The SEC has an important role in making sure that traded securities are issued by companies that have made correct statements about themselves. Incorrect statements maybe misleading to the public and hence, cause people to invest in a business without the relevant facts. The following is an excerpt from the SEC website:
Washington, D.C., June 13, 2011 – The Securities and Exchange Commission today announced that it has instituted proceedings to determine whether stop orders should be issued suspending the effectiveness of registration statements filed by two companies – China Intelligent Lighting and Electronics Inc. (CIL) and China Century Dragon Media Inc. (CDM).
The SEC instituted the stop order proceedings against each company after the companies’ independent auditor resigned and withdrew its audit opinions on the financial statements included in the companies’ registration statements.
“The Division of Enforcement is seeking stop orders to protect investors by preventing any further sales under materially misleading and deficient offering documents,” said Kara Brockmeyer, Assistant Director of the SEC’s Division of Enforcement and co-head of the Cross Border Working Group. The Cross Border Working Group has representatives from each of the SEC’s major divisions and offices, and focuses on U.S. companies with substantial foreign operations.
The purpose of a stop order is to prevent a company or its selling shareholders from selling their privately-held shares to the public under a registration statement that is materially misleading or deficient. If a stop order is issued, no new shares can enter the market pursuant to that registration statement until the company has corrected the deficiencies or misleading information in the prospectus.
In proceedings instituted against CIL on June 10, the SEC’s Division of Enforcement alleges that CIL’s independent auditor resigned on March 24, 2011, due to accounting fraud at the company involving forged accounting records and bank statements. The auditor also notified the company that it could no longer support its audit opinions relating to the company’s previously-issued financial statements – which were included in registration statements filed by CIL in June and December 2010 – and that the financial statements contained in the registration statements cannot be relied upon. The Division of Enforcement alleges that, as a result, CIL’s registration statements are materially misleading and deficient.
In separate proceedings instituted against CDM on June 13, the SEC’s Division of Enforcement alleges that CDM’s independent auditor resigned on March 22, 2011, due to “discrepancies noted on customer confirmations and the auditor’s inability to directly verify the Company’s bank records,” which could indicate a material error in the company’s previously-issued financial statements. The auditor also notified the company that it could no longer support its audit opinions relating to the company’s previously-issued financial statements, which were included in a registration statement filed by CDM in February 2011, and that those financial statements cannot be relied upon. The Division of Enforcement alleges that, as a result, CDM’s registration statement is materially misleading and deficient.
The Commission instituted the proceedings against CIL and CDM, respectively, pursuant to Section 8(d) of the Securities Act of 1933 to determine whether the allegations of the Division of Enforcement are true, to afford each company an opportunity to establish any defenses to these allegations, and to determine whether in each case a stop order should be issued suspending the effectiveness of the registration statement or statements.
Trading in the companies’ stock on the NYSE Amex LLC has been halted since March 2011, pending the outcome of Amex’s delisting proceedings against each company for failure to meet Amex’s listings requirements.”
This is a photo of the National Register of Historic Places listing with reference number 7000063
Thursday, June 16, 2011
SEC GOES AFTER THE UNKNOWN
Because any sane criminal would want to remain anonymous, sometimes those seeking justice do not know who their adversaries might be. In the following case taken from the SEC website, the SEC goes after such unknown potential criminal(s) by getting a court to freeze the assets of said potential criminal(s):
"Securities and Exchange Commission v. One or More Unknown Purchasers of Securities of Telvent GIT S.A., 11 Civ. 3794 (TPG) (S.D.N.Y.) (filed June 3, 2011)
Court Freezes Assets Linked to Suspicious Securities Purchases Ahead of Telvent GIT S.A. Acquisition Announcement
On June 3, 2011, the U.S. District Court for the Southern District of New York entered a Temporary Restraining Order freezing assets and trading proceeds of certain unknown purchasers of the securities of Telvent GIT S.A. (the “Unknown Purchasers”). The Commission filed a complaint alleging that the Unknown Purchasers engaged in illegal insider trading in the days preceding the June 1, 2011 announcement that Schneider Electric S.A., a French company, and Telvent, a company based in Madrid, Spain, had entered into an agreement under which Schneider would offer to acquire all of the outstanding common stock of Telvent at a price of $40 per share, a 16% premium over the previous day’s closing price. The Commission’s complaint alleges that the Unknown Purchasers, through their insider trading, violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks permanent injunctive relief, the disgorgement of all illegal profits, and the imposition of civil money penalties.
The Commission’s complaint alleges that between April 29, 2011 and May 27, 2011, the Unknown Purchasers bought 1,200 Telvent call option contracts through an account at Pershing LLC. About two-thirds of the call option contracts were purchased within five calendar days (or two trading days) before the acquisition announcement and comprised as much as 52% of the volume of that series of call options that day. The price of the call options held by the Unknown Purchasers rose dramatically. In one instance, the price of the options increased by about 480%. The complaint alleges that, as a result, the Unknown Purchasers realized total profits of approximately $475,000 from the sale of the call options.
In addition to freezing the assets relating to the trading, the Temporary Restraining Order requires the Unknown Purchasers to identify themselves, imposes an expedited discovery schedule, and prohibits the defendants from destroying documents."
"Securities and Exchange Commission v. One or More Unknown Purchasers of Securities of Telvent GIT S.A., 11 Civ. 3794 (TPG) (S.D.N.Y.) (filed June 3, 2011)
Court Freezes Assets Linked to Suspicious Securities Purchases Ahead of Telvent GIT S.A. Acquisition Announcement
On June 3, 2011, the U.S. District Court for the Southern District of New York entered a Temporary Restraining Order freezing assets and trading proceeds of certain unknown purchasers of the securities of Telvent GIT S.A. (the “Unknown Purchasers”). The Commission filed a complaint alleging that the Unknown Purchasers engaged in illegal insider trading in the days preceding the June 1, 2011 announcement that Schneider Electric S.A., a French company, and Telvent, a company based in Madrid, Spain, had entered into an agreement under which Schneider would offer to acquire all of the outstanding common stock of Telvent at a price of $40 per share, a 16% premium over the previous day’s closing price. The Commission’s complaint alleges that the Unknown Purchasers, through their insider trading, violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks permanent injunctive relief, the disgorgement of all illegal profits, and the imposition of civil money penalties.
The Commission’s complaint alleges that between April 29, 2011 and May 27, 2011, the Unknown Purchasers bought 1,200 Telvent call option contracts through an account at Pershing LLC. About two-thirds of the call option contracts were purchased within five calendar days (or two trading days) before the acquisition announcement and comprised as much as 52% of the volume of that series of call options that day. The price of the call options held by the Unknown Purchasers rose dramatically. In one instance, the price of the options increased by about 480%. The complaint alleges that, as a result, the Unknown Purchasers realized total profits of approximately $475,000 from the sale of the call options.
In addition to freezing the assets relating to the trading, the Temporary Restraining Order requires the Unknown Purchasers to identify themselves, imposes an expedited discovery schedule, and prohibits the defendants from destroying documents."
CFTC CHAIRMAN SAYS SWAPS MARKET PLAYED CENTRAL ROLE IN FINANCIAL CRISIS
The following remarks were made by CFTC Chairman Gary Gensler to the House Committee on Financial Services. The remarks are an excerpt from the CFTC website:
June 16, 2011
Good morning Chairman Bachus, Ranking Member Frank and members of the Committee. I thank you for inviting me to today’s hearing on the international context of financial regulatory reform. I also thank my fellow Commissioners and CFTC staff for their hard work and commitment on implementing the legislation.
I am pleased to testify alongside my fellow regulators.
Global Crisis
It has now been more than two years since the financial crisis, when both the financial system and the financial regulatory system failed. So many people – not just in the United States, but throughout the world – who never had any connection to derivatives or exotic financial contracts had their lives hurt by the risks taken by financial actors. The effects of the crisis remain. All over the world, we still have high unemployment, homes that are worth less than their mortgages and pension funds that have not regained the value they had before the crisis. We still have significant uncertainty in the financial system.
Though the crisis had many causes, it is clear that the swaps market played a central role. Swaps added leverage to the financial system with more risk being backed up by less capital. They contributed, particularly through credit default swaps, to the bubble in the housing market and helped to accelerate the financial crisis. They contributed to a system where large financial institutions were thought to be not only too big to fail, but too interconnected to fail. Swaps – initially developed to help manage and lower risk – actually concentrated and heightened risk in the economy and to the public.
At the conclusion of the September 2009 G-20 summit held in Pittsburgh, leaders of 19 nations and the European Union concurred that “[a]ll standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements.”
We now are working across borders to achieve that goal.
Derivatives Markets
Each part of our nation’s economy relies on a well-functioning derivatives marketplace. The derivatives market – including both the historically regulated futures market and the heretofore unregulated swaps market – is essential so that producers, merchants and other end-users can manage their risks and lock in prices for the future. Derivatives help these entities focus on what they know best – innovation, investment and producing goods and services – while finding others in a marketplace willing to bear the uncertain risks of changes in prices or rates.
With notional values of approximately $300 trillion in the United States – that’s more than $20 of swaps for every dollar of goods and services produced in the U.S. economy – and approximately $600 trillion worldwide, derivatives markets must work for the benefit of the public. Members of the public keep their savings with banks and pension funds that use swaps to manage their interest rate risks. The public buys gasoline and groceries from companies that rely upon futures and swaps to hedge their commodity price risks.
That’s why international oversight must ensure that these markets function with integrity, transparency, openness and competition, free from fraud, manipulation and other abuses. Though the CFTC is not a price-setting agency, recent volatility in prices for basic commodities – agricultural and energy – are very real reminders of the need for common sense rules in the derivatives markets.
