FINRA Issues Report on Digital Investment Advice Tools

FINRA issued a report identifying effective practices that firms should consider when developing and using “digital investment advice tools.”

FINRA highlights five key regulatory principles and effective practices:

  • Governance and supervision of algorithms. This includes initially assessing the methodology of digital tools and the quality and reliability of data inputs, as well as ongoing evaluation such as testing the tools to ensure they are performing as expected, and determining whether models used by a tool remain appropriate as market conditions change;
  • Customer profiling. This includes assessing both a customers’ risk capacity and risk willingness, and addressing contradictory or inconsistent responses in customer-provided information;
  • Governance and supervision of portfolios and conflicts of interest. This includes determining the risk, return and diversification characteristics of a portfolio suitable for a given investor profile, and mitigating – through avoidance or disclosure – conflicts that can arise through the selection of securities for a portfolio;
  • Rebalancing. This includes providing descriptions of how the rebalancing works and procedures that define how the tools will act in the event of a major market movement;
  • Training. Training enables financial professionals to understand the key assumptions and limitations of individual digital investment advice tools, and determine when use of a tool may not be appropriate for a client.

In addition, investors should be apprised of (i) the soundness of the information gathered by the firm, (ii) the investment approach embodied in the digital tools, and (iii) the underlying assumptions used in such advice tools. FINRA cautioned that digital investment advice tools do not necessarily eliminate conflicts of interest, and that investors should understand the services provided by the tools, the costs of those services and how the services will be performed. FINRA stated that the report is not intended to create any new legal requirements or change the existing regulatory obligations of broker-dealers.

Lofchie Comment: This is a thorough and practical report. Although it focuses on providing e-advisory services to customers, much of the discussion is equally relevant to firms that provide personalized advice to customers (e.g., the section that pertains to asking customers about their objectives and potential risks: different results can arise from identical situations). This report should be reviewed by anyone (broker-dealer or adviser) who is responsible for providing advice to customers – or for supervising or monitoring that advice – regardless of how the advice might be delivered.

CFS Monetary Measures for February 2016

Today we release CFS monetary and financial measures for February 2016. CFS Divisia M4, which is the broadest and most important measure of money, grew by 4.0% in February 2016 on a year-over-year basis, maintaining the same growth rate as in January.

CFS Divisia indices can 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:

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

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

SEC Warns against Government Impersonators and Disseminators of False Information on Microcap Stocks

The SEC issued two guides that warn investors to be wary of (i) government impersonators who target previous fraud victims in order to impose phony loss-recovery fees and (ii) the distribution of false information about “microcap stocks,” or low-priced stocks issued by small companies.

The first investor guide warns of government impersonators who target the prior victims of investment fraud. The guide explains that impersonators often will claim to help investors recover their investment-related losses for a fee, which may be disguised as a tax, deposit or refundable insurance bond.

The second investor guide reviews the basics of microcap stocks, including how they trade and where they differ from other stocks. The guide also educates investors about the kinds of fraud that are associated with the stock – specifically, the ease with which fraudsters can spread false information due to the relative lack of available data about microcap stocks. The guide also offers advice on finding accurate information, red flags to consider, and where investors should turn if they run into issues when trading microcap stocks.

Lofchie Comment: The SEC’s first investor guide did not address the issue of candidate impersonators.

Fund Urges SEC to Rectify Competitive Imbalance between National Securities Exchanges and ATSs

A public comment letter (the “Letter”) submitted to the SEC in response to proposed amendments to Regulation ATS urged the Commission to (i) strengthen the transparency, fairness and resiliency of the Regulation Alternative Trading Systems Proposal (the “Proposal”) and (ii) apply the Proposal to platforms trading government securities.

The Proposal concerns the regulatory requirements of alternative trading systems (“ATSs”) that transact in National Market System stocks (such ATSs, “NMS Stock ATSs”). Though the Letter does provide support for the SEC for “proposing rules that would significantly increase the amount of public information required to be disclosed by NMS Stock ATSs,” it also recommended several ways in which the SEC should revise the Proposal.

