Senators query Roisman on enforcement, conflicts of interest among brokers

The Senate Banking Committee on July 24, 2018, held a confirmation hearing for the following nominees:

— Elad L. Roisman to be a Member of the Securities and Exchange Commission
— Michael R. Bright to be President of the Government National Mortgage Association
— Rae Oliver to be Inspector General of the Department of Housing and Urban Development, and
— Dino Falaschetti to be Director of the Treasury Department's Office of Financial Research

In his statement, Chairman Mike Crapo (R-ID) expressed gratitude for Roisman's service to the Banking Committee as chief counsel for the majority staff, saying he could attest to Roisman's "impressive command of securities law, his keen intellect and work ethic, and his commitment to doing what is right." Crapo said Roisman is "intimately familiar with the inner workings of the SEC, having previously served as counsel to Commissioner Daniel Gallagher and as Chief Counsel at the NYSE Euronext." Crapo said Falaschetti — nominated to head the Office of Financial Research (OFR), a research agency established by the Dodd-Frank Act — most recently served as chief economist for the House Financial Services Committee. He said Falaschetti has held faculty positions at eight universities and served as senior economist for the president's Council of Economic Advisors during the second Bush administration, where he worked directly under future Federal Reserve Chairman Ben Bernanke.

In his statement, Ranking Member Sherrod Brown (D-OH) said he expected Roisman to "face many difficult issues if he is confirmed. I hope he pays particular interest to the downward trend in enforcement actions and penalties. That is a serious problem." Brown said the SEC "must emphasize integrity and fairness in the capital markets in order for investors to have faith in the markets and the regulator. Market participants need to see meaningful efforts by the SEC to enforce the law and to punish bad actors. Ten years after the [financial] crisis, we're reminded that regulators failed to hold any senior executives accountable for the widespread misconduct that devastated millions of families and many, many of those families have not recovered." Turning to Falaschetti, Brown said that as Congress and the regulators "make changes to rules that roll back the strong post-crisis regulation, OFR's analysis of market trends and potential gaps in regulators' view of risks is critical to financial stability." He noted that Falaschetti has in the past been "a skeptic of regulation … If confirmed, I hope you'll take OFR's mandate seriously … Too often the White House looks like a retreat for Wall Street Executives." Brown said that whatever the OFR can do to monitor risks "will benefit everyone. Not seeing the signs of the next crisis would be bad enough, but to miss them because the office created to study systemic risk doesn't have the resources it needs is inexcusable."

In his statement, Elad Roisman, currently chief counsel with the Banking Committee's majority staff, said his experience as a securities lawyer at a global law firm, as the chief counsel at NYSE Euronext, as counsel to an SEC Commissioner, and now as chief counsel to the Banking Committee had "afforded me a broad spectrum of experiences that would enable me to effectively serve the public and carry out the SEC's mission, should I be confirmed." Roisman said that as the child of immigrants who moved to the U.S. "determined to pursue a better life for themselves and their children, I have a strong appreciation for the stability and security that our form of government and financial markets provide … While [my parents] may not have understood or appreciated the complex system of oversight and regulation that governs the conduct of market participants in our financial markets, they believed and expected that our markets would be regulated in a fair and orderly manner with requisite investor protection, transparency, and accountability." He said that in order to preserve public confidence, "the SEC must examine and re-examine its rules, regulations and guidelines to ensure that they are still working as intended to accomplish the SEC's mission. This has most recently manifested in areas such as data protection in cybersecurity, as well as the emergence of new investments in technologies such as initial coin offerings and Blockchain."

Questions

Chairman Crapo asked Roisman to discuss two or three areas he intends to focus on personally at the SEC. Roisman said it is important for the SEC to dispel the notion that the financial markets are "rigged against the little guy … one of the ways they can do that is by having a strong enforcement program … that holds regulated entities and individuals accountable." He said it is also important for the SEC to "hear from folks that may not make it to Washington. There is a large part of the country that is represented by small-business owners and investors that may not have as much as … the rich people, but their perspectives are incredibly important in determining what the SEC is doing right and what could it improve on." His third focus was on "improving capital formation and secondary market liquidity for smaller companies." In response to the same question, Falaschetti said his first goal "is to provide FSOC and its member agencies with the firmly grounded and data-driven research they need to evaluate and address risks to financial stability … My second goal is to build out OFR's foundational work to strengthen market discipline by increasing transparency to financial transactions."

Ranking Member Brown said Roisman's remarks to the chairman seemed to indicate that "you fundamentally believe the system isn't rigged in any way, and when we see in this country banks making huge profits, getting a huge tax cut, especially financial service industry executive compensation from 2016 to 2017, the CEOs of the largest banks got a 22% raise on the average … So we need you to particularly be vigilant to make sure the system is not rigged against the middle class and against workers because this government clearly sings with an upper-class accent, and this committee has collective amnesia about what happened 10 years ago." Brown then asked if the SEC is doing enough on the enforcement side "to hold bad actors accountable. … Are the penalties meaningful enough to deter wrongdoers from violating the law?" Roisman said, "I think it's important for the SEC, if they have rules on the books, to enforce them. And as you know, each case is [decided] on a facts-and-circumstances basis, and it's important to hold individuals and regulated entities accountable." When Brown asked if Roisman was bothered by the decline in enforcement cases, he said, "I don't necessarily gauge the success of the program based on numbers. I think it depends on the type of cases, and the impact on recidivism. I'd say the commission has been focusing on retail fraud, which is important to root out, as well as what I would call market integrity cases." Brown said he will ask the GAO to "examine the reliability and transparency of the SEC's enforcement statistics." He said he hoped that Roisman, if confirmed, would work with the committee to "ensure that the SEC's enforcement statistics are reliable and transparent."