International Coordination
To address changes in the derivatives markets as well as the real weaknesses in swaps market oversight exposed by the financial crisis, the CFTC is working to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act’s derivatives oversight reforms. Our international counterparts also are working to implement reform.
Japan has acted and is now working to implement its reforms. In September of last year, the European Commission (E.C.) released its swaps proposal. The European Council and the European Parliament are now considering the proposal. Asian nations, as well as Canada, also are working on their reform packages.
As we work to implement the derivatives reforms in the Dodd-Frank Act, we are actively coordinating with international regulators to promote robust and consistent standards and avoid conflicting requirements in swaps oversight. The Commission participates in numerous international working groups regarding swaps, including the International Organization of Securities Commissions Task Force on OTC Derivatives, which the CFTC co-chairs with the Securities and Exchange Commission (SEC). The CFTC, SEC, European Commission and European Securities Market Authority are intensifying discussions through a technical working group.
As we do with domestic regulators, we are sharing many of our memos, term sheets and draft work product with international regulators. We have been consulting directly and sharing documentation with the European Commission, the European Central Bank, the UK Financial Services Authority, the new European Securities and Markets Authority, the Japanese Financial Services authority and regulators in Canada, France, Germany and Switzerland. Two weeks ago, I met with Michel Barnier, the European Commissioner for Internal Market and Services, to discuss ensuring consistency in swaps market regulation.
The Dodd-Frank Act recognizes that the swaps market is global and interconnected. It gives the CFTC the flexibility to recognize foreign regulatory frameworks that are comprehensive and comparable to U.S. oversight of the swaps markets in certain areas. In addition, we have a long history of recognition regarding foreign participants that are comparably regulated by a home country regulator. The CFTC enters into arrangements with our international counterparts for access to information and cooperative oversight. We have signed memoranda of understanding with regulators in Europe, North America and Asia.
Furthermore, Section 722(d) of the Dodd-Frank Act states that the provisions of the Act relating to swaps shall not apply to activities outside the U.S. unless those activities have “a direct and significant connection with activities in, or effect on, commerce” of the U.S. We are developing a plan for application of 722(d) and expect to receive public input on that plan.
I will highlight a few broad areas where both regulators in the U.S. and regulators abroad are implementing swaps oversight reform.
Broadening the Scope
Foremost, the Dodd-Frank Act broadened the scope of oversight. The CFTC and the SEC will, for the first time, have oversight of the swaps and security-based swaps markets. The CFTC’s remit is growing from a marketplace that has a notional value of approximately $40 trillion to one with a notional value of approximately $300 trillion.
Similar to the Dodd-Frank Act, the European Commission’s proposal covers the entire product suite, including interest rate swaps, currency swaps, commodity swaps, equity swaps and credit default swaps. It is important that all standardized swaps are subject to mandatory central clearing. We are working with our counterparts in Europe to make sure that all swaps, whether bilateral or traded on platforms, are subject to such mandatory clearing.
Centralized Clearing
Another key reform of the Dodd-Frank Act is to lower interconnectedness in the swaps markets by requiring standardized swaps between financial institutions to be brought to central clearing. This interconnectedness was, in part, the reason for the $180 billion bailout of AIG.
Clearing is another area where the Dodd-Frank Act and the E.C.’s proposal generally are consistent. In both cases, financial entities, such as swap dealers, hedge funds and insurance companies, will be required to use clearinghouses when entering into standardized swap transactions with other financial entities. Non-financial end-users that are using swaps to hedge or mitigate commercial risk, however, will be able to choose whether or not to bring their swaps to clearinghouses.
Capital and Margin
The Dodd-Frank Act includes both capital and margin requirements for swap dealers to lower risk to the economy. Capital requirements, usually computed quarterly, help protect the public by lowering the risk of a dealer’s failure. Margin requirements, usually paid daily, help protect dealers and their counterparties in volatile markets or if either of them defaults. Both are important tools to lower risk in the swaps markets.
The Dodd-Frank Act authorizes bank regulators, the CFTC and the SEC to set both capital and margin “to offset the greater risk to the swap dealer or major swap participant and the financial system arising from the use of swaps that are not cleared.”
In Europe, Basel III includes capital requirements for swap dealers. The E.C.’s swaps proposal includes margin requirements for uncleared swaps to lower the risk that a dealer’s failure could cascade through its counterparties.
Data Reporting
The Dodd-Frank Act includes robust recordkeeping and reporting requirements for all swaps transactions. It is important that all swaps – both on-exchange and off – be reported to data repositories so that regulators can have a window into the risks posed in the system and can police the markets for fraud, manipulation and other abuses.
There is broad international consensus on the need for data reporting on swaps transactions. The E.C. proposal includes similar requirements to the Dodd-Frank Act’s requirements. Regulators in Japan, Hong Kong and China also have indicated the need for reporting of swaps data.
Business Conduct Standards
The Dodd-Frank Act explicitly authorizes regulators to write business conduct standards to lower risk and promote market integrity. The E.C. proposal addresses similar protections through what it calls “risk mitigation techniques.” This includes documentation, confirmation and portfolio reconciliation requirements, which are important features to lower risk. Further, the Dodd-Frank Act provides regulators with authority to write business conduct rules to protect against fraud, manipulation and other abuses.
Promoting Transparency
In the U.S., the Dodd-Frank Act brings transparency to the derivatives marketplace. Economists and policymakers for decades have recognized that market transparency benefits the public.
The more transparent a marketplace is, the more liquid it is, the more competitive it is and the lower the costs for hedgers, borrowers and their customers.
The Dodd-Frank Act brings transparency in each of the three phases of a transaction.
First, it brings pre-trade transparency by requiring standardized swaps – those that are cleared, made available for trading and not blocks – to be traded on exchanges or swap execution facilities.
Second, it brings real-time post-trade transparency to the swaps markets. This provides all market participants with important pricing information as they consider their investments and whether to lower their risk through similar transactions.
Third, it brings transparency to swaps over the lifetime of the contracts. If the contract is cleared, the clearinghouse will be required to publicly disclose the pricing of the swap. If the contract is bilateral, swap dealers will be required to share mid-market pricing with their counterparties.
The Dodd-Frank Act also includes robust recordkeeping and reporting requirements for all swaps transactions so that regulators can have a window into the risks posed in the system and can police the markets for fraud, manipulation and other abuses.
In Europe, the E.C. is considering revisions to its existing Markets in Financial Instruments Directive (MiFID), which includes a trade execution requirement and the creation of a report with aggregate data on the markets similar to the CFTC’s Commitments of Traders reports.
Furthermore, in February 2011, IOSCO issued a report on trading that included eight characteristics that trading platforms should have. Many of the IOSCO members participating in the report indicated a belief that added benefits are achieved through multi-dealer trading platforms. The IOSCO report concluded that, beyond the added benefits of pre-trade transparency, trading helps mitigate systemic risk and protect against market abuse.
Japan’s swaps reform promotes transparency through mandated post-trade reporting to a trade repository. Hong Kong is examining exchange-trading and electronic platform requirements as it pursues derivatives reform. China intends to mandate electronic trading of RMB FX forwards, RMB forward swaps and RMB currency swaps on trading platforms by the end of 2012.
Foreign Boards of Trade
The Dodd-Frank Act broadened the CFTC’s oversight to include authority to register foreign boards of trade (FBOTs) providing direct access to U.S. traders. To become registered, FBOTs must be subject to regulatory oversight that is comprehensive and comparable to U.S. oversight. This new authority enhances the Commission's ability to ensure that U.S. traders cannot avoid essential market protections by trading contracts on FBOTs that are linked with U.S. contracts.
Access to Data
The Dodd-Frank Act includes a provision that generally requires domestic and foreign authorities, in certain circumstances, to provide written agreements to indemnify SEC- and CFTC-registered trade repositories, as well as the SEC and CFTC, for certain litigation expenses as a condition to obtaining data directly from the trade repository regarding swaps and security-based swaps. In addition, the trade repository must notify the SEC or CFTC upon receipt of an information request from a domestic or foreign authority.
After having consulted with staff, SEC Chairman Shapiro and I wrote to European Commissioner Barnier to indicate our belief that the indemnification and notice requirements need not apply to requests for information from foreign regulators in at least two circumstances.
First, the indemnification and notice requirements need not apply when a trade repository is registered with the SEC or CFTC, is registered in a foreign jurisdiction and the foreign regulator, acting within the scope of its jurisdiction, seeks information directly from the trade repository. In such dual-registration cases, we acknowledged our belief that the Dodd-Frank Act's indemnification and notice requirements need not apply, provided that applicable statutory confidentiality provisions are met. Our staff is considering this, along with other recommendations, as it prepares final rules for the Commissions' consideration.
Second, as indicated in the SEC's and CFTC's proposed rules regarding trade repositories' duties and core principles, foreign regulators would not be subject to the indemnification and notice requirements if they obtain information that is in the possession of the SEC or CFTC. The SEC and CFTC have statutory authority to share such information with domestic and foreign counterparts and have made extensive use of this authority in the past to share information with our counterparts around the world. Furthermore, separate statutory authority exists to allow the SEC and CFTC to obtain information from a trade repository on behalf of a foreign regulator if that foreign regulator is investigating a possible violation of foreign law.
I anticipate that the CFTC staff will make additional recommendations for the Commission’s consideration to facilitate regulators’ access to information necessary for regulatory, supervisory and enforcement purposes.
Rule-Writing Process
The CFTC is working deliberatively, efficiently and transparently to write rules to implement the Dodd-Frank Act. The Commission on Tuesday scheduled public meetings in July, August and September to begin considering final rules under Dodd-Frank. We envision having more meetings throughout the fall to take up final rules.
The Dodd-Frank Act has a deadline of 360 days after enactment for completion of the bulk of our rulemakings – July 16, 2011. The Dodd-Frank Act and the Commodity Exchange Act (CEA) give the CFTC the flexibility and authority to address the issues relating to the effective dates of Title VII. We are coordinating closely with the SEC on these issues.