Specifically, the Letter recommended that the SEC:

  • require all NMS Stock ATSs to provide fair access to all market participants (under current regulations, an ATS is required only to provide fair access to market participants if the ATS has 5% or more of the average daily trading volume in a security during at least four of the preceding six calendar months);
  • increase the public display of quotations on NMS Stock ATSs by lowering (to 0.25%) or eliminating the trading volume threshold that triggers disclosure (under current regulations, an NMS Stock ATS is required to report only its highest displayed bid and lowest displayed offer if the ATS has 5% or more of the average daily trading volume in a security during at least four of the six preceding calendar months);
  • provide a public comment period for Form ATS-N filings;
  • require all NMS Stock ATSs to provide daily reports on trading volumes (as opposed to the current weekly trading volume reports required under FINRA Rule 4552); and
  • eliminate the exemption of ATSs that trade only in government securities from the requirement to register as national securities exchanges or ATSs.

The Letter reasons that either lowering or eliminating the trading thresholds that trigger order display and fair access requirements would “reduce the competitive imbalance that currently exists between [national securities] exchanges . . . and NMS Stock ATSs,” which is “a dynamic that [otherwise] could undermine the price transparency provided by [national securities] exchanges that is fundamental to the price discovery process for investors.” Additionally, the Letter argues that because a significant amount of the trading of on-the-run U.S. Treasuries occurs on electronic platforms that closely resemble NMS Stock ATSs, it is critical that those electronic trading platforms be subject to appropriate regulatory oversight, including (i) registration with the SEC and (ii) equivalent obligations to NMS Stock ATSs.

Lofchie Comment: The source of the SEC’s authority to apply ATS regulations to government securities is not apparent. Very likely, such regulation would require action by the Treasury, which has authority over government securities broker-dealers pursuant to Section 15C of the Securities Exchange Act. (The “theory” of ATS regulation is that ATSs are “brokers” rather than “exchanges.”)

President Obama Declares Wall Street Reform a Success

After meeting with regulators from the Financial Stability Oversight Council (“FSOC”), President Barack Obama declared that the Dodd-Frank reforms work. President Obama claimed that Wall Street reform (i) boosted jobs and (ii) created a safer and stronger financial system in spite of arguments by “certain members of Congress who are consistently pressuring independent regulators to back off; who want to strip away the authorities that were granted under Dodd-Frank; who tried to weaken those regulations, tried to water them down; or tried to starve these regulators of the resources and the budgets that they need to hire enough personnel to track everything that’s taking place in the financial sector.”

President Obama highlighted the following areas in which there is “still work to do”:

  • closing potential gaps in regulating the “shadow banking system” – a “set of institutions” that are not regulated in the same way as traditional banks (e.g., hedge funds, asset managers, etc.);
  • completing executive compensation regulations in order to provide fewer incentives for individuals working in financial institutions to take “big, reckless risks that could end up harming our financial sector overall”; and
  • “tightening up” cybersecurity within the financial sector by identifying areas where it might be weak and vulnerable.

President Obama asked Americans to check to make sure that Wall Street is “doing the right thing” and prevent their representatives from diminishing the authority or cutting the budgets of regulatory agencies. “That should be the target of your concern and your wrath,” he said. He emphasized that “unless we have strong, independent agencies . . . that can provide the oversight that’s necessary, it is absolutely true that these financial institutions with enormous resources and mountains of lawyers and accountants and analysts will run circles around the government and will end up engaging once again in the kinds of disruptive behavior that caused so much damage to so many people in the first place.”

