importance of
this work will become increasingly critical in the near future. For
example, because of low returns in the bond market in which many people
have their post-retirement savings concentrated, retirees are
increasingly looking for new investments promising higher returns.
While some senior citizens may find the higher yielding investments
they are seeking, others will become victims of fraud and Ponzi
schemes. Without proper SEC staff in numbers, quality, training and
mobility, we will see an increasing number of seniors at risk of being
cheated out of their retirement savings and investments. Seniors should
not lose their retirement savings to unscrupulous advisors because of
an understaffed or weak SEC.
NTEU appreciates the opportunity to present our views to the
subcommittee and hopes to continue to work with the Chair and the
members of the subcommittee on SEC funding as well as other matters
under the subcommittee's jurisdiction. Thank you.
Senator Udall. The responsibilities of these agencies have
grown dramatically over the past 3 years. The CFTC and the SEC
both have pivotal roles to play in stimulating and sustaining
economic growth and prosperity in our country and protecting
the marketplace from fraud and manipulation, and in
implementing Dodd-Frank reforms.
During the debate on Dodd-Frank, and as we work through its
implementation, my constituents have made clear that they
support these reforms. The hardworking and honest people of New
Mexico want us to prevent the reckless and abuse practices that
contributed to the financial crisis.
While some sectors of our economy are recovering, many
families have not. They continue to struggle, and I believe
it's my responsibility to them and to all Americans who
suffered as part of the crisis to ensure that we work to fully
implement Dodd-Frank. We need a financial system that is safe
and sound, because what happened on Wall Street touches every
American family. Whether they are putting away a little
something to buy their first home or helping put their kids
through college, or are planning for retirement, they put their
faith in our financial markets and we cannot let them down.
They are not the only ones. Market users, financial
investors, and the U.S. economy all rely on vigilant oversight
by these two agencies, especially in today's rapid-paced,
evolving, and often-volatile global marketplace.
It's clear that both Chairman Gensler and Chairman White
and their fellow Commissioners and their staffs have devoted
many hours toward a more reliable regulatory structure, one
that will ensure the stability and integrity of the futures and
securities markets. We depend on your leadership to effectively
implement the comprehensive reforms designed to strengthen our
regulatory framework.
The CFTC carries out market surveillance, compliance, and
enforcement programs in the futures and swaps arena. It
detects, deters, and punishes abusive trading activity and
manipulation of commodity prices, preventing negative impacts
on consumers and the economy. The CFTC regulates the activities
of over 62,000 salespersons, commodity pool operators, trading
advisors, and brokers.
Currently, the CFTC has criteria for trading futures or
options or both. In addition, 17 derivative clearing
organizations are registered with the CFTC. Adding to the
challenge of your mission is a significantly transformed and
highly diversified marketplace, a marketplace that is
globalized, electronic, and around-the-clock. Three years ago,
and that mission was substantially expanded to embrace
oversight of the swaps marketplace and the vast once-in-the-
shadows world of the over-the-counter derivatives.
As the investors advocate, the SEC also has crucial
responsibility to maintain fair, orderly, and efficient stock
and securities markets. The SEC conducts day-to-day oversight
of the major market participants, monitors corporate disclosure
of information to the investing public, and investigates and
pursues enforcement action against security law violation.
To fulfill its duties, the SEC monitors approximately
35,000 entities. These include 11,000 investment advisors, with
$44 trillion in assets under management, 9,700 mutual funds and
exchange-traded funds, and 4,600 broker/dealers with more than
160,000 branch offices. The SEC also is responsible for
reviewing the disclosures and financial statements of
approximately 9,500 reporting companies and oversees
approximately 4,600 transfer agents, 17 national security
exchanges, 8 active clearing agencies, 10 nationally recognized
statistical rating organizations, and 4 oversight boards.
Like the CFTC, the enactment of the Dodd-Frank Act 3 years
ago dramatically expanded the SEC's responsibilities. You were
thrust into the driver's seat for issuing 100 new rules,
creating 5 new offices, producing more than 20 studies and
reports, overseeing the over-the-counter derivatives market and
hedge fund advisers, registering municipal advisors and
security-based swap market participants, and creating a new
whistleblower program, among other new duties.
To jumpstart our Business Startups Act of 2012 added more
to the plate, directing the SEC to write rules and issue
studies on capital formation, disclosure, and registration
requirements. Now, looking ahead for 2014, the President seeks
funding of $315 million for the CFTC, an increase of $110
million, or 54 percent, over fiscal year 2013, the enacted
level of $204.8 million, not including sequester.
Under sequestration, the CFTC is currently operating at
$194.5 million, significantly below the $308 million requested
for fiscal year 2013 and recommended by this subcommittee. For
the SEC, the President's fiscal year 2014 budget seeks base
funding of $1.674 billion. This is an increase of $353 million,
or 27 percent above the fiscal year 2013 base enacted level of
$1.321 billion, not including the sequester amount of $66
million.
The SEC has slightly over $100 million in unobligated
balances to further support its operating expenses this year,
which helps mitigate some of the effects of sequester. But the
total funding available still falls far short of the $1.566
billion requested for 2013 and that this subcommittee has
recommended.
Congress probably exercises its most effective oversight of
agencies and programs through the appropriations process,
allowing an annual checkup and review of operations and
spending.
Today's hearing provides a valuable opportunity to ask some
important questions. Are the CFTC and the SEC keeping pace with
the developments in the markets, particularly with new, more
complex financial products? Do the agencies have the right mix
of talent and specialized expertise to be vigilant watchdogs?
Do they have nimble state-of-the-art information technology to
augment and support their human capital? What are the likely
consequences of continued budget shortfalls and reduced
resources?
And I welcome the opportunity to conduct critical oversight
of these two agencies and look forward to a candid discussion
of where they are today and where they need to be, more robust
and responsive regulators, and how we can work to provide
resources they need to satisfy their vital missions. It will be
helpful to hear from both Chairmen, to have their honest
appraisals about the resources that they will require to
achieve their missions to keep pace with change and to
responsibly manage taxpayer dollars.
And so with that, I want to recognize my very distinguished
colleague from the State of Nebraska, my ranking member,
Senator Johanns.
STATEMENT OF SENATOR MIKE JOHANNS
Senator Johanns. Thank you, Mr. Chair. And let me just say
how much I appreciate you calling this hearing today.
To both chairs, welcome. As we review the budget
submissions for the CFTC and the SEC for 2014, I look forward
to hearing the detail of your request and your plans to carry
out your core missions and implement Dodd-Frank in a timely and
responsible manner.
To Chair White, I believe this is your first time since
you've been confirmed? Well, we welcome you. I understand
you're just getting settled in. I appreciate you stopping by
the office the other day, appreciate that immensely.
There are three areas I'd like to highlight for you. First,
I do encourage you and your team to move with all appropriate
speed implementing last year's JOBS Act. Rulemaking for
Regulation A, plus crowdfunding and general solicitation, are
all behind.
Second, I urge the Commission to take a holistic, robust
look at our current market structure. I hope you can identify
places where tweaks and modernization are necessary before the
next major market malfunction, instead of continuing down a
path that someone described as ``reactionary.''
Finally, I will ask you to be persistent in trying to work
with your fellow regulators, who would prefer to go it alone as
opposed to coordinating with the SEC. In my judgment, it is
completely unacceptable that this year could end with
conflicting SEC, Department of Labor fiduciary standards and
with uncoordinated SEC, CFTC cross-border swaps regulatory
regimes.
Chairman Gensler, as you have said, and I'm quoting here,
``Derivatives markets and effective oversight of those markets
matter to corporations, farmers, homeowners, and small
businesses.'' Could not agree more. We all benefit from
effective oversight that promotes fair and orderly derivatives
markets.
In some instances, however, the CFTC has moved too quickly,
and others the Commission has simply chosen to issue guidance.
And I'm critical of that, because it often looks to someone in
my position as a United States Senator that this is just
skirting the cost/benefit analysis. In many cases, the
commission has opted to act alone instead of properly
coordinating with the SEC, as well as other domestic and
international regulators.
It was especially troubling to discover that you have been
on your personal email account. I encourage you to stay away
from that. Conducting business on a personal email account is a
bad idea.
In order to be an effective regulator, transparency is
critical. This need for transparency and coordination could not
be clearer in the CFTC's approach to cross-border
implementations swaps regulation. The CFTC's guidance, the
delays, the lack of coordination with other regulators have led
to confusion and concern from market participants, foreign
government finance ministers, and investors both here and
abroad.
Now, in reviewing the budget requests of both the CFTC and
SEC, we recognize that protecting investors is paramount, as
they look to the markets to help secure their retirements, pay
for their homes, and send their kids to college. However, our
budget deficit and fiscal restraints require all agencies to
make decisions as to how to best allocate resources.
Technological solutions are necessary to keep up with the
next-generation trading platforms in systems that operate at
record-breaking pace. Staffing levels have to be carefully
considered so that they do not become unsustainable. But this
is not really a new challenge.
All agencies have to make strategic decisions on where the
resources go. Simply increasing funding doesn't necessarily
ensure that an agency will successfully achieve its mission, as
we all know.
So, to the chairs, you both have difficult tasks before
you. You must improve transparency in our securities markets,
uncover fraud and deception, while not over-regulating our
markets and hindering our economic recovery. Some would argue
that's nearly an impossible task.
Chairman Udall, I look forward to working with you as we
consider the fiscal year 2014 budget request of the CFTC and
the SEC. Thank you.
Senator Udall. Thank you very much, Senator Johanns.
At this time, I invite Chairman Gensler to present
testimony on behalf of the CFTC, followed by Chairman White on
behalf of the SEC. We would ask that you try to keep your
statements to 5 minutes, and your full statements will,
obviously, go on the record. And then after that, we will
probably have a very lively discussion here. And we'll go to
members' questioning with the 7-minute rounds. Please proceed.
Mr. Gensler. Good afternoon, Chairman Udall.
Congratulations on taking over the chairmanship.
Senator Udall. Thank you.
SUMMARY STATEMENT OF HON. GARY GENSLER
Mr. Gensler. Ranking Member Johanns and Senator Moran.
And I'm pleased to be here for the first time with my new
friend and colleague, Chair Mary Jo White.
The CFTC's mission, as you both mentioned, is critical to
so many hedgers: the farmers, ranchers, community bankers,
insurance companies, mortgage brokers, really anyone who wants
to lock in a price, hedge that risk, and then focus on what
they really do best, which is investing in the economy and
promoting job growth.
The CFTC dates back to the 1920s when we were part of the
Department of Agriculture. We weren't there when Senator
Johanns ran the Department. We became independent in 1975, and
until last year we only oversaw the futures and options market.
Congress then directed the CFTC and SEC to take on the
significantly expanded mission to oversee the swaps market,
something technically called ``swaps'' over at the CFTC,
``securities-based swaps'' at the SEC. These were at the center
of the 2008 financial crisis.
Now, with most of the swap market reforms completed at the
CFTC, this is with over 90 percent of the rule-writing
completed, this small agency has now taken on not only
overseeing futures, but overseeing swaps, and the swaps markets
that we oversee is over 90 percent of the jurisdiction. The
futures market is actually, as critical as it is, only about 10
or 11 percent of what we oversee. That's because the swaps
market is about $300 trillion, or about $20 of derivatives for
every dollar in our economy.
Until just recently, the swaps market was closed and dark,
but now we have transparency. The public can view the price and
volume of transactions on websites, DTCC's website and CME's
websites, and elsewhere. And soon, swaps will be traded on
transparent platforms. This transparency, I think, helps the
entire economy.
We now have 78 registered swap dealers, a group that
includes some of the largest domestic and foreign banks around
the globe. Senator Johanns asked about our cross-border
guidance that we're seeking to complete by July 12. I'm
optimistic. I think that we can and should complete that final
guidance by July 12.
Swaps are also coming into something called central
clearing. Now, central clearing helps access to the market,
makes it more competitive, and also lowers the risk of the
marketplace. I do think that we must address these cross-border
applications of the reform; it's critical because the far-flung
operations of U.S. financial institutions must be included in
reform.
Just as the risk of our housing crisis went over to Europe
and elsewhere in 2008, we also saw risks crashing back on our
shores when AIG financial products and other firms that were
operating offshore collapsed, their risks came back here and
our taxpayers were left holding that risk.
Congress knew that when they crafted the law. They said
that if activities had a direct and significant connection back
here at home--and the words are ``direct and significant
connection with activities or effect on commerce in the United
States''--we should cover it. And that's what we're trying to
do by July 12.
Otherwise, if we don't cover it, if we follow what some
U.S. financial firms are saying, and they say they should have
a free pass on reform if it's business done in one of their
offshore affiliates or if it's a hedge fund operating here in
the United States, but incorporated in the Cayman Islands, I
think we've failed to protect the public as the Congress and
the President came in and asked us to do. We wouldn't have done
what you wanted us to do.
We're about 689 people today. That's only 9 percent bigger
than we were 20 years ago. And of course, we now cover the
swaps market as well. The President has asked for $315 million,
or about 1,015 people. That's to cover markets eight times the
size of the futures markets. We do need additional technology
as well. Technology and staff are how we can effectively
promote transparency, how we can monitor for customer funds,
how we can ensure that the vast number of newly registered
market participants have their answers questioned, and that we
can really police and enforce what you've given us to do.
Just one example, the London Interbank offer rate LIBOR, we
found misconduct along with the Department of Justice and good
help from the SEC. The U.S. taxpayer's Treasury collected $2
billion in fines in the last year. We did the arithmetic. That
was our appropriations funding for 22 prior years, from 1990 to
2012 all combined. It's not the way you should measure
appropriations, but it does give you a sense of what we're
doing.
PREPARED STATEMENT
So given the vast markets you've asked us to now oversee,
we do need more people and technology to protect the farmers,
ranchers, and community banks and insurance companies. And I
look forward to your questions, and I thank you.
Senator Udall. Thank you very much.
[The statement follows:]
Prepared Statement of Hon. Gary Gensler
Good afternoon, Chairman Udall, Ranking Member Johanns and members
of the subcommittee. Thank you for inviting me to today's hearing on
the President's request for the Commodity Futures Trading Commission's
(CFTC's) fiscal year 2014 budget. I'm pleased to testify along with
Securities and Exchange Commission (SEC) Chair Mary Jo White.
This hearing is occurring at an historic time in the markets
because under Congress' direction, the CFTC now oversees not only
futures markets that we have overseen for decades, but also the swaps
market. The SEC oversees the security-based swaps market. The CFTC has
completed 90 percent of the swap market reform rules required under the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act). The public is benefiting from seeing the price and volume of each
swap transaction. This information is available free of charge on a
website, like a modern-day tickertape. For the first time, standardized
swaps will have to be traded on transparent trading platforms. The
public also is benefiting from the risk reduction and greater access to
the market that comes from centralized clearing. And for the first
time, the public is benefiting from the oversight of swap dealers. So
far, 78 have registered and must adhere to sales practice and business
conduct standards to help lower risk to the overall economy.
The marketplace is increasingly shifting to implementation of these
common-sense rules of the road. Now it is all the more clear: the CFTC
is not the right size for its new and expanded mission Congress has
directed it to perform.
The CFTC's current funding is $195 million after sequestration. We
recognize that the Federal Government is operating under a sequester
and that budgets for agencies across Government require additional
scrutiny. Our mission, however, has expanded dramatically. We now
oversee the nearly $300 trillion swaps market. It is critical that we
be resourced to promote transparency in these markets and to help
protect the economy and taxpayers from risks posed by these markets.
Thus, the President's fiscal year 2014 budget requests an appropriation
of $315 million and 1,015 FTEs. The overall funding levels requested
approximate the plan set forth in the President's 2013 budget ($308
million and 1,015 FTEs), but also take into account industry progress
in implementing financial reform. Although the 1,015 FTEs requested in
this budget are at the same level as for fiscal year 2013, adjustments
were made across our mission activities to reflect the transition from
Dodd-Frank rulemaking to swaps market oversight in 2014. Primarily, the
Commission shifted its requested resource allocation to support and
maintain direct examinations--a critical component of customer
protection. Market events have highlighted that the Commission must do
everything within our authorities and resources to strengthen oversight
programs and the protection of customers and their funds.
The President's budget request for the Commission strikes a balance
between important investments in technology and human capital, both of
which are essential to carrying out the agency's mandate. This
approximately 50 percent increase in appropriated funding includes a 62
percent increase in IT services, but only a 44 percent increase in
staff.
The CFTC is dedicated to using taxpayer dollars efficiently--nearly
a fourth of the overall budget request, $73 million, is for outside IT
services. When the CFTC's dedicated IT staff is included, the request
is $94.8 million for IT, or nearly a third of the overall budget. But
it still takes human beings to watch for market manipulation and abuses
that affect hedgers, farmers, ranchers, producers and commercial
companies, as well as the public buying gas at the pump.
The CFTC is operating under a strategic plan for fiscal year 2011-
2015. This plan raises the bar on the agency's performance measures to
more accurately evaluate our progress. But the agency's performance is
affected by the challenges of limited resources. For the second year in
a row, there are many goals that were not met, as are detailed in the
agency's Annual Performance Report (APR). The agency will include
findings from the APR in this year's revision of the strategic plan and
consider the results as the agency reevaluates the allocation of
resources.
Appropriations statutes for the CFTC for fiscal year 2012 granted
authority to transfer funds between purposes. This authority will
expire on September 30, 2013. We used the authority in both fiscal year
2012 and fiscal year 2013 to avoid furloughs or reductions-in-force
that otherwise would have been necessary. In the event that fiscal year
2014 funding is provided through a continuing resolution for any period
of time on and after October 1, 2013, the lapse in the transfer
authority will very likely lead to a need to take personnel actions
that seriously undermine the agency's ability to perform its mission.
