Commissioner Aguilar Urges SEC to Reform the Waiver Review Process

SEC Commissioner Aguilar urged the SEC to reform its waiver review protocols to provide the SEC and the public greater insight into the entire process.  In a public statement, Commissioner Aguilar discussed the ways in which the SEC should strengthen its protocols for handling waiver requests and providing enhanced transparency and clarity for its waiver process. He highlighted two basic reforms that he stated he believes could be implemented easily: 

  • First, the SEC could consider implementing procedures that would give it a more holistic view of the waiver process. For instance, he suggested, the staff could be directed to provide periodic reports to the SEC detailing relevant information about the waiver process, including (i) a list of the requests and informal inquiries that were received, (ii) information about the circumstances that triggered the need for those waivers, (iii) reporting on whether any waiver requests or inquiries were handled via delegated authority and, if so, why, (iv) the final disposition of the waiver requests or inquiries, including the dates acted on, and (v) regarding requests and inquiries handled by the staff, information concerning the staff’s justification for granting them or not.
  • Second, the SEC could consider creating a public Web site to track the progress and ultimate resolution of all waiver requests and inquiries. This Web site, Commissioner Aguilar suggested, could explain the circumstances that led the SEC or its staff to grant or not grant a waiver request. In addition, the Web site could redact information that might reveal the identity of the requesting party. This information, he said, could provide useful guidance and additional transparency to a process that has garnered considerable public interest in recent years.

Commissioner Aguilar argued that the public and the Commission should better assess whether “the Commission is fulfilling its obligation to grant waivers only when it is appropriate to do so” and whether the Commission is granting waivers “in the manner that is consistent with the protection of investors and the public interest .”

Commissioner Aguilar also discussed the benefit of conditional waivers. Conditional waivers, he explained, can permit statutorily disqualified persons or parties to continue engaging in regular courses of business in cases that don’t involve clear-cut grants or denials. Specific benefits of conditional waivers that were highlighted by Aguilar included (i) imposing meaningful investor protections while mitigating the potential damage of not granting waivers at all, (ii) dispelling the notion that the breadth and severity of disqualification provisions have left the SEC too willing to grant blanket waivers and (iii) allowing the Commission to grant waivers in a judicious manner – one that limits damage to an entity’s operations while minimizing potential risks to investors and the public.

Conditional waivers, Commissioner Aguilar concluded, “seem to be a fair and sensible approach to an especially nettlesome problem.”

Lofchie Comment: The fundamental issue with the grant of waivers to financial institutions is the pretense that granting a waiver is an act of forbearance, whereas the reality is that, in most instances, the imposition by the SEC of a broad disqualification as part of a regulatory sanction would be completely inappropriate. That is the problem with a statute that makes the disqualification automatic: it creates the need for a routine waiver process. Eliminating automatic statutory disqualification would save the SEC considerable time and the needless expenditure of regulatory resources. It would also abate the politicization of the enforcement process by curtailing gasps of public shock whenever a waiver is granted.

Consider what would happen if the same standards that are applied to private industry were applied to the government. Imagine the consequences if, whenever a member of government was charged with misconduct in connection with official activities, the automatic result were a shutdown of that entire agency. That sanction would be disproportionate to the misconduct and damaging to society.

It is no different when sanctions are imposed on private industries. The imposition of sanctions that are disproportionate to the violation (which arguably is a fairly common event) enriches the collector of the fine without benefiting the economy or society as a whole.

OCIE Finds Deficiencies in Implementation of Controls across Firms

The SEC Office of Compliance Inspections and Examinations (“OCIE”) examined ten branch offices of registered broker-dealers and found “significant deficiencies” in the supervision and control of structured securities products (“SSPs”). The SSPs were issued by affiliates in some cases and unaffiliated third parties in others. The OCIE stated that it “assessed these firms’ compliance with suitability and supervision requirements in the Securities Exchange Act” and “evaluated whether the firms effectively supervised and monitored activities and risks associated with sales of SSPs to retail investors.” The examinations revealed deficiencies across all ten firms, including:

(i) failures “to maintain and/or enforce adequate controls relating to determining the suitability of SSP recommendations”; and

(ii) failures “to conduct both compliance and supervisory reviews of registered representatives’ determinations of customer suitability in the SSPs, as required by their internal controls.”

OCIE staff cited all of the firms for failing to maintain and enforce appropriate supervisory policies relating to SSPs. Even where policies were in effect, the OCIE found numerous instances in which such controls were implemented inadequately or inconsistently. Other problems observed by the OCIE included significant volumes of sales to seniors, dense concentrations of investors in SSPs, and overrides of ordinary compliance limitations without sufficient explanation.