Lofchie Comment: In this political season, it is important to posit facts accurately and to stop demonizing those who hold legitimate though contrary views. The President’s complaint that hedge funds are not regulated like banks is a good place to start. Banks take retail deposits; they benefit from FDIC insurance; they are not permitted to invest in equities; they are subject to minimum capital requirements to prevent their depositors from losing money; they are permitted to borrow from the Fed. Hedge funds are exactly the opposite: they are proprietary investment vehicles that take speculative risks; their owners might make or lose some or all of their money. The notion that hedge funds should be regulated like banks simply denies the different purpose and importance of these two types of entities within the financial system. Is the President suggesting that hedge funds (or private investors generally) should be prohibited from taking risks? If they should be prohibited, then who should be permitted?

Regarding executive compensation, the President’s views lead to a conclusion that government regulators know best. Have regulators ever demonstrated that they “know” how to manage compensation appropriately? If, in fact, they do possess such knowledge, then perhaps they should demonstrate it by managing compensation levels for states and municipalities, which seem to be in significant financial distress across the country.

The President’s regulatory approach to cybersecurity seems based on the premise that the financial services industry is averse to tightening it up in any reasonable way. Few industries are threatened by cyber criminals as often as the financial services sector which is eager, in fact, to partner with government to improve cyber safety.

As to the President’s claim that all recent work in financial regulation has been good, it is not difficult to argue the opposite case: that much of the new regulation has been utterly wasteful and beside the point; that the effect has been to diminish liquidity and further concentrate economic activity. By way of example, see the articles in today’s Newsletter about central clearing.

There are serious consequences when politicians treat financial regulation as a mere political device and call to “target” the opposition. It’s time to start focusing on precisely those points where the Dodd-Frank Congress and the implementing regulators might have gotten it wrong.


White House Press Secretary Earnest Praises Wall Street Reforms

In a press briefing, White House Press Secretary Josh Earnest praised the Wall Street reforms that have taken place during President Obama’s tenure.

“One of the key legacy achievements of this presidency will be the important reforms of Wall Street,” Press Secretary Earnest remarked. “Those reforms have led to a financial system that is more stable and ensures that taxpayers are not on the hook for bailing out the financial institutions that make risky bets.”

He added that President Obama takes pride in knowing he was able to keep the promise he made at the beginning of his term: to “impose greater regulations on Wall Street to make the system more stable, while at the same time not shutting down the dynamism of the U.S. economy.”

He emphasized that the “significant growth” of stock market trends over the last seven years was “just one piece of evidence” that White House reforms have made the financial system safer and more stable.

Lofchie Comment: It is true that many rules have been adopted and that, if Dodd-Frank is implemented fully, even more will be adopted. It is far less clear that the financial system is better or more stable. Many of the new requirements are irrelevant to financial stability (e.g., the requirement that certain swaps be traded on an exchange), while the effect of other rules that are touted by the regulators as promoting financial stability (e.g., the requirement that certain swaps be centrally cleared) seem either financially inconsequential (so what if interest rate swaps are centrally cleared?) or potentially destabilizing (clearing corporations are obviously too big to fail and will need to be bailed out if they do). Further, there is no “evidence” from stock market trends that shows the economy is safer. Is it not possible that stock prices are high largely because interest rates are dangerously low? If the government gives itself an A for pronouncing the achievement of financial stability, then the Cabinet should get an A-plus for asking these questions.

Senator Warren Argues Regulatory Scales “Tilted” by “Undue Industry Influence”

Senator Elizabeth Warren (D-MA) argued that “our rulemaking process is broken from start to finish.” Senator Warren blamed “regulatory capture – the [corporate] capture of agencies as they write the rules” – for “undue industry influence.”

In a speech before the Regulatory Capture Forum of the Administrative Conference of the Unites States, Senator Warren recommended five principles to “balance the scales” between Main Street and Wall Street interests:

  • Increase Transparency: Disclosure should be required concerning: (i) all meetings between agencies and interested parties, both before and during rulemaking; (ii) “financial arrangements and editorial relationships associated with regulatory comments”; and (iii) cited data published online with appropriate safeguards to protect anonymity.
  • Level the Playing Field between Public and Private Interests: “Severely under-resourced public interest advocates are simply out-gunned” by “the notice-and-comment process dominated by business advocates.” Accordingly, a public advocate should be built into the regulatory process or, alternatively, “public interest advocates who invest resources to produce meaningful feedback on rules” should be compensated.
  • Simplify Complex Rules: Complex rules (i) take longer to finalize; (ii) are harder for the public to understand; (iii) “contain more special interest carve-outs that favor big business interests over small businesses and individuals; and (iv) “are also more reliant on industry itself to provide additional detail and expertise – and that means more opportunities for capture” and biased results.
  • Limit Opportunities for Cultural Capture: Regulators should “crack down on the revolving door, and end golden parachutes for executives who enter government.” The Financial Services Conflict of Interest Act (H.R. 3065) introduced by Senator Tammy Baldwin (D-WI) and Representative Elijah Cummings (D-MD) is “a good start,” she said.
  • Give Agencies the Money They Need to Do Their Job: “Writing rules, responding to thousands of comments, and separating valuable data from self-serving nonsense takes capable people with adequate resources. Starving the regulators is the quickest way to ensure [their] work is essentially outsourced to the regulated industries themselves.”

Senator Warren concluded saying: “reforms must address the central problem – a tilted playing field that benefits the rich and powerful.”

Lofchie Comment: Senator Warren’s populist rhetoric obscures how problematic her policy and process recommendations are as a practical matter. Her recommendations represent oversimplified answers to complex market issues and this latest speech demonstrates an increasing tendency toward stifling valuable dissent and demonizing opponents. Here is a breakdown:

The Public Interest and Its Advocates. What precisely is this thing called the “Public Interest,” and who are the proper “Advocates” for it? The implication of Senator Warren’s remarks is that there is some singular viewpoint that may be defined as the “Public Interest” and that the Senator is confident of her ability to discern it. A contrary view is that there are differing positions as to what constitutes the “Public Interest,” and that at least some of those who advocate for it, may be mistaken in their beliefs that they know what is beneficial for all. This is not an idle debate. Is it so easy to determine what is in the “Public Interest” with respect to, say, the central clearing of swaps or international trade?

In the controversy around the proposed imposition of a broad set of position limits on energy products, it is reasonable to conclude (based on an understanding of energy markets, economics and regulation) that the imposition of such limits seems like a wasteful government project that will impose significant costs on the economy but not produce any material benefit (because if someone were to “withhold” oil from the market, someone else could simply produce more). The Senator believes the opposite. She supports the adoption of a new and complicated set of position limits regulations. What is new in the debate is that the Senator insists now that to be against position limits regulation is to be against the “Public Interest” which the Senator is not only able to discern, but whose advocates she can identify.

As to the debate over free trade, Senator Warren denounced President Obama over his support of the Trans-Pacific Partnership trade treaty. (As the footnotes in her letter demonstrate, it appears that the Senator’s position was taken in response to the President’s criticism of her.) It is not odd that there should be a disagreement (political or otherwise) between the President and a Senator; disagreements between knowledgeable people are to be expected. What should not be expected is a view that one of them has a monopoly on the identification of the “Public Interest.”

The Complexity of Rules. It is easy to agree with Senator Warren’s simplistic statement that rules are too complicated. Here is a test anyone can take: (i) go to a search engine, and (ii) run a search on the phrase, “fiduciary rule” along with “complicated.” So what is one to make of the fact that Senator Warren is a great advocate for that “fiduciary rule” proposed by the Department of Labor. This is to say nothing of her advocacy of Dodd-Frank, which is something of a nightmarish maze of complexity at 2,000 pages of ordinary text, generating hundreds of thousands of pages of rules.

Delays in Rulemaking. The Senator complains that the regulatory agencies are failing to meet Congressional deadlines for the adoption of required rules. Rather than allowing advocates of the “Public Interest” to sue regulators for failing to meet Congressional deadlines, Senator Warren might consider filing suit against Congress for setting fantasy deadlines. As she noted in her remarks, Dodd-Frank required the adoption of hundreds of interrelated rules, many of them within a one-year deadline. As many stated at the time, there was simply no way that this schedule could ever have been met – and it was not. The CFTC, which rushed to adopt rules, still is nowhere nearly done, and it has been forced to issue numerous “no-action” letters to correct mistakes in its rulemaking. Senator Warren might be on more solid ground if she would advocate that Congress be prevented from requiring any more rules on a given topic until its pre-existing rule requirements have been met. At least that might encourage Congress to prioritize.