In my remaining testimony, I will review the five areas that make
up over 90 percent of our requested budgeted staff increase:
registrations, examinations, surveillance and data, enforcement, and
economics and legal analysis.
registration and product reviews
A significant task before us in fiscal year 2014 will be the
continuation of registration of entities, as well as reviews of new
products for both the clearing mandate and the trading mandate.
We want to consider registration applications in a thoughtful and
timely manner, be efficient in reviewing submissions, and be responsive
to market participant inquiries--but this will require sufficient
funding. For fiscal year 2014, the President's request supports $38.9
million and 147 FTEs for these two mission areas, an increase of $22.6
million and 92 FTEs.
The estimated 200 clearinghouses, trading platforms, swap data
repositories, swap dealers and major swap participants that are
recently registered or may seek CFTC registration within the next year
is a dramatic increase over any registration effort the agency has
overseen in the past.
The Commission needs staff to facilitate the registration of the
following:
--Clearinghouses.--Entities that lower risk to the public by
guaranteeing the obligations of both parties in a transaction.
We are working with four entities seeking to register as DCOs
and have inquiries from others. These entities would join the
13 we currently oversee.
--Designated contract markets (DCMs).--U.S. trading platforms that
list futures and options and likely will start listing swaps.
The CFTC currently oversees 16 DCMs, and by 2014, staff expects
another three to four to seek registration.
--Foreign boards of trade (FBOTs).--Regulated trading platforms in
other countries that are generally equivalent to DCMs. Since
the FBOT rule became effective, 20 FBOTs have filed
applications with the CFTC. By 2014, staff expects an
additional couple of FBOTs to seek registration with the CFTC.
--Swap data repositories (SDRs).--Recordkeeping facilities created by
Dodd-Frank to bring transparency to the swaps market. Three are
provisionally registered with the CFTC, and by 2014, one
additional SDR may seek registration.
--Swap dealers and major swap participants.--Under the Dodd-Frank
Act, the CFTC is working to comprehensively regulate swap
dealers and major swap participants to lower their risk to the
economy. As the result of completed CFTC rules, 78 swap dealers
and two major swap participants are now provisionally
registered. This group includes the largest domestic and
international financial institutions dealing in swaps with U.S.
persons. Commission staff currently estimates that over time,
25-50 additional swap dealers may request registration with the
National Futures Association (NFA). We'll be overseeing their
registration and related questions.
--Swap execution facilities (SEFs).--The new trading platform for
swaps. Commission staff estimates that 15-20 entities may
request to become SEFs.
The Commission approved the first clearing requirement last
November. As of June 10, most financial entities were required to bring
certain credit default and interest rate swaps into central clearing.
Accounts managed by third party investment managers and ERISA pension
plans have until September 9 to begin clearing. The Commission
continues in the resource intensive review for determinations of other
swaps that will be subject to the clearing mandate.
Full funding for the agency means that we will be best prepared to
review the dramatic increase in requested registrations and to review
swaps for the clearing mandate. A partial increase in funding means
market participants will see a backlog in registrations, responses to
their inquiries, and product review because we won't have personnel
sufficient to review their submissions in a timely and complete manner.
Flat funding means market participants will wait even longer. There
will be significant backlogs for participants seeking to register with
the CFTC, as well as for the review of swaps for mandatory clearing.
examinations
Another critical mission for fiscal year 2014 will be more regular
and more in-depth examinations of the major market participants the
CFTC oversees. Examinations are the CFTC's tool to check for compliance
with laws that protect the public and to ensure the protection of
customer funds. The President's request would provide $44.3 million and
185 FTEs for examinations, an increase of $25.6 million and 104 FTEs.
The CFTC would more than double our current allocation for this mission
because the number of entities we examine is expected to more than
double.
This is an area where the agency has fallen short of our goals in
performance reviews. The CFTC directly reviews clearinghouses and
trading platforms and will review SDRs. But while the agency reviews
them directly, we don't have the resources to have full-time staff
onsite, unlike other regulatory agencies that do have on-the-ground
staff at the significant firms they oversee. The CFTC also doesn't do
annual reviews. Clearinghouses, for instance, currently are examined on
a 3-year cycle. For intermediaries such as futures commission merchants
(FCMs) and swap dealers, the CFTC relies on what are known as self-
regulatory organizations (SROs) to be the primary examiners. Given our
lack of resources, we're only able to double check the SROs' work on a
limited number of FCMs each year, and the agency can spend little time
onsite at the firms. Our budget also doesn't allow us to review
commodity pool operators or commodity trading advisors.
On top of the current lack of staff for examinations, our
responsibilities in 2014 will expand to include reviews of many new
market participants. For instance, there are currently 106 FCMs, 78
swap dealers and two major swap participants have provisionally
registered, and more are expected to do so as the year progresses. More
frequent and in-depth examinations are necessary to assure the public
that firms have adequate capital, as well as systems and procedures in
place to protect customer money. Reviews are critical to ensuring the
financial soundness of clearinghouses, and ensuring transparency and
competition in the trading markets.
Fully funding the increase for examinations means the Commission
can move toward annual reviews of all significant clearinghouses and
trading platforms and adequate reviews of FCMs and swap dealers. A
partial increase for examinations means cutting back our monitoring
plans for new market participants and more in-depth risk reviews. Flat
funding means we will continue lacking the ability to assure the public
that the CFTC's registrants are financially sound and in compliance
with regulatory protections.
surveillance and data
Effective market surveillance is dependent on the CFTC's ability to
acquire and analyze extremely large volumes of data to identify trends
and events that warrant further investigation. For fiscal year 2014,
the President's request would support $61.7 million and 174 FTEs for
surveillance, data acquisition, and analytics, an increase of $18.3
million and 53 FTEs. Of the $61.7 million request, 55 percent would be
directed toward IT.
The Dodd-Frank swaps market transparency rules mean a major
increase in the amount of incoming data for the CFTC to aggregate and
analyze. The agency is taking on the challenge of establishing
connections with SDRs and aggregating the newly available swaps data
with futures market data. This requires high performance hardware and
software and the development of analytical alerts. But it also requires
the corresponding personnel to manage this technology effectively for
surveillance and enforcement.
As the CFTC also receives ownership and control information for
trading accounts, the agency will have data to better detect intraday
position limit violations and analyze high frequency trading.
A full increase for surveillance means the CFTC will have the
ability to analyze futures and swaps data to protect market
participants and the public. A partial increase would limit the
agency's investments in analysis-based surveillance tools. And flat
funding will limit our capacity to effectively utilize and aggregate
the new data we now are receiving.
enforcement
The CFTC's enforcement arm protects market participants and other
members of the public from fraud, manipulation, and other abusive
practices in the futures and swaps markets. Our efforts range from
pursuing Ponzi schemers who defraud individuals across the country out
of life savings; to abuses that threaten customer funds; to false
reporting of prices; to schemes to manipulate prices, including of
goods, such as oil, gas and agricultural products. The Commission has
opened more than 800 investigations in the past 2 fiscal years. The
President's fiscal year 2014 request would provide $57.7 million and
213 FTEs for enforcement, an increase of $18.1 million and 51 FTEs.
In 2002, we had 154 people devoted to enforcement, and that number
is nearly flat with our current staff of 156. This staff has been
called upon to enforce laws and rules that are new to our arsenal. The
Dodd-Frank mandate closed a significant gap in the agency's enforcement
authorities by extending the enforcement reach to swaps and prohibiting
the reckless use of manipulative or deceptive schemes. In addition, the
CFTC will be overseeing a host of new market participants.
A full increase for enforcement means more investigations and cases
that the agency can pursue to protect the public. A less than full
increase means that the CFTC will be faced with difficult choices. We
could maintain the current volume and types of cases, but we would have
to shift resources from futures cases to swaps cases or not cover all
of the swaps market. Flat funding means not only that the Commission's
enforcement volume likely would shrink, but parts of the markets would
be left with little enforcement oversight.
The Commission's engagement in targeted enforcement efforts in the
public interest include its historic actions regarding the rigging of
benchmark rates, such as the London Interbank Offered Rate (LIBOR), a
reference rate for much of the U.S. futures and swaps markets.
Barclays, UBS and RBS were fined approximately $2.5 billion for
manipulative conduct by the CFTC, the UK Financial Services Authority
(FSA) and the Justice Department. At each bank, the misconduct spanned
many years, took place in offices in several cities around the globe,
included numerous people, and involved multiple benchmark rates and
currencies. In each case, there was evidence of collusion. In the UBS
and RBS cases, one or more inter-dealer brokers painted false pictures
to influence submissions of other banks, i.e., to spread the falsehoods
more widely. Barclays and UBS also were reporting falsely low borrowing
rates in an effort to protect their reputation. While the cases led to
$2 billion in fines flowing to the U.S. Treasury, this is about
ensuring for financial market integrity.
economics and legal analysis
For fiscal year 2014, the President's budget would support $24.6
million and 97 FTEs to invest in robust economic analysis teams and
Commission-wide legal analysis, a decrease of $3.6 million and 20 FTEs
from our estimate under the pre-sequester continuing resolution. The
CFTC's economists support all of the Commission's divisions, including
surveillance and complex enforcement cases. They have served on Dodd-
Frank rule teams to carefully consider the costs and benefits of each
rule.
The decision to make downward adjustments in the resources
requested for this critical mission activity was not an easy one.
However, given the increasing number of intermediaries the CFTC now
oversees, examination teams need to be bolstered.
In 2014, the CFTC's economists will be integral in developing tools
to analyze automated surveillance data and continuing to evaluate new
products for clearing.
Flat funding means a strained ability to analyze the market and
detect problems that could be negative for the economy. Flat funding
also means the Commission's legal analysis team will be cut back even
further to support front-line examinations, adding to the delays in
responding to market participants and processing applications and
straining the team's ability to support enforcement efforts.
conclusion
The CFTC's hardworking team is just 9 percent more in numbers than
at our peak in the 1990s. Yet since that time, the futures market has
grown five-fold, driven by rapid advances in technology. The swaps
market is eight times larger than the futures market. Effective market
implementation of swaps reforms by the CFTC requires additional
resources. We are not asking for eight times the funding or staff.
Investments in both technology and people, however, are needed for
effective oversight of these markets.
Though data has started to be reported to the public and to
regulators, we need the staff and technology to access, review and
analyze the data. With 80 entities having registered as new swap
dealers and major swap participants, we need people to answer their
questions and work with the NFA on the necessary oversight to ensure
market integrity. Furthermore, as market participants expand their
technological sophistication, CFTC technology upgrades are critical for
market surveillance and to enhance customer fund protection programs.
This is an incredibly strained budget environment. But without
sufficient funding for the CFTC, the Nation cannot be assured this
agency can closely monitor for the protection of customer funds and
utilize our enforcement arm to its fullest potential to go after bad
actors in the futures and swaps markets. Without sufficient funding for
the CFTC, the Nation cannot be assured that this agency can effectively
enforce essential rules that promote transparency and lower risk to the
economy.
Thank you again for inviting me today, and I look forward to your
questions.
SECURITIES AND EXCHANGE COMMISSION
STATEMENT OF HON. MARY JO WHITE, CHAIRMAN
Senator Udall. Please proceed, Chair White.
Ms. White. Thank you very much, Mr. Chairman, Ranking
Member Johanns, and Senator Moran. I'm pleased to appear before
you today with Chairman Gensler. Thank you for giving me the
opportunity to testify in support of the President's fiscal
year 2014 budget request for the SEC and to discuss how the
agency would effectively use the funds requested to support the
additional staff, technology, and training needed to fulfill
our mission.
When I joined the SEC in April, the breadth and importance
of the agency's responsibilities became immediately apparent.
As Chairman Udall has summarized, in addition to vigorously
enforcing the Nation's securities laws, the SEC oversees over
25,000 market participants, including over 10,000 investment
advisers, 9,700 mutual funds and ETFs, 460 transfer agents,
4,600 broker/dealers, 17 national securities exchanges, and
multiple clearing agencies and nationally recognized
statistical rating organizations, as well as the Public Company
Accounting Oversight Board (PCAOB), Financial Accounting
Standards Board (FASB), Financial Industry Regulatory Authority
(FINRA), the Municipal Security Rulemaking Board, and SIPC.
The agency is also, as the chairman said, responsible for
reviewing disclosures of over 9,500 reporting companies. In
addition, the Dodd-Frank Act gave the SEC significant new
responsibilities for over-the-counter derivatives, hedge fund
and other private fund advisers, municipal advisers, and
security-based swap clearing agencies. The JOBS Act changed the
way certain companies can go public and provided several new or
revised securities offering exemptions, including a new regime
for crowdfunding offerings, all of which the SEC oversees.
With the resources provided by Congress in recent years,
the SEC has bolstered its examination and enforcement
functions, enhanced its technology, and made important internal
improvements. Much more, however, remains to be done. The SEC's
current funding level presents significant challenges as we
seek to keep pace with the increasing size and complexity of
the securities markets.
If enacted, our request would permit us to add
approximately 676 new positions to improve core operations and
implement the agency's new responsibilities. While our funding
is fully offset by securities transaction fees, and thus will
not impact the deficit, we understand that we must always be
good stewards of appropriated funds and use them in the most
efficient way possible.
More specifically, our budget request would allow us to
expand oversight of investment advisers. The number of
registered advisers has increased by more than 40 percent in
the last decade, while their assets under management have more
than doubled to over $50 trillion. Yet, during fiscal year
2012, the SEC was able to examine only about 8 percent of the
registered advisers and over 40 percent have yet to be
examined.
Although we've employed more risk-based analytics to target
advisers for review and the advisers examined in fiscal 2012
represented 20 percent of the assets under management,
significant additional coverage is essential.
This request would permit us to hire 250 additional
examiners to increase the percentage of advisers examined each
year. Our budget request would also permit us to bolster our
enforcement program and continue to send a strong message to
would-be wrongdoers that misconduct will be aggressively
punished. We would focus enforcement hiring on increased market
expertise, trial attorneys, forensic accountants, and the staff
of the whistleblower and market intelligence offices.
Our request would also, importantly, support 45 additional
positions in the Division of Economic and Risk Analysis, a
roughly 45 percent increase in the size of this essential
function. These positions would be primarily for additional
economists to perform economic analyses in support of
rulemaking and other activities, including economists with
expertise in analyzing high-frequency trading data and market
structure practices.
Our need to continue to invest in technology cannot be
overstated. While the SEC is rapidly modernizing its systems,
significant investments are needed to properly oversee the
markets and entities we regulate. Technology initiatives that
would be funded under this request include improvements to our
system for receiving tips, our information technology (IT)
security, and our IT infrastructure.
We also plan to use the statutorily created reserve fund to
fund large mission-critical technology projects including our
multiyear effort to overhaul EDGAR and to construct the
Enterprise Data Warehouse, which will create a central
repository for SEC data and effect significant efficiencies.
We are working to reduce costs wherever possible and, for
example, achieved substantial technology-related cost savings
in fiscal year 2012 of approximately $12 million. With respect
to the very important Dodd-Frank and JOBS Act mandates, much
has been accomplished, but much remains. A top priority is to
promptly finalize the mandated rulemakings while recognizing
the successful implementation will require additional staff and
technology investments.
I appreciate your consideration of the President's budget
request. Your continued support for the SEC and its increased
responsibilities will allow us to better fulfill our mission
and build upon the significant improvements the agency has
achieved. I would be happy to answer any of your questions.
Thank you.
[The statement follows:]
Prepared Statement of Hon. Mary Jo White
Chairman Udall, Ranking Member Johanns, and members of the
subcommittee, thank you for the opportunity to testify today in support
of the President's fiscal year 2014 budget request for the U.S.
Securities and Exchange Commission (SEC).\1\ I welcome the chance to
discuss how the SEC would make effective use of the $1.674 billion
requested for the coming fiscal year and to explain why the agency
needs the funding it is seeking to do the job it is required to do on
behalf of investors and our capital markets.\2\ As described in more
detail below, the agency's funding request is critical to support the
additional staff, technology, and training needed to fulfill our
mission. Even though our funding mechanism is deficit-neutral, I
recognize it is critical that we use appropriated funds in the most
efficient and effective way possible as stewards of these resources.
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\1\ A copy of the SEC's fiscal year 2014 Budget Congressional
Justification can be found on our website at http://www.sec.gov/about/
reports/secfy14congbudgjust.pdf.
\2\ The views expressed in this testimony are those of the Chair of
the Securities and Exchange Commission and do not necessarily represent
the views of the President or the full Commission. In accordance with
past practice, the budget justification of the agency was submitted by
the Chair and was not voted on by the full Commission.
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As you know, the SEC has a broad, three-part mission: to protect
investors, maintain fair, orderly, and efficient markets, and
facilitate capital formation. When I arrived at the agency in April,
two things were immediately apparent: first, the tremendous scope and
importance of the SEC's mission, and second, the exceptional level of
commitment, talent, and expertise the agency's staff demonstrates each
and every day on behalf of America's investors and markets. One of the
reasons the U.S. markets are the envy of the world is precisely because
of the SEC's work effectively regulating the markets, requiring
comprehensive disclosure, and vigorously enforcing the securities laws.
I am honored to have the opportunity to lead the SEC in executing its
mission.
