SEC Commissioner Daniel M. Gallagher delivered a speech before the Corporate Directors Forum, in which he discussed the proper role of federal government in the corporate governance realm.  In particular, Commissioner Gallagher asserted that the standard response to severe economic downturns or epochal corporate scandals is hurried and reactive federal legislation and regulation; and usually onerous, requirements as “feel good and cure all” responses to perceived problems.  According to Commissioner Gallagher, such legislation and its implementing regulations are rushed out without serious analysis of costs and benefits. Gallagher discussed the relationship between shareholders, management and boards of directors as well as the impact of legislation such as the Dodd-Frank Act. Gallagher also discussed the advantages of state regulation of corporate governance, coupled with the fact that the federal government, as demonstrated by Section 404 of Sarbanes-Oxley, has not been successful at predicting the costs and outcomes of federal corporate governance legislation. Gallagher recommended that the SEC should resist the urge to intrude upon state regulation of corporate governance absent compelling reasons to do so.

View speech in full here (links externally to SEC website).

CFTC Commissioner Scott D. O’Malia delivered a speech titled “Derivatives Reform: Assessing and Improving the Change” at TabbForum, Fixed Income 2013: Liquidity, Products, Platforms.  Commissioner O’Malia specifically discussed: (1) customer protection measures and the supervision of automated and high-frequency trading; (2) the phenomenon known as the “futurization” of the swaps markets; (3) swaps margin; and (4) the Commission’s upcoming rules governing swap execution facilities (“SEFs”).

Commissioner O’Malia’s remarks began with his customary expression of dissatisfaction with the CFTC rulemaking process.  According to the Commissioner:

“[In addition to various rules and proposals, the CFTC has] issued a total of 73 exemptions, interpretations, Q&As, and no-action relief letters – 63 of them since October alone. We have been sued three times – won one, lost one, and one has been withdrawn for the moment – and I wouldn’t be surprised to see more lawsuits. The lawsuits and the ad-hoc barrage of exemptions point to a flawed rulemaking process that prioritized getting the rules done fast over getting them done right.”

The Commissioner then talked about the need to use technology to protect customer assets.  He then moved on to a discussion of high-frequency trading, and indicated that he hoped to have a proposal on the topic released before April 30. 

Next, he discussed the topic of “futurization” (as to which the CFTC is holding a conference shortly): the move of swaps into futures.  He suggested that some of this transition is to the good, but that some exists so that market participants may avoid swaps rules which are “vague, poorly understood, and now riddled with temporary exemptions and no-action relief. . . . “

As to the topic of the swaps margin, he worried that the cost of increased margin requirements might be so high as to do significant damage to the financial markets.  In this regard, he cited a speech by Janet Yellen, Vice-Chairman of the Federal Reserve Board, in which she described the additional margin requirements as “eye-opening.” 

Finally, he turned to the topic of SEFs and provided some insight as to the struggles that the CFTC is going through in adopting rules on this topic.

View speech in full here (links externally to CFTC website).

The SEC Division of Corporation Finance provided no-action relief regarding a broker-dealer’s pecuniary interest, as defined in Exchange Act Rule 16a-1(a)(2), in any “Insider Security” in certain transactions in the component securities of an certain exchange-traded funds (“ETF”).  The relief would not be available to ETFs that are actively managed, ETFs with component securities that are issued by foreign private issuers or ETFs holding debt instruments.  As to those ETFs within the scope of the rule, the relief permits broker-dealers to engage in a variety of transactions with respect to buying and selling shares as part of an ETF without concern that the purchases and sales will be “matched” against each other for purposes of Section 16, or that the broker-dealer will be subject to, among other requirements, the obligation of giving up any profit on the matched transactions. 

The Division is of the view that a broker-dealer acting as an authorized participant (“AP”) would not have a pecuniary interest in an Insider Security in the following circumstances, albeit subject to a number of conditions:

• The security was obtained by the broker-dealer to create a Deposit Basket to be delivered to an ETF Agent in exchange for ETF shares in connection with an ETF Cash Transaction or ETF Loan Transaction;
• The security was transferred in a Deposit basket by the broker-dealer to an ETF Agent in exchange for ETF shares when creating an ETF in connection with an ETF Cash Transaction or ETF Loan Transaction;
• The security was received in a Deposit Basket by the broker-dealer from an ETF Agent when redeeming an ETF in connection with an ETF Cash Transaction or ETF Loan Transaction;
• The security was transferred by the broker-dealer to its clients or others in a disposition of the component securities received from an ETF Agent after redeeming the ETF;
• The security was purchased or sold in order to hedge against exposure to intraday trading prices of component securities in the period between the customer order of an ETF share and the end of the day of the order when ETF shares are created or redeemed; and
• The security was, in connection with an ETF Loan Transaction, purchased or sold in order to hedge against market risk in relation to ETF Rebalancing.

