Republicans praise White in her final appearance, urge SEC not to approve any 'Midnight Rules'

The House Financial Services Committee on November 15, held a hearing on the SEC's fiscal 2018 budget request; the only witness was SEC Chairman Mary Jo White. Because White had announced the previous day that she would be stepping down as chairman at the end of President Obama's term (though she has three years remaining on hers), and this would be her final appearance at the committee, the hearing often featured well-wishes from members praising her public service. Testimony from the hearing is posted here.

In his opening statement, Chairman Jeb Hensarling (R-TX) said that while much of White's tenure had been positive, the Commission had nonetheless failed to develop a capital formation agenda, which stemmed in part from its "refusal to act on recommendations made by its small business capital formation forum." Hensarling said a directive passed by Congress (the FAST Act) requiring the SEC to simplify its disclosure regime was "languishing," and that the Commission's failure to require electronic delivery of mutual fund documents is "disappointing." He pushed back on critics who have said the agency is underfunded, saying he saw "no need for the SEC to receive a prefunded escrow account of more than $290 million for a potential move of its headquarters." He asked White to resist the urge to pass "midnight rules" as a way of "cementing the policy priorities of the outgoing administration … I would strongly urge you to respect the results of last week's election and resist the temptation to finalize any regulations, including Dodd-Frank Title VII regulations, in deference to the right of the incoming administration to set its own priorities upon taking office in January."

Ranking Member Maxine Waters (D-CA) said she was "appalled that the reaction on Wall Street to Tuesday's election is record highs for bank stocks, as the industry rallies on the news of a massive, destabilizing lawless agenda." Waters said the nation faces uncertain times, "and at the forefront of that uncertainty is a president-elect who does not have a coherent or consistent stance on anything … We cannot rely on anything he says, because it changes from one day to the next. So when Mr. Trump talks about financial services reform and dismantling Dodd-Frank, what does he mean? … Does he mean breaking up the banks by reinstating Glass-Steagall? In that regard, I'm sure we could find some common ground."

In her statement, SEC Chairman Mary Jo White said that despite working with only three members since October 2015, the SEC "was able to continue to pursue a very consequential set of policy measures … " Among these, she cited "major rules addressing important equity market structure issues, including the transparency of ATSes and order-handling practices, while moving forward with a comprehensive assessment of other fundamental structural questions." She noted that later that day, the Commission was scheduled to consider approving a final plan for the consolidated audit trail (CAT). White said the SEC is "implementing a series of proposals to address the increasingly complex portfolios and operations of mutual funds and exchange-traded funds," had "adopted final rules to modernize the data reported by both funds and their advisers, completed rules for enhanced liquidity management by funds, and adopted a proposal for new controls on their use of derivatives." She said the SEC has now "adopted rules for nearly 80% of the mandatory rulemaking provisions of the Dodd-Frank Act, and all of the rulemakings directed by the Jobs Act." But she said the Commission remains underfunded, given its list of new and long-held responsibilities.

Questions

Chairman Hensarling said there has been "significant attention" devoted to concerns about liquidity in the U.S. and global fixed-income markets. He said there was now evidence that Dodd-Frank and Basel III regulations had affected liquidity, citing a quote from former Treasury secretary Henry Paulson that the Volcker Rule "solved a problem that was not a problem," and another from a broker who said he would no longer trade bond exchange-traded funds (ETFs) because it had become too hard to manage the underlying securities. White said she did not agree that regulations were responsible for reducing liquidity in bond markets. She said the SEC's own data showed some decrease in bond dealers' inventories, but not in liquidity. But Hensarling said the next financial crisis could be "triggered by the bond market liquidity phenomenon." Hensarling then asked if the Financial Stability Oversight Council (FSOC) had analyzed what systemic risks could be posed by "the significant diminution in liquidity in corporate bond markets." White said different working groups at FSOC and the SEC had looked at the problem but had not reached a "definitive conclusion."

Ranking Member Waters noted that White had served as legal counsel for a New York Times reporter who had been sued for defamation by President-elect Trump in 2007, and that Trump had "lied 30 separate times" in the course of a deposition for the case. She asked if Trump had "systemically misstated and invented and lied about information." White said that she had argued the reporter's appeal herself and that her client had "prevailed" in the case, but it was not appropriate for her to comment on specific statements in the litigation.

Scott Garrett (R-NJ) focused on the FAST Act, which required the SEC to simplify and modernize its disclosure under Regulation SK. He noted that in her prepared testimony, White had mentioned that SEC staff had "completed a report on how to further simplify and modernize Reg SK." White said that report is due to Congress on November 28, and the commissioners were reviewing a staff draft. Garrett then inquired about whether the Commission's Equity Market Structure Advisory Committee would be renewed or if that decision would be left to her successor. White told him she believed the committee "deserves to be renewed — we have to deal with it now in order to renew the charter. In my view, it certainly should go forward." When Garrett asked if the membership would be expanded to include representatives from retail brokerages, White said their concerns had been represented by other members of the panel but that it would be good for a retail brokerage to be "an actual member," and that the Nasdaq and New York Stock Exchange had also sought to join the panel.