Today, the SEC's jurisdiction and responsibilities have evolved to
cover significant new aspects of the securities markets. As part of its
core responsibilities, the SEC is charged with implementing and
enforcing the Federal securities laws, overseeing thousands of key
market participants (over 25,000 entities currently),\3\ and reviewing
disclosures and financial statements of approximately 9,100 reporting
companies. With the passage of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) and the Jumpstart Our Business
Startups Act (JOBS Act), the agency's importance and scope of
responsibilities increased. The Dodd-Frank Act gave the Commission
significant new responsibilities for over-the-counter derivatives,
hedge fund and other private fund advisers, municipal advisors, and
security-based swap clearing agencies; and the JOBS Act changed the way
certain companies can go public and provided several new or revised
securities offering exemptions, including a new regime for crowdfunding
offerings.
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\3\ These participants include approximately 10,600 investment
advisers, 9,700 mutual funds and exchange traded funds, 4,600 broker-
dealers, and 460 transfer agents. The SEC also oversees 17 national
securities exchanges, 7 active registered clearing agencies, and 10
nationally recognized statistical rating organizations (NRSROs), as
well as the Public Company Accounting Oversight Board (PCAOB),
Financial Industry Regulatory Authority (FINRA), Municipal Securities
Rulemaking Board (MSRB), the Securities Investor Protection Corporation
(SIPC), and the Financial Accounting Standards Board (FASB).
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In recent years, the agency has made significant strides to
strengthen its oversight over our markets, which are so critical to the
savings of American families and to the growth potential of American
businesses. With the help of the resources provided by Congress in
recent years, the SEC has bolstered its examination, review, and
enforcement functions, improved its capacity to assess risks, enhanced
its technology, and made internal improvements designed to maximize
efficiencies and reform its operations. Much more, however, remains to
be accomplished.
The SEC's current level of resources still presents significant
challenges as we seek to keep pace with the increasing size and
complexity of the securities markets and fulfill our broad mandates and
responsibilities. The fiscal year 2014 budget request--all of which
would be fully offset by matching collections of fees on securities
transactions and thus would not increase the Federal budget deficit--
seeks to address these challenges directly, by better positioning the
agency to provide the kind of market oversight that the public expects
and deserves.
Before describing the details of our funding needs for 2014, I
would like to briefly highlight a few key areas that I believe should
be among four top priorities and that have been important drivers for
our budget request.
key priorities
First, the SEC must complete, quickly and thoughtfully, the
rulemaking mandates contained in the Dodd-Frank Act and JOBS Act. As
discussed in greater detail below, although the SEC has proposed or
adopted rules for about 80 percent of the more than 90 Dodd-Frank Act
provisions that require SEC rulemaking, and also has finalized 17 of
the more than 20 studies and reports that it was directed to complete,
much work remains. Similarly, the JOBS Act requires significant
Commission rulemaking which has not yet been completed. Fulfilling
these legislative mandates expeditiously must be an immediate
imperative for the Commission. In connection with those rules, I will
continue the Commission's efforts to ensure that the SEC performs
rigorous economic analysis, which is critically important and will
inform and help guide our rulemaking decisions.
While the Commission, with its existing staff, is already far along
in many of its statutorily mandated rulemakings, we need additional
staff and investments in technology to successfully implement these
mandates. For example, the fiscal year 2014 budget request would enable
the SEC to hire more economists to perform economic and risk analyses
to assist in our rulemaking decisions, as well as support new
technology for a municipal advisor registration system. We also need
additional resources to improve our ability to help markets and market
participants transition to new rules and requirements. Certainty is
critical to the efficient functioning of our markets, particularly
during periods of regulatory change. The fiscal year 2014 request also
would allow us to hire additional staff with technical skills and
experience to process and review on a timely basis requests for
interpretations, registrations, and other required approvals.
Additional resources will be needed to help conduct risk-based
supervision of newly registered entities such as security-based swap
dealers and major security-based swap participants, which will be
subject to regulation by the agency.
Second, I am committed to further strengthening the core
enforcement and examination functions of the SEC. Strong enforcement of
the securities laws is necessary for investor confidence and is
essential to the integrity of our financial markets. Successful
enforcement actions result in sanctions that deter and punish
wrongdoing and protect investors, both now and in the future.
Similarly, our National Examination Program (NEP) is critical to
improving compliance, preventing and detecting fraud, and monitoring
market risks. As described in more detail below, the current level of
resources is not sufficient to permit the SEC to adequately examine
regulated entities and enforce compliance with the securities laws in a
way that investors expect and deserve.
Third, the SEC needs to be in a position to provide adequate
oversight of today's highly complex and dispersed marketplace so that
it can be wisely and effectively regulated. Such oversight must come
without undue cost and without undermining market vitality. We are
working to understand more fully the impact on investors and the
quality of our markets of high-frequency trading, complex trading
algorithms, dark pools, and intricate new order types so that
appropriate regulatory responses can be developed. I know that many in
Congress are also interested in these important areas. The fiscal year
2014 budget request would assist the SEC in making investments in much-
needed technology and expertise, not only helping us keep better pace
with the markets we monitor and regulate, but also permitting us to see
around corners and anticipate issues that may arise.
fiscal year 2014 request
The SEC is requesting $1.674 billion for fiscal year 2014. If
enacted, this request would permit us to add approximately 676 new
staff positions, which are needed both to improve core operations and
implement the agency's new responsibilities. While we understand that
this request comes during a time of serious fiscal challenges, we have
tried to be targeted in making requests in the areas where the
immediate deployment of resources is most critical.
The budget request would provide additional funding for the
following key areas:
--expanding oversight of investment advisers and improving their
regulation and compliance--a point at which investors are most
at risk of being defrauded and harmed;
--bolstering enforcement--a primary function of the agency is to
enforce the law and deter other would-be wrongdoers;
--economic and risk analysis to support rulemaking and oversight--
critical to good rulemaking and effective oversight;
--building oversight of derivatives and clearing agencies--
significant new agency responsibilities that help safeguard
against a future financial crisis;
--enhancing reviews of corporate disclosures--including supporting
implementation of the JOBS Act;
--leveraging technology--to improve our ability to detect wrongdoing,
streamline our operations, and tighten the security of our
data; and
--enhancing training and development of SEC staff--to increase our
staff expertise.
I would now like to describe each of these in more detail.
expanding oversight of investment advisers and improving their
regulation and compliance
During fiscal year 2012, although the SEC continued to use and
improve risk-based analysis to select examination candidates in its
examination program and was able to examine advisers representing over
20 percent of the overall assets under management, it was able to
examine only about 8 percent of the number of registered investment
advisers. Over 40 percent of advisers have never been examined. The
number of registered investment advisers has increased by more than 40
percent over the last decade, while the assets under management by
these advisers have increased more than two-fold, to more than $50
trillion. At the same time as this exponential growth in size, the
industry has grown increasingly more complex. This complexity includes:
the use of new and sophisticated products, including derivatives and
certain structured products; technologies that facilitate high-
frequency and algorithmic trading; and complex ``families'' of
financial services companies with integrated operations that include
both broker-dealer and investment adviser affiliates. Although the
agency has successfully focused its limited examination resources on
those areas posing the greatest risk to investor assets, the SEC's
examination coverage rate continues to be insufficient.
Therefore, under the fiscal year 2014 request, one of the SEC's top
priorities is to hire 250 additional examiners to increase the
proportion of advisers examined each year, the rate of first-time
examinations, and the examination coverage of investment advisers and
newly registered private fund advisers. This would be an important step
in a multi-year effort to increase coverage by our examination program
to meet our regulatory responsibilities to investors who increasingly
turn to investment advisers for assistance navigating the securities
markets and investing for retirement and family needs.
The NEP also would be able to add 60 positions to improve oversight
and examination functions related to broker-dealers, clearing agencies,
transfer agents, self-regulatory organizations (SROs), and municipal
advisors. In addition, 15 positions would be used to support other
critical program initiatives such as enhancing global risk assessment
and surveillance efforts and improving technology capabilities. These
positions are vital as the agency continues to strive to adapt to the
rapid change and increasing complexity of the markets it regulates and
its increased examination responsibilities with regard to clearing
agencies, securities-based swap market participants, and municipal
advisors.
bolstering enforcement
The ability to identify and bring timely, high-quality enforcement
actions when violations of the Federal securities laws occur is
integral to the SEC's core mission. The SEC must enhance its
enforcement function not only to send strong messages to wrongdoers
that misconduct will be swiftly and aggressively addressed, but also to
adapt for the highly automated, high-speed markets of today and
tomorrow. Under this budget request, we would be able to further refine
our analysis of tips and leverage incoming data to identify trends of
possible misconduct across product, sector, or geographic areas. We
also would engage additional industry experts and proactive data
analytics to better target industry practices that may harm investors.
For example, we have developed algorithms to mine publicly-available
hedge fund performance data to identify aberrational performance
returns that could be indicative of conduct warranting further
investigation. With additional front line investigative attorney, trial
attorney, and forensic accountant resources, we would further bolster
our core work of pursuing potential securities laws violations
identified from these and other sources. The Division of Enforcement
would focus its hiring of 131 staff on increased expertise in the
securities industry and new product areas, trial attorneys, and
forensic accountants, as well as staff for the Office of Market
Intelligence, the Office of the Whistleblower, and the SEC's
collections and distributions functions.
economic and risk analysis to support rulemaking and oversight
For fiscal year 2014, the SEC requests funding to add 45 positions
in the Division of Economic and Risk Analysis (DERA),\4\ a roughly 45
percent increase in the size of this essential function. These
positions would be used primarily for additional financial economists
to perform economic analyses and research in support of the
Commission's activities, including those undertaken in connection with
the Dodd-Frank Act and JOBS Act. Specifically, DERA would seek
economists with expertise in analyzing high-frequency trading data,
market structure and practices, executive compensation and related
areas of corporate governance, and credit-default swaps. DERA also
plans to hire operations research analysts with backgrounds in
mathematics, statistics, or econometrics to expand the development and
delivery of risk metrics and analytics to inform risk assessment in
examinations and investigations, rulemaking, and economic analysis.
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\4\ The Division of Risk, Strategy and Financial Innovation was
recently renamed the ``Division of Economic and Risk Analysis'' to
better reflect its core responsibilities and focus. See www.sec.gov/
news/press/2013/2013-104.htm.
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building oversight of derivatives and clearing agencies
The Commission's regulatory responsibilities have been
significantly expanded with the addition of new categories of
registered entities (including security-based swap execution
facilities, security-based swap data repositories, security-based swap
dealers, and major security-based swap participants); the required
regulatory reporting and public dissemination of security-based swap
data; and the mandatory clearing of security-based swaps. To avoid
bottlenecks and unintended market disruptions as the new requirements
become operational over the next 2 years, the agency will need
additional staff with technical skills and experience to process and
review on a timely basis the requests for rule interpretations,
registration, or required approvals. New staff also will be needed to
supervise registered security-based swap dealers and participants, and
to use newly-available data to identify excessive risks or other
threats to security-based swap markets and investors.
In addition, the agency will need to focus further on enhancing its
oversight of clearing agencies, including clearing agencies expected to
register with the Commission in the near future. Currently, six
clearing agencies have been designated systemically important by the
Financial Stability Oversight Council (FSOC) and, of the six, the SEC
is the supervisory agency for four. These designations have been
accompanied by a materially higher level of oversight, including, for
example, an annual exam requirement for those clearing agencies for
which we are the supervisory agency, and also have required enhanced
coordination with other agencies. We also anticipate additional work
associated with Commission rules relating to clearing of security-based
swaps, as the requirements are new and the relevant clearing agencies
are new agency registrants.
Currently, the average transaction volume cleared and settled by
the seven active registered clearing agencies is approximately $6.6
trillion a day. Notwithstanding this tremendous volume, the SEC
currently has on staff 14 examiners devoted to examining registered
clearing agencies, with only a limited on-site presence existing in
four of the seven. Additionally, the SEC has about a dozen other staff
focused on the monitoring and evaluation of risk management systems
used by the existing clearing agencies, and will need to expand these
efforts to address the expected increase in the number of clearing
agencies and rule filings raising risk management issues. Without these
additional resources, the mismatch between the amount of regulated
clearing activity and staffing will be exacerbated both by the
additional clearing agencies that are expected to register with the SEC
as a result of security-based swap activities and the expanded
oversight required due to clearing agencies' designations as
systemically important by the FSOC. Accordingly, the fiscal year 2014
budget request seeks to add 25 positions in the Division of Trading and
Markets and in the NEP to support these functions.
enhancing reviews of corporate disclosures and supporting
implementation of the jobs act
For fiscal year 2014, the SEC requests 25 new positions for the
Division of Corporation Finance. These positions would permit us to
hire additional attorneys and accountants to continue to enhance the
Division's reviews of large companies, and prepare, finalize, and
implement the remaining rules and projects under the Dodd-Frank Act and
the JOBS Act, including responding to requests for interpretive
guidance with respect to new rules. Further, the additional positions
would allow the Division to enhance its review of SEC rules and
regulations impacting small business capital formation and better
evaluate trends in increasingly complex offerings.
leveraging technology
Beyond the need to increase the number of experts dedicated to
overseeing the securities industry, it also is critically important to
continue leveraging technology to streamline operations and increase
the effectiveness of the agency's programs. While the SEC has made
significant progress over the past few years in modernizing our
technology systems, the agency must continue to make significant
investments if it is to properly oversee the markets and entities it
regulates. The fiscal year 2014 budget request would add $56 million
for technology to support a number of key information technology (IT)
initiatives, including enhancements to the system for receiving tips,
complaints, and referrals (TCR), improvements to IT security, and
infrastructure upgrades to achieve efficiencies in business operations
and reduce long-term costs.
The SEC plans to enhance its TCR system by building an interface to
the agency's exam and case management systems, adding intake and
routing functionality for referrals from SROs, and expanding internal
reporting to SEC management on the tracking, investigation, and
disposition of TCRs. Additionally, the agency plans to develop a
component of the TCR system that will automatically triage incoming
tips so they can quickly be flagged for additional follow-up.
The agency also seeks to make a significant investment in its
information security program to deploy a new set of security tools and
develop and train staff to monitor, respond to, and remediate threats.
Additionally, the SEC is requesting resources to implement
infrastructure upgrades that will achieve efficiencies in business
operations and reduce long-term costs. For example, the agency plans a
number of initiatives to automate business processes and share data
across the agency, to improve collaboration and content management
across the agency, and continue strategic replacement of existing
hardware and software to hold down maintenance costs.
While the need for resources is significant, we also realize and
appreciate the imperative to identify ways to reduce costs wherever
possible. The SEC has made important strides forward in this regard,
identifying and realizing substantial savings and operational
efficiencies in recent years. For example, in the technology areas,
agency initiatives have resulted in more robust IT infrastructure
support contracts, savings in software maintenance and support
contracts, upgrades to data storage systems, and reductions in remote
connectivity and network costs. Together these steps yielded cost
savings of approximately $12 million in fiscal year 2012, and continued
savings are expected in fiscal year 2013 and beyond.
The SEC's savings initiatives are expected to continue into fiscal
year 2014, as the agency is working to identify and implement new
technologies and business process improvements that will offer
increased performance with reduced operational costs.
sec reserve fund
In fiscal year 2014, the SEC plans to use $50 million from the SEC
Reserve Fund, established by statute, to fund large, multi-year,
mission-critical technology projects. As required by statute, we will
continue to notify this subcommittee within 10 days of each obligation
from the Reserve Fund. Among other projects, the agency would continue
its multi-year effort to overhaul the Electronic Data Gathering,
Analysis and Retrieval (EDGAR) system to create a new, modernized
system that will meet Commission requirements for real-time system
updates, reduce filer burden by providing simplified search and filing
options based on filer experience (i.e., professional or novice),
improve data capture by moving to structured formats for various SEC
forms, and reduce the long term costs of operating and maintaining the
system.
In addition, we plan to use the SEC Reserve Fund for the
construction and enhancement of the Enterprise Data Warehouse (EDW).
The EDW is a critical step in combining currently disparate sources of
data from EDGAR filings, exam reports, investigations, external
vendors, and many other sources. An organized central data repository
will allow enhanced analytical capabilities, predictive modeling, and
strengthened governance of data controls and quality standards.
We also plan to use the SEC Reserve Fund toward the development of
the capability to intake, store, and analyze data from the upcoming
Consolidated Audit Trail (CAT) that the Commission has mandated the
SROs create to increase the data available to regulators. A CAT
repository would enable the SEC to intake CAT data and store it in the
EDW, as well as to develop analytical tools and a single software
platform that will allow the SEC to identify patterns, trends, and
anomalies in the CAT data. The tools and platform will allow seamless
searches of data sets to examine activity to reveal suspicious behavior
in securities-related activities and quickly trace the origin.
enhancing training and development of sec staff
The SEC's hardworking staff is the most important component of the
agency's strength. The fiscal year 2014 request includes a significant
increase in the SEC's total training budget to deepen staff expertise
and skills, in order to keep pace with the rapidly evolving nature of
the markets and areas of new responsibility. The planned investment
principally supports training and development for employees directly
involved in examinations, investigations, fraud detection, litigation,
and other core mission responsibilities of the SEC. The training will
consist of specialized in-depth training concerning new trends in the
securities industry and changing market conditions, the impact of the
current market structure on compliance and trading activities, and
analytics and forensics using market data. The resources requested in
the fiscal year 2014 budget would bring the SEC's level of training
investment more on par with other Federal financial regulatory
agencies.
dodd-frank and jobs acts progress
The subcommittee's invitation references the SEC's implementation
of the Dodd-Frank and JOBS Acts. Below is a brief summary of our
progress to date.
As discussed above, the SEC has proposed or adopted rules for about
80 percent of the Dodd-Frank Act provisions that require SEC
rulemaking. We have also finalized 17 of the more than 20 studies and
reports that the act directed the SEC to complete.
