SEC Congressional Testimony, Mary L. Schapiro (July 21, 2011) On the one year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or Act), Securities and Exchange Commission (SEC) Chairman Mary L. Schapiro testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs regarding the impact of the Act on reshaping the regulatory landscape and helping restore confidence in the financial system. Schapiro attributed improvements in the financial system to the Act, including, among other things, (1) regulating hedge funds and other private fund advisers under the Investment Advisers Act of 1940 (Advisers Act), (2) establishing a new whistleblower program, (3) creating a new regime for the over-the-counter (OTC) derivatives market, (4) strengthening the SEC's authority over nationally recognized statistical rating organizations (NRSROs) and clearing agencies, (5) heightening asset-backed securities (ABS) regulation, and (6) establishing an array of rules related to corporate governance and executive compensation. Schapiro further noted the SEC's accomplishments in (1) proposing or adopting more than two-thirds of the 90 mandatory provisions that Dodd-Frank requires the SEC to write, and (2) finalizing 10 of the 20 studies and reports required under the Act. Below are the key points discussed by Schapiro.

Hedge Fund and other Private Fund Adviser Regulation

Schapiro discussed various amendments to the Advisers Act pursuant to Dodd-Frank, including, (1) requiring the registration of, and reporting by, hedge fund and private fund advisers who previously were exempt from SEC registration; (2) requiring reporting by investment advisers relying on certain new exemptions from SEC registration; and (3) giving state securities authorities regulatory authority over advisers that have between $25 million and $100 million in assets under management. For more information, see Bloomberg Law Reports®—Securities Law, Divided SEC Implements New Registration and Reporting Regime for Advisers (June 24, 2011) and Bloomberg Law Reports®—Securities Law, Foreign Private Adviser and Private Fund Adviser Exemptions Implemented by SEC (June 28, 2011). Schapiro further noted an SEC rule proposal requiring hedge fund advisers and other private fund advisers to report systemic risk information on a new Form PF, and an SEC order that raises the dollar amount test for a "qualified client" in Adviser Act Rule 205-3. For more information on qualified client fees, see Bloomberg Law Reports®—Securities Law, Dollar Amount Tests for Determining Qualified Client Status Increase under SEC Order (July 14, 2011).

Investor Protection

Citing different provisions of Dodd-Frank, Schapiro described multiple investor protection rules implemented by the SEC that have enhanced its enforcement authority. Most notably, the SEC created a new whistleblower program as required by Dodd-Frank Section 922, under which the SEC will pay an award to eligible whistleblowers who voluntarily provide the agency with original information concerning a federal securities law violation that leads to a successful enforcement action. For more information, see Bloomberg Law Reports®—Securities Law, Whistleblower Program Rules Adopted by the SEC (May 27, 2011). Additionally, Schapiro discussed other investor protections implemented by the SEC, including, (1) Section 929E, which allows for nationwide service of process so that the SEC can compel a witness to appear at trial anywhere in the U.S.; (2) Section 925, which provides the SEC with the authority to collaterally bar or suspend persons in any SEC regulated industry; and (3) Section 929P(a), which grants the SEC the authority to impose penalties in administrative cease-and-desist actions against non-regulated individuals and entities.

OTC Derivatives

Title VII of the Act requires the SEC and the Commodity Futures Trading Commission (CFTC) to work together to establish rules for the OTC derivatives marketplace. To date, the SEC has proposed numerous rules required by Title VII, including, rules (1) prohibiting fraud and manipulation in connection with security-based swaps, and (2) relating to the mandatory clearing of security-based swaps. Schapiro further discussed an interim final rule adopted by the SEC regarding the reporting of outstanding security-based swaps entered into prior to the date of the enactment of the Act. For more background information, seeBloomberg Law Reports®—Securities Law, New SEC Interim Reporting and Record Retention Rule Adopted for Certain Security-based Swaps (Oct. 15, 2011). Shapiro noted, however, that the SEC still has much work to do with respect to proposing and implementing rules required by Title VII. To that end, Schapiro stated that the SEC has been working with other regulators and market participants to consider implementation timeframes and reviewing the steps market participants will need to comply with proposed rules. Moreover, Schapiro noted that the SEC has taken measures to provide legal certainty to avoid unnecessary market disruption that may have otherwise occurred due to the many final rules that were not enacted by the July 16 effective date of Title VII.

