Mike & Co.,
Last week, tersely-worded letters from prominent Senators brought the SEC back into focus. Issues with the SEC’s proposed regulations have been raised before by Sens. Warren and Brown, who have gone so far as to challenge Chair White’s leadership abilities and intentions. Issues at the SEC are further complicated by the continued vacancies of two seats on the five-member Commission, with little prospect for progress in the Senate.
This update examines the state of play regarding salient outstanding rules at the SEC, what may be accomplished this year, and what will likely be postponed until after the election.
The Chief Rules on the Docket
Specifically, the status of the following four SEC rules or proposals is examined:
- Disclosure Effectiveness Initiative
- Open-End Fund Liquidity Risk Management Programs (liquidity risk rule)
- Use of Derivatives by Registered Investment Companies and Business Development Companies (derivatives rule)
- . Fiduciary Rule (not yet officially proposed)
Revamping the Rules?
Last month, the SEC announced an upcoming vote on July 13 to propose amendments to address “redundant, duplicative, overlapping, outdated, or superseded disclosure requirements.” This Disclosure Effectiveness Initiative is seen by some as part of the SEC’s implementation of the FAST Act of 2015, primarily a transportation funding act, which directed the agency to consider ways to modernize and simplify disclosures.
Sen. Warren has strongly criticized this move to constrain regulation, outlining concerns about the number of public disclosures require in a July 7 letter accusing the agency of masking this initiative as a “pro-investor effort to address information overload,” saying this problem of too much public information doesn’t exist. Other organizations, like Pubic Citizen, have expressed concerns about consolidation of the rules when greater disclosure is widely demanded. The SEC Investor Advisory Committee expressed reassurance last month after Chair Mary Jo White claimed the initiative’s goal is to broaden regulatory understanding by investors, rather than reduce disclosures.
Sen. Warren’s strong comments are consistent with her recent interactions with the SEC, calling White’s performance as Chair as “extremely disappointing” at a Senate Banking hearing in June. Only hours after Sen. Warren released her most recent letter, the agency announced its intention to proceed with its efforts to consolidate regulations, and Chair White stated in May the SEC’s dedication to disclosure effectiveness.
Sen. Brown also addressed proposed SEC rules last week, focusing instead on encouraging Chair White to strengthen two current rule drafts. The first, pertaining to liquidity risk, would address hazards arising from mutual funds with illiquid securities difficult to sell in times of stress. Brown urged this rule be revamped to require comprehensive liquidity disclosures and include explicit instructions on how funds should classify assets. He also sought greater oversight of derivatives trading, asking the SEC to provide detailed instructions on the determination of risk-based coverage, as well as a definition of stressed conditions. Brown argued this helps investors gain valuable information on how their money is used. Both of these rules remain open for public comment. Chair White in a May speech announced her intention to “promptly finalize these rules.”
With regard to the fiduciary rule, Chair White has maintained her support for a uniform fiduciary standard between the SEC and the Department of Labor. She did indicate in March that the two agencies have separate mandates, and as such cannot promise that any SEC fiduciary proposal would be identical to that under the DOL.
The SEC projected this past May that a fiduciary standard on both investment advisors and brokers could be proposed by April 2017. For such a rule to go into effect, Chairman White would need the support of at least two more Commissioners, which could be difficult given the current vacancies on the Commission.
The five-member Commission remains short by two officials, with the nominations of Hester Peirce (R) and Lisa Fairfax (D) stalled in the Senate. After some initial delay, Senate Banking did approve the two nominees by voice vote, but the Senate floor has yet to address the vacancies. One culprit appears to be an unidentified Democratic senator, who put a “hold” on Peirce’s nomination, effectively blocking her confirmation vote unless overruled by 60 senators. Sens. Warren and Schumer have also both openly opposed Peirce’s nomination.
Given the tendency to confirm a Democrat and a Republican nominee in tandem to ensure partisan balance, Fairfax’s nomination is now stalled as well. The lack of a full Commission for the SEC has a major bearing on how well the agency can fulfill its mandate, particularly as agency rules require a minimum of three Commissioners to attend all votes.
It appears increasingly unlikely that these two seats will be filled before the November election and the SEC will thus remain thwarted until 2017.
Institutional Struggles in Context
The SEC has not been portrayed in a favorable light in recent months and the administration felt it had to defend the agency. Following Sen. Warren’s sharp critiques in June, the White House stepped in and spoke up in the Chair’s defense, maintaining that she is the right person to head the SEC. In a way, the Commission is being “Garlanded,” denied a full bench, consequently disappointing key constituents like Congress, and, rightly or wrongly, getting pilloried in the process.