With respect to registration of private fund advisers, the SEC has
implemented the Dodd-Frank Act's mandates, including rules to
effectuate private fund adviser registration and reporting,\5\
implementing new registration exemptions for certain advisers,\6\
reallocating responsibility for smaller advisers to the State
securities authorities,\7\ and amending requirements for advisers that
charge performance fees.\8\ In addition, throughout the past year, SEC
staff has been assisting private fund advisers as they file their
initial Form PF data. Form PF is a confidential data reporting form
providing data about private funds' risk characteristics, developed by
the SEC and the CFTC, in consultation with FSOC, pursuant to a Dodd-
Frank Act mandate.\9\ We are beginning to use the data collected on
Form PF to assist us in carrying out our regulatory mission, and going
forward, we will seek to expand and improve our use of it, while also
sharing the information with FSOC for their systemic risk analysis
functions as contemplated by the Dodd-Frank Act.
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\5\ See Release No. IA-3221, ``Rules Implementing Amendments to the
Investment Advisers Act of 1940'' (June 22, 2011), http://www.sec.gov/
rules/final/2011/ia-3221.pdf.
\6\ See Release No. IA-3222, ``Exemptions for Advisers to Venture
Capital Funds, Private Fund Advisers with Less Than $150 Million in
Assets under Management, and Foreign Private Advisers'' (June 22,
2011), http://www.sec.gov/rules/final/2011/ia-3222.pdf.
\7\ See Release No. IA-3221, ``Rules Implementing Amendments to the
Investment Advisers Act of 1940'' (June 22, 2011), http://www.sec.gov/
rules/final/2011/ia-3221.pdf.
\8\ See Release No. IA-3372, ``Investment Adviser Performance
Compensation'' (February 15, 2012), http://www.sec.gov/rules/final/
2012/ia-3372.pdf.
\9\ See Release No. IA-3308, ``Reporting by Investment Advisers to
Private Funds and Certain Commodity Pool Operators and Commodity
Trading Advisors on Form PF'' (October 31, 2011), http://www.sec.gov/
rules/final/2011/ia-3308.pdf.
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The Commission also has proposed nearly all of the core rules
required by title VII of the Dodd-Frank Act to establish a new
oversight regime for the over-the-counter derivatives marketplace.
Recent initiatives include:
--proposed rules regarding the application of title VII in the cross-
border context; \10\
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\10\ See Release No. 34-69490, ``Cross-Border Security-Based Swap
Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms
Relating to the Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants'' (May 1, 2013), http://www.sec.gov/
rules/proposed/2013/34-69490.pdf.
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--proposed core financial responsibility rules for security-based
swap dealers and major security-based swap participants; \11\
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\11\ See Release No. 34-68071, ``Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-Based
Swap Participants and Capital Requirements for Broker-Dealers''
(October 18, 2012), http://www.sec.gov/rules/proposed/2012/34-
68071.pdf.
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--final rules and interpretations adopted jointly with the CFTC
regarding key product definitions; \12\
---------------------------------------------------------------------------
\12\ See Release No. 33-9338, ``Further Definition of `Swap,'
`Security-Based Swap,' and `Security-Based Swap Agreement'; Mixed
Swaps; Security-Based Swap Agreement Recordkeeping'' (July 18, 2012),
http://www.sec.gov/rules/final/2012/33-9338.pdf.
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--final rules and interpretations adopted jointly with the CFTC
regarding key entity definitions; \13\
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\13\ See Release No. 34-66868, ``Further Definition of `Swap
Dealer,' `Security-Based Swap Dealer,' `Major Swap Participant,' `Major
Security-Based Swap Participant' and `Eligible Contract Participant' ''
(April 27, 2012), http://www.sec.gov/rules/final/2012/34-66868.pdf.
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--final rules adopted to establish operational and risk management
standards for clearing agencies, including clearing agencies
that clear security-based swaps; \14\ and
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\14\ See Release No. 34-68080, ``Clearing Agency Standards''
(October 22, 2012), http://www.sec.gov/rules/final/2012/34-68080.pdf.
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--final rules adopted to establish procedures for the Commission's
review of certain actions undertaken by clearing agencies.\15\
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\15\ See Release No. 34-67286, ``Process for Submissions for Review
of Security-Based Swaps for Mandatory Clearing and Notice Filing
Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4
and Form 19b-4 Applicable to All Self-Regulatory Organizations'' (June
28, 2012), http://www.sec.gov/rules/final/2012/34-67286.pdf.
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In addition, as part of its implementation of the Dodd-Frank Act,
the Commission has established a whistleblower program which offers
incentives for individuals with information regarding securities law
violations to come forward. The Commission also has proposed permanent
rules for municipal advisor registration,\16\ as well as a series of
rules designed to improve the practices of credit rating agencies,
including rules to limit the conflicts that may arise when NRSROs rely
on client payments to drive profits and rules to monitor rating agency
employees who move to new positions with rated entities.\17\ Beyond
this, the Commission has adopted Dodd-Frank Act rules regarding
accredited investors,\18\ ``say-on-pay'',\19\ asset-backed
securities,\20\ compensation committee listing standards and
disclosure,\21\ conflict minerals,\22\ and payments by resource
extraction issuers.\23\
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\16\ See Release No. 34-63576, ``Registration of Municipal
Advisors'' (December 20, 2010), http://sec.gov/rules/proposed/2010/34-
63576.pdf. The SEC received over 1,000 comment letters on this
proposal. Many expressed concern that the proposed rules were
overbroad, including well-publicized concerns about their potential
impact on appointed board members of municipal entities, municipal
investments unrelated to municipal securities, and traditional banking
products and services. The staff is developing a recommendation for
final rules that we anticipate will address these concerns.
\17\ See Release No. 34-64514, ``Proposed Rules for Nationally
Recognized Statistical Rating Organizations'' (May 18, 2011), http://
www.sec.gov/rules/proposed/2011/34-64514.pdf.
\18\ See section 413(a) of the Dodd-Frank Act and Release No. 33-
9287, ``Net Worth Standard for Accredited Investors'' (December 21,
2011), http://www.sec.gov/rules/final/2011/33-9287.pdf.
\19\ See section 951 of the Dodd-Frank Act and Release No. 33-9178,
``Shareholder Approval of Executive Compensation and Golden Parachute
Compensation'' (January 25, 2011), http://www.sec.gov/rules/final/2011/
33-9178.pdf.
\20\ See section 942(a) of the Dodd-Frank Act and Release No. 34-
65148, ``Suspension of the Duty to File Reports for Classes of Asset-
Backed Securities under Section 15(d) of the Securities Exchange Act of
1934'' (August 17, 2011), http://www.sec.gov/rules/final/2011/34-
65148.pdf; section 943 of the Dodd-Frank Act and Release No. 33-9175,
``Disclosure for Asset-Backed Securities Required by Section 943 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act'' (January
20, 2011), http://www.sec.gov/rules/final/2011/33-9175.pdf; section 945
of the Dodd-Frank Act and Release No. 33-9176, ``Issuer Review of
Assets in Offerings of Asset-Backed Securities'' (January 20, 2011),
http://www.sec.gov/rules/final/2011/33-9176.pdf.
\21\ See section 952 of the Dodd-Frank Act and Release No. 33-9330,
``Listing Standards for Compensation Committees'' (June 20, 2012),
http://www.sec.gov/rules/final/2012/33-9330.pdf.
\22\ See section 1502 of the Dodd-Frank Act and Release No. 34-
67716, ``Conflict Minerals'' (August 22, 2012), http://www.sec.gov/
rules/final/2012/34-67716.pdf. SEC staff has provided answers to
Frequently Asked Questions about various aspects of Exchange Act
section 13(p) and the rule, see http://www.sec.gov/divisions/corpfin/
guidance/conflictminerals-faq.htm (May 30, 2013).
\23\ See section 1504 of the Dodd-Frank Act and Release No. 34-
67717, ``Disclosure of Payments by Resource Extraction Issuers''
(August 22, 2012), http://www.sec.gov/rules/final/2012/34-67717.pdf.
SEC staff has provided answers to Frequently Asked Questions about
various aspects of Exchange Act section 13(q) and the rule, see http://
www.sec.gov/divisions/corpfin/guidance/resourceextraction-faq.htm (May
30, 2013).
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SEC rulewriting teams also have been working on recommendations for
the Commission's consideration with respect to JOBS Act rulemakings
concerning general solicitation, crowdfunding, an exemption from
registration for public offerings up to $50 million, and thresholds for
registration and deregistration under section 12(g) of the Exchange
Act.\24\ Pursuant to title II of the JOBS Act, the Commission has
proposed rules to allow general solicitation and general advertising
for offers and sales made under Rule 506, provided that all securities
purchasers are accredited investors and issuers take reasonable steps
to verify that purchasers are accredited investors.\25\ The Commission
and staff continue to work diligently on completing this rule and on
the recommendations for each of the other rulemaking mandates of the
JOBS Act.
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\24\ See titles II, III, IV, V and VI of the JOBS Act,
respectively. SEC staff has provided answers to Frequently Asked
Questions about some of these provisions, see http://www.sec.gov/
divisions/corpfin/guidance/cfjjobsactfaq-12g.htm (April 11, 2012),
http://www.sec.gov/divisions/marketreg/tmjobsact-
crowdfundingintermediariesfaq.htm (May 7, 2012), and http://
www.sec.gov/divisions/marketreg/exemption-broker-dealer-registration-
jobs-act-faq.htm (February 5, 2013).
\25\ See section 201(a) of the JOBS Act and Release No. 33-9354,
``Eliminating the Prohibition against General Solicitation and General
Advertising in Rule 506 and Rule 144A Offerings'' (August 29, 2012),
http://www.sec.gov/rules/proposed/2012/33-9354.pdf.
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Title I of the JOBS Act also changed the initial public offering
process for a new category of issuer, called an ``emerging growth
company,'' by, among other things, permitting certain of these
companies to submit draft registration statements for review on a
confidential basis, providing exemptions for such companies from
various disclosure and other requirements for up to 5 years following
their initial public offerings, and relaxing certain restrictions on
communications by issuers and their underwriters. Although the
provisions of title I were effective upon enactment of the JOBS Act,
immediately following enactment, the staff published procedures for
emerging growth companies to submit draft registration statements for
confidential non-public review.\26\ To date, the Commission has
received more than 250 confidentially-submitted draft registration
statements for non-public review as permitted under title I. Through
the issuance of responses to frequently asked questions, the staff has
provided guidance on the application of title I in light of the
Commission's existing rules, regulations and procedures.\27\ The staff
is continuing to work with companies and practitioners when questions
arise concerning the application of this title.
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\26\ See http://www.sec.gov/divisions/corpfin/cfannouncements/
draftregstatements.htm.
\27\ See http://www.sec.gov/divisions/corpfin/guidance/
cfjjobsactfaq-title-i-general.htm, and http://www.sec.gov/divisions/
marketreg/tmjobsact-researchanalystsfaq.htm.
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The JOBS Act also required the Commission to conduct several
studies. The Commission was required, for example, to study the
transition to trading and quoting securities in one penny increments--
also known as decimalization--and the impact decimalization has had on
the number of initial public offerings since its implementation.\28\
The report on this study was submitted to Congress in July 2012,\29\
and the Commission hosted a decimalization roundtable in February 2013.
The Commission also was required to examine its authority to enforce
the anti-evasion provisions of Exchange Act Rule 12g5-1 and submit
recommendations to Congress.\30\ A report on that study was submitted
to Congress in October 2012.\31\ The JOBS Act also mandated that the
Commission conduct a review of Regulation S-K to determine how it may
be modernized and simplified to reduce the costs and other burdens for
emerging growth companies.\32\ Commission staff is in the process of
preparing its recommendations and working to complete the review in the
near future.
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\28\ See section 106(b) of the JOBS Act.
\29\ See ``Report to Congress on Decimalization'' (July 2012),
http://www.sec.gov/news/studies/2012/decimalization-072012.pdf.
\30\ See section 504 of the JOBS Act.
\31\ See ``Report on Authority to Enforce Exchange Act Rule 12g5-1
and Subsection (b)(3)'' (October 15, 2012), http://www.sec.gov/news/
studies/2012/authority-to-enforce-rule-12g5-1.pdf. The staff concluded
that the current enforcement tools available to the Commission are
adequate to enforce the anti-evasion provision of Rule 12g5-1 and
determined not to make any legislative recommendations regarding
enforcement tools relating to Rule 12g5-1(b)(3).
\32\ See http://www.sec.gov/comments/jobs-title-i/reviewreg-sk/
reviewreg-sk.shtml for comments on section 108 of title I.
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While we have made significant progress on both the Dodd-Frank Act
and the JOBS Act mandates, much work remains. As emphasized above, one
of my top priorities is to promptly finalize the rulemakings required
by each act, while at the same time recognizing that successful
implementation will require additional staff and technology investments
as set forth in the fiscal year 2014 budget request.
conclusion
I very much appreciate your consideration of the President's fiscal
year 2014 budget request. Your support for the SEC's expansive and
vital mission will allow us to better protect investors and facilitate
capital formation, more effectively oversee the markets and entities we
regulate, and build upon the significant improvements we have made to
date.
Thank you for inviting me to be here today. I would be happy to
answer your questions.
Senator Udall. Thank you very much. And thank you for those
opening statements.
As you both know, I was a staunch supporter of Dodd-Frank,
and as we approach its third anniversary I'm particularly
concerned with its implementation and efforts to end the
practices that spawned the crisis that hurt so many. However, I
realize the budget constraints this year are very sobering.
Both the SEC and the CFTC are operating under a continuing
resolution, with no increase in funds, compounded further by
another reduction due to sequestration. Neither agency has the
necessary funding that they requested for this current year.
These shortfalls in resources make it difficult to meet a
growing workload of significant, immediate requirements to
address new swap entities coming under oversight.
For the millions of American investors saving for
retirement, for entrepreneurs raising capital to start a
business, and for those who rely on the futures markets as a
means of price discovery and offsetting price risk,
sequestration of agency resources of the CFTC and the SEC has a
significant adverse impact on the protections the CFTC and the
SEC strive to maintain.
Because of sequestration, neither the CFTC nor the SEC will
be able to hire the necessary staff to fully implement programs
that oversee areas such as over-the-counter derivatives,
private fund advisors, or clearing agencies. Efforts to bolster
the tools available to agency staff to uncover and prosecute
violations of the law will be significantly curtailed. The
ability to conduct examinations and oversight will be hindered.
So I want to get your answers to a couple of questions
here, and this is directed to both of you. In balancing the
risks and acknowledging that funds do not support meeting all
that is expected, how are your agencies prioritizing the work
and juggling competing demands this year? What will suffer as a
result, and who will be harmed? Putting this in the context of
your respective agencies' requirements for fiscal year 2014,
describe the implications of the CFTC and the SEC if they are
again faced with making these tough choices beyond the current
year. And whoever wants to jump in first, that would be great.
Ms. White. Let me start. Is this on? I think it is.
First, I just should observe that I essentially was, when I
walked in the door, really struck by the massiveness of the
responsibilities that the SEC oversees. We've talked about some
of those in the opening statements. I cited the one example of
investment advisors in terms of, you know, because of resource
constraints what can be covered and what can't. There are,
obviously, other examples.
Sequestration in particular, Mr. Chairman, has meant to us
that we won't be able to hire staff to fully implement the new
programs over the over-the-counter derivatives, the private
fund advisors, the clearing agencies that you mentioned. We
can't make investments in that new technology that we think is
so important to the agency, particularly on the enforcement
side and on the examination side, which again, in turn, is so
critical to finding wrongdoers and bringing them to justice and
protecting investors. So it's a huge challenge for us every
year.
What we've asked for in this year's request, and we realize
the budget constraints that the Nation faces, frankly, is--
tried to be surgical about it so that we can discharge our
responsibilities as best we can. But there are choices to make.
We have to make them every year. Should there be another
continuing resolution, those will be and will have a
substantial impact on our ability to discharge our
responsibilities.
INCREASED RESPONSIBILITIES
Mr. Gensler. I thank you for your question, and support. We
balance these issues every day. This year, we actually shrank
the agency, modestly, but on about a 710-person base, where we
were 9 or 10 months ago we are about 25 or 30 people smaller.
We did that in part with an eye toward sequestration. We didn't
want the negative morale that would come out of furloughs. And
we had a small bit of money, but important, about $6 million
that, thank you, you gave us 2-year money. You wouldn't have
known this, chairman, but 2 years ago, so we came into this
year with a little bit of money to make that work.
What has suffered and what we haven't been able to do is,
we frankly haven't been able to hire, and as you asked in an
earlier point, when I have the right mix of people right now
that truly know the swaps business and swaps markets as well as
they know futures. We have great experts who are learning a lot
about swaps. But it would be good to have additional people. We
don't have enough money and technology, and state-of-the-art
technology is critical to doing our jobs well.
In terms of 2014, if we are at flat funding again, we would
not go into 2014 with any carryover money. And we've done some
arithmetic. We'd have to skinny down the agency even further,
about 50 more people, and shrink the agency further, which is
about another 8 or 9 percent shrinkage, even though we have
this large job to cover: both the swaps and futures markets.
Senator Udall. Senator Johanns.
Senator Johanns. Thank you, Mr. Chairman.
Mr. Chairman, let me start with you, Chairman Gensler. As
you know, the Budget Control Act was passed with significant
bipartisan support. It was signed by the President of the
United States; it is the law. That's just the reality of what
we're dealing with. It established caps on the amount of money
that can be spent over the next 10 years. So this is not a 1-
year plan. This is something we need to pay attention to over
the long term.