Two-Step Rulemaking Process. The Senator seems to object to the reality that regulated industries comment on rules that apply to them, and also that different companies will make different comments. When Congress adopts a 2,000-page statute that requires 100,000 pages of rules, the rules are not “simple” to create, and it really does matter what the rules require. The notion that somehow the 2,000 pages of statute may be turned by the regulators into rules that accurately reflect what Congress would have intended, without any forum for discussion, is wishful thinking.

Departing Executives. As to the Senator’s suggestion that companies should not allow departing executives to collect compensation that they would have been paid had they not gone into government, the obvious effect of this is that it discourages qualified people from entering government. Given that such individuals are often taking very significant pay cuts, and uprooting their families, it is a little puzzling why the Senator would want to make it still more costly and less encouraging for qualified people to enter government service rather than find other ways to address potential conflicts concerns. Law firms, for example, often allow their partners to quit early and to enter government without forfeiting their pensions. Government should be trying to encourage knowledgeable experts to offer their services on behalf of the “Public Interest.” Notwithstanding legitimate arguments to the contrary, the Senator’s broad prescription is simplistic and problematic.

Transparency. Many of the Senator’s recommendations on transparency simply would have the effect, and are actually intended to have the effect, of discouraging those who work in heavily regulated industries from talking to the government. What, after all, does it mean to say that businesses should turn over all their data to the government before they comment? How seriously should they take the assertion that company data, once online, would be anonymous?

The Importance of Discussion. The Senator’s recent personal attacks on the ethics of those in academia and government who dissent from her views are in line with the partisan idea of framing her every position exclusively as in the “Public Interest.” Rather than championing her cause with arguments on the merits, the Senator is increasingly attempting to stifle legitimate points of view on complex issues with exclusionary rhetoric and public criticism of the ethics of the opposition. The Senator’s recommendation that the government’s voice should be further amplified by paid “advocates” of the “Public Interest” reflects a world view in which the influence of private voices in opposition is small, but that of the government’s is like the Leviathan incarnate. The Senator’s concerns about the disproportionate voice owned by “big” business should be balanced by like concerns for the disproportionate voice owned by “big” government.

SEC Commissioner Piwowar Discusses Securitization and “The Big Short”

SEC Commissioner Michael S. Piwowar discussed the benefits, risks and future of the securitization market, as well as recent developments in the credit rating agencies.

In his remarks at the ABS Vegas 2016 Conference, Commissioner Piwowar highlighted a number of the benefits of securitization, including its potential to reduce costs and increase access to credit for borrowers. He acknowledged the risks associated with securitization, and noted that the financial crisis “revealed that many market participants and regulators were not fully aware of the risks underlying residential mortgage-backed securities.”

Commissioner Piwowar discussed various SEC actions to improve the asset-backed securitization (“ABS”) regulatory framework in the aftermath of the financial crisis. He expressed concern regarding the “one-size-fits-all” approach taken for asset classes in the “credit risk retention” rulemaking. In particular, he considers the exception for qualified residential mortgages in the rulemaking to be the result of “arbitrary choices” made by “prudential bureaucrats” who took “the easy way out” by not allowing enough time to examine distinct asset class attributes. On the other hand, the Commissioner cited increased transparency through TRACE and disclosures through amendments to Regulation ABS as examples of more positive developments in the market. In light of these rulemakings, Commissioner Piwowar said, the SEC should evaluate their cumulative impact on the ABS markets. He also cited a general decline in public ABS offerings and pointed out that “unnecessary or inappropriate” regulation could have an adverse impact on the market even though the SEC must “appropriately” regulate these offerings.