Clearing Agencies

Schapiro discussed the SEC's efforts in implementing Dodd-Frank Title VIII, which provides for increased regulation of clearing agencies. To help ensure the integrity of clearing agency operations and governance, the SEC has proposed rules requiring clearing agencies to, among other things, (1) maintain certain risk management and operations standards, and (2) have adequate procedures to protect the confidentiality of trading information. Schapiro noted that many of the proposed rules would apply to all clearing agencies, while others would focus specifically on agencies that clear security-based swaps. Further, Schapiro testified that the SEC and the CFTC have been working jointly to develop a report to Congress, which will set forth recommendations regarding risk management supervision of clearing entities that the Financial Stability Oversight Council designates as systematically important.

Credit Rating Agencies

Additionally, Schapiro testified regarding the proposed rules related to NRSROs, which are intended to strengthen the integrity of credit ratings. Under the proposed rules, NRSROs would be required to, among other things, (1) report on their internal controls, (2) better protect against conflicts of interest, and (3) provide enhanced public disclosures regarding the performance of their credit ratings. For more information, see Bloomberg Law Reports®—Securities Law,New Rules for Credit Ratings Proposed by SEC (May 20, 2011). Schapiro also discussed studies relating to credit rating agencies that the SEC is required to conduct, such as a two-year study on alterative compensation models for rating structured finance products.

Asset-backed Securities

Subtitle D of Title IX of Dodd-Frank requires SEC rulemaking related to improving the asset-backed securitization process. Shapiro noted, among other things, that the SEC has issued for public comment in connection with proposed rules to implement Dodd-Frank Act Section 941. Section 941, which is codified as new Section 15G of the Securities Exchange Act of 1934, generally requires the SEC and other federal regulators to prescribe jointly regulations that require a securitizer to retain not less than 5 percent of the credit risk of any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells, or conveys to a third party. Moreover, Schapiro described other adopted rules implementing the Act, including, (1) Section 943, which relates to the use of representations and warranties in the ABS market; and (2) Section 945, which requires an asset-backed issuer in a registered transaction pursuant to the Securities Act of 1933, to perform a review of the assets underlying the ABS and to disclose the nature of such review. Schapiro further stated that the SEC currently is working on other rules, such as prohibiting material conflicts of interest in securitizations.

Corporate Governance and Executive Compensation

As Schapiro discussed, the SEC has made much headway on implementing Dodd-Frank's rules regarding corporate governance and executive compensation. The SEC has adopted rules regarding (1) say-on-pay, (2) compensation committee and adviser requirements, (3) incentive-based compensation arrangements, and (4) the prohibition on broker voting of uninstructed shares. Schapiro further stated that the SEC is working on adopting other rules, including, mandating new listing standards relating to "clawback" policies and new disclosure requirements concerning executive compensation and company performance. For more information on executive compensation, see Bloomberg Law Reports®—Securities Law, One Year after Dodd-Frank: A Look at the SEC's Work on Executive Compensation (July 21, 2011).

Required Funding for Implementing the Dodd-Frank Act

Lastly, Schapiro stated that as a result of the expansion of the SEC's oversight, it requires "significant additional resources" to effectively implement Dodd-Frank. As such, she noted that the SEC needs to (1) hire hundreds of new staff members, of which many will need to have derivatives and hedge fund expertise; and (2) invest in technology to facilitate the registration of additional entities, and to capture and analyze data on these new markets. Schapiro maintained that if the SEC does not receive additional resources, many issues highlighted by the financial crisis that the Act seeks to remedy will not be "adequately addressed." Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.