As noted above, the relief is subject to a number of limitations on the relevant circumstances and conditions, including (i) that the relevant Insider Securities have not been previously in the broker-dealer’s inventory and (ii) that neither the broker-dealer nor any of its affiliates are involved in managing the index underlying the relevant ETF.

  Lofchie Comment:  Firms relying on the relief should be quite careful as to the various limitations.  For example, as drafted, the letter would not apply to transactions in the securities of an ETF if even one security were that of a foreign private issuer, which seems an odd limitation to me.

View letter in full here (links externally to SEC website).

The Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) issued a report discussing the Treasury’s 2012 executive compensation decisions for the senior employees of corporations within the scope of the rule.  SIGTARP found that the Treasury failed to manage pay at such corporations adequately.  Even though the Treasury-created Office of the Special Master for TARP Executive Compensation (“OSM”) set pay guidelines, SIGTARP asserted that the Treasury lacked the robust criteria, policies, and procedures to ensure those guidelines were met.

SIGTARP recommends that each year the Treasury should do the following:

• Reevaluate compensation for employees in the Top 25 from the prior year;
• Develop policies, procedures, and criteria for approving pay in excess of Treasury guidelines;
• Independently analyze whether good cause exists to award a pay raise or cash salary over $500,000; and
• Return to using long-term restricted stock for employees, particularly for senior employees such as CEOs.

Lofchie Comment:  The report asserts that executives at the various companies assert undue leverage with respect to their pay by reason of their ability to “leave and go elsewhere” and because of their “fail[ure] to view themselves through the lenses of the U.S. Government.”   Statements such as these reflect a very odd, and I think troubling, view of a private citizen’s obligations to the government.

Click here to view report in full (links externally to SIGTARP website).

Senator Debbie Stabenow, Chairwoman of the U.S. Senate Committee on Agriculture Nutrition and Forestry, urged the nation’s chief financial regulators to implement the Dodd-Frank Act.  Chairwoman Stabenow stated that the recent failures of firms like Peregrine Financial Group and MF Global, as well as trading losses at JP Morgan and the ongoing LIBOR scandal, all underscore the need to implement the bill, which was passed by Congress more than two years ago.  CFTC Chairman Gary Gensler and SEC Director of the Division of Trading and Market, Robert Cook, testified at hearing.

Lofchie Comment:  There is nothing in Dodd-Frank that would be particularly relevant as far as the losses at Peregrine and MF Global are concerned, and any connection between Dodd-Frank and either JP Morgan trading losses or LIBOR is at best uncertain.  For example, the losses at Peregrine/MF Global were caused by fraud at an FCM or deficiencies in the custody rules and operations at an FCM; these are not issues that Dodd-Frank addresses.  In fact, I would say that Dodd-Frank is a distraction from the regulators’ ability to address these issues.

View Press Release in full here (links externally to AG Senate website).

Financial Services Committee Chairman Jeb Hensarling has released a statement regarding the U.S. Court of Appeals for the D.C. Circuit’s ruling on President Obama’s recess appointments, including the appointment of Richard Cordray as head of the CFPB.  The  gist of the statement reads as follows:

“As it is currently structured, the CFPB is the most powerful and least accountable agency in all of Washington.  The Dodd-Frank Act places the CFPB under the control of a single person who has sole authority to command more than 1,000 government employees and spend hundreds of millions of dollars – no questions asked. . . . Congress and the Administration should take this opportunity to make common sense reforms to the CFPB so it is transparent and accountable to the American people.  At a bare minimum, the CFPB should be governed by a bipartisan commission – which is how other federal agencies charged with consumer or investor protection operate.  And to ensure there is proper oversight of this massive bureaucracy, the CFPB should be subject to the same appropriations process as other agencies.  The House passed similar legislation in the last session of Congress and our committee will once again advance a proposal to bring accountability and oversight to the CFPB.”

Click here to view Chairman Hensarling’s statement in full (links externally to the House Financial Services Committee website).

President Obama nominated Mary Jo White to serve as Chairman of the SEC.  SEC Commissioner Elisse Walter has been serving as interim SEC chairman since Mary Schapiro stepped down last December.

See: SIFMA Statement on Nomination of Mary Jo White for SEC Chairman.
See also: MSRB Issues Statement on Nomination of SEC Chair and NASAA Statement on Nomination of Mary Jo White as SEC Chair.
Related News Story: SEC Chairman Mary Schapiro to Step Down; Commissioner Elisse Walter to Become Chairman.