Additionally, Commissioner Piwowar discussed “overreliance” on credit ratings, which in his view was “another key contributing factor to the financial crisis.” He mentioned steps the SEC has taken in order to remove excessive reliance on credit ratings noting that the SEC removed references to credit ratings from the rules, as required by Section 939A of Dodd-Frank. “The removal of credit rating references from our rulebook – and, therefore, any implied government seal of approval of credit ratings – should encourage investors to view credit ratings in a more appropriate manner, merely one input in making an investment decision,” he said. Commissioner Piwowar stated that “credit ratings continue to be used as benchmarks in many state and local laws and regulations and these entities should consider taking a hard look as to whether such use remains warranted.”

On a lighter note, Commissioner Piwowar sought to correct a few misperceptions about SEC participation at the conference by asserting that staffers would not be lounging by the pool or seeking jobs with investment banks as portrayed in the film, The Big Short.

House Bill Offers Regulatory Relief to “Traditional Banks”

Representative Ed Perlmutter (D-CO) introduced the “Traditional Banking Regulatory Relief Act of 2015” (H.R. 4647) in order to provide relief to “traditional banks” that do not require additional regulatory scrutiny or pose a systemic risk to the economy. The relief is offered based on the level of complexity and volume of activities of a given bank.

Specifically, H.R. 4647 defines a “traditional banking organization” as “any bank holding company, savings and loan holding company, bank, or savings association” that, together with its affiliates: (i) has zero trading assets and liabilities, (ii) does not engage in swaps or security-based swaps other than those that reference interest rates or foreign exchange swaps, and (iii) has a gross notional exposure of swaps and security-based swaps that totals less than $3,000,000,000.

H.R. 4647 would amend Section 18 of the Federal Deposit Insurance Act to require the following:

  • federal banking agencies must establish a minimum simple leverage ratio at no less than 10 percent;
  • a traditional banking agency that meets this minimum simple leverage ratio may elect to maintain it as that agency’s “sole measure of capital adequacy”;
  • traditional banking agencies that elect to maintain the minimum simple leverage ratio will be exempt from the risk-based capital requirement of Section 38(c)(1)(A) of the Federal Deposit Insurance Act; and
  • traditional banking agencies that fail to maintain the minimum simple leverage ratio, as determined by the first quarterly report following their choice to do so, will be exempted from the risk-based capital requirements for a period of 18 months beginning on the date of this determination.

“When Dodd-Frank was enacted five years ago,” Representative Perlmutter remarked, “it provided an important regulatory scheme to protect taxpayers and reduce the risk of another financial crisis. But we must recognize the difference between institutions that conduct their activities in a safe and sound manner and those institutions that expand their activities beyond retail and commercial banking.”

Lofchie Comment: It is good that elected representatives are thinking about giving relief to the overly regulated in the financial system. However, the relief offered in this bill moves us in the wrong direction. Here are a few reasons: (i) offering conditional relief is based on the false premise that traditional banking activities, such as mortgage lending, are inherently safer than other financial activities (when likely the opposite is true), (ii) conditional regulatory relief would make it impossible for firms to enter “non-traditional” businesses in a small way because, for example, even a single “bad” swap will ratchet up their regulatory costs in a completely disproportionate manner, and (iii) offering conditional relief would raise costs for businesses that require so-called nontraditional banking services.

Senator Warren Asks CFTC to Withdraw EEMAC Report on Position Limits

Senator Elizabeth Warren wrote to CFTC Commissioner J. Christopher Giancarlo asking that he withdraw the Energy and Environmental Markets Advisory Committee (“EEMAC”) report on the CFTC’s proposed rule on position limits for commodities futures and swaps until the CFTC reconvenes a committee that “complies with the law and that addresses both the procedural and factual errors in the present product.”