Decisions about how these caps will affect specific
agencies or programs will be made by Congress and the President
through the regular process. The caps established can't be
weighed by a single chamber. Both chambers have to act in
concert to do that.
Then, if the caps are exceeded, the BCA provides for the
sequester process, which is largely across-the-board
cancellation of budgetary resources. So, in the context of how
that operates, our job up here, and therefore your job, is to
figure out how to make appropriate decisions for all Federal
agencies and departments.
Now, in your case, Mr. Chairman, the CFTC has requested a
50 percent increase over the last fiscal year, substantial by
any measure. Do you continue to believe that such a significant
percentage increase, which is the largest proposed in this
Financial Services and General Government bill, is justified,
number one? And number two, how do you justify it in comparison
to the priorities of other agencies, one of which is sitting
with you at the table today? Make your best case as to why you
should win and she should lose.
Mr. Gensler. Well, I'd hoped that the American public would
win if we both got funding. So I want to support Chair White.
But I think it is a challenge. This is an unusual
circumstance where a small Federal agency is just about the
size we were 20 years ago. We've shrunk a little, because we
did anticipate the sequestration would likely happen. We read
the Budget Act, as you just laid out.
But we've been asked to take on this very large oversight
role to a market that was at the center of the crisis. It
wasn't the only problem. There were a lot of other problems
that led to the crisis, but swaps were at the center of it.
We've now completed in 3 years' time most of the rule-writing.
We didn't do it was quickly as Congress wanted. They said 1
year. You all said 1 year. We took longer. And we're even
phasing some of this all the way into 2014.
But we're now at this critical juncture where this vast
complex swaps market is to be overseen. And the question for
Congress is, Do we put the people and technology behind that?
And I think that we should, because 8 million people did lose
their jobs out of the crisis. Millions of Americans lost their
homes. Hundreds of thousands of businesses had problems in that
crisis.
This extra $100 million, and it is another $100 million, I
believe is a good investment for the American public, even
though, as you rightly pointed out, it's 50 percent on a base
of $200 million.
Senator Johanns. Madam Chair, let me ask you that same
question a little bit differently. The SEC has requested a 27
percent increase over 2012 and a 33 percent increase over the
sequester amount for fiscal year 2013. Just because the SEC is
funded by fees really doesn't excuse the Commission from
managing the funding it has, and this subcommittee is required
to give that serious oversight. That's why we're here.
Do you continue to believe that such a significant
percentage increase is necessary? And explain to us why you
believe we should make that sizeable increase for the SEC.
Ms. White. Thank you for the question. I do maintain that
as strongly as I possibly can. Obviously, as a relatively new
chairperson at this agency, my focus is on understanding the
context we're operating in in terms of the budget, you know, to
get the job done, to discharge the responsibilities of this
vital agency to our markets and to investors.
We are confronted with the responsibilities we've really
outlined already, added to significantly by Dodd-Frank and the
JOBS Act, and increasing complexity of our marketplace. I think
it's also an agency that has in the last few years really
tightened its internal controls over financial reporting,
spending. I mentioned the cost savings, for example, that have
been effected with the investment in new technology.
And so, I think, and I certainly agree that because we have
matched funding and are deficit neutral does not excuse us from
effectively using the funding that we're appropriated. And we
certainly would do that.
But I think to minimally discharge our responsibilities, we
very much do need this level of increase. And we have tried to
be targeted and surgical about it.
Senator Johanns. When I came here 4 years ago, 4.5 years
ago, the SEC was reeling from the Bernie Madoff scandal and the
fallout from that; how could that possibly have been missed?
Dodd-Frank came along. The JOBS Act came along. It was an
opportunity, I think, for the SEC to show its talent and skill
and get back on its game, if you will. In both areas, the SEC
has been behind in getting the work done.
Tell me how that ship is going to get turned in a different
direction and what you're doing or what your management team is
doing to convince us that the investment being made here,
whether it comes from fees or taxes or whatever, is being
implemented in a wise way and is going to get things back on
course.
Ms. White. I think this is an agency that has gone through
the times that you've mentioned. I think it's also an agency
that certainly prior to my arrival has made significant strides
in strengthening itself. It's had its best financial audits
ever in fiscal year 2012. It's implemented a number of
enhancements to its infrastructure.
In terms of handling tips, for example, one of our
requested items for funding in technology is for that very
system that should certainly, you know, help the agency
considerably in not missing information or a tip, such as
occurred in Madoff and Stanford.
In terms of the timing on the rulemakings, the SEC was
given over 90 rulemakings under Dodd-Frank, additional ones
under the JOBS Act. And I think that to date, under the Dodd-
Frank, the SEC has proposed or adopted 80 percent of those.
There's much left to be done.
I am clearly, as I said at my confirmation hearing, focused
like a laser, I obviously am part of a commission, but in
getting those mandated rulemakings done under both those
statutes. I think we've made considerable progress already. I
see more progress to come.
I just think at the end of the day, I mean, if you look
even at the results the SEC has recently achieved in its
enforcement division in terms of the financial crisis cases, in
addition to the number of cases they've brought, the complexity
of cases they've brought, the sophisticated institutional that
they have charged, they've also gotten orders of penalties,
returned monies of $2.7 billion. I mean, that's a ship that's
working very well.
Much more to be done, and I'm committed to driving it to
even greater heights. But I think they've accomplished a great
deal, and I think the management team that we have in place now
is firmly committed to seeing that that course is continued on
an upward swing.
Senator Johanns. Thank you, Mr. Chair.
Senator Udall. Thank you for that questioning.
And I will be recognizing Senators in the order of arrival.
And we go to Senator Moran.
Senator Moran. Mr. Chairman, thank you. First, let me
welcome you to the chairmanship of our subcommittee and tell
you that you have the better circumstance than your predecessor
did. You have a finer ranking member than when I served in that
capacity.
And let me welcome my friend Senator Coons to the
Appropriations Committee and to this subcommittee.
I have about an equal number of questions for both of our
witnesses. And I don't know what your plans are. Help me
prioritize.
Senator Udall. Sure.
Senator Moran. Will we have more than one round?
Senator Udall. If there's interest in more than one round,
happy to do more than one round.
MF GLOBAL
Senator Moran. Thank you, Mr. Chairman, very much.
Let me start, then, with Chairman Gensler. It was announced
today that the CFTC is prepared to file civil charges as early
as next week against Jon Corzine for the mismanagement that
resulted in the largest bankruptcy since 2008's financial
crisis. Civil charges can be an indication of no criminal
charges to be filed.
I would appreciate knowing an update on the circumstances
in which the continual public's request that heads roll when
wrongdoing is found occurs, and I would like your analysis,
your opinion as to whether or not those who committed either
civil violations of the law or committed crimes will pay a
price in that regard.
And then, again, a question that I've asked you previously,
although not recently, about the likelihood that Kansas farmers
and others are going to be made whole as a result of the
efforts by CFTC in regard to MF Global.
Mr. Gensler. As I think we've discussed in other
subcommittees, maybe not in front of this subcommittee, as the
MF Global matters move from regulatory to an enforcement
matter, it's about 1\1/2\ years ago in November 2011, an
enforcement matter that might actually include Jon Corzine,
who, though it was 14 years earlier, I'd been a partner with, I
stepped aside from any involvement in that enforcement matter.
So I, too, read that which was in the newspaper this morning
with interest, as you might have, being the first time that I
knew what was in the newspaper. So I've been not participating
in this matter over those 18 or 24 months.
But as a general matter, if I can speak to a general
matter, I think that you're absolutely right that our laws,
whether they are about customer protection that is so critical
to the farmers and ranchers in Kansas, as you mentioned, or the
broad rules that we have should be actively pursued not only in
civil violations, but criminal.
We work very closely with the Department of Justice, for
instance, with regard to the enforcement actions we brought
around interest rate benchmarks, and we work with the
Department of Justice actively on many of the matters we do.
Senator Moran. Mr. Chairman, I guess I thank you for your
answer. As you know, I've been critical of your recusal from
these proceedings. Normally, one criticizes someone for not
recusing themselves; I would have liked for you to have been
involved in the efforts of something that is clearly important.
Let me ask you then in that regard if you would ask--I
don't know who now is in charge of the efforts at the CFTC. I
believe it used to be Commissioner Sommers.
Mr. Gensler. Commissioner Sommers, and Commissioner is
still there. And she's wonderful. But I will also--John Riley,
who is the head of our legislative affairs here will ensure--is
John here?
REAL TIME REPORTING
Senator Moran. Would you ask Commissioner Sommers or the
CFTC in general to respond to my question in writing? Thank you
very much.
Let me ask another, more specific question. And this deals
with the issue of real-time public reporting of swap
transaction data. Dodd-Frank required that you write rules
around public reporting of swap transactions. And part of that
instruction from the law was that Congress specified that the
rulemaking be done in a way that does not result in the
identity of the market participants and does not reduce market
liquidity.
I've met, over the course of the last several months, with
a number of market participants in user companies who trade
illiquid points on the curve in large sizes. And they clearly
have evidence that their identities are being not disclosed,
but are becoming evident. And as a result, there's a behavior
that occurs in the markets knowing what end user is
participating in that swap market.
So my point, or the point I would raise is that the rules
that have been developed don't seem to comply with the
instructions of the law to make certain that the identity of
the end user is not known. And they also tell me that the cost
of transacting in the marketplace has increased significantly
since that rule was made effective, and they indicate 35 basis
points is a common story to me.
So, I don't know how you solve this problem. I don't know
what went through you, the thought process in your efforts to
comply with the law in this rule. But perhaps it would be worth
the CFTC considering a delay in the reporting when the
contracts are illiquid, since price references are typically
the front or nearby months on a curve. And I'm interested in
knowing if the CFTC has or would consider that or another
solution to this problem.
Mr. Gensler. I think you'll find that you and I agree on
almost all this. We did actually, when we finalized this rule,
this was a rule we actually finalized unanimously in December
2011. It started, in fact, about 1 year later, December 31 of
this past year.
There are time delays, depending upon the underlying market
and whether they're end users. For instance, in the interest
rate market that is large and liquid, there is a 30-minute time
delay before the post-trade reporting. In some of the energy
markets, agriculture markets, if they are what you and I would
probably both call end users, there was up to a 48-hour time
delay in the initial period and so forth.
So, what I'd like to suggest, if it's possible, anybody
that you've met with, maybe we can jointly meet with them or
I'd be glad to meet with them if you want us to follow up,
because we did have that sensitivity and kept Congress's intent
in mind. But if for some reason we didn't get it right, we'd
need to hear that and we need to see if there are other
solutions.
Senator Moran. At this point, you don't know the problem.
But if we can bring it to you, you're interested in helping
find a solution----
Mr. Gensler. Absolutely, sir.
Senator Moran [continuing]. Assuming that their stories,
their facts are correct?
Mr. Gensler. No, because the key thing is price
transparency and volume transparency is what's critical to help
markets, but not the identity of the actors. And I think
Congress's intent is clear to us. That's what we tried to do in
this triage, that some things would wait 48 hours, for
instance.
Last, we also mask the size. If it's above a certain size,
we don't actually say you have to say that it's a $300 million
transaction in the energy markets, for instance. There's a
smaller size.
But I would want to work with you and hear from your
people.
Senator Moran. I appreciate that offer, and I'll see if I
can get two or three of us together.
Mr. Gensler. All right. Thank you.
Senator Moran. Thank you.
Senator Udall. Thank you, Senator Moran.
And, Senator Coons, we want to welcome you to the
Appropriations Committee and to this subcommittee. I understand
from talking to you earlier today, this is your first activity
in terms of appropriations. And so we're very happy to have you
here today. And please proceed with your question.
Senator Coons. Thank you, Chairman Udall and Ranking Member
Johanns, and my good friend Senator Moran. It's great to be
joining on the subcommittee and on the full Appropriations
Committee. I know I will have a steep learning curve, and I
look forward to your help as I come up to speed on exactly how
to best conduct myself on the Appropriations Committee.
And to Chair White and to Chairman Gensler, thank you for
your hard work and your testimony today and for a chance to be
with you here today. Your appearance in front of this
subcommittee comes at, in many ways, a critical time. As we all
know, the financial crisis destroyed an enormous amount of
household wealth, created great wreckage in our economy, which,
although we've had 39 months of consecutive job growth, we
still don't have unemployment back to pre-crisis levels. And
although there's been strong recovery in the market, there's
still not full recovery from it.
And I think, more than anything, we have to ensure a
collapse like this doesn't happen again. Dodd-Frank, although I
was not a Member of the Senate at the time that it was passed,
I think, took critical strong steps in the right direction. It
creates new regulatory frameworks, in particular for
derivatives. It enhances consumer protection, and it made
significant steps toward ending too-big-to-fail institutions.
Yet having a fully functioning Dodd-Frank framework
requires a tremendous effort from your organizations in
particular.
There are encouraging signs. Chair White, in your
testimony, I believe you mentioned that you have completed 80
percent of the more than 90 Dodd-Frank provisions that require
SEC rulemaking, and you've finalized 17 of 20 studies and
reports that the SEC was directed to complete.
Chairman Gensler, if I read it right, your testimony
suggested CFTC has completed about 90 percent of the swap
market reform rules directed under Dodd-Frank.
But while you've accomplished all of this, there is, as the
other members have commented, a great deal left to be done,
given the remaining rules and studies for Dodd-Frank, the scope
of the JOBS Act, and your oversight duties, which continue to
grow and be challenging, given the complexity of the financial
sector.
So, given all of that, I will strongly support sufficient
funding for you to carry out your vital oversight duties.
Let me, if I might, ask a few questions about rules that
are on the verge of coming online for Dodd-Frank and how we can
work together to ensure that we achieve both well-regulated and
vibrant financial markets, both protecting consumers and
allowing financial institutions to have clear rules of the
road.
There's been a great deal of debate about title VII of
Dodd-Frank and your role with regard to derivatives. I believe
the notional value of the derivatives market is something like
$600 trillion. I thought that was a typo when I saw that in the
briefing memo. So I think it is critical that we get the
rulemaking in this area right, in the near term.
I'm concerned with the impression I've gotten that the SEC
and CFTC are issuing a potentially conflicting or uncoordinated
guidance in this area. Could you elaborate on efforts to
harmonize between the CFTC and the SEC so-called cross-border
derivative rules and what would facilitate harmonization going
forward and what value there might be to harmonization going
forward?
HARMONIZATION
Ms. White. Thank you for your question. And just as a
clarification, the SEC has either proposed or adopted 80
percent, not adopted 80 percent. I think it's over 40 percent
that are adopted. And these rules, and particularly if we're
talking about the over-the-counter derivatives space, you know,
are quite complex. It is a uniquely global market with lots of
regulators and lots of, you know, different markets and issues
to try to get right.
And one of the commands of Dodd-Frank in doing that is to
coordinate closely not only with the CFTC, but also with
international regulators. And so we have been doing that. There
are some differences, and they've been publicized, between what
the SEC has proposed and some of its cross-border proposals
when compared to the CFTC; we're in constant dialogue about
those differences. We're not required to do a joint rule. There
are some differences in the markets. But obviously, the
objective should be to have certainty and as much consistency
as possible.
And so we continue to work with all of our fellow
regulators to do that. We had the benefit of the CFTC's initial
proposals when we made our cross-border proposal on May 1.
We're continuing to receive, you know, comments on that, and
obviously one of the goals will be to harmonize those rules to
the greatest extent possible, but still to carry out the
statutory objective in a very robust way.
So I think that's what I would say as to that.
Senator Coons. Thank you.
Chairman Gensler.
Mr. Gensler. We have been coordinating with the SEC since,
well, Chair White's predecessor, Chair Shapiro, and I were
announced together in Chicago in December 2008. And I do
remember a discussion even that day in Chicago with the soon-
to-be chief of staff about how important it was to harmonize.
So we didn't wait for Congress to tell us how important it was.
The now-mayor of Chicago told us in some colorful ways.
But we have since then, and even now share all of our draft
documents. We share internal documents, deliberative documents,
with the SEC. They go to our Commissioners, go to the SEC,
pretty much within a day or two after we have them ready. And
we get a lot of feedback, terrific, excellent feedback. We do
similar things with the U.S. Treasury Department and the
Federal Reserve and the Office of the Controller of the
Currency, and so forth.
We do have a little bit different markets to oversee. And
we are 90 percent now done. The SEC has more to do. We were
handed about 60 rules to finish, and we've finalized 55 or so.
We have the vast part of the market, the interest rate swap
market, which is about eight-tenths of the whole market. And
then, of course, the important energy, agricultural, and metals
markets.
So we're probably ahead in timing from the SEC because they
have so many other challenges that they're faced with. We're
largely aligned, and even on the cross-border guidance, how we
approach the definitions, for instance, of ``U.S. person,'' how
we're approaching the important issue of covering the
guaranteed affiliates of U.S. financial institutions, meaning
their offshore far-flung operations are quite similar to the
SEC. But there are some differences, and we keep trying to see
if we can narrow those differences.
Senator Coons. As Chair White mentioned, and as I think you
implicitly just mentioned, these are uniquely global markets in
some ways. There is some concern that we might place the
American financial markets or institutions at a competitive
disadvantage if these rules are finalized and implemented
before competitive markets, non-U.S. markets achieve comparable
regulatory progress.
Is there any value to that insight? Or in striking the
balance, is it critical that we get to the finish line first?
Mr. Gensler. I think the word you just used, Senator, is
correct. It's a balance. So on the one hand, Japan, the United
States, and Europe have passed laws. And they're strong, robust
laws. And there's about 140 or 150 other nations around the
globe that have not. You know, Japan, the United States, and
Europe is a lot of the jurisdictional side of this. So we're
looking most, and also two of the major provinces in Canada. So
we're working closely with those areas that have completed
rules.