The Dodd-Frank Act made many significant changes to the CEA. Section 754 of the Dodd-Frank Act states that Subtitle A of Title VII – the Subtitle that provides for the regulation of swaps – “shall take effect on the later of 360 days after the date of the enactment of this subtitle or, to the extent a provision of this subtitle requires a rulemaking, not less than 60 days after publication of the final rule or regulation implementing such provisions of this subtitle.”
Thus, those provisions that require rulemakings will not go into effect until the CFTC finalizes the respective rules. Furthermore, they will only go into effect based on the phased implementation dates included in the final rules. During Tuesday’s public Commission meeting, the CFTC released a list of the provisions of the swaps subtitle that require rulemakings.
Unless otherwise provided, those provisions of Title VII that do not require rulemaking will take effect on July 16. The Commission on Tuesday voted to issue a proposed order that would provide relief until December 31, 2011, or when the definitional rulemakings become effective, whichever is sooner, from certain provisions that would otherwise apply to swaps or swap dealers on July 16. This includes provisions that do not directly rely on a rule to be promulgated, but do refer to terms that must be further defined by the CFTC and SEC, such as “swap” and “swap dealer.”
The order proposed by the Commission also would provide relief through no later than December 31, 2011, from certain CEA requirements that may result from the repeal, effective on July 16, 2011, of some of sections 2(d), 2(e), 2(g), 2(h) and 5d.
The proposed order will be open for public comment for 14 days after it is published in the Federal Register. We intend to finalize an order regarding relief from the relevant Dodd-Frank provisions before July 16, 2011.
Conclusion
Though two years have passed, we cannot forget that the 2008 financial crisis was very real. Effective reform cannot be accomplished by one nation alone. It will require a comprehensive, international response. With the significant majority of the worldwide swaps market located in the U.S. and Europe, the effectiveness of reform depends on our ability to cooperate and find general consensus on this much needed regulation.
Thank you, and I’d be happy to take questions.
June 16, 2011
Good morning Chairman Bachus, Ranking Member Frank and members of the Committee. I thank you for inviting me to today’s hearing on the international context of financial regulatory reform. I also thank my fellow Commissioners and CFTC staff for their hard work and commitment on implementing the legislation.
I am pleased to testify alongside my fellow regulators.
Global Crisis
It has now been more than two years since the financial crisis, when both the financial system and the financial regulatory system failed. So many people – not just in the United States, but throughout the world – who never had any connection to derivatives or exotic financial contracts had their lives hurt by the risks taken by financial actors. The effects of the crisis remain. All over the world, we still have high unemployment, homes that are worth less than their mortgages and pension funds that have not regained the value they had before the crisis. We still have significant uncertainty in the financial system.
Though the crisis had many causes, it is clear that the swaps market played a central role. Swaps added leverage to the financial system with more risk being backed up by less capital. They contributed, particularly through credit default swaps, to the bubble in the housing market and helped to accelerate the financial crisis. They contributed to a system where large financial institutions were thought to be not only too big to fail, but too interconnected to fail. Swaps – initially developed to help manage and lower risk – actually concentrated and heightened risk in the economy and to the public.
At the conclusion of the September 2009 G-20 summit held in Pittsburgh, leaders of 19 nations and the European Union concurred that “[a]ll standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements.”
We now are working across borders to achieve that goal.
Derivatives Markets
Each part of our nation’s economy relies on a well-functioning derivatives marketplace. The derivatives market – including both the historically regulated futures market and the heretofore unregulated swaps market – is essential so that producers, merchants and other end-users can manage their risks and lock in prices for the future. Derivatives help these entities focus on what they know best – innovation, investment and producing goods and services – while finding others in a marketplace willing to bear the uncertain risks of changes in prices or rates.
With notional values of approximately $300 trillion in the United States – that’s more than $20 of swaps for every dollar of goods and services produced in the U.S. economy – and approximately $600 trillion worldwide, derivatives markets must work for the benefit of the public. Members of the public keep their savings with banks and pension funds that use swaps to manage their interest rate risks. The public buys gasoline and groceries from companies that rely upon futures and swaps to hedge their commodity price risks.
That’s why international oversight must ensure that these markets function with integrity, transparency, openness and competition, free from fraud, manipulation and other abuses. Though the CFTC is not a price-setting agency, recent volatility in prices for basic commodities – agricultural and energy – are very real reminders of the need for common sense rules in the derivatives markets.
International Coordination
To address changes in the derivatives markets as well as the real weaknesses in swaps market oversight exposed by the financial crisis, the CFTC is working to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act’s derivatives oversight reforms. Our international counterparts also are working to implement reform.
Japan has acted and is now working to implement its reforms. In September of last year, the European Commission (E.C.) released its swaps proposal. The European Council and the European Parliament are now considering the proposal. Asian nations, as well as Canada, also are working on their reform packages.
As we work to implement the derivatives reforms in the Dodd-Frank Act, we are actively coordinating with international regulators to promote robust and consistent standards and avoid conflicting requirements in swaps oversight. The Commission participates in numerous international working groups regarding swaps, including the International Organization of Securities Commissions Task Force on OTC Derivatives, which the CFTC co-chairs with the Securities and Exchange Commission (SEC). The CFTC, SEC, European Commission and European Securities Market Authority are intensifying discussions through a technical working group.
As we do with domestic regulators, we are sharing many of our memos, term sheets and draft work product with international regulators. We have been consulting directly and sharing documentation with the European Commission, the European Central Bank, the UK Financial Services Authority, the new European Securities and Markets Authority, the Japanese Financial Services authority and regulators in Canada, France, Germany and Switzerland. Two weeks ago, I met with Michel Barnier, the European Commissioner for Internal Market and Services, to discuss ensuring consistency in swaps market regulation.
The Dodd-Frank Act recognizes that the swaps market is global and interconnected. It gives the CFTC the flexibility to recognize foreign regulatory frameworks that are comprehensive and comparable to U.S. oversight of the swaps markets in certain areas. In addition, we have a long history of recognition regarding foreign participants that are comparably regulated by a home country regulator. The CFTC enters into arrangements with our international counterparts for access to information and cooperative oversight. We have signed memoranda of understanding with regulators in Europe, North America and Asia.
Furthermore, Section 722(d) of the Dodd-Frank Act states that the provisions of the Act relating to swaps shall not apply to activities outside the U.S. unless those activities have “a direct and significant connection with activities in, or effect on, commerce” of the U.S. We are developing a plan for application of 722(d) and expect to receive public input on that plan.
I will highlight a few broad areas where both regulators in the U.S. and regulators abroad are implementing swaps oversight reform.
Broadening the Scope
Foremost, the Dodd-Frank Act broadened the scope of oversight. The CFTC and the SEC will, for the first time, have oversight of the swaps and security-based swaps markets. The CFTC’s remit is growing from a marketplace that has a notional value of approximately $40 trillion to one with a notional value of approximately $300 trillion.
Similar to the Dodd-Frank Act, the European Commission’s proposal covers the entire product suite, including interest rate swaps, currency swaps, commodity swaps, equity swaps and credit default swaps. It is important that all standardized swaps are subject to mandatory central clearing. We are working with our counterparts in Europe to make sure that all swaps, whether bilateral or traded on platforms, are subject to such mandatory clearing.
Centralized Clearing
Another key reform of the Dodd-Frank Act is to lower interconnectedness in the swaps markets by requiring standardized swaps between financial institutions to be brought to central clearing. This interconnectedness was, in part, the reason for the $180 billion bailout of AIG.
Clearing is another area where the Dodd-Frank Act and the E.C.’s proposal generally are consistent. In both cases, financial entities, such as swap dealers, hedge funds and insurance companies, will be required to use clearinghouses when entering into standardized swap transactions with other financial entities. Non-financial end-users that are using swaps to hedge or mitigate commercial risk, however, will be able to choose whether or not to bring their swaps to clearinghouses.
Capital and Margin
The Dodd-Frank Act includes both capital and margin requirements for swap dealers to lower risk to the economy. Capital requirements, usually computed quarterly, help protect the public by lowering the risk of a dealer’s failure. Margin requirements, usually paid daily, help protect dealers and their counterparties in volatile markets or if either of them defaults. Both are important tools to lower risk in the swaps markets.
The Dodd-Frank Act authorizes bank regulators, the CFTC and the SEC to set both capital and margin “to offset the greater risk to the swap dealer or major swap participant and the financial system arising from the use of swaps that are not cleared.”
In Europe, Basel III includes capital requirements for swap dealers. The E.C.’s swaps proposal includes margin requirements for uncleared swaps to lower the risk that a dealer’s failure could cascade through its counterparties.
Data Reporting
The Dodd-Frank Act includes robust recordkeeping and reporting requirements for all swaps transactions. It is important that all swaps – both on-exchange and off – be reported to data repositories so that regulators can have a window into the risks posed in the system and can police the markets for fraud, manipulation and other abuses.
There is broad international consensus on the need for data reporting on swaps transactions. The E.C. proposal includes similar requirements to the Dodd-Frank Act’s requirements. Regulators in Japan, Hong Kong and China also have indicated the need for reporting of swaps data.
Business Conduct Standards
The Dodd-Frank Act explicitly authorizes regulators to write business conduct standards to lower risk and promote market integrity. The E.C. proposal addresses similar protections through what it calls “risk mitigation techniques.” This includes documentation, confirmation and portfolio reconciliation requirements, which are important features to lower risk. Further, the Dodd-Frank Act provides regulators with authority to write business conduct rules to protect against fraud, manipulation and other abuses.
Promoting Transparency
In the U.S., the Dodd-Frank Act brings transparency to the derivatives marketplace. Economists and policymakers for decades have recognized that market transparency benefits the public.
