To be fair, Securities and Exchange Commission Chair Mary Jo White started her five-year term in April with a to-do list long enough to send most people into a state of abject panic. Included on that list were a slew of unfinished rules from the 2010 Dodd-Frank Wall Street regulatory reform law, as well as proposals for money market reform and implementing the Jumpstart Our Business Startups (JOBS) Act, which allows small companies to raise money through crowdfunding.
As 2013 draws to a close, Credit Suisse’s Public Policy Americas team notes that rulemaking under White’s leadership has increased 42 percent – and they expect the pace to accelerate even more next year. Still, plenty of the items on this year’s agenda will carry over into 2014, partly due to a series of unexpected challenges this year, including a wave of resignations at the top of the organization, trade-disrupting technology failures on major exchanges and October’s government shutdown. This month, Credit Suisse’s Washington-watchers assessed what the SEC did manage to achieve and what’s left on the docket for 2014.
The Elusiveness of Dodd-Frank
With healthcare reform hanging in the balance, the White House has put serious pressure on the commission to finish drafting specific proposals and begin implementing the sprawling Wall Street reform law. Credit Suisse’s policy team says that three years on, the commission is 60 percent of the way through the process. Rules governing derivatives make up the bulk of the remaining work. The commission has finalized 10 rules – all prior to 2013 – and still has 19 to go, the team notes. This year, the SEC put forth a road map for regulating cross-border securities-based swaps, and several additional measures are due in the first half of next year.
The commission did make headway in crafting new asset-backed securities regulations. A rule proposed at the end of October says issuers should remain on the hook for 5 percent of a security’s credit risk for two years, except in the case of residential mortgages, which would have a five-year risk-retention requirement. The comment period ended late last month, but due “the complexity of the rule-making and the number of comments that are expected to be filed, it is highly unlikely that the rules will be finalized in 2013,” Credit Suisse says. In fact, the policy team doesn’t expect any changes in rules governing residential mortgage-backed ABS to take effect until the second half of 2015.
Also in response to Dodd-Frank, last month an SEC committee suggested broker-dealers should have the same fiduciary duty as investment advisers – that is, an obligation to put client interests ahead of their own. Credit Suisse believes the agency could still propose a rule to that effect in 2013, but that “there is near zero likelihood” it would be implemented by year-end – and maybe not even in the first quarter of 2014. Elsewhere in the financial advisory realm, the commission created a permanent registration system for municipal advisors who counsel state and local governments on bond issuances and investments.
Finally, the SEC probably won’t make any final decisions this year on a controversial rule proposed in September that would require companies to disclose the difference between the salary of the CEO and a middle-of-the-pack employee. The issue won’t top the priority list next year, says Credit Suisse.
Too Many Cooks in the Volcker Rule Kitchen
Five agencies share responsibility for drafting the requirement that forbids proprietary trading at banks with federally insured deposits – and getting them to agree has been a long and drawn-out process. Credit Suisse’s Washington team puts the probability of the Volcker Rule being finalized by the end of the year at close to 80 percent, noting that the White House is keen to see it done. Many financial institutions have already sold off proprietary trading businesses, but the final rule likely “will still require a major restructuring of many business lines,” Credit Suisse’s public policy team writes.
This Close to Crowdfunding for Startups
Chances are good that startups eager to tap the masses for growth capital will soon be able to do so. Several SEC commissioners requested further public comment after a crowdfunding rule was proposed in October, but Credit Suisse says the regulations should be finalized shortly after the comment period ends in January.
The SEC also finalized two rules in September and proposed a third in October concerning private placements, which allow small companies to sell stock to institutional or other accredited investors without registering a sale with the SEC. First, the agency allowed companies to advertise private placements, widening their circle of potential investors. A second rule disqualified people convicted of financial crimes and other so-called bad actors from participating in such financings. But the commission is still struggling to hammer out controversial new reporting requirements for the structures, and is unlikely to reach any conclusions this year.
Kicking the Tires
The SEC has been thinking about big-picture changes to address structural issues in financial markets since at least 2010, when it released a 74-page “concept paper” that asked for input on everything from high-frequency trading to dark pools. And there does, of late, seem “to be more agreement than ever that market innovation has outpaced dated regulations,” according to Credit Suisse’s policy team. A series of technology-related exchange meltdowns and trading snafus has made that painfully obvious. In August, for example, a software problem took NASDAQ offline for three hours. After that incident, White ordered the major exchanges to collaborate on drafting new testing protocols and backup procedures, and to create a “kill switch” that immediately halts trading during a crisis. The difficulty of harmonizing the myriad IT systems and protocols, however, pretty much guarantees that the issues will be debated far into 2014.
Finally, White said in an October speech that she has instructed commission staffers to work with exchanges to develop a pilot program that would allow some small companies’ stocks to trade in wider increments –five or ten cents, for example, rather than a penny. Proponents argue that trading in larger increments would open up a larger gap between buyer and seller bids in a given transaction, which would encourage market makers to quote prices on smaller stocks. That, in turn, could spur investor interest and create more liquidity. Others, however, argue that higher “tick prices” will simply raise costs for retail investors. A trial run could begin as early as the first half of next year.
Controversial Money Market Fund Reform
The SEC got an earful in July, when it proposed two major changes – which could be adopted separately or together – to rules governing money market funds. The first would require funds to trade at their net asset values, meaning that they would have to sell shares based on the market value of securities in their funds. The funds currently trade on a discounted basis, allowing them to ignore small fluctuations in value and maintain a stable $1 share price. That perceived stability may have led many retail investors to assume money market funds were almost as safe as cash, the SEC notes in a document explaining its draft rules, a mistake they learned the hard way in 2008. After Lehman Brothers declared bankruptcy, the Reserve Primary Fund, which was invested heavily in Lehman paper, saw its net asset value drop to $0.97 – the first instance of what’s known as “breaking the buck” since 1994. In the four days that followed, the fund’s investors requested redemptions worth $60 billion of the fund’s $62.5 billion in total assets. The stampede quickly spread to other money-market funds. Even in less dramatic circumstances, the commission notes, massive redemptions can send a fund’s value further south, reduce liquidity and add to remaining investors’ losses. To discourage future runs, the SEC’s second proposed rule would impose a 2 percent fee on investors cashing in their chips after the portion of a fund’s liquid assets – defined as the cash, Treasuries, discount notes issued by federal agencies with maturities of 60 days or less and securities maturing within five business days – has dropped below 15 percent of the total.
Credit Suisse says the Financial Stability Oversight Council established under Dodd-Frank has been pushing the SEC to finalize money-market reforms this year, but it probably will not do so until the second quarter of next year.
The New Sheriff
It’s no surprise that White, a former federal prosecutor, places a high value on identifying rule-breakers. In the first six months under her leadership, the commission brought charges against more than 40 municipalities, companies and individuals. White has also repeatedly stressed that she wants more SEC settlements to include an admission of wrongdoing by the accused party. To date, the SEC has largely allowed accused parties to settle via fine while giving them a pass on actual admission of guilt. While that has surely allowed for more expeditious—and lucrative—closure in most cases, it nevertheless comes with a cost, which is the protection of the accused from other potential liabilities that might arise from such an admission as well as depriving an angry public of the satisfaction of an actual admission of guilt. Those days appear to be over.
SEC Chair Mary Jo White, pictured above, has a packed agenda in 2014.