In terms of competitive advantage or disadvantage, we also
look, as Congress did, to protecting the American public,
bringing transparency to these markets. And if international
financial institutions want access to these markets, and I
think this is correct at the SEC, too, if they want access to
the markets here to do transaction with U.S. persons, then they
come under these reforms, the transparency and other reforms.
If U.S. financial institutions are operating overseas, and
they still have a guarantee from the mother ship back here
that's a concern. If we do not cover those risks, then we're
back into that really awful place that we found ourselves in in
2008. AIG Financial Products was operating offshore, and yet
the U.S. taxpayers put $180 billion in. It was guaranteed by
the mother ship back here.
And so often, the large financial institutions generally
have 2,000 to 3,000 legal entities. They set them up all around
the globe. Usually, about one-half of them are somewhere else.
But they might guarantee them back here. And that's what we, I
think both agencies, are grappling with. Europe is grappling
with the same issue. Their large financial institutions have
guaranteed affiliates somewhere else, so that, if that risk is
going to come back, particularly in complex financial
institutions, we need to guard against that.
They were very committed if their rules in Europe, rules in
Japan, Canada, elsewhere, that we look to, what's called
substituted compliance. We want to look to those comparable
rules for fulfilling the obligations.
Senator Coons. Thank you both very much.
Senator Udall. Thank you, Senator Coons. Thank you very
much.
I think there's an interest in a second round, so I'm going
to start here.
Chair White, this question is really directed to you. The
SEC has clear and longstanding authority to determine what
information public companies must disclose to their
shareholders. Using that authority, the SEC has amassed an
extensive array of disclosure rules that provide shareholders
with detailed information on the companies in which they
invest.
In August 2011, a group of 10 corporate law professors
petitioned the SEC to initiate a rulemaking project to address
growing investor interest in receiving the information about
corporate political spending. The petition emphasizes that
interest among investors for this information has been
percolating for nearly a decade, but was heightened
significantly as a result of the U.S. Supreme Court's decision
in Citizens United, which held that Federal restrictions on
corporate independent spending in support of or opposition of
political candidates are unconstitutional.
Since the petition on rulemaking was filed, more than a
half-million comments on the petition have been filed with the
SEC. According to media counts, the petition has attracted
diverse input from both proponents and opponents of a possible
disclosure policy. In December 2012, the SEC issued public
notice as part of its unified agenda that it would add a
possible rule proposal on political contributions to its
regulatory agenda.
In the notice, entitled ``Disclosure Regarding the Use of
Corporate Resources for Political Activities,'' the SEC stated,
``The Division of Corporation Finance is considering whether to
recommend that the Commission issue a proposed rule to require
that public companies provide disclosure to shareholders
regarding the use of corporate resources for political
activities.''
The next step, according to the announcement, would be a
notice of proposed rulemaking. The December notice listed April
13, 2013, as a projected date for that notice of proposed
rulemaking. In May 2013, during questioning as part of the
House hearing, you indicated that the SEC is not currently
writing a rule to require public corporations to disclose their
political contributions.
Couple of questions here: Is the petition seeking SEC
issuance of a proposed rulemaking on this subject currently
under review by the SEC? What component of the SEC is
undertaking the review? And what is the current status of the
review?
Ms. White. The answer, the status of it is that the
petitions are under review by the Division of Corporation
Finance, the division that you referenced in your question. And
the staff is considering whether or not to recommend the
proposed rulemaking. There's no proposed rulemaking being
worked on now. There is no determination by the staff or the
Commission that there should be, in terms of the current
status, whether there should be a proposed rule.
The focus of not only the Division of Corporation Finance,
but the other divisions, as well as the Commissioners, is on
the congressionally mandated rulemakings at this point. So the
status is, it is still under review by the Division of
Corporation Finance and no one is working on a proposed rule at
this point. They haven't reached their determination. And I
haven't gotten the benefit of that review. So, no judgment has
been made on it.
Senator Udall. And then, if they made no recommendation to
you, how would it proceed from there? If you thought that there
was a good reason to go forward with this, would you? Would the
Commission act in order to inspire it? I mean, what process
would be followed there?
Ms. White. I mean, you know, again, I think if I ask them
for a recommendation, they will probably give me a
recommendation. But I certainly want to be made privy to their
work and not prejudge the issue before reaching any assessment
myself.
Senator Udall. Sure. Sure. Do you have any sense on a
timetable here? I mean, the reason I laid that out the way I
did was trying to get a sense of where we were moving. And now
there, how long are they going to continue to review it? Do you
have any----
Ms. White. I can't really be more specific, I think, than I
have been on this.
Senator Udall. Right.
Ms. White. You know, as we sit here now, and for the
foreseeable future, that division and the staff, much of the
staff is focused very closely on the congressionally mandated
rulemakings.
Senator Udall. Sure. Sure.
Ms. White. So I really can't, you know, give you any better
sense of it than that at this point.
Senator Udall. No. Thank you. Thank you very much. And part
of the reason I asked this question is, when I go back to New
Mexico and visit with my constituents, there's a lot of
interest in this Citizens United and what's happened and the
whole idea that, you know, for 100 years we had a law that said
no corporate spending should take place except under these
voluntary political action committees. And now that's changed.
And so these corporate treasuries are in play.
And the corporate treasuries are huge, as you know. Just to
pick one, Exxon-Mobil has an $81 billion corporate treasury
that could be in play now. We only spent in Federal elections
last cycle $6 billion. And so that's a huge amount of money
that could impact the political process.
And I think investors and people looking at this say,
``Well, if this is going to happen, if you're going to have
companies way out there and start putting these big dollars
into the political system, don't shareholders have a right to
know about this? And what, do they have a right?''
And I think you and I talked about this yesterday. 60
percent of the companies are apparently doing something.
They're putting something out there. And I think what helps is
if the SEC lends some consistency to it and moves it forward so
that we see something going on that's going to educate the
public as to what's going on out there.
And I know that my Republican friends and colleagues, we
all talk about transparency. And so if we're going to have a
big push in terms of corporate dollars going into political
activities, I would like to see it be transparent. I hope I can
join them on this.
So with that, let me turn to Senator Johanns for his
questioning.
CROSS BORDER
Senator Johanns. I do have some thoughts about that. But
suffice it to say I think of the many things that you have to
worry about. I mean, breathtaking responsibility. The SEC is
coming off kind of a pretty tough time. Four and one-half or 5
years ago, things didn't look so good. The SEC had taken its
eye off the ball.
There is a huge debate on the appropriate approach to
campaign finance. It's been raging across this country for
years and years and years, decades. Congress has grappled with
this issue over and over again, passed laws. The Supreme Court
has reviewed those laws because there's First Amendment rights
at stake here.
I just caution you to tread very, very carefully into this
area because there is nothing that is more controversial, more
hotly debated. And why the SEC would want to place itself in
the middle of that right now would be beyond me, but that's
just a public observation on my part.
Let me, if I might, follow up on the swaps issue, the
cross-border swaps guidance issue. And I'm going to preface my
questions here with a little bit of history. Dodd-Frank, now
about 2 years old, but we still don't have a resolution of
exactly what we're doing here and what the direction should be.
The CFTC has proposed cross-border guidance, but it includes a
very broad definition of a ``U.S. person.'' In addition,
there's been interim and proposed definitions that many feel
have created ambiguity for market participants.
Several foreign regulators have weighed in on this. They've
expressed concern about the CFTC guidance. The European
Commission warned the CFTC in a letter dated 2012 that ``The
proposed rules would lead to a duplication of laws and to
potentially irreconcilable conflicts of law for market
operators.''
The Bank of Japan, in a letter to the CFTC, said, ``It
would not be acceptable for us that the Commission applies its
regulations in addition to Japanese regulations in place to
address the differences.'' They've expressed concern about the
CFTC's version of the concept ``substituted compliance,'' which
is also included in the CFTC guidance.
So, you now have foreign governments weighing in on this.
On May 1, 2013, the SEC proposed rules governing cross-border
activities in security-based swaps. The SEC's sequencing
process seems to be less disruptive to me than the CFTC. During
the meeting to approve the rules, Madam Chair, you noted that
the provisions in the new rules will consider ultimate outcomes
instead of going line by line by line, to use words that you
used.
You also indicated that the approach taken by the new rules
would allow the elimination of overlapping regulation when it
truly is a duplication, while recognizing that regulatory
regimes will necessarily differ in some respects.
You gained a new title, Mr. Chairman. It came from the Wall
Street Journal. They referred to you as ``the regulator for the
world.'' And the finance ministers of foreign jurisdictions are
confused, if not up in arms. The EU banking supervisor wrote a
public piece in Bloomberg last week imploring the United States
not to go it alone. And all of our major trading partners have
urged a slowdown until the G-20 can convene. Now, having been a
Cabinet member, when you're doing something that gets popped up
to the attention of the G-20, you've really got people's
attention.
Now, these regulations, as you know, were to go into effect
in October, again in January, but swap participants have
received no-action letters of exemptive relief twice since
then. So, the current exemptive relief expires in just 2 weeks,
with no one having a concrete idea of what the direction is
going to be.
Just this morning, the Democratic CFTC Commissioner, Mark
Wetjen, said in a speech, ``The CFTC should take more time,
solicit more feedback and input from market participants and
foreign regulators before finalizing the rules.'' So my
question to both of you, that's about a 5-minute introduction,
but it's enormously complicated, number one; and number two, I
think we've got everybody totally confused by what has
transpired.
How do we sort that out between the CFTC and the SEC? You
obviously are doing different things. You obviously have
differences of opinion here. And is the marketplace truly ready
for action to be finalized on the 12th, or should we follow the
advice of one of your colleagues on the commission that says,
``Let's take a deep breath here. Let's gather some more input
before we drop the hammer on this''?
Mr. Gensler. I think that the market can be ready. There
are 78 registered swap dealers. The good news is, whether it's
Societe Generale from France, Deutsche Bank from Germany,
Barclays Bank from the United Kingdom, Mitsubishi from Japan,
some of the largest financially sophisticated firms around the
globe, if they're dealing with U.S. persons, they're not only
registered, a licensing procedure, but as of this past
December, they have started reporting to their regulators and
reporting their trades publicly, which Senator Moran was asking
about earlier.
As of March, they had to clear those trades, and as of
June, if they're doing it with a U.S. financial institution on
the other side, clear those trades. They are clearing them.
Good news there. They have business conduct requirements,
called ``sales practice,'' as of May 1. I remember all these
dates, but they're all on our website. They've all been out
there for many, many months, sometimes for 1\1/2\ years.
So we have been bringing reform, as Congress directed us,
to the American public. And again, the SEC has so many other
bigger challenges. And we are a small agency that was asked to
do this on 95 percent of the market.
I think it would be a mistake for the American public that
an agency like ours would effectively repeal the reform
Congress put in place by saying, ``Nope. Three years after the
law is passed, you know, guess what? If you're an affiliate of
Morgan Stanley or Goldman Sachs or J.P. Morgan or Citibank or
Bank of America''--I'll pick the five big ones--``and you're
operating out of the Cayman Islands or something, this reform
doesn't matter,'' because then they would just, you know, put
their jurisdictions down there and all the risks would come
back here.
Senator Johanns. But, Mr. Chairman, I don't think anybody
is suggesting that. I mean, I voted against Dodd-Frank. I don't
share the enthusiasm that the chair does. But having said that,
the law passed. Now it's got to be interpreted, and it's got to
be applied.
My concern is that the marketplace is just totally
confused. And it's not accidental. It's been coming from you
and your team, and probably the SEC to some extent, trying to
figure a very complicated area out. And if we need more time to
do that, we should take more time.
Even one of your colleagues on the Commission is saying,
``I'm out.''
Mr. Gensler. It is not at all a surprise that this is going
to be the most challenging area. And it's also not at all a
surprise that Wall Street and, yes, the financial firms
overseas, will say, ``This is so confusing; we need more
time.'' But what they're really saying behind that is, ``Don't
apply these commonsense reforms when we operate in our offshore
jurisdictions.''
You raised, and I just--if I could, Mr. Chair, you raised
four issues.
Senator Udall. Please.
Mr. Gensler. ``U.S. person,'' we did go broad last July. We
have narrowed that, you mentioned an interpretation that we
actually put out in December, to a more territorial approach,
the definition of ``U.S. person.'' While it's not identical to
the SEC, it's far closer. And it will, I think, need at the end
of the day to cover these hedge funds that have a principal
place of business here in the United States. It might have a
P.O. box in a tropical island.
You asked about European conflicts and Bank of Japan
conflicts. We have narrowed them. Working very closely with the
Japanese authorities, we did use a tool that we have in the
toolbox called a no-action letter, so that where somebody has
to clear a transaction, and the good news is Japan does have a
clearing mandate. We said if it's clearing under that mandate
and not our mandate, that was okay. But we had to use one of
these tools in the toolkit.
With Europe, we have narrowed many of the issues there. And
even last week when we were over in Montreal, we laid out with
Chair White's help when she was there, too, an approach if a
transaction were on a trading platform. We wouldn't want
conflicts on those trading platforms and so forth.
But I think we've made tremendous progress. And last, on
substituted compliance, we did get a letter from seven finance
ministers and asked a question that we'd already answered
privately, but I'll answer it publicly. We're absolutely
committed that where there are comparable and comprehensive
rules in a home country, that we find our way to look to that
on the entity level requirements for these institutions on an
outcomes-based approach.
Now, outcomes-based is a matter of judgment. And I believe
that we should finish this guidance and can finish this
guidance by July 12, and simultaneously give ourselves more
time to come to those substituted compliance determinations, to
give time to work with Europe, Japan, Canada, and so forth on
those substituted compliance determinations.
Senator Johanns. Mr. Chairman, I know I'm way over time.
But can we let Senator Moran go ahead and then come back?
Senator Udall. Yes.
Senator Moran. I'm happy to yield to the Senator.
Senator Udall. Oh, well, if you'd go ahead.
Senator Moran. As long as he doesn't take my time.
Senator Udall. No, he's not taking--well, he's taking your
time in a sense. But if you're willing to wait, that's fine.
Senator Johanns. I just, I don't want to--we can go back
and forth forever. I just wanted to offer Chair White, you, the
opportunity to offer your observations. Because there's
obviously a difference of opinion here. Please go ahead.
Ms. White. There are still some differences. I think there
are some, in the SEC's proposal, there are places where we
would apply, assuming it met the test in terms of the foreign
regulators' rules, broader substituted compliance. Our rules
are actually, the comments are due in in August on the cross-
border release and on the substantive rules, I think at the end
of July.
You know, certainly I don't think undue delay is good for
anybody in this space. I think market certainty, however, is
very important. I think robust rules are very important. It's
about preventing risk, but at least certainly my staff has
advised me that there still is considerable concern and
uncertainty. It's an extraordinarily complex arena.
But our rules are actually, comments are still coming in.
They're very useful to study in this very difficult area. And
they will not be in until the end of August.
Senator Udall. Thank you. Thank you. I think that was a
very good discussion.
Senator Moran, go ahead.
Senator Moran. Chairman, thank you again.
Let me just, I'm going to mostly visit with Chair White.
But let me make sure that I have an understanding with you,
Chairman Gensler, about MF Global and the status of the civil
proceedings and/or criminal proceedings with Jon Corzine.
I asked that you would take my question to either
Commissioner Sommers or to your staff and ask for a response to
me or to the subcommittee. I want to make certain that you
would ask them to respond to me in a matter of days, hours or
days, not weeks or months. This is a very timely topic, and I'd
like to have a response as quickly as possible. And by that I
mean a day or two.
Way too often, and I'm not directing this to you, Chairman
Gensler, but so many times in a request for a written answer
from a witness from our agencies, it's weeks, months, and
sometimes forgotten. And I just want to make certain that our
understanding is that you'll respond in the next day or two.
Mr. Gensler. I guess the record will show that John Riley
shook his head.
Senator Moran. Since you can't answer the question,
chairman, the record shows that John Riley nodded his head
affirmatively. And I thank you for that.
[Clerk's note.--CFTC Commissioner Jill Sommers provided a
verbal response to the office of Senator Moran.]
Senator Moran. Chair White, let me ask about the JOBS Act.
We had a conversation about this in your confirmation hearing,
and I appreciated your answer then. I want to go into two areas
in regard to that legislation.
First of all, title II of the JOBS Act removed the ban on
general solicitation for issuers who sell securities only to
accredited investors. The SEC has published proposed rules that
eliminate this ban on advertising, provided issuers, quote,
``take reasonable steps to verify that the purchasers of the
securities are accredited investors.''
I believe the SEC has said that they will make the
determination whether or not that test has been met, on a case-
by-case basis. There's a problem with that in people trying to
conduct their business. And my question to you is, What does
``reasonable steps'' mean in practice? How can someone know
that there is a safe harbor, that they'll not be criticized by
the SEC if they're out pursuing investors in their company?
And this question comes to me from angel investors in our
State. Something that we desperately in Kansas and across the
country are people who are willing to invest in these start-up
businesses. And there is just this significant level of
uncertainty as to whether or not they are complying with your
regulations, whether they would comply with your proposed
regulation.
Ms. White. Yes. And I think you're absolutely right,
Senator. I think the proposal essentially envisioned the facts
and circumstances test, or I call it principles-based approach.
We've gotten a number of comments to the same effect as your
constituencies have given to you that there is a need for more
certainty, a non-exclusive list, at least a not-exclusive safe
harbor that would actually specify some of the steps that would
be taken as in satisfaction, absent some, obviously, contrary
information that would undermine that. That is an area where
the staff and the commissioners are quite focused as they work
their way through this.