Senator Warren cited three principal problems with the EEMAC’s report:

  • the EEMAC consists almost entirely of energy industry leaders, which appears to violate Dodd-Frank Section 751;
  • the record of the EEMAC’s work reflects “significant procedural irregularities” that “resulted in major flaws and mischaracterizations” in the report; and
  • the report’s conclusions were not supported by the record before the EEMAC, and the report was adopted without public discussion of its findings and conclusions and with no public vote.

She also specifically expressed concern about the decision to include two witnesses at the EEMAC’s hearing: 1) a representative from the CME Group, “an energy derivatives exchange,” and 2) Dr. Craig Pirrong.

Senator Warren concluded that the report is “nothing more than a recitation of industry talking points, and should be treated as such.”

Lofchie Comment: This is at least the second time that Senator Warren publicly launched a personal attack against an academic who has taken a position with which the Senator disagrees. In both cases, the Senator asserted that the academics withheld information about their beliefs or funding. Her assertions rest on uncertain ground. (See the Senator’s attack on Professor Robert Litan in this news article; see also Mr. Pirrong’s defense of himself on his blog, Streetwise Professor. These broadsides are in addition to Senator Warren’s personal attacks against SEC Chair Mary Jo White.) Attacks by the Senator on those who disagree with her can serve only to chill discussion on issues of financial regulation, perspectives which serve to benefit all concerned.

As to the notion that Craig Pirrong somehow concealed his views on energy matters, the professor has a blog ( on which he expresses them quite consistently, clearly and openly. His position is no more hidden than is Senator Warren’s. The Senator can disagree with his views, of course, but the claim that they are hidden seems not only unjustified, but inconsistent with her description of him in the letter as a well-known advocate in this space.

As to the substance of the Senator’s objections to the EEMAC’s report, the relevant language from Dodd-Frank Section 751 is as follows: The EEMAC shall have 9 members. The Committee shall “serve as a vehicle for discussion and communication on matters of concern to exchanges, firms, end users and regulators. . . ” The members shall have a “wide diversity of opinion and who represent a broad spectrum of interests, including hedgers and consumers.” Here are links to the lists of EEMAC Members and EEMAC Associate Members. There are distinguished people in both groups, possessing a wide range of viewpoints and economic interests; e.g., both buy-side and sell-side. Even if the Senator believes that a majority of the Committee’s members were inclined to disagree with her, this is not a group to be cowed. There was legitimate dissent and debate by these members.

The Senator criticizes the EEMAC for including representatives of “public utilities,” whom one would think would be inclined to favor regulation that might drive competing buyers (i.e., speculators) out of the market. The Senator also appears to criticize the decision to have representatives of the “government” on the Committee, whom she seems to imply would not be “objective” for reasons that she does not explain. Upon reading the letter more closely, it is easy to speculate that Senator Warren believes that there are likely alternative, more “objective” government employees who would have favored her views.

The Senator’s claim that the EEMAC report “dramatically mischaracterizes the recorded positions of its members” is not serious. The Committee voted 8-1 in favor of the report. Again, one can clearly disagree with the findings of the report, but it is hard to understand how exactly the report mischaracterizes an 8-1 vote. Senator Warren cites a 2006 report that is consistent with her views, but there are other studies that are inconsistent with Senator Warren’s views. There ought not to be any implication that the dispute over position limits must end with one report that Senator Warren elects to single out.

It is simply hard to see how anyone reading the newspapers these days can believe that energy position limits are needed to either maintain a sufficient energy supply or hold prices down. With so many producer nations (Iran, Russia, Saudi Arabia, Kuwait, Venezuela, the United States, Mexico, Canada) trying to bring oil and other energy products to market, it seems obvious that the power of suppliers to increase deliveries overwhelms any ability of speculators to store oil and create an artificial price spike. If there were even the briefest price spike, wouldn’t the energy suppliers (including those in the United States) rush to take advantage of it by pumping more oil?

Most worrisome about the Senator’s letter is not her stance on position limits nor that she seems disinclined to modify that stance in light of current events. Most worrisome is that the presentation of her views is done in a way that might discourage the presentation of legitimate alternative views.