Jack Reed (D-RI) said he believes cybersecurity is "the most important issue systemwide that we're facing" and noted that he has sponsored S. 536 with Susan Collins (R-ME), Mark Warner (D-VA) and John McCain (R-AZ) that would "have a simple disclosure rule, and I would not be offended if you at the SEC stepped in by rule and adopted this — feel free." Roisman said the committee has held several hearings focused on the importance of revisiting the SEC's existing rules on cybersecurity requiring companies to disclose their cyber-risk profiles to investors. He said if confirmed he looked forward to working with the committee and the regulators to see what additional changes should be made. Reed said it was the companies that disclose such risks poorly and "are the least aware" of cyber-risks that are the most vulnerable to hacks. He urged Roisman to press the SEC to move more aggressively with rulemaking in this area.

Mike Rounds (R-SD) said he recalled from his visit with Roisman earlier that they both agreed that the fiduciary rule for retirement plan advisers issued by the Obama administration's Department of Labor had been rightfully overturned by an appeals court in April. He asked Roisman for his views on what a "proper" fiduciary standard for brokers should look like. Roisman said that he could not prejudge the issue because the SEC has already proposed a Regulation Best Interest for brokers, but that it was important that the SEC acted, and he looked forward to reviewing public comments on the proposal: "Generally, it's important to think about things such as ensuring access to financial advice," as well as whether investors understand the nature of their relationship with a provider of financial advice, including how conflicts are addressed and mitigated, and "whether the rule is business-model neutral, meaning the SEC is not picking winners and losers, and preserving investor choice and different types of services." Rounds said the concern many lawmakers had with the DOL fiduciary rule was that "in demanding a certain level of professional advice, and limitations, it was restricting the number of individuals who could offer services" to clients with smaller incomes."

Robert Menendez (D-NJ), like Sen. Brown, focused on enforcement, saying such efforts had declined under Chairman Jay Clayton. He noted the decision by Michael Piwowar, then serving as acting chairman, to revoke the additional subpoena and investigative authority for the SEC's senior enforcement attorneys that had been granted by former chair Mary Schapiro. Menendez noted that Roisman had served as counsel to former SEC Commissioner Michael Gallagher, and asked if he also thought Schapiro's decision had given the SEC too much authority. Roisman said he had not focused on enforcement powers when he worked for Gallagher, but said it may have made sense to limit such authority to the director of the SEC's enforcement division, because that person has a "line of sight" into all ongoing cases. Menendez then asked why, since he had helped insert into the 2010 Dodd-Frank Act a provision giving the SEC authority to set a uniform standard of conduct for broker dealers and advisers, the SECs current Regulation Best Interest proposal "fails to establish a uniform standard of conduct … and puts the burden on the customer to understand the difference between brokers and investment advisers, ignoring the SEC's own findings" in a 2011 report on this issue that was mandated by Dodd-Frank. Roisman said he believes it is important "for there to be investor choice in different types of service providers … one of the things that has been talked about in the debate is ensuring that if there are conflicts, that they're addressed — and whatever the SEC ultimately does, that's critical."

Elizabeth Warren (D-MA) also focused on conflicts of interest among brokers. Warren said she had serious concerns with the SEC's April proposal for a Regulation Best Interest because "it won't come close to eliminating the conflicts that hurt American families." She said she expected Roisman to decline to weigh in on the SEC's pending proposal, so she asked a series of "general questions" designed to elicit his views. She noted that other professions don't allow lawyers or doctors to represent both sides of a relationship, "so why should your broker be able to have serious conflicts of interest, like receiving monetary awards or other perks for recommending certain investments, even if those investments are not in the customer's best interest?" Roisman said the SEC has traditionally been "a disclosure agency, and one of the things you try to do is provide information to investors so they can make informed decisions, and I think it's important for them to have adequate disclosure to understand the nature of the relationship, including how conflicts of interest exist and how they can be addressed." But Warren said that in medicine, it didn't make any difference what disclosures were given to patients: "Your doctor cannot prescribe drugs in order to get kickbacks from drug companies," so why should a broker be able to get a "kickback" for recommending an investment?

Roisman said he would have concerns "if someone is providing you a product that incentivizes themselves over the customer … I'd like to speak to the people who receive advice as well as provide it to have a better sense of what is actually happening in this space." Warren replied: "We know what's happening in this space — we know that American families are losing more than $17 billion a year because they're put into products that were not in their best interest." Like Sen. Menendez, she asked why the current proposed rule did not follow the recommendation of the SEC's own study to produce a standard that applies uniformly to brokers and investment advisers, and asked if Roisman agreed with that recommendation. Roisman said the report had not been "universally agreed upon" by SEC commissioners. "Part of what the SEC staff acknowledged in the report is that there was investor confusion, and it's important to maintain access to financial advice for most people … The concern I've had is, first, the system currently works where we can all acknowledge the amount of people who are doing wrong is small."

John Kennedy (R-LA) was critical of the Municipal Securities Rulemaking Board (MSRB), saying 11 of the board's members are supposed to be "public" members, but he didn't know if that meant such members are supposed to advocate for consumers: "The whole things incestuous. If you go look at their resumes," he said, they are "insiders" who formerly worked at banks and other financial firms. "Do you know how they're picked?" Kennedy continued. "They pick themselves! It's a little club. When they need to add members, they all get together and decide who they want. It needs to be fixed … And I can't figure out who, on the [board], really represents consumers." Roisman said he didn't want to prejudge the issue because it might require an SEC rulemaking.

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