SEC Chair Mary Jo White spoke at the Fordham Law School 14th Annual A.A. Sommer, Jr. Corporate Securities and Financial Law Lecture, focusing on the importance of the SEC remaining nonpartisan.  Chair White said her speech was a tribute to Al Sommer, and his staunch belief that politics has no place in the SEC hallways.  She noted that Mr. Sommer spearheaded the SEC’s groundbreaking rules to “unfix” brokerage commissioners and establish a national securities market system.  Chair White stated that it is vital for the SEC and its employees to have the freedom to do what is right for investors and markets without the interference of politics or outside pressure.  Chair White also noted that while the SEC is an independent agency, it still relies on the ideas and recommendations of those who are impacted by its rules.  She further explained that disclosure is a key aspect in maintaining the securities market; however, Chair White noted that if disclosure “gets to be too much” or strays from its main purpose, it can lead to an information overload, therefore it is important to strike a balance between useful information for investors and over-sharing.

Chair White also discussed the role of the judiciary and the importance of separation of powers to “stay in respective lanes.”  She stated her belief in the enormous value of the “no admit, no deny” settlements, because it provides swift remedies for misconduct and quick relief to investors without the risk of litigation. 

Lofchie Comment:  This is a fairly significant speech, as it does not take much of a stretch to read the speech as a criticism of a number of provisions of Dodd-Frank, including the provisions regarding the disclosure of pay ratios and probably the requirements as to conflict minerals as well.

This speech sheds light on an interesting perspective (though it is hard to say what that perspective shows) as to the SEC’s recent rule proposal regarding corporate disclosure of the ratio between the compensation of the pay of a CEO and the average employee at the company.  See SEC Proposes Rule for Pay Ratio Disclosure.  The SEC voted to put that proposal forward by a 3-2 vote (with Chairman White voting in favor) – the face of two Commissioner dissents, including a particularly strong one from Commissioner Gallagher who argued that the pay disclosure rule requirement had nothing to do with the SEC’s mission and that the SEC should essentially ignore the relevant statutory provision.  Arguably, this speech could be read as the Chairman regretting the decision to put forward the pay ratio rule, and as an argument that the disclosure rule on conflict minerals is not well-advised and is yet another regulatory injury to the economy.   

One expressed message of the speech is that SEC Chairman White does not intend for the SEC to be entirely deferential to the White House.  In an odd way, this could be read as very good news for the White House.  That is, a strong argument could be made that the White House will be greatly benefitted by a more independent and self-confident financial regulator that serves as a check on some of the more ill-conceived acts of Congress, which are arguably destructive to the economy. 

Although Chairman White’s declaration of regulatory independence seems to be a good choice as a practical matter, it does raise interest Constitutional issues as to the role of the federal independent agencies effectively serving as the “fourth branch” of the government, not part of the judiciary and not directly in the command of either the White House or the Congress.

See: SEC Chair White Lecture “The Importance of Independence”.

In a speech at a workshop held by the New York Fed, Fed Governor Jeremy C. Stein delivered a speech discussing “fire sales” in securities financing transactions and laying out a case for further policy attention to the issue.

Governor Stein began by discussing the welfare of economics of fire sales, explaining that when a forced sale of an asset is not just an event that leads to prices being driven below long-run fundamental values, but one that involves market failure or externality of the sort that might elicit a regulatory response.  Governor Stein stated that by itself, the existence of substantial price discounts in distressed sales does not speak to the normative economics of fire sales, and therefore is not sufficient to make a case for regulatory intervention.  According to Governor Stein, for a fire sale to have the sort of welfare effects that create a role for regulation, the reduced price in the fire sale must hurt somebody other than the original party making the leverage decision. 