Lofchie Comment: This is about as negative a report as the SEC has produced on any topic. While it is possible that OCIE staff members were inclined to take a critical view of structured products, that is of limited import from the standpoint of firms that sell such products. The clear message from the OCIE is that firms’ procedures with respect to such products are significantly deficient, and that any failure to correct these deficiencies will result in sanctions.

FINRA Focuses on Market Integrity in Sixth Podcast on Regulatory and Examination Priorities

FINRA issued the final podcast in its six-part series on Regulatory and Examination Priorities for 2015. The sixth podcast focuses on market integrity and addresses the following priorities:

Supervision and Governance Surrounding Trading Technology

  • FINRA stated that it is reviewing (i) firms’ technology and related controls with an emphasis on “the development and ongoing supervision of algorithms,” (ii) the segregation of duties among technology staff, (iii) firms’ risk management, as well as their financial and operational controls, and (iv) the intraday monitoring of net capital.

Algorithm Abuse

  • FINRA stressed that it “views these algorithms and failures to supervise for potential manipulation to be one of the biggest risks to market integrity,” and stated that it continues to pursue firms whose traders or customers use algorithms to manipulate markets.

Cross-Market and Cross-Product Manipulation

  • FINRA reported that its cross-market surveillance covers 99% of the U.S. equities markets, and emphasized that it provides surveillance services to “about two-thirds of the options market.”

Order-Routing Practices, Best Execution and Disclosure

  • FINRA stated that it is reviewing “firms that route much of their unmarketable customer limit orders to trading venues that provide the highest trading rebates for providing liquidity” and, as a consequence, the “routing decisions for marketable versus non-marketable orders to see how rebates impact those decisions.”
  • FINRA stated that its “examiners are looking for firms that are intermediating transactions on structured products, but have not adequately disclosed to their customers how they would be charged.”

 Market Access Controls

  • FINRA stated that it has “noticed confusion about how the [SEC market-access] rule applies to fixed-income markets.”
  • In response to the control challenges faced by firms, FINRA announced, it is “starting a PILOT program to give firms relationship trading alert activity detected in its cross-market surveillance program,” which can be used by the firms “to supplement their ability to detect and prevent manipulative activity through multiple firms.”

Audit-Trail Integrity

  • FINRA stated that it continues to focus on late reporting on TRACE-eligible and municipal securities that “affect FINRA’s audit trail.”
  • FINRA announced that it has formed a new team “to focus on finding potential equity audit-trail issues not usually detected through routine sweeps and reviews.”

FINRA also announced that it is launching a pilot program to examine trading issues and controls for fixed-income securities in 2015.  According to FINRA, this fixed-income program will focus on areas that complement FINRA’s surveillance program, such as alternative trading systems, books and records, and supervision.

Lofchie Comment: From a compliance risk standpoint, two areas stand out: (i) order routing and rebates, and (ii) compliance/supervisory procedures around the development/maintenance/testing of trading algorithms.

World Bank Archives Online

The World Bank has begun to digitize its archives and place them online. I have used the archives a couple of times, and though the staff have been helpful, the hours are limited, one must wait for materials to be delivered, and for people outside of Washington the trip is expensive and time-consuming. So, bravo! I expect little additional material of interest on the Bretton Woods conference to turn up, because of what is already in the IMF Archives. Eventually, though, there will be miles of files for scholars interested in studying how economic development and aid evolved after World War II.

First Try at European Money Union Didn’t Work Either

Author Reunka Rayasam interviewed CFS Advisory Board member Charles Goodhart, emeritus professor at the London School of Economics and formerly a member of the Bank of England’s monetary policy committee, for a recent article in Reuters.

In “First try at European money union didn’t work either” Ms. Rayasam, using history as a guide, questions if politics could be the stumbling block as Greece and it’s eruo zone lenders finalize details of its third bailout package.  Professor Goodhart believes that “Currency and money are much more interconnected with political control than most people think.”

To read the complete article, please go to:

Appeals Court Upholds Decision That Voids Part of SEC’s Conflict Minerals Rule

The U.S. Court of Appeals for the D.C. Circuit upheld a prior decision to void one of the SEC requirements under the conflict minerals rule. The voided section concerns disclosure requirements for companies offering products that depend on minerals from central African war zones for their functionality or production. The statute required companies to disclose products that have “not been found to be ‘DRC [Democratic Republic of Congo] conflict free.'” The court’s decision did not affect other requirements under the conflict minerals rule.

The Court found that the required disclosure was in violation of the First Amendment because it forced a company to make statements in terms that embarrassed it instead of requiring it to provide commercial information to a purchaser of the company’s products.