The more transparent a marketplace is, the more liquid it is, the more competitive it is and the lower the costs for hedgers, borrowers and their customers.
The Dodd-Frank Act brings transparency in each of the three phases of a transaction.
First, it brings pre-trade transparency by requiring standardized swaps – those that are cleared, made available for trading and not blocks – to be traded on exchanges or swap execution facilities.
Second, it brings real-time post-trade transparency to the swaps markets. This provides all market participants with important pricing information as they consider their investments and whether to lower their risk through similar transactions.
Third, it brings transparency to swaps over the lifetime of the contracts. If the contract is cleared, the clearinghouse will be required to publicly disclose the pricing of the swap. If the contract is bilateral, swap dealers will be required to share mid-market pricing with their counterparties.
The Dodd-Frank Act also includes robust recordkeeping and reporting requirements for all swaps transactions so that regulators can have a window into the risks posed in the system and can police the markets for fraud, manipulation and other abuses.
In Europe, the E.C. is considering revisions to its existing Markets in Financial Instruments Directive (MiFID), which includes a trade execution requirement and the creation of a report with aggregate data on the markets similar to the CFTC’s Commitments of Traders reports.
Furthermore, in February 2011, IOSCO issued a report on trading that included eight characteristics that trading platforms should have. Many of the IOSCO members participating in the report indicated a belief that added benefits are achieved through multi-dealer trading platforms. The IOSCO report concluded that, beyond the added benefits of pre-trade transparency, trading helps mitigate systemic risk and protect against market abuse.
Japan’s swaps reform promotes transparency through mandated post-trade reporting to a trade repository. Hong Kong is examining exchange-trading and electronic platform requirements as it pursues derivatives reform. China intends to mandate electronic trading of RMB FX forwards, RMB forward swaps and RMB currency swaps on trading platforms by the end of 2012.
Foreign Boards of Trade
The Dodd-Frank Act broadened the CFTC’s oversight to include authority to register foreign boards of trade (FBOTs) providing direct access to U.S. traders. To become registered, FBOTs must be subject to regulatory oversight that is comprehensive and comparable to U.S. oversight. This new authority enhances the Commission's ability to ensure that U.S. traders cannot avoid essential market protections by trading contracts on FBOTs that are linked with U.S. contracts.
Access to Data
The Dodd-Frank Act includes a provision that generally requires domestic and foreign authorities, in certain circumstances, to provide written agreements to indemnify SEC- and CFTC-registered trade repositories, as well as the SEC and CFTC, for certain litigation expenses as a condition to obtaining data directly from the trade repository regarding swaps and security-based swaps. In addition, the trade repository must notify the SEC or CFTC upon receipt of an information request from a domestic or foreign authority.
After having consulted with staff, SEC Chairman Shapiro and I wrote to European Commissioner Barnier to indicate our belief that the indemnification and notice requirements need not apply to requests for information from foreign regulators in at least two circumstances.
First, the indemnification and notice requirements need not apply when a trade repository is registered with the SEC or CFTC, is registered in a foreign jurisdiction and the foreign regulator, acting within the scope of its jurisdiction, seeks information directly from the trade repository. In such dual-registration cases, we acknowledged our belief that the Dodd-Frank Act's indemnification and notice requirements need not apply, provided that applicable statutory confidentiality provisions are met. Our staff is considering this, along with other recommendations, as it prepares final rules for the Commissions' consideration.
Second, as indicated in the SEC's and CFTC's proposed rules regarding trade repositories' duties and core principles, foreign regulators would not be subject to the indemnification and notice requirements if they obtain information that is in the possession of the SEC or CFTC. The SEC and CFTC have statutory authority to share such information with domestic and foreign counterparts and have made extensive use of this authority in the past to share information with our counterparts around the world. Furthermore, separate statutory authority exists to allow the SEC and CFTC to obtain information from a trade repository on behalf of a foreign regulator if that foreign regulator is investigating a possible violation of foreign law.
I anticipate that the CFTC staff will make additional recommendations for the Commission’s consideration to facilitate regulators’ access to information necessary for regulatory, supervisory and enforcement purposes.
Rule-Writing Process
The CFTC is working deliberatively, efficiently and transparently to write rules to implement the Dodd-Frank Act. The Commission on Tuesday scheduled public meetings in July, August and September to begin considering final rules under Dodd-Frank. We envision having more meetings throughout the fall to take up final rules.
The Dodd-Frank Act has a deadline of 360 days after enactment for completion of the bulk of our rulemakings – July 16, 2011. The Dodd-Frank Act and the Commodity Exchange Act (CEA) give the CFTC the flexibility and authority to address the issues relating to the effective dates of Title VII. We are coordinating closely with the SEC on these issues.
The Dodd-Frank Act made many significant changes to the CEA. Section 754 of the Dodd-Frank Act states that Subtitle A of Title VII – the Subtitle that provides for the regulation of swaps – “shall take effect on the later of 360 days after the date of the enactment of this subtitle or, to the extent a provision of this subtitle requires a rulemaking, not less than 60 days after publication of the final rule or regulation implementing such provisions of this subtitle.”
Thus, those provisions that require rulemakings will not go into effect until the CFTC finalizes the respective rules. Furthermore, they will only go into effect based on the phased implementation dates included in the final rules. During Tuesday’s public Commission meeting, the CFTC released a list of the provisions of the swaps subtitle that require rulemakings.
Unless otherwise provided, those provisions of Title VII that do not require rulemaking will take effect on July 16. The Commission on Tuesday voted to issue a proposed order that would provide relief until December 31, 2011, or when the definitional rulemakings become effective, whichever is sooner, from certain provisions that would otherwise apply to swaps or swap dealers on July 16. This includes provisions that do not directly rely on a rule to be promulgated, but do refer to terms that must be further defined by the CFTC and SEC, such as “swap” and “swap dealer.”
The order proposed by the Commission also would provide relief through no later than December 31, 2011, from certain CEA requirements that may result from the repeal, effective on July 16, 2011, of some of sections 2(d), 2(e), 2(g), 2(h) and 5d.
The proposed order will be open for public comment for 14 days after it is published in the Federal Register. We intend to finalize an order regarding relief from the relevant Dodd-Frank provisions before July 16, 2011.
Conclusion
Though two years have passed, we cannot forget that the 2008 financial crisis was very real. Effective reform cannot be accomplished by one nation alone. It will require a comprehensive, international response. With the significant majority of the worldwide swaps market located in the U.S. and Europe, the effectiveness of reform depends on our ability to cooperate and find general consensus on this much needed regulation.
Thank you, and I’d be happy to take questions.
SEC CHAIRMAN TESTIFIES ON FINANCIAL REFORM AND INTERNATIONAL
RAMIFICATIONS U.S. Securities and Exchange
Below is a speech given by SEC Chairman Mary L. Schapiro before the House Committee on Financial Services. The following is an excerpt from the SEC website:
“June 16, 2011
Chairman Bachus, Ranking Member Frank, and members of the Committee:
Thank you for the opportunity to testify today on behalf of the Securities and Exchange Commission (“SEC”) regarding the international implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” or “Act”).
The Dodd-Frank Act establishes a host of new reforms that will have implications for U.S. companies that compete internationally and the U.S. investors who own those companies. My testimony today will outline some of these implications, as well as the SEC’s attempts to facilitate coordination and limit regulatory arbitrage, both domestically and internationally. In particular, I will discuss the international implications of the Dodd-Frank Act for regulation of over-the-counter (“OTC”) derivatives and foreign investor adviser registration. I also will provide a brief update on the status of international accounting convergence.
OTC Derivatives
The OTC derivatives marketplace has grown dramatically over the past three decades to become enormous and truly international. Since the early 1980s, when the first swap agreements were negotiated, the global notional value of this marketplace has grown to just over $600 trillion.1 However, OTC derivatives were largely excluded from the financial regulatory framework by the Commodity Futures Modernization Act of 2000.
Title VII of the Dodd-Frank Act would bring this market under the regulatory umbrella and requires that the SEC and Commodity Futures Trading Commission (“CFTC”) write rules relating to security-based swaps and swaps that address, among other things, mandatory clearing, the operation of execution facilities and data repositories, capital and margin requirements and business conduct standards for dealers and major participants, and regulatory access to and public transparency for transaction information.
This series of rulemakings is designed to improve transparency and facilitate the centralized clearing of swaps and security-based swaps, helping, among other things, to improve oversight and reduce counterparty risk. It also will increase disclosure regarding swap and security-based swap transactions and help to mitigate conflicts of interest involving swaps and security-based swaps. By promoting transparency, efficiency and stability, this framework should help foster a more nimble and competitive market.
Because the OTC derivative marketplace already exists as a functioning, global market with limited oversight or regulation, international coordination is very important to seek to limit creating opportunities for cross-border regulatory arbitrage and competitive disadvantages, and to address unnecessarily duplicative and conflicting regulation, as well as, for achieving the goals of reform: reducing the systemic risks, increasing the transparency and improving the integrity of the OTC derivatives marketplace, while being mindful of the potential effects on efficiency and liquidity.
Pittsburgh G20 Communiqué
While the U.S. has been a leader in this important area, significant international consensus exists around core components of OTC derivatives reform. For example, in September 2009, the G20 Leaders agreed that:
“[a]ll standardized OTC derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest,”
“OTC derivatives contracts should be reported to trade repositories,” and
“[n]on-centrally cleared contracts should be subject to higher capital requirements.”