He then discussed how securities financing transactions (“SFTs”), such as those done via repurchase agreements, are an object of concern for policymakers since they give way to fire sale externalities (e.g., market costs that may result from problems in these markets).  Governor Stein laid out two stylized examples of SFTs which illustrate the properties of various regulatory tools:  (i) where a broker-dealer acts as principal, and (ii) where a broker-dealer as an SFT intermediary.  In either case, Governor Stein noted that if the associated externalities are deemed to create significant costs, the goal of the regulatory policy should be to get private actors to internalize these costs. 

Finally, Governor Stein surveyed and assessed the effectiveness of recent regulatory tools, such as risk-based capital requirements, liquidity requirements, and leverage ratio.  He concluded that while these tools have a variety of virtues, none seem well-suited to comprehensively lean against the specific fire sale externalities created by SFTs.  He suggested possible alternative ways to deal with SFT-related fire-sale externalities, such as capital surcharges, modified liquidity regulation, and universal margin requirements. 

Lofchie Comment:  Perhaps it is reading too much into a hifalutin economic analysis, but certain aspects of this speech seem troublesome in that Governor Stein suggested that the government could (or should) play a material role in the making of credit decisions, including become involved in the mechanics of unwind decisions.  For example, I wonder how the Governor believes that the government will determine which unwind decisions affect third parties (and which do not).

See:  Governor Stein’s Speech.

SEC Chair Mary Jo White delivered a speech to the Security Traders Association’s 80th Annual Market Structure Conference which reviewed the status of equity market structure. 

Chair White focused on three particular “fundamentals” in her review of equity market structure, including:

• technology and the operational integrity of the markets;
• the identification and testing of “assumptions” about market structure; and
• the need for more empirical evidence and data to inform decisions about the markets.

According to Chair White, there have been steps taken to address the technology and operational integrity of the markets, such as the Market Access Rule and Regulation SCI; however, there are still areas needing improvement. She noted that she has asked the SEC, FINRA, and executives of the exchanges to work on developing “comprehensive action plans that address the standards necessary to establish highly resilient and robust systems for securities information processors.”

Additionally, Chair White identified certain “assumptions” that she believes must be reconsidered to improve market structure, including the idea of a “one-size-fits-all” market structure, including the scope of NMS and the self-regulatory model.

Finally, Chair White spoke about the need for greater sources of data to use to better assess today’s markets. Chair White described certain efforts the SEC has employed to improve empirical evidence, such as the market information and data analysis system, “MIDAS,” the Large Trader Reporting Rule adopted in 2012, and the Consolidated Audit Trail Rule. She also announced a new website being launched by the SEC next week that is “designed to promote a fuller empirical understanding of the equity markets,” and will allow users to explore key market metrics and trends based on aggregate analyses of MIDAS records over the last year. The site will also feature staff research papers and reviews based on a variety of data sources.

Lofchie Comment:  Chair White’s speech was far-ranging; it included everything from doing away with the self-regulatory structure of exchanges, to rethinking Regulation NMS, to establishing a new market structure for small companies. 

    On the issue of technology and the role of high-speed trading, Chair White strikes a generally positive note, but observes that the SEC is moving more aggressively to regulate the use of technology (with the implicit threat to bring disciplinary actions against firms with technology that fails. Government should not hold business to a standard of perfect technologically that is impossible to meet. Some level of failure is inevitable. It is not obvious that the appropriate response to a technology failure is either more rulemaking or the bringing of disciplinary actions. In short, cooperation in the service of a common interest may be a better route than the threat of sanctions. 

     On a different note, Chair White’s speech contains some surprising statistics, particularly as to the decline in the number of companies that are listed on U.S. exchanges. According to her speech, this number has declined from over 8,000 in 1997 to about 4,900 today. That is a pretty shocking fall. Her delivery of this statistic in the context of a speech on market structure carries with it at least some implication that there is a material tie between market structure and the number of listed companies. While this may be true to some extent, it should raise questions as to whether the entire regulatory system is making the United States a less attractive business environment.

See: SEC Chair White’s Speech, “Focusing on Fundamentals: The Path to Address Equity Market Structure”.