Senator Moran. Thank you very much for that answer. And I
just would suggest that in the failure to figure out a
different answer than a case-by-case basis, my guess is that
that provision, the encouragement of investment in start-up
companies, will not occur. The legislation, the JOBS Act, its
purpose will not be fulfilled if we simply leave this up to a
case-by-case basis. So I thank you for the suggestion that it's
being taken seriously.
And then on our usual conversation that I know that you
get, and I always hate to be one who asks the same question
that you are asked numerous times, and I asked you this back
in, I believe it was February, at the confirmation hearing. Can
you tell us about the crowdfunding rules and their
finalization? And is it a problem of they're so complex that
it's taking a long time? Or there's so much work at the SEC,
other rules take priority?
And I know that you will not answer this question. I
certainly know that you don't want to answer the question, and
I doubt that you will. But can you give us the timeframe in
which these rules will be finalized?
Ms. White. The crowdfunding rules that you mention, and I
know there has been a lot of excitement out there, hopefully
not diminished by the passage of time. You know, that is a
rulemaking. Just stepping back out, I can't give you a time or
date; you're right. But my focus since the day I arrived there
was essentially to look at all of the work streams that we had
on rulemakings, make sure to the extent possible that they were
parallel and you didn't have the same people working on, you
know, different rules, because obviously that slows down
progress.
And the crowdfunding is among the very top, you know,
priorities that we are really working on quite actively. There
are complexities in it. It's a heavy lift in some ways. As you
know, funding portals, for example, you know, when rules with
the registration with FINRA need to be worked out, we're
coordinating very closely with them both on substance and
timing. So we're in very active engagement on that rulemaking.
That's about as much as I can say today, I think.
Senator Moran. If I had more time, I would have asked about
the two topics you just raised, FINRA and portals, which I
think deserve specific questions and issues about them within
this regulatory process as well.
Let me conclude with my final 58 seconds. Too often, I read
in the press and see in the media that an agency has had an
expensive, extravagant conference, seminar that brings a black
eye to Congress, the people who oversee the funding, but
certainly a black eye to the agencies and its leadership in a
time in which you are here bemoaning the fact--and perhaps
that's too strong. But I guess you would be decrying the fact
that we need more resources. Sequestration is a problem. The
continuing resolution is a problem.
There's no good time ever to waste taxpayer dollars. But I
would like for each of you to assure me that there is no chance
that I'm going to open the paper or turn on the news and see
that either one of your agencies has conducted a seminar,
workshop, conference in some extravagant location with some
entertainment that's unbecoming of your profession and that is
not within the tight constraints that a budget requires. Do I
need to have any worries about what I might see or hear in
regard to the CFTC or the SEC?
Ms. White. I certainly hope not, Senator. I think we have
very tight controls over our conferences. I mean, obviously,
you need to train and meet to carry out your functions. In
almost in toto, the conferences are held on SEC premises. The
expenses are extraordinarily modest, limited to per diem,
typically. And there are layers of approval, depending on, you
know, how much the conference cost, quite modest cost.
Mr. Gensler. Now, we don't have the luxury even to come
close to that. So I think you have that assurance. We do at
times send people to conferences that are hosted by others, and
we try to keep those numbers to a minimum number. But no, we
don't.
Senator Moran. And let me make clear that I don't find it
objectionable for professional staff at the SEC or the CFTC or
other Government agencies to attend appropriate, reasonable
conferences that are designed to educate and to bring people
within the industry--one of the things you will hear me
consistently complain about is the uncertainty of what you're
doing at the CFTC or the SEC among those people you regulate.
In my view, you ought to be having the opportunity for you to
convey to them what's happening at your agency, and they ought
to have the opportunity to convey to you their concerns and
complaints.
So mine is not raising the issue that you should not be out
among the folks that you regulate providing input, getting
input. But we all know there's a way to do that and there's a
way not to do it. And I just wanted to make certain that when
and if that occurs, you're doing it in the appropriate manner.
And I would say that both of you answered my question in the
affirmative, and I appreciate it.
Mr. Chairman, thank you.
Ms. White. I think I answered that question.
Senator Moran. Great.
Ms. White. I hope to your satisfaction.
Senator Moran. As I tried to indicate, both of you
indicated that there is not a scandal in the works.
Ms. White. Right. Definitely not.
Thank you.
PROTECTION OF CUSTOMER FUNDS
Senator Udall. Thank you very much, Senator Moran.
Chairman Gensler, the startling failures of two futures
commission merchants, FCMs, in the past 18 months, I'm talking
there about MF Global and the Peregrine Financial Group. And
the shortfalls in customer-segregated funds held by these firms
captured the headlines and raised, I think, very serious
questions about the regulatory oversight structure that failed
to prevent these devastating losses.
In November 2012, CFTC's inspector general cited these two
cases and identified the need to expand delivery of customer
protection resources and consumer education as one of the two
most serious management challenges facing the CFTC. In the
aftermath of these collapses and resultant losses to customers,
what steps have been taken to revamp the regulatory framework
and oversight of FCMs in order to prevent similar fiduciary
breaches and to better protect the funds' customers and trust
to the FCMs?
Mr. Gensler. I thank you, Mr. Chair. Protection of customer
funds, as critical as it is to farmers and ranchers in the
futures market, became even more critical as Dodd-Frank, as
there's more customer funds in the swaps market coming to
clearinghouses and futures commission merchants.
We worked with the self-regulatory organizations, the
Chicago Mercantile Exchange, the National Futures Association.
And they put in place rules last summer, about 1 year ago, with
our collaboration. We had several public roundtables to do
that. We've also proposed various rules at the Federal level,
which are parallel with those of the self-regulatory
organizations, and particularly addressed some of the issues we
learned in Peregrine about accountants. And one area was the
direct access to the bank accounts and knowing how much money
is really in there when a firm like Peregrine, that had
doctored their books.
So there was a lot to do. And the American public and the
farmers and ranchers that rely on these markets need to know
that we're doing that. We've worked with the self-regulatory
organizations on their rules. We've also narrowed the use of
investment of customer funds, which was an amendment we passed
in last 2011. But we have yet to finalize some of these
Federal-level customer protection rules, which I would hope to
do in the latter half of this year.
Senator Udall. Do you have the resources you need in order
to do that?
Mr. Gensler. We have the resources to finalize the rule.
But we do not have the resources to appropriately examine
futures commission merchants. We do rely on the self-regulatory
organizations first and foremost. But I do think that it's
appropriate to increase what's approximately a 40-person staff
that's the examination function for intermediaries. This covers
the clearing members, these futures commission merchants, and
now the swap dealers. And we're a second line of examination,
not the first line. But we do think that unit needs to be about
twice that size. Our examination function is very stretched
right now.
Senator Udall. And you think that would protect consumers?
Mr. Gensler. I think it will protect consumers, but also we
are, by the nature of our agency, not somebody that has
examiners on site. We're not like the bank regulators that
often have examiners on site. And I don't think we're asking to
change that. But as a second line of examination, coming second
to the self-regulatory organizations, I do think that it would
help protect the American public and to finalize our customer
protection rules as well.
SPECULATIVE POSITION LIMITS
Senator Udall. Let me shift over here to position 1-minute
requirements. The enactment of Dodd-Frank Act included several
provisions designed to insulate commodity prices from the
impact of excessive speculation and manipulation. For example,
under section 737, the CFTC was directed to establish position
limits to cap on the size of bets for both swaps and futures.
In October 2011, the CFTC approved and published final
rules establishing position limits for 28 different
commodities. On September 28, 2012, a Federal court struck down
the CFTC's efforts to impose speculative position limits
because the CFTC did not explicitly demonstrate that its rules
were necessary and appropriate. The court vacated and remanded
the rule of the CFTC. The CFTC appealed the ruling, and there
may be action, I think, underway to reissue the rule.
What is the status and forecast for republishing the
position on that rule?
Mr. Gensler. Mr. Chair, I do think it's important as we
have, as we sought the appellate court's guidance on this.
Because I would speak just as one Commissioner. I think
Congress was quite clear that we were to do these rules. And
I've had very lively discussions with Senator Moran, I see, on
that.
And of course, one district court said, ``Well, maybe
not.'' So we simultaneously are looking, as you said, to
following the guidance from that district court to move
forward, and also reissue that rule. And if I can borrow from
Chair White's answer to the crowdfunding question, it's a very
high priority. It's a document that is coming together. And I
hope would be in front of the Commissioners this summer. That
will give a little bit of sense of timing.
Senator Udall. Great. Thank you very much.
Senator Moran, do you want to go for another round, or
shall we close up here?
Senator Moran. Mr. Chairman, I'm satisfied for the moment.
Senator Udall. Okay. Thank you very much.
And let me thank all who participated in preparing for this
hearing. I appreciate the discussion with the top officials of
these two pivotal agencies about their funding needs.
Today's discussion, I think, has been very helpful, with
valuable insights into the agency's operations and challenges.
This information will be instructive as we further consider the
budget proposals and as we develop our fiscal year 2014 bill
over the coming weeks.
ADDITIONAL COMMITTEE QUESTIONS
The hearing record will remain open until next Tuesday,
July 2, at 12 noon, for subcommittee members to submit
statements and/or questions to be submitted to witnesses for
the record.
[The following questions were not asked at the hearing, but
were submitted to the agencies for response subsequent to the
hearing:]
Questions Submitted to Gary Gensler
Questions Submitted by Senator Tom Udall
position limits and reducing excessive speculation
Question. The enactment of the Dodd-Frank Act included several
provisions designed to insulate commodity prices from the impact of
excessive speculation and manipulation. For example, under section 737,
the Commodity Futures Trading Commission (CFTC) was directed to
establish position limits--a cap on the size of the bets--for both
swaps and futures.
In October 2011, the CFTC approved and published final rules
establishing position limits for 28 different commodities. The position
limit rule, which would have taken effect in October 2012--60 days
following the August 13 issuance of a final rule defining ``swaps''--
was issued in response to Congress' concern that no single trader be
permitted to obtain too large a share of the market, and that
derivatives markets remain fair and competitive.
On September 28, 2012, a Federal court struck down the CFTC's
efforts to impose speculative position limits because the CFTC did not
explicitly demonstrate that its rules were ``necessary and
appropriate.'' The court vacated and remanded the rule to the CFTC. The
CFTC appealed the ruling, and there may be action underway to reissue
the rule.
What is the status and forecast for republishing the position limit
rule?
Answer. Staff is preparing a revised notice of proposed rulemaking,
taking into account matters addressed in the court decision. The staff
recommendation is expected to be available for consideration by the
Commission in the near future.
Question. When it comes to speculation, is it relatively easy to
differentiate between normal speculation, excessive speculation, and
manipulation?
Answer. Farmers, ranchers, producers, processors and packers all
rely on futures and swaps markets to lock in the price of a commodity
and manage risk. The futures and swaps markets help them to focus on
what they do best--producing food and fiber and other products for the
Nation. The Commodity Exchange Act includes the finding that excessive
speculation causing sudden or unreasonable fluctuations or unwarranted
changes in the price of a commodity is an undue and unnecessary burden
on interstate commerce. In setting position limits generally, the
agency sought to ensure that the markets were made up of a broad group
of participants with a diversity of views. At the core of our
obligations is promoting market integrity, which the agency has
historically interpreted to include ensuring that markets do not become
too concentrated. The act directs that the Commission set position
limits at levels that would serve to the maximum extent possible to
diminish, or prevent excessive speculation; deter and prevent market
manipulation, squeezes, and corners; ensure sufficient market liquidity
for bona fide hedgers; and ensure that the price discovery function of
the underlying market is not disrupted.
The Commission's rule implementing the Dodd-Frank Act's anti-
manipulation provision sets in place a broad new ability to effectively
combat fraud and manipulation. The Commission can explicitly act
against fraud-based manipulation. Congress also gave the Commission
authority to prohibit trading practices that are disruptive of fair and
equitable trading. With adequate resources, these and other authorities
are available to be used by the Commission to promote and ensure fair
and orderly trading, free from fraud, manipulation and other abuses.
Question. Has the CFTC conducted studies on the impact of position
limits on excessive speculation? If so, what have those studies
concluded?
Answer. As part of rulemaking regarding Position Limits for Futures
and Swaps, the Commission reviewed over 50 studies by institutional,
academic, and industry professionals that were cited by commenters.
Some were supportive of positions limits, some were opposed, and many
expressed no view on position limits. Thirty-eight of these studies
were focused on the impact of speculative activity in futures markets
and did not address position limits. The other 14 studies mentioned
position limits, but did so only as part of a broader discussion of the
role of speculation. None addressed the question of how the Commission
should specifically implement the required limits to advance the
objectives set forth in the Commodity Exchange Act.
Question. What are the key pieces of data that the CFTC currently
analyzes to determine whether forces other than supply and demand are
impacting the futures price of a particular commodity?
Answer. Commission personnel examine trading activity and
positions.
Question. What are the ``tests'' for discerning the legitimate from
the questionable?
Answer. The CFTC analyzes the data it gathers to detect trade
practice violations, disruptive trading practices, and concentrations
of positions indicative of market power. The CFTC depends on
experienced surveillance staff using both regular tests and ad hoc
reviews of the data.
enforcement activities
Question. Detecting and deterring against illegitimate market
forces requires the CFTC's steady vigilance and swift response. Market
users and others must be protected from possible wrongdoing that may
affect or tend to affect the integrity of the markets.
One of the CFTC's five strategic goals is to ensure that firms and
individuals who come to the marketplace to fulfill their business and
trading needs are in compliance with applicable laws and regulations.
CFTC's most recent Performance Report describing the CFTC's
accomplishments during fiscal year 2012 highlight some commendable
results:
--102 enforcement actions, the highest in the agency's history.
--Opening of more than 350 new investigations--among the highest
annual counts.
--Resolution of a landmark case against Barclays PLC and two
affiliates for manipulations and false reporting concerning
LIBOR and other global benchmark interest rates--resulting in a
$200 million fine, the largest penalty ever imposed by the
CFTC.
Let me preface by saying that these accomplishments are impressive.
Do the significant increases in the caseload suggest that there is
more illicit activity occurring or is it because the CFTC is becoming
more adept at rooting it out? How rapidly is the CFTC able to collect
restitution, disgorgement of ill-gotten gains, and civil monetary
penalties imposed against violations of the Federal commodities laws?
What is the recovery rate? Are there any statutory or administrative
impediments that prevent the CFTC from doing more to combat fraud? What
tools do you lack?
Answer. A combination of factors has contributed to increased
enforcement activity by the Commission in recent years, but our ability
to pursue actions is highly dependent on the availability of resources.
When resources permitted, the Division of Enforcement hired additional
staff attorneys and investigators to keep up with the demands of the
docket. As a result, the number of investigations opened increased.
Also contributing is the fact that the Commission has been granted new
oversight authority. The Dodd-Frank mandate closed a significant gap in
the agency's enforcement authorities by extending the enforcement reach
to swaps and prohibiting the reckless use of manipulative or deceptive
schemes. In addition, the CFTC will be overseeing a host of new market
participants.
However, the Division currently has a staff of 156--about the same
size as it was in 2002.
The following table demonstrates the Commission's results regarding
penalties imposed and those collected through the first few months of
fiscal year 2013.
CIVIL MONETARY PENALTIES
[Fiscal Year 1994-Fiscal Year 2013]
------------------------------------------------------------------------
Penalties
Fiscal Year Penalties Imposed Collected
------------------------------------------------------------------------
1994.............................. $4,112,407 $3,134,266
1995.............................. 11,201,100 9,430,239
1996.............................. 1,335,000 1,526,000
1997.............................. 4,532,000 1,752,636
1998.............................. 132,623,756 125,803,781
1999.............................. 85,863,311 22,165,368
2000.............................. 179,811,562 3,299,362
2001.............................. 16,876,335 3,170,252
2002.............................. 9,942,382 \1\ 5,922,387
2003.............................. 110,264,932 87,699,077
2004.............................. 302,049,939 122,468,925
2005.............................. 76,672,758 \2\ 34,163,077
2006.............................. 192,921,794 12,364,509
2007.............................. 345,614,139 12,137,848
2008.............................. 234,835,121 140,745,252
2009.............................. 99,489,609 17,362,486
2010.............................. 136,040,764 75,111,675
2011.............................. 316,682,679 11,343,236
2012.............................. 475,360,925 \3\ 257,562,359
2013.............................. 1,326,645,157 1,031,806,815
------------------------------------------------------------------------
\1\ Includes $30,005 for civil monetary penalties imposed in prior
years.
\2\ Includes $617,409 for civil monetary penalties imposed in prior
years.
\3\ Collections as of fiscal year 2012.
The discrepancy between the amount of civil penalties imposed and the
amount collected is accounted for by the following factors: (1) when
courts order the defendants to both pay restitution to victims and a
civil monetary penalty to the Commission, established Commission
policy directs available funds to satisfy restitution obligations
first; (2) in fraud actions, it is not uncommon that the proceeds of
the fraud have been dissipated and/or that the penalty far exceeds the
defendants represented financial ability to pay; (3) delinquencies
assessed in default proceedings against respondents who are no longer
in business and who cannot be located or are incarcerated; (4)
penalties imposed on 1 year may not become due and payable until the
next year; (5) a penalty may be stayed by appeal; (6) some penalties
call for installment payments that may span more than 1 year; (7)
penalties have been referred to the Attorney General for collection;
and (8) collection still in process internally.
