Issuance of Cross-Border Swaps Proposal Tops SEC's Priority List, Chair Walter Says

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By Yin Wilczek

Securities and Exchange Commission Chairman Elisse Walter Jan. 18 said that first on the agency's rulemaking agenda is issuance of a proposal on how it will regulate cross-border derivatives trades and foreign entities engaged in U.S. swap transactions.

The proposal is “the critical lynchpin” and the “most important thing that we need to do as a prelude to adopting” the commission's substantive security-based swap rules, Walter said at a SEC Investor Advisory Committee meeting, in her first public appearance as commission chair.

“My view is, and my fellow commissioners agree, that we have certain big things we must do, that being one of them,” Walter continued. “The rest of our agenda will be set by trying to figure out what we can marry and get done at the same time. We're going to be very pragmatic about it.”

Statutory Mandate
The SEC, as part of its rule writing obligations under Dodd-Frank Wall Street Reform and Consumer Protection Act, has been tasked to create a regulatory regime for security-based swaps. SEC Commissioner Daniel Gallagher, speaking to reporters after a Jan. 16 U.S. Chamber of Commerce event, said the cross-border proposal could be issued as early as next month (12 SLD, 1/17/13).

Walter told the Investor Advisory Committee that she could not provide much detail on the SEC's rulemaking agenda, given that she and her colleagues still are discussing what should be the agency's priorities and timetable. “I will say though I am confident that completing the remaining rulemakings and other projects mandated by” Dodd-Frank and the Jumpstart Our Business Startups Act “will be at the top of the list,” she said.

After the departure of former chairman Mary Schapiro in December (227 SLD, 11/27/12), commentators had suggested that the agency would be deadlocked, with a membership of two Democrats--Walter and Luis Aguilar--and two Republicans--Troy Paredes and Gallagher. The partisan divide was particularly problematic during the last year of Schapiro's leadership.

However, Walter downplayed the concerns, telling the committee that she and her “fellow commissioners, as well as commission staff, are eager to find common ground and move forward in a practical and effective manner.”

General Solicitation Proposal
Under the JOBS Act, Walter said the commission is trying to determine how it will proceed on a controversial proposal to lift the general solicitation ban for certain private offerings, as mandated by the JOBS Act (172 SLD, 9/6/12).

Investor groups, including the Consumer Federation of America, have voiced concerns over the proposal's lack of investor protections and threatened to sue should it be adopted (195 SLD, 10/10/12). Barbara Roper, CFA's director of Investor Protection and a member of the Investor Advisory Committee, was named in a recent letter by Rep. Patrick McHenry (R-N.C.) as being a factor in Schapiro's refusal at the time to expedite the rulemaking (232 SLD, 12/4/12).

The Investor Advisory Committee, for its part, recommended in October that the SEC include new protections in the proposal, including requiring issuers to file a new Form GS for their generally-solicited private offerings (198 SLD, 10/15/12).

Committee Recommendations
At the meeting, committee chairman Joseph Dear--also chief investment officer of the California Public Employees' Retirement System--asked when the commission will respond to the recommendations. Walter said she hoped that the SEC will soon issue an acknowledgement of the recommendations. However, the commission's response is complicated by the fact that the matter is the subject of an open rulemaking proceeding, she added. “At the time we decide what we're doing on the rulemaking, we can decide whether that's going to be a sufficient response or whether we should give you an additional and separate response.”

Aguilar, also present at the meeting, observed that Dodd-Frank Section 911--the provision authorizing the establishment of the investor committee--requires the SEC to “promptly” respond to the committee's recommendations and to disclose the actions, if any, it plans to take on the recommendations. “To that end, I do look forward to the commission issuing the required response assessing” the committee's recommendations, he said. “I understand the rulemaking is ongoing, but our obligations under Dodd-Frank are quite clear, and I think it's important quite frankly that we issue an assessment before we finalize the rule so that people can have a chance to react to that.”

Aguilar was the sole commissioner who voted against the general solicitation proposal. He told reporters last month that it should be reproposed to incorporate investor safeguards.

Fiduciary Duty
In other comments, Walter said she is “passionate” about ensuring that retail investors receive investment advice that is in their best interests. To that end, she said she wants to see if the commission “can make forward progress” on a rulemaking to impose a uniform fiduciary standard for broker-dealers and investment advisers that provide personalized investment advice to retail customers. She added that “the commission itself doesn't have a unified view” on the matter.

The SEC staff, after conducting a study mandated by Dodd-Frank (16 SLD, 1/25/11), recommended in early 2011 that the SEC pursue the rule.

Gallagher, however, suggested in his Jan. 16 Chamber appearance that at this point, he is not sure if the rulemaking is warranted.

Walter also said the SEC “is going to move forward” on a Dodd-Frank requirement that companies disclose the ratio comparing their chief executive officer's pay to the median annual pay of their employees. “It is a mandate of Congress,” she said, adding that although the Dodd-Frank provision is too prescriptive to allow the SEC much wiggle room, the commission wants to ensure its rule is “workable and practical.”

Market Structure
Walter spoke more generally on technology issues with respect to the equity markets. “We've got to push those kinds of things forward on our agenda,” she said. Walter added that a high-priority item is issuance of a set of rules to mandate the kinds of controls markets must implement to prevent errors. In addition, the markets also should have policies and procedures in place to correct errors when they occur.

Moreover, the SEC should strive to fill in gaps in its data, either through the forthcoming consolidated audit trail or through hiring more expertise, Walter continued. Finally, she said the commission should use technology to ensure retail investors receive the necessary disclosures.

By Yin Wilczek

The text of Aguilar's formal remarks is available at

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