Lofchie Comment: In reaching its decision, the Court found it necessary to comment on the costs and benefits of the conflict minerals rule. In doing so, the Court noted that the SEC’s own estimates of the cost of the conflict minerals requirements were $3-4 billion initially and as much as $600 million a year thereafter (at page 14). Additionally, the Court found that the government was unable to demonstrate any benefit to parties in the Congo from the rule, and that substantial arguments indicated that the rule caused material injury to those whom it was intended to benefit (at page 16).

In short, the Court’s opinion may be read as a criticism of those who act with good intentions but without understanding the consequences of their actions. Even if one were to assume that the United States has a moral obligation to alleviate suffering in the Congo, it is obvious that there are more effective ways to do so than spending the billions of dollars that the conflict minerals rule requires to provide an uncertain benefit and, arguably, serious injury.

Coincidentally, the Appeals Court issued its decision on the same day that the GAO issued a report questioning the accuracy of any disclosures made with regard to conflict minerals given the poor quality of the available information about them. See GAO Report on SEC’s Conflict Minerals Rule.

CFS Monetary Meaures for July 2015

Today we release CFS monetary and financial measures for July 2015. CFS Divisia M4, which is the broadest and most important measure of money, grew by 4.0% in July 2015 on a year-over-year basis versus 3.0% in June.

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1)  {ALLX DIVM <GO>}
3)  {ECST<GO>} –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4)  {ECST S US MONEY SUPPLY<GO>} –> From source list on left, select ‘Center for Financial Stability’

CFS Divisia indices can also be found on our website at  Broad aggregates are available in spreadsheet, tabular and chart form.  Narrow aggregates can be found in spreadsheet form.

For Monetary and Financial Data Release Report:

Sincerely yours,
Lawrence Goodman

Center for Financial Stability, Inc.
1120 Avenue of the Americas, 4th floor
New York, NY 10036

The Center for Financial Stability is a nonprofit, nonpartisan, independent think tank dedicated to financial markets for the benefit of investors, officials, and the public.

Secretary of Labor Perez Moves Forward with Fiduciary Standards Proposal

Responding to Congresswoman Ann Wagner, who had urged that the Department of Labor to “re-propose [the Conflict of Interest] rule to ensure that it achieves its stated goal of protecting Americans saving for retirement,” U.S. Secretary of Labor Thomas E. Perez said he would push ahead with the current rulemaking.

Lofchie Comment: The Secretary’s letter reflects his determination to move forward with the rulemaking rather than repropose the rule. This determination is in apparent contravention of a majority in Congress (judging from the number of Congress members who have written to the Secretary, including members from both parties), and is likewise inconsistent with the stated views of other regulators with jurisdiction over the area, including the SEC.

CFTC Commissioner Wetjen Resigns

CFTC Commissioner Mark Wetjen announced his resignation in a letter to President Barack Obama. Mr. Wetjen was unanimously confirmed by the Senate in October 2011 and served as Acting Chairman of the Commission from January 2014 to June 2014. Mr. Wetjen stated that “more than ninety CFTC actions related to [title VII of the] Dodd-Frank [Act], in addition to many other commission actions, have been adopted since I joined the agency, and I supported and helped shape every one of them.” Mr. Wetjen also emphasized his efforts, among other things, to: (i) strengthen the risk-management practices of clearinghouses; (ii) enhance protections of customer funds held by entities registered with the CFTC; (iii) reach international harmonization of the G20 reforms; (iv) improve the efficiency of the global derivatives markets; and (v) support the CFTC enforcement program, which collected “record fines during [his] tenure through the CFTC’s responses to global schemes to manipulate LIBOR and foreign-currency markets, among many others.”

CFTC Chair Timothy Massad affirmed that “When Mark arrived, the commission was just beginning the task of implementing the Congressional mandate to regulate the swaps market. Today, thanks to Mark’s help, the Commission has a framework in place to make the swaps market more open, transparent and competitive.”

Mr. Wetjen’s final day as Commissioner will be August 28, 2015.

Lofchie Comment:  Commissioner Wetjen was a thoughtful and conscientious regulator. For most of his time as a Commissioner, he presented a constructive position between a Chairman with an “all in” approach to regulation (with one sure supporter) and two minority party Commissioners who were often in open opposition to the Chairman. On this middle road, Commissioner Wetjen could not draw political support from either side, yet he was willing to soldier on for a reasonable outcome. While many of the rules that emerged from the CFTC during his tenure received and deserved criticism, these rules could have been much worse but for his service. His departure from the CFTC is a loss. The Commission would be well served with a replacement of comparable dedication and character.