The President's budget for fiscal year 2014 includes an estimate of
$57.7 million and 213 FTEs for enforcement.
A full increase for enforcement means more investigations and cases
that the agency can pursue to protect the public. A less than full
increase means that the CFTC will be faced with difficult choices. We
could maintain the current volume and types of cases, but we would have
to shift resources from futures cases to swaps cases or not cover all
of the swaps market. Flat funding means not only that the Commission's
enforcement volume likely would shrink, but parts of the markets would
be left with little enforcement oversight.
annual exams
Question. The CFTC regulates the activities of nearly 63,000
registrants who handle customer funds, solicit or accept orders, or
give trained advice. Among these registrants are commodity pool
operators, futures commission merchants, floor brokers, floor traders,
and salespersons. CFTC delegates oversight authority to the National
Futures Association, a self-regulatory organization (SRO).
The CFTC is constrained through limited resources from conducting
reviews of CFTC registrants, more frequently than once every 3 years.
Because of the triennial cycle, the ability to check compliance is
diluted. The CFTC also would prefer to perform regular and direct
reviews of all exchanges and intermediaries and to assess their
compliance with the Commodity Exchange Act (CEA) rather than relying on
Designated Self-Regulatory Organizations for these reviews.
What would be the advantages of performing more frequent reviews of
registered entities (e.g., annual rather than triennial)? To what
extent do you believe there is a risk that an ineffective self-
regulatory program may go undetected or a systemic risk may not be
identified if frequency of reviews remains triennial? Would more
frequent reviews require adding staff with expertise in trading and
build CFTC's knowledge base of how exchanges' various electronic
trading platforms operate and how violations may occur on and across
electronically traded markets?
Answer. Annual Exams: Examinations are the CFTC's tool to check for
compliance with laws that protect the public and to ensure the
protection of customer funds. The President's budget request for fiscal
year 2014 would provide $44.3 million and 185 FTEs for examinations, an
increase of $25.6 million and 104 FTEs over current levels. The CFTC
would more than double our current allocation for this mission because
the number of entities we examine is expected to more than double.
This is an area where the agency has fallen short of our goals in
performance reviews. For intermediaries such as futures commission
merchants (FCMs) and swap dealers, the CFTC relies on what are known as
self-regulatory organizations (SROs) to be the primary examiners. Given
our lack of resources, we're only able to double check the SROs' work
on a limited number of FCMs each year, and the agency can spend little
time onsite at the firms. Our budget also doesn't allow us to review
commodity pool operators or commodity trading advisors.
On top of the current lack of staff for examinations, our
responsibilities in 2014 will expand to include reviews of many new
market participants. For instance, there are currently 106 FCMs, 82
swap dealers and two major swap participants have provisionally
registered, and more are expected to do so. More frequent and in-depth
examinations are necessary to assure the public that firms have
adequate capital, as well as systems and procedures in place to protect
customer money. Reviews are critical to ensuring the financial
soundness of clearinghouses, and ensuring transparency and competition
in the trading markets.
The President's budget for fiscal year 2014 would provide the
funding estimated to be necessary for more thorough reviews. Fully
funding the increase for examinations means the Commission can move
toward annual reviews of all significant clearinghouses and trading
platforms and adequate reviews of other market participants. A partial
increase for examinations means cutting back our monitoring plans for
new market participants and more in-depth risk reviews. Flat funding
means we will continue lacking the ability to assure the public that
the CFTC's registrants are financially sound and in compliance with
regulatory protections.
______
Questions Submitted to Mary Jo White
Questions Submitted by Senator Tom Udall
market mutual fund regulations
Question. As you know, I have written to the Securities and
Exchange Commission (SEC) with some concerns about the future of market
mutual funds (MMFs). Given the role that market mutual funds play in
short-term financing for State and local governments, I have been
contacted by constituents who share my concerns that a floating Net
Asset Value (NAV) will alter the nature of MMFs and tighten capital
availability and raise costs.
Has the SEC reached out to local governments to learn more about
their concerns?
Answer. In crafting the proposal, the Commission and its staff
engaged in a deliberative process that included reaching out to many
interested parties, including representatives of State and local
governments. For example, I understand that in March of this year,
Commission staff met with representatives from the National Association
of State Treasurers to discuss the concerns of government treasurers,
learn more about how they use money market funds, and explore the
anticipated effects of reform. We plan to continue to make further
efforts to reach out to State and local government representatives
regarding any concerns they might have with money market fund reform
and look forward to reviewing any comments they might provide on the
proposal.
Question. Are any efforts underway to address their concerns?
Answer. One of the primary goals of the reform process has been
attempting to preserve the benefits of money market funds as much as
possible. The floating NAV proposal, which was one of two alternative
proposals, included exemptions for government and retail money market
funds: under the proposal, those funds could continue to transact at a
stable $1 price as they do today. The proposal also requested comment
on whether the Commission should similarly exempt tax-exempt municipal
money market funds, which serve as a significant source of capital for
local governments. The proposal notes that many tax-exempt municipal
money market funds are intended for retail investors and may choose to
take advantage of the proposed retail exemption, which may further
limit any potential disruption to State and local capital financing. As
the Commission reviews the comments it receives and deliberates on how
to proceed, any concerns raised by State and local government
commenters regarding the effects of a floating NAV on money market
funds will be carefully considered during the reform adoption process.
jumpstart our business startups act update
Question. On April 5, 2012, the Jumpstart Our Business Startups
(JOBS) Act was signed into law. The act requires the Commission to
adopt rules to implement a new exemption that will allow crowdfunding.
Crowdfunding is essentially a means by which money is raised in
relatively small amounts from a large number of people including
through social media and other online platforms. The equity model of
crowdfunding allows individual to invest in newly forming and
established small businesses while realizing a return on their
contribution and a way of financing an enterprise that bigger investors
and lenders are often unwilling or unable to provide.
It has been estimated that potentially 60 crowdfunding portals will
register with the SEC as a result of the JOBS Act. Without adequate
staffing and technology infrastructure, the SEC may be unable to
regulate these portals.
How do the responsibilities for the SEC under the JOBS Act impact
your resource needs? What additional investments in staffing skills and
supportive equipment are called for? How are those needs reflected in
your fiscal year 2014 budget request?
Answer. Implementation of the JOBS Act impacts resource needs
across various divisions and offices of the agency. While our fiscal
year 2014 budget request does not break out in specific detail the
staffing resources necessary to perform activities related to the JOBS
Act, the request does discuss categories of JOBS Act-related functions
where we believe we will need resources. Those include:
--Capital Formation.--The requests for the SEC's Divisions of
Corporation Finance (CF), Trading and Markets (TM), and
Economic and Risk Analysis (DERA) each include resources to
finalize and implement new JOBS Act rules. The Divisions will
need additional staff resources to answer interpretive
questions related to the new rulemakings, monitor
implementation of the new rules and the resulting market
behavior, and collect, process, and analyze data related to the
use of the new rules. TM also expects to allocate new staff to,
among other things, exchange activities related to emerging
growth companies, research, and offering matters.
--Funding Portals.--The SEC's Office of Compliance Inspections and
Examinations (OCIE) will need additional resources for
examining the funding portals under the new crowdfunding rule
and for examining the oversight of funding portals by FINRA.
Also, TM will allocate resources toward governing crowdfunding
intermediaries, including processing FINRA rules.
--Enforcement.--The SEC's Division of Enforcement anticipates needing
additional resources in connection with new rules permitting
crowdfunding and general solicitation in certain Rule 506
offerings. Enforcement plans to employ technology-based risk
assessments by analyzing data collected from broker-dealers,
funding portals, issuers, and investors. They also expect an
increase in tips, complaints, and referrals flowing through the
Commission's central complaint system, requiring additional
resources and infrastructure to process the information and to
allocate staff to investigate and prosecute potential fraud and
abuse in these two new sectors.
--Outreach Initiatives.--Title VII of the JOBS Act requires the SEC
to provide online information and conduct outreach to inform
small- and medium-sized businesses, and businesses owned by
women, veterans and minorities, of the changes made by the JOBS
Act. The SEC's Office of Minority and Women Inclusion is
leading these outreach efforts, in consultation with other
Divisions and Offices.
--Investor Education.--The SEC's fiscal year 2014 budget request
includes staff for its Office of Investor Education and
Advocacy (OIEA) to meet the resource needs it anticipates
arising from the ability of issuers to use general solicitation
and crowdfunding. OIEA seeks additional staff resources to: (1)
prepare educational materials for retail investors; (2) address
inquiries from investors who contact OIEA with questions
related to investment opportunities learned through general
solicitation and crowdfunding; and (3) conduct outreach to
retail investors at investment seminars and conferences.
gaps in the review frequency
Question. The SEC's Office of Compliance, Inspections and
Examinations is responsible for conducting examinations of the Nation's
registered entities, including broker-dealers, transfer agents,
investment advisers, investment companies, the national securities
exchanges, clearing agencies, SROs such as the Financial Industry
Regulatory Authority (FINRA) and others.
During fiscal year 2012, the SEC was able to examine only about 8
percent of registered investment advisers. That means only 1 of every
dozen of those investment advisers is inspected. Over 40 percent of
advisers have never been examined.
Your prepared statement for a House hearing emphasized that while
the SEC has focused its limited examination resources on those areas
posing the greatest risk to investor assets, the SEC's examination
coverage continues to be insufficient in comparison with the rates
achieved by other financial regulators and in the opinion of many
third-party observers.
What is the current frequency of reviews/exams? Is that sufficient
or acceptable, in your judgment? What do you believe would be a more
suitable frequency?
Answer. In fiscal year 2012, OCIE staff examined only 8 percent of
all investment advisers. Although the SEC seeks to focus its limited
examination resources on those areas posing the greatest risk to
investor assets, the agency's examination coverage rate continues to be
insufficient. That is why one of the SEC's top priorities under the
fiscal year 2014 request is to hire 250 additional examiners to
increase the proportion of advisers examined each year, the rate of
first-time examinations, and the examination coverage of investment
advisers and newly registered private fund advisers. This would be an
important step in a multi-year effort to significantly increase
coverage by our examination program.
While the number and frequency of examinations are important to an
effective examination program, other non-quantitative factors, such as
the effectiveness of examinations, selection of examination candidates
and examination results, also are important. Additional resources are
also needed to provide additional training for OCIE staff and to invest
in technology to help OCIE better understand and evaluate increasingly
sophisticated investment products and complex trading strategies
pursued by investment advisers, including advisers to hedge funds.
In addition, our desire to increase the frequency of investment
adviser examinations will need to be balanced with the increase of new
Dodd-Frank mandated registrants, such as municipal advisors and
security-based swap entities and participants.
Question. In the meantime before the SEC is able to establish
annual review cycles, to what extent and with what success is the SEC
using risk assessment procedures to identify the entities most suitable
for review?
Answer. While the SEC's budget request details the need for the
resources to examine a greater percentage of investment advisers in the
coming years, OCIE already is using a risk-based examination approach
with respect to the firms selected for examination, the areas of the
firm examined, and the issues covered during the examinations. While
the SEC was able to examine only about 8 percent of the number of
registered investment advisers during fiscal year 2012, it was able to
examine advisers representing over 20 percent of the overall assets
under management. Staff draws on numerous sources for identifying high
risk registrants and selected areas of focus. For example, staff works
with colleagues throughout the Commission, including those in the
Division of Economic and Risk Analysis, to identify high risk issues
and to develop models and methodologies to identify registrants with
anomalous characteristics. The staff also use algorithms to analyze
available quantitative data to help better identify the firms that pose
the greatest risk to investors. Those advisers are then considered for
examination. Once OCIE selects firms for examination using this risk-
based methodology, examination staff rigorously reviews information
about these individual firms before sending examiners out to the field.
In this regard, the program is focused on allocating our limited
resources on registrants and issues that pose the highest risk.
sec responsiveness to complaints and tips
Question. What has the SEC instituted to address concerns that the
SEC was historically woefully unresponsive to complaints, tips, and
referrals submitted to the agency citing potential violations of the
rules and securities laws? To what extent does SEC management interface
with your Inspector General to cross-match complaints and tips and
referrals that may be routed to each of you to identify redundancy and
duplication? If that is not occurring, would doing so pose any issues?
Are all of the incoming complaints, tips, and referrals presently
channeled to one centralized destination within the SEC for review
regardless of the mode of transmission (e-mail, letter, hotline) or
substantive nature of the issue? Does the SEC have an automated intake
system in place at this time? If so, does it provide a means to link
and search for multiple similar complaints against a single entity?
Answer. Over the last several years, the SEC has deployed an
automated intake system for tips, complaints and referrals (the TCR
System), which has significantly improved our ability to analyze and
respond appropriately to information received regarding potential
violations of Federal securities laws. The TCR System is the
Commission's centralized system for receiving, analyzing and resolving
tips, complaints and referrals from the public, other Government
agencies, and self-regulatory organizations. It can be accessed from
the Commission's website and incorporates information we receive by
other means, including emails and letters. In addition, the
Commission's Office of Investor Education and Advocacy enters inquiries
and complaints it receives from the public into its Investor Response
Information System and forwards allegations of potential securities law
violations to the TCR System.
The agency also has instituted policies and procedures to ensure
that the other SEC divisions and offices, including the Commission's
Office of the Inspector General, enter tips, complaints and referrals
into the TCR System as appropriate. Matters within the TCR System are
then triaged, reviewed, and where appropriate, routed to the
appropriate division, office or group for review and disposition.
Searches can be conducted in the TCR System to, among other things,
identify similarities or relationships between multiple tips,
complaints and referrals.
______
Questions Submitted by Senator Jerry Moran
making crowdfunding rules accessible
Question. Background: Crowdfunding will introduce many
entrepreneurs and small business owners to Securities and Exchange
Commission (SEC) regulation for the first time. These entrepreneurs and
business owners may not be familiar with ``SEC speak'' and may lack the
resources to hire attorneys to explain it to them. Therefore, it is
important that the rules be written in such a way that entrepreneurs
and business owners seeking capital through crowdfunding are able to
understand and comply with them.
What is the SEC going to do to make certain the rules and
requirements of crowdfunding are clear and accessible to people
unfamiliar with securities law?
Answer. We recognize the need for the crowdfunding rules to be
clear and understandable, especially for individuals who are new to the
capital markets and unfamiliar with SEC regulations. Staff from the
Office of Small Business Policy in the SEC's Division of Corporation
Finance, which acts as the SEC's ombudsman for small business, will be
available to assist small businesses with their questions. In addition,
under title VII of the Jumpstart Our Business Startups (JOBS) Act, SEC
staff is conducting outreach efforts to these new market participants
to inform them of the JOBS Act and the new ways to raise capital.
sec cooperation with financial industry regulatory authority on
crowdfunding regulations
Question. Background: The JOBS Act requires entrepreneurs and small
business owners to use the services of an intermediary to issue
crowdfunded securities. Intermediaries are either SEC-registered
brokers or ``funding portals'' registered with the SEC. A funding
portal is an intermediary that does not offer investment advice; does
not solicit purchases, sales or offers to buy securities; does not
compensate employees based on the sale of securities; and does not hold
or manage investor funds.
While the SEC is writing the bulk of regulations for crowdfunding,
Financial Industry Regulatory Authority (FINRA) is developing rules
that would apply to member firms engaging in crowdfunding as a
registered funding portal. Entrepreneurs have had to wait for more than
a year for the SEC to issue rules and they are still waiting. If the
SEC is not coordinating with FINRA, implementation could be further
delayed.
How closely is the SEC working with FINRA on getting all the rules
out related to crowdfunding and could FINRA be a roadblock to ultimate
implementation?
Answer. We appreciate the need to work with FINRA to develop and
implement crowdfunding rules expeditiously. From early in the process,
SEC staff has been working collaboratively with FINRA staff as the
staffs develop proposals for rules relating to crowdfunding. SEC staff
has met on a number of occasions with FINRA staff to consult on the
content and coverage of the rules, and the staff will continue to work
with FINRA throughout the rulemaking process.
streamlining regulation a offerings
Question. Background: Regulation A (Reg A) of the Securities Act of
1933 allows the SEC to exempt publicly offered securities from having
to be registered if the value of the securities does not exceed $5
million during any 12-month period. Title IV of the JOBS Act (commonly
called Reg A+) raised that ceiling to $50 million during any 12-month
period. The JOBS Act also included a provision that if the securities
are offered or sold on a national securities exchange, or are offered
or sold to ``qualified purchasers,'' they will be considered ``covered
securities''--exempting them from State securities law regulation.
Otherwise, securities offered under Reg A+ are still subject to State
securities regulatory review.
If a business wants to raise funds using Reg A and it does not
offer securities on a national exchange or offer them to ``qualified
purchasers,'' the business must not only register with the SEC but with
each State in which potential investors reside. This burdensome
requirement may discourage businesses from using Reg A.
Changing this requirement would likely require new legislation.
Do you support Federal preemption of State registration
requirements for issuers not meeting the provisions for Reg A+
offerings?
Answer. The issue of whether the Commission can and should preempt
State ``blue sky'' laws in connection with Regulation A+ offerings that
do not meet the preemption provisions in the JOBS Act is a significant
one that the staff is considering as it prepares its recommendations
for the Commission. While it is premature to reach a conclusion on this
complex issue, I do believe it is important that the Commission create
a workable exemption that facilitates the intent of title IV--to help
small companies raise capital--while ensuring that the appropriate
investor protections are in place.
SUBCOMMITTEE RECESS
Senator Udall. And the subcommittee hearing is hereby
recessed.
[Whereupon, at 4:46 p.m., Tuesday, June 25, the
subcommittee was recessed, to reconvene subject to the call of
the Chair.]