The G20 deadline contemplates that every G20 country will have completed the legislation, rulemaking and implementation of these reforms by the 2012 deadline. While progress is being made internationally, other jurisdictions lag behind our efforts here. Apart from the United States, only Japan has enacted OTC derivatives reform legislation since the September 2009 G20 Communiqué, and its legislation only covers clearing and reporting, not mandatory trading. In the European Union, legislation is currently being considered that would establish criteria for the mandatory clearing of eligible OTC derivatives contracts, rules on risk mitigation for OTC derivatives contracts that are not centrally cleared, reporting obligations to, and registration requirements for, trade repositories, and organizational requirements for central counterparties. The proposed legislation is expected to be enacted before year-end 2011, with draft implementing regulations to be proposed to the European Commission by the market regulator by the end of June 2012, at the earliest. With regard to mandatory trading and post-trade reporting, the European Commission published a consultative paper in December 2010 on the issue of moving OTC derivatives trading to exchanges and electronic platforms and establishing post-trade requirements. A legislative proposal in this area has yet to be released.
Although U.S. action on OTC derivatives gives us an opportunity to shape the OTC derivatives regulatory landscape, we also face challenges in negotiating with other regulators, as they have limited scope to commit to regulatory coordination before their own legislative and regulatory frameworks have been established.
Ongoing Regulatory Coordination
Domestically, the SEC is working closely with the CFTC, the Federal Reserve Board, and other federal prudential regulators, as required by the Dodd-Frank Act, to develop a coordinated approach to implementing the statutory provisions of Title VII to the extent practicable, while recognizing relevant differences in products, entities, and markets. Working closely domestically also helps our efforts internationally.
Similarly, the Dodd-Frank Act specifically requires the SEC, the CFTC, and the prudential regulators to “consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards” with respect to the regulation of OTC derivatives in order to promote consistent global regulation.
Accordingly, the SEC has been extremely active in bilateral and multilateral discussions with regulators at home and abroad. We have been engaged with international securities and market regulators and other bodies, both through informal conversations and more formally through participation in various international task forces and working groups, to discuss issues surrounding the regulation of OTC derivatives, thereby encouraging coordination and limiting opportunities for regulatory arbitrage.
SEC staff has encouraged international securities regulators that are contemplating OTC derivatives market reforms to use the Dodd-Frank Act and its regulations as a model for developing robust and complementary regulatory regimes. The SEC is continuing to actively coordinate with our counterparts in other jurisdictions to foster the development of common frameworks and, in that way, avoid the potential for market participants to engage in regulatory arbitrage. Such efforts include our active involvement in:
Financial Stability Board Working Group on OTC Derivatives Regulation (“FSB Working Group”): In April 2010, at the initiative of the FSB, a working group led by representatives from the Committee on Payment and Settlement Systems (“CPSS”), the International Organization of Securities Commissions (“IOSCO”), and the European Commission was formed to make recommendations on the implementation of the G20 Leaders’ September 2009 commitments. The SEC serves as one of the co-chairs of the FSB Working Group on IOSCO’s behalf. The FSB Working Group is comprised of international standard setters and authorities responsible for translating the G20 Leaders’ commitments into standards and implementing regulation.
IOSCO Task Force on OTC Derivatives Regulation (“IOSCO Task Force”): The IOSCO Task Force was formed in October 2010 by the Technical Committee of IOSCO in order to coordinate international securities and futures regulators’ efforts to work together in the development of supervisory and oversight structures related to the OTC derivatives markets. The SEC is one of the four co-chairs of the IOSCO Task Force. The IOSCO Task Force seeks to: (1) develop consistent international standards related to OTC derivatives regulation in the areas of clearing, trading, trade data collection and reporting, and the oversight of certain market participants; (2) coordinate other international initiatives relating to OTC derivatives regulation, including addressing certain recommendations made by the FSB Working Group; and (3) serve as a centralized group within IOSCO through which IOSCO members can consult and coordinate generally on issues relating to OTC derivatives regulation.
CPSS/IOSCO: The CPSS/IOSCO fora (which cover various topics, including principles for financial market infrastructures (e.g., clearinghouses), are joint endeavors through which CPSS, as an organization for central bankers, and IOSCO, as an international policy forum for securities regulators, work together to address issues of concern to both prudential and market regulatory authorities.
Regulatory Divergence and Competitiveness
The SEC also is charged with protecting U.S. investors and reducing systemic risk in the security-based swaps markets, and in doing so we consider the potential impact on the global competitiveness of U.S. companies. U.S. markets have been global leaders in part because of a legal framework that promotes firms and markets that are a benchmark for strength, resilience and transparency.
To this end, we have been carefully considering the potential consequences of certain provisions of Title VII and our proposed rulemaking for domestic and foreign market participants – in particular the impact on the ability of U.S. market participants to compete effectively with foreign market participants that may not be subject to the Dodd-Frank Act. Our goal is to establish a framework that meets the requirements and objectives established by the Congress, while fostering, to the maximum extent possible, a fair and level playing field for all market participants.
One area where these issues arise acutely is in the differing margin standards for U.S. and foreign market participants, where U.S. regulators seek strong standards to maximize safety and soundness, but U.S. firms are concerned that these rules could place their overseas operations at a competitive disadvantage to foreign-owned firms that meet different standards. To address these and other issues, U.S. regulators are working closely with foreign regulators to establish similar standards that will reduce risk more broadly and address competitiveness concerns.
Process
Rather than addressing the international implications of Title VII of the Dodd-Frank Act piecemeal, we are considering addressing the relevant international issues holistically in a single proposal. Such a release would give investors, market participants, foreign regulators, and other interested parties an opportunity to consider our proposed approach to the registration and regulation of foreign entities engaged in cross-border transactions involving the U.S. as an integrated whole. This approach should generate thoughtful and constructive comments for us to consider regarding the application of Title VII to cross-border transactions.
In the meantime, in considering international jurisdictional and harmonization issues in our implementation framework, we continue to welcome input from interested parties, and we look forward to continued discussions about the most effective means of providing necessary regulation without being unduly burdensome to market participants or their competitiveness in the global markets.
Implementation Challenges Generally
Part of balancing regulatory concerns with competitiveness concerns also involves establishing an implementation process for derivatives regulation that permits market participants sufficient time to establish systems and procedures in order to comply with new regulatory requirements without imposing undue implementation burdens and yet does not unnecessarily delay bringing this market under the regulatory umbrella. This is particularly a challenge when imposing a comprehensive regulatory regime on existing markets, particularly ones that until now have been largely unregulated.
We recognize that there are costs and benefits associated with compliance, and we have been keeping these costs and benefits in mind as we have moved forward in proposing rules implementing Title VII. We have requested extensive comment on the costs and benefits associated with the SEC’s proposed rulemakings, and have been engaged in many discussions with market participants, as well as domestic and foreign regulators, regarding such costs and benefits.
To this end, we have been working with our fellow regulators and with market participants to craft rules and establish expeditious implementation timeframes that are reasonable for the various rulemakings, and are reviewing what steps market participants will need to take in order to comply with our proposed rules. These discussions are vital to establishing an implementation timeline that is workable. We also recognize the importance of obtaining input on an implementation timeline for Title VII.
After proposing all of the key rules under Title VII, we intend to consider seeking public comment on a detailed implementation plan that will permit a roll-out of the new securities-based swap requirements in an efficient manner, while minimizing unnecessary disruption and costs to the markets. Let me assure you that the implementation plan is not a mechanism for delay. Instead is should help facilitate the important and necessary reform of the OTC derivatives market.
Steps to Address Effective Date of Title VII
We also have announced that we intend to take a series of actions in the coming weeks to clarify the requirements that will apply to security-based swap transactions as of July 16 – the one-year effective date of Title VII of the Dodd-Frank Act – and provide appropriate temporary relief. Specifically, we intend to:
provide guidance regarding which provisions in Title VII governing security-based swaps become operable as of the effective date and provide temporary relief from several of these provisions;
provide guidance regarding – and where appropriate, temporary relief from – the various pre-Dodd-Frank provisions that would otherwise apply to security-based swaps on July 16;
take other actions to address the effective date, including extending certain existing temporary rules and relief to continue to facilitate the clearing of certain credit default swaps by clearing agencies functioning as central counterparties.
We also have proposed rules that would exempt transactions by clearing agencies in security-based swaps that they issue from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as exempt these security-based swaps from Exchange Act registration requirements and from the provisions of the Trust Indenture Act, provided certain conditions are met.
Volcker Rule
Section 619 of the Dodd-Frank Act, often known as the Volcker Rule, may also have international implications. Under the Volcker Rule, banks and bank holding companies and their affiliates as well as the U.S. operations of foreign banks and foreign bank holding companies and their affiliates, including their affiliated broker-dealers (collectively defined as “banking entities” in the Dodd-Frank Act), are generally prohibited from engaging in proprietary trading or sponsoring or investing in a hedge fund or private equity fund. The Volcker Rule includes certain exceptions for activities such as market-making-related activities, risk-mitigating hedging, underwriting, and trading on behalf of customers. Otherwise-permitted activities are impermissible if they involve material conflicts of interest, high-risk assets or trading strategies, or threats to the safety and soundness of the banking entity or U.S. financial stability.
In January, as required by the Dodd-Frank Act, the Financial Stability Oversight Council (“FSOC”) issued a study on the Volcker Rule pursuant to requirements under the Dodd-Frank Act. The study was published on January 18, 2011. The FSOC study recommended a supervisory framework for implementing the prohibition on proprietary trading consisting of a programmatic compliance regime (e.g., policies and procedures, internal controls, recordkeeping and reporting, etc.), metrics, supervisory review and oversight, and enforcement procedures for violations. For the restrictions on proprietary trading, the study recognizes the close relationship between impermissible proprietary trading and other permitted activities (for example, whether the position was taken in anticipation of customer demand or for speculative purposes). The recommended supervisory framework seeks to leverage industry compliance efforts involving data review and metrics analysis with examination and testing by the SEC and other financial regulatory agencies to enforce compliance.