Carolyn Maloney (D-NY) said that a joint report on market volatility had found that the most active dealers in inter-dealer markets are high-frequency traders, "many of which are not registered … So why has this been allowed to go on for so long … ? Why has the SEC not brought any enforcement actions?" White told her the SEC needs "public guidance on the line between dealers and traders … What's happening in the Treasury markets is terrific, there's great cooperation among regulators … We each have spheres of authority. I said we should apply the SEC's authority to create greater transparency." Maloney then asked White about the status of a proposal to "rethink the 2009 diversity disclosure requirements [for public companies] to provide more information on boards and nominees." She noted that the GAO had reported that women make up only 16% of corporate boards, and institutional investors wanted more diversity. White said that the SEC staff has studied the issue and are preparing a recommendation for the Commission: "It's pretty far along, but I don't think there will be a proposal before I leave."

Randy Neugebauer (R-TX) noted that the SEC had held a forum on November 14 on new financial technologies, or "FinTech." White said she had formed a working group on FinTech to make recommendations about what the next steps should be for regulations that may apply to their activity, and that yesterday's forum had focused on three specific topics: 1) distributed ledger technology in the settlement and clearing space; 2) so-called "robo-advisers" and how they should comply with fiduciary duties; and 3) marketplace lending. She said the SEC's Corporate Finance Division is "looking at ideas on issuing digitized securities … We'll see what we have to do next on a concept release and rulemaking, and bring more clarity to what people will have to comply with."

Stephen Lynch (D-MA) said he had proposed reforms to the "maker-taker" rule last year, and that the proposal that came out of the Equity Market Structure Advisory Committee (EMSAC) "did not go as far as mine; theirs didn't get at the issue of conflicts of interest in routing certain trades. Going forward, is there anything percolating that might actually come to fruition in your last months?" White said she didn't know if a rule proposal would come out before she departs, but "I want to do a comprehensive pilot program — there's also an outstanding proposal on transparency in order routing. The staff's recommendation to the Commission will be the next step. I think it's a good proposal from the [EMSAC] … I can't tell you something will come out before I leave, but we're still driving it." In later questions from Lynch about the SEC's budget, White said the lack of appropriated funds had allowed the SEC to examine only a small percentage of registered investment advisers.

Nydia Velazquez (D-NY) said White and other regulators had spent years crafting Dodd-Frank's Volcker Rule, which bans banks from engaging in proprietary trading or owning hedge funds, and asked what would happen if the Volcker Rule "is eliminated and banking entities that have access to the safety net are once again allowed to make risky proprietary trades." White said the Dodd-Frank reforms "have been enormously important to strengthening the financial system. The Volcker Rule is part of that. We are stronger and more resilient. I would not want to see them repealed."

Like Chairman Hensarling, Bill Huizenga (R-MI) spent most of his time trying to get White to commit not to finalize any new rules in the final weeks of her tenure. He said there were press reports that regulators are "rushing to complete" Dodd-Frank's rules on incentive compensation and clawbacks. White told him, "I will be as clear as I can, no rule benefits from being rushed — I have tried to make sure our economic analysis comes into play, but I can't judge in a vacuum the next 2 ½ months … I understand the sensitivity you're raising … This is something that has been proceeding apace all year. It's not happening all of a sudden."

Sean Duffy (R-WI), after adding his voice to other Republicans' urging White not to approve any new "midnight rules" for the remainder of President Obama's term, noted that the rules for shareholder proxy submissions had not been updated for 50 years. White said that "in the press of our other rulemaking for the last five years, this has obviously been discussed. It's important for staff to refresh their recommendations here. There are divergent rules — the $2,000 threshold for shareholders was made deliberately small … So you'll see the SEC returning to that, but nothing will come out during my tenure."

Al Green (D-TX), Emanuel Cleaver (D-MO) and Gregory Meeks (D-NY) all pressed White to speak about an SEC inquiry into Wells Fargo Bank, related to the bank's admission that its sales staff had started as many as 2 million accounts for customers who had not asked for them, but White told them she could not comment on ongoing investigations. White said that Wells Fargo's "sales practices themselves are not in our purview. Our Corporate Finance Division raised questions about the disclosures, as part of their annual review practice … I can't tell you that they were exactly … Obviously with public company disclosures, if we have questions, they come under investigation. I can't say more than what [Wells Fargo] has said so far." She told Meeks, "On the broader issues, on corporate culture, how to better deter misconduct in our financial institutions and companies … our authority must focus on senior executives' being accountable for things that happen on their watch … When you want your employees to behave a certain way, you must focus on what you're rewarding and punishing."