Where a banking entity is permitted to invest in a hedge fund or private equity fund to facilitate customer-related business under the Volcker Rule, the study provided that agencies should consider requirements for banking entities to disclose the nature and amount of any such investment. The FSOC study also sets forth various methods that agencies may use to define “customers” for purposes of the “organize/offer” exception, factors to consider in determining the scope of funds that will be included in the definition of “hedge fund” and “private equity fund,” and considerations regarding the calculation of a de minimis investment, among other things.
The SEC is required to consider the FSOC’s study and coordinate and consult with the federal banking agencies and the CFTC in implementing the Volcker Rule with respect to any entity for which the SEC is the primary financial regulatory agency. The SEC is the primary regulator for registered broker-dealers, registered investment advisers, registered security-based swap dealers, and major security-based swap participants that are affiliates of insured depository institutions.
We are still considering rulemaking regarding the Volcker Rule, and we have been in extensive discussions with other regulators about how to address the various issues raised by the Volcker Rule. We will be seeking extensive comment on the issues of global competitiveness to the extent we can address them in any proposed rulemaking regarding the Volcker Rule.
Global Accounting Standards
Accounting and financial reporting standards are essential to efficient allocation of capital by investors everywhere in the world. Although the Dodd-Frank Act does not specifically address the issue, the SEC is continuing its work on this long standing and important issue. Our primary consideration is the best interests of U.S. investors.
The SEC has long promoted a single set of high-quality globally accepted accounting standards. This position advances the dual goals of improving financial reporting within the United States and reducing country-by-country disparity in financial reporting. As evidenced by the recent economic crisis, the activities and interests of investors, companies, and markets are increasingly global.
In pursuit of this goal, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) have been prioritizing projects most in need of improved global standards, including revenue recognition, leases, financial instruments, and insurance. Their efforts have been marked by rigorous outreach and field-testing. These tasks are important elements of due process and critical to the quality of any globally-accepted accounting standards.
As the Boards move into the phase of final deliberations on some of the highest priority projects, we are encouraging them not only to consider the results of the outreach and field-testing, but to evaluate carefully the feedback and extensive comments received on the proposals as well.
Last year, the SEC published a statement providing an update regarding our consideration of whether and how to incorporate IFRS into the financial reporting system for U.S. issuers, including the SEC’s continued support for the convergence of U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”). We will continue to consider the ongoing work of the FASB and the IASB to develop and improve financial accounting standards, including its implications with respect to the SEC’s ongoing consideration of the potential incorporation of IFRS for U.S. issuers.
In response to the broad public feedback the Commission received on earlier efforts in this area, the SEC determined that a comprehensive analysis was necessary to lay out transparently the work that must be done to support consideration of incorporating IFRS, including the scope, timeframe, and methodology for any such transition. We asked our Office of the Chief Accountant, with consultation from other SEC Divisions and Offices, to carry out the work plan.
Specifically, the principal areas of the work plan include:
the sufficiency of IFRS’ development and application for the U.S. domestic reporting system;
the independence of IFRS standard-setting process for the benefit of investors;
investor understanding and education regarding IFRS;
examination of the U.S. regulatory environment that would be affected by a change in accounting standards;
the impact on issuers, both large and small; and
human capital readiness.
The first two areas consider characteristics of IFRS and its standard setting that would be the most relevant to a future determination by the Commission regarding whether to incorporate IFRS into the financial reporting system for U.S. issuers. The remaining four areas relate to transitional considerations that will enable the staff to better evaluate the scope of, timing of, and approach to changes that would be necessary to effectively incorporate IFRS into the financial reporting system for U.S. issuers, should the commission determine in the future to do so.
The staff is executing the work plan in an open and deliberative manner. Last October, the staff published a progress report that discussed each section of the work plan and provided an update of the staff’s outreach, research and preliminary observations. Last month, the staff published a paper to provide additional detail and request comment on one potential method of incorporation.
In various forums, the Commission and its staff previously have described and sought public comments on several other possible approaches for progressing toward a single set of high-quality, globally accepted accounting standards. Those approaches include: full adoption of IFRS on a specified date, without any endorsement mechanism; full adoption of IFRS following staged transition over several years, similar to the approach described in the Commission’s Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers; and an option for U.S. issuers to apply IFRS, as described in the Commission’s Concept Release and the Proposed Roadmap. In addition, in response to the requests for comment on these alternative approaches, some commenters have suggested that the U.S. retain U.S. GAAP with continued convergence efforts, with or without a specific mechanism in place to promote alignment with IFRS. A public roundtable is scheduled for early next month to focus on topics such as investor understanding of IFRS, the impact on smaller public companies, and the regulatory implications of incorporating IFRS.
In addition to acknowledging the clear benefits of a single set of high quality, global accounting standards, we also acknowledge the magnitude of the task that will be involved, and the transition time and costs that would be necessary to incorporate IFRS for U.S. issuers. Accordingly, we are carefully considering the potential incorporation of IFRS for U.S. issuers. In addition, the SEC has affirmed its belief that, looking forward, the FASB will continue to play a substantive role in achieving the promise of high-quality global accounting standards, and that role will remain critical.
Other Issues
Indemnification Requirement
The Dodd-Frank Act includes a provision requiring domestic and foreign authorities, in certain circumstances, to provide written agreements to indemnify SEC and CFTC-registered trade repositories (i.e., swap and security-based swap data repositories), as well as the SEC and CFTC, for certain litigation expenses as a condition of obtaining data directly from the trade repository regarding swaps and security-based swaps. In addition, the trade repository must notify the SEC or CFTC upon receipt of an information request from a domestic or foreign authority.
Concerns have been raised about the potential effect of the indemnification and notice provisions on the ability of foreign regulators to obtain access to data regarding transactions, positions and market participants active in the derivatives markets. Regulators also must have the ability to verify that trade repositories are complying with their statutory and regulatory obligations.
We understand that in response to the indemnification requirement, European regulators are considering including in their final legislation a reciprocal provision that would prohibit a non-EU trade repository from operating in the EU unless the repository’s home country regulator has agreed to indemnify the repository and EU authorities for any litigation expenses related to the information provided by the repository to the home country regulator. Like most regulators, the SEC is not in a position to enter into an open-ended indemnification agreement.
Given our need for access to data held in trade repositories registered with a foreign authority and in response to European concerns about their regulators’ access to data held in SEC and CFTC-registered trade repositories, Chairman Gensler and I recently provided EU Commissioner Michel Barnier of the European Commission a letter that analyzes the scope of the Dodd-Frank Act’s indemnification provision. The European Commission is expected to finalize its data access provisions later this year.
Foreign Investment Adviser Registration and Reporting.
Title IV of the Dodd-Frank Act repeals an exemption from registration for private investment advisers, which means that many hedge fund and private equity fund advisers will be required to register with the Commission. However, the Act also adds certain exemptions from registration for foreign private advisers, venture capital fund advisers and private fund advisers with less than $150 million in assets under management in the United States.
Next week, the Commission will consider final rules that, among other things, would do the following: (1) clarify the meaning of certain terms included in the foreign private adviser exemption; (2) define “venture capital fund”; (3) implement the exemption for private fund advisers with less than $150 million in assets under management; (4) establish tailored reporting requirements for advisers relying on the venture capital and private fund adviser exemptions; and (5) extend the deadline for previously exempt advisers to come into compliance to the first quarter of 2012. In implementing the new registration requirements and exemptions for foreign advisers provided under the Act, the Commission has sought to protect U.S. investors and the functioning of U.S. markets while minimizing potential conflicts with foreign regulation. These rules are intended to provide certainty to foreign advisers who are eager to determine their registration and compliance requirements under U.S. law.
Staff members also continue to work on analyzing and addressing comments in response to the joint proposal of the Commission and the CFTC for private fund reporting.2 In developing this proposal, the staffs of the Commissions drew heavily on the experience and input of foreign regulators which had conducted or were developing reporting standards for hedge funds. Commission staff are continuing to coordinate with the European Securities and Markets Authority (ESMA), the U.K. Financial Services Authority (FSA) and the International Organization of Securities Commissions (IOSCO) to seek comparability of data and the consistency of reporting requirements. Staff also continue to consult with staff of the other FSOC member agencies.
Conclusion
In conclusion, the Dodd-Frank Act requires the SEC, among other regulators, to conduct a substantial number of rulemakings and studies that, directly or indirectly, may have international implications for U.S. companies and investors seeking to access foreign financial markets. As we proceed with implementation, we look forward to continuing to work closely with Congress, our fellow regulators, and members of the financial and investing public.
Thank you for inviting me to share with you our progress on and plans for implementation. I am happy to respond to your questions.”
It is obvious that more rules and/or the clarification of current rules are needed to keep our financial markets working honestly for the good of investors and the economy however, the wrong rules made by bureaucracies like the SEC could cause a lot of harm to the economy. In regards to international ramifications, the new rules could lead to a great deal of international confusion. Let us hope they get it right.
Below is a speech given by SEC Chairman Mary L. Schapiro before the House Committee on Financial Services. The following is an excerpt from the SEC website:
“June 16, 2011
Chairman Bachus, Ranking Member Frank, and members of the Committee:
Thank you for the opportunity to testify today on behalf of the Securities and Exchange Commission (“SEC”) regarding the international implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” or “Act”).
The Dodd-Frank Act establishes a host of new reforms that will have implications for U.S. companies that compete internationally and the U.S. investors who own those companies. My testimony today will outline some of these implications, as well as the SEC’s attempts to facilitate coordination and limit regulatory arbitrage, both domestically and internationally. In particular, I will discuss the international implications of the Dodd-Frank Act for regulation of over-the-counter (“OTC”) derivatives and foreign investor adviser registration. I also will provide a brief update on the status of international accounting convergence.
OTC Derivatives
The OTC derivatives marketplace has grown dramatically over the past three decades to become enormous and truly international. Since the early 1980s, when the first swap agreements were negotiated, the global notional value of this marketplace has grown to just over $600 trillion.1 However, OTC derivatives were largely excluded from the financial regulatory framework by the Commodity Futures Modernization Act of 2000.
Title VII of the Dodd-Frank Act would bring this market under the regulatory umbrella and requires that the SEC and Commodity Futures Trading Commission (“CFTC”) write rules relating to security-based swaps and swaps that address, among other things, mandatory clearing, the operation of execution facilities and data repositories, capital and margin requirements and business conduct standards for dealers and major participants, and regulatory access to and public transparency for transaction information.
This series of rulemakings is designed to improve transparency and facilitate the centralized clearing of swaps and security-based swaps, helping, among other things, to improve oversight and reduce counterparty risk. It also will increase disclosure regarding swap and security-based swap transactions and help to mitigate conflicts of interest involving swaps and security-based swaps. By promoting transparency, efficiency and stability, this framework should help foster a more nimble and competitive market.
Because the OTC derivative marketplace already exists as a functioning, global market with limited oversight or regulation, international coordination is very important to seek to limit creating opportunities for cross-border regulatory arbitrage and competitive disadvantages, and to address unnecessarily duplicative and conflicting regulation, as well as, for achieving the goals of reform: reducing the systemic risks, increasing the transparency and improving the integrity of the OTC derivatives marketplace, while being mindful of the potential effects on efficiency and liquidity.
Pittsburgh G20 Communiqué
While the U.S. has been a leader in this important area, significant international consensus exists around core components of OTC derivatives reform. For example, in September 2009, the G20 Leaders agreed that:
“[a]ll standardized OTC derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest,”
“OTC derivatives contracts should be reported to trade repositories,” and
“[n]on-centrally cleared contracts should be subject to higher capital requirements.”
The G20 deadline contemplates that every G20 country will have completed the legislation, rulemaking and implementation of these reforms by the 2012 deadline. While progress is being made internationally, other jurisdictions lag behind our efforts here. Apart from the United States, only Japan has enacted OTC derivatives reform legislation since the September 2009 G20 Communiqué, and its legislation only covers clearing and reporting, not mandatory trading. In the European Union, legislation is currently being considered that would establish criteria for the mandatory clearing of eligible OTC derivatives contracts, rules on risk mitigation for OTC derivatives contracts that are not centrally cleared, reporting obligations to, and registration requirements for, trade repositories, and organizational requirements for central counterparties. The proposed legislation is expected to be enacted before year-end 2011, with draft implementing regulations to be proposed to the European Commission by the market regulator by the end of June 2012, at the earliest. With regard to mandatory trading and post-trade reporting, the European Commission published a consultative paper in December 2010 on the issue of moving OTC derivatives trading to exchanges and electronic platforms and establishing post-trade requirements. A legislative proposal in this area has yet to be released.
Although U.S. action on OTC derivatives gives us an opportunity to shape the OTC derivatives regulatory landscape, we also face challenges in negotiating with other regulators, as they have limited scope to commit to regulatory coordination before their own legislative and regulatory frameworks have been established.
Ongoing Regulatory Coordination
Domestically, the SEC is working closely with the CFTC, the Federal Reserve Board, and other federal prudential regulators, as required by the Dodd-Frank Act, to develop a coordinated approach to implementing the statutory provisions of Title VII to the extent practicable, while recognizing relevant differences in products, entities, and markets. Working closely domestically also helps our efforts internationally.
Similarly, the Dodd-Frank Act specifically requires the SEC, the CFTC, and the prudential regulators to “consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards” with respect to the regulation of OTC derivatives in order to promote consistent global regulation.
Accordingly, the SEC has been extremely active in bilateral and multilateral discussions with regulators at home and abroad. We have been engaged with international securities and market regulators and other bodies, both through informal conversations and more formally through participation in various international task forces and working groups, to discuss issues surrounding the regulation of OTC derivatives, thereby encouraging coordination and limiting opportunities for regulatory arbitrage.
SEC staff has encouraged international securities regulators that are contemplating OTC derivatives market reforms to use the Dodd-Frank Act and its regulations as a model for developing robust and complementary regulatory regimes. The SEC is continuing to actively coordinate with our counterparts in other jurisdictions to foster the development of common frameworks and, in that way, avoid the potential for market participants to engage in regulatory arbitrage. Such efforts include our active involvement in:
Financial Stability Board Working Group on OTC Derivatives Regulation (“FSB Working Group”): In April 2010, at the initiative of the FSB, a working group led by representatives from the Committee on Payment and Settlement Systems (“CPSS”), the International Organization of Securities Commissions (“IOSCO”), and the European Commission was formed to make recommendations on the implementation of the G20 Leaders’ September 2009 commitments. The SEC serves as one of the co-chairs of the FSB Working Group on IOSCO’s behalf. The FSB Working Group is comprised of international standard setters and authorities responsible for translating the G20 Leaders’ commitments into standards and implementing regulation.
IOSCO Task Force on OTC Derivatives Regulation (“IOSCO Task Force”): The IOSCO Task Force was formed in October 2010 by the Technical Committee of IOSCO in order to coordinate international securities and futures regulators’ efforts to work together in the development of supervisory and oversight structures related to the OTC derivatives markets. The SEC is one of the four co-chairs of the IOSCO Task Force. The IOSCO Task Force seeks to: (1) develop consistent international standards related to OTC derivatives regulation in the areas of clearing, trading, trade data collection and reporting, and the oversight of certain market participants; (2) coordinate other international initiatives relating to OTC derivatives regulation, including addressing certain recommendations made by the FSB Working Group; and (3) serve as a centralized group within IOSCO through which IOSCO members can consult and coordinate generally on issues relating to OTC derivatives regulation.
CPSS/IOSCO: The CPSS/IOSCO fora (which cover various topics, including principles for financial market infrastructures (e.g., clearinghouses), are joint endeavors through which CPSS, as an organization for central bankers, and IOSCO, as an international policy forum for securities regulators, work together to address issues of concern to both prudential and market regulatory authorities.
Regulatory Divergence and Competitiveness
The SEC also is charged with protecting U.S. investors and reducing systemic risk in the security-based swaps markets, and in doing so we consider the potential impact on the global competitiveness of U.S. companies. U.S. markets have been global leaders in part because of a legal framework that promotes firms and markets that are a benchmark for strength, resilience and transparency.
To this end, we have been carefully considering the potential consequences of certain provisions of Title VII and our proposed rulemaking for domestic and foreign market participants – in particular the impact on the ability of U.S. market participants to compete effectively with foreign market participants that may not be subject to the Dodd-Frank Act. Our goal is to establish a framework that meets the requirements and objectives established by the Congress, while fostering, to the maximum extent possible, a fair and level playing field for all market participants.
One area where these issues arise acutely is in the differing margin standards for U.S. and foreign market participants, where U.S. regulators seek strong standards to maximize safety and soundness, but U.S. firms are concerned that these rules could place their overseas operations at a competitive disadvantage to foreign-owned firms that meet different standards. To address these and other issues, U.S. regulators are working closely with foreign regulators to establish similar standards that will reduce risk more broadly and address competitiveness concerns.
Process
Rather than addressing the international implications of Title VII of the Dodd-Frank Act piecemeal, we are considering addressing the relevant international issues holistically in a single proposal. Such a release would give investors, market participants, foreign regulators, and other interested parties an opportunity to consider our proposed approach to the registration and regulation of foreign entities engaged in cross-border transactions involving the U.S. as an integrated whole. This approach should generate thoughtful and constructive comments for us to consider regarding the application of Title VII to cross-border transactions.
In the meantime, in considering international jurisdictional and harmonization issues in our implementation framework, we continue to welcome input from interested parties, and we look forward to continued discussions about the most effective means of providing necessary regulation without being unduly burdensome to market participants or their competitiveness in the global markets.
Implementation Challenges Generally
Part of balancing regulatory concerns with competitiveness concerns also involves establishing an implementation process for derivatives regulation that permits market participants sufficient time to establish systems and procedures in order to comply with new regulatory requirements without imposing undue implementation burdens and yet does not unnecessarily delay bringing this market under the regulatory umbrella. This is particularly a challenge when imposing a comprehensive regulatory regime on existing markets, particularly ones that until now have been largely unregulated.
We recognize that there are costs and benefits associated with compliance, and we have been keeping these costs and benefits in mind as we have moved forward in proposing rules implementing Title VII. We have requested extensive comment on the costs and benefits associated with the SEC’s proposed rulemakings, and have been engaged in many discussions with market participants, as well as domestic and foreign regulators, regarding such costs and benefits.
To this end, we have been working with our fellow regulators and with market participants to craft rules and establish expeditious implementation timeframes that are reasonable for the various rulemakings, and are reviewing what steps market participants will need to take in order to comply with our proposed rules. These discussions are vital to establishing an implementation timeline that is workable. We also recognize the importance of obtaining input on an implementation timeline for Title VII.
After proposing all of the key rules under Title VII, we intend to consider seeking public comment on a detailed implementation plan that will permit a roll-out of the new securities-based swap requirements in an efficient manner, while minimizing unnecessary disruption and costs to the markets. Let me assure you that the implementation plan is not a mechanism for delay. Instead is should help facilitate the important and necessary reform of the OTC derivatives market.
Steps to Address Effective Date of Title VII
We also have announced that we intend to take a series of actions in the coming weeks to clarify the requirements that will apply to security-based swap transactions as of July 16 – the one-year effective date of Title VII of the Dodd-Frank Act – and provide appropriate temporary relief. Specifically, we intend to:
provide guidance regarding which provisions in Title VII governing security-based swaps become operable as of the effective date and provide temporary relief from several of these provisions;
provide guidance regarding – and where appropriate, temporary relief from – the various pre-Dodd-Frank provisions that would otherwise apply to security-based swaps on July 16;
take other actions to address the effective date, including extending certain existing temporary rules and relief to continue to facilitate the clearing of certain credit default swaps by clearing agencies functioning as central counterparties.
We also have proposed rules that would exempt transactions by clearing agencies in security-based swaps that they issue from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as exempt these security-based swaps from Exchange Act registration requirements and from the provisions of the Trust Indenture Act, provided certain conditions are met.
Volcker Rule
Section 619 of the Dodd-Frank Act, often known as the Volcker Rule, may also have international implications. Under the Volcker Rule, banks and bank holding companies and their affiliates as well as the U.S. operations of foreign banks and foreign bank holding companies and their affiliates, including their affiliated broker-dealers (collectively defined as “banking entities” in the Dodd-Frank Act), are generally prohibited from engaging in proprietary trading or sponsoring or investing in a hedge fund or private equity fund. The Volcker Rule includes certain exceptions for activities such as market-making-related activities, risk-mitigating hedging, underwriting, and trading on behalf of customers. Otherwise-permitted activities are impermissible if they involve material conflicts of interest, high-risk assets or trading strategies, or threats to the safety and soundness of the banking entity or U.S. financial stability.
In January, as required by the Dodd-Frank Act, the Financial Stability Oversight Council (“FSOC”) issued a study on the Volcker Rule pursuant to requirements under the Dodd-Frank Act. The study was published on January 18, 2011. The FSOC study recommended a supervisory framework for implementing the prohibition on proprietary trading consisting of a programmatic compliance regime (e.g., policies and procedures, internal controls, recordkeeping and reporting, etc.), metrics, supervisory review and oversight, and enforcement procedures for violations. For the restrictions on proprietary trading, the study recognizes the close relationship between impermissible proprietary trading and other permitted activities (for example, whether the position was taken in anticipation of customer demand or for speculative purposes). The recommended supervisory framework seeks to leverage industry compliance efforts involving data review and metrics analysis with examination and testing by the SEC and other financial regulatory agencies to enforce compliance.
Where a banking entity is permitted to invest in a hedge fund or private equity fund to facilitate customer-related business under the Volcker Rule, the study provided that agencies should consider requirements for banking entities to disclose the nature and amount of any such investment. The FSOC study also sets forth various methods that agencies may use to define “customers” for purposes of the “organize/offer” exception, factors to consider in determining the scope of funds that will be included in the definition of “hedge fund” and “private equity fund,” and considerations regarding the calculation of a de minimis investment, among other things.
The SEC is required to consider the FSOC’s study and coordinate and consult with the federal banking agencies and the CFTC in implementing the Volcker Rule with respect to any entity for which the SEC is the primary financial regulatory agency. The SEC is the primary regulator for registered broker-dealers, registered investment advisers, registered security-based swap dealers, and major security-based swap participants that are affiliates of insured depository institutions.
We are still considering rulemaking regarding the Volcker Rule, and we have been in extensive discussions with other regulators about how to address the various issues raised by the Volcker Rule. We will be seeking extensive comment on the issues of global competitiveness to the extent we can address them in any proposed rulemaking regarding the Volcker Rule.
Global Accounting Standards
Accounting and financial reporting standards are essential to efficient allocation of capital by investors everywhere in the world. Although the Dodd-Frank Act does not specifically address the issue, the SEC is continuing its work on this long standing and important issue. Our primary consideration is the best interests of U.S. investors.
The SEC has long promoted a single set of high-quality globally accepted accounting standards. This position advances the dual goals of improving financial reporting within the United States and reducing country-by-country disparity in financial reporting. As evidenced by the recent economic crisis, the activities and interests of investors, companies, and markets are increasingly global.
In pursuit of this goal, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) have been prioritizing projects most in need of improved global standards, including revenue recognition, leases, financial instruments, and insurance. Their efforts have been marked by rigorous outreach and field-testing. These tasks are important elements of due process and critical to the quality of any globally-accepted accounting standards.
As the Boards move into the phase of final deliberations on some of the highest priority projects, we are encouraging them not only to consider the results of the outreach and field-testing, but to evaluate carefully the feedback and extensive comments received on the proposals as well.
Last year, the SEC published a statement providing an update regarding our consideration of whether and how to incorporate IFRS into the financial reporting system for U.S. issuers, including the SEC’s continued support for the convergence of U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”). We will continue to consider the ongoing work of the FASB and the IASB to develop and improve financial accounting standards, including its implications with respect to the SEC’s ongoing consideration of the potential incorporation of IFRS for U.S. issuers.
In response to the broad public feedback the Commission received on earlier efforts in this area, the SEC determined that a comprehensive analysis was necessary to lay out transparently the work that must be done to support consideration of incorporating IFRS, including the scope, timeframe, and methodology for any such transition. We asked our Office of the Chief Accountant, with consultation from other SEC Divisions and Offices, to carry out the work plan.
Specifically, the principal areas of the work plan include:
the sufficiency of IFRS’ development and application for the U.S. domestic reporting system;
the independence of IFRS standard-setting process for the benefit of investors;
investor understanding and education regarding IFRS;
examination of the U.S. regulatory environment that would be affected by a change in accounting standards;
the impact on issuers, both large and small; and
human capital readiness.
The first two areas consider characteristics of IFRS and its standard setting that would be the most relevant to a future determination by the Commission regarding whether to incorporate IFRS into the financial reporting system for U.S. issuers. The remaining four areas relate to transitional considerations that will enable the staff to better evaluate the scope of, timing of, and approach to changes that would be necessary to effectively incorporate IFRS into the financial reporting system for U.S. issuers, should the commission determine in the future to do so.
The staff is executing the work plan in an open and deliberative manner. Last October, the staff published a progress report that discussed each section of the work plan and provided an update of the staff’s outreach, research and preliminary observations. Last month, the staff published a paper to provide additional detail and request comment on one potential method of incorporation.
In various forums, the Commission and its staff previously have described and sought public comments on several other possible approaches for progressing toward a single set of high-quality, globally accepted accounting standards. Those approaches include: full adoption of IFRS on a specified date, without any endorsement mechanism; full adoption of IFRS following staged transition over several years, similar to the approach described in the Commission’s Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers; and an option for U.S. issuers to apply IFRS, as described in the Commission’s Concept Release and the Proposed Roadmap. In addition, in response to the requests for comment on these alternative approaches, some commenters have suggested that the U.S. retain U.S. GAAP with continued convergence efforts, with or without a specific mechanism in place to promote alignment with IFRS. A public roundtable is scheduled for early next month to focus on topics such as investor understanding of IFRS, the impact on smaller public companies, and the regulatory implications of incorporating IFRS.
In addition to acknowledging the clear benefits of a single set of high quality, global accounting standards, we also acknowledge the magnitude of the task that will be involved, and the transition time and costs that would be necessary to incorporate IFRS for U.S. issuers. Accordingly, we are carefully considering the potential incorporation of IFRS for U.S. issuers. In addition, the SEC has affirmed its belief that, looking forward, the FASB will continue to play a substantive role in achieving the promise of high-quality global accounting standards, and that role will remain critical.
Other Issues
Indemnification Requirement
The Dodd-Frank Act includes a provision requiring domestic and foreign authorities, in certain circumstances, to provide written agreements to indemnify SEC and CFTC-registered trade repositories (i.e., swap and security-based swap data repositories), as well as the SEC and CFTC, for certain litigation expenses as a condition of obtaining data directly from the trade repository regarding swaps and security-based swaps. In addition, the trade repository must notify the SEC or CFTC upon receipt of an information request from a domestic or foreign authority.
Concerns have been raised about the potential effect of the indemnification and notice provisions on the ability of foreign regulators to obtain access to data regarding transactions, positions and market participants active in the derivatives markets. Regulators also must have the ability to verify that trade repositories are complying with their statutory and regulatory obligations.
We understand that in response to the indemnification requirement, European regulators are considering including in their final legislation a reciprocal provision that would prohibit a non-EU trade repository from operating in the EU unless the repository’s home country regulator has agreed to indemnify the repository and EU authorities for any litigation expenses related to the information provided by the repository to the home country regulator. Like most regulators, the SEC is not in a position to enter into an open-ended indemnification agreement.
Given our need for access to data held in trade repositories registered with a foreign authority and in response to European concerns about their regulators’ access to data held in SEC and CFTC-registered trade repositories, Chairman Gensler and I recently provided EU Commissioner Michel Barnier of the European Commission a letter that analyzes the scope of the Dodd-Frank Act’s indemnification provision. The European Commission is expected to finalize its data access provisions later this year.
Foreign Investment Adviser Registration and Reporting.
Title IV of the Dodd-Frank Act repeals an exemption from registration for private investment advisers, which means that many hedge fund and private equity fund advisers will be required to register with the Commission. However, the Act also adds certain exemptions from registration for foreign private advisers, venture capital fund advisers and private fund advisers with less than $150 million in assets under management in the United States.
Next week, the Commission will consider final rules that, among other things, would do the following: (1) clarify the meaning of certain terms included in the foreign private adviser exemption; (2) define “venture capital fund”; (3) implement the exemption for private fund advisers with less than $150 million in assets under management; (4) establish tailored reporting requirements for advisers relying on the venture capital and private fund adviser exemptions; and (5) extend the deadline for previously exempt advisers to come into compliance to the first quarter of 2012. In implementing the new registration requirements and exemptions for foreign advisers provided under the Act, the Commission has sought to protect U.S. investors and the functioning of U.S. markets while minimizing potential conflicts with foreign regulation. These rules are intended to provide certainty to foreign advisers who are eager to determine their registration and compliance requirements under U.S. law.
Staff members also continue to work on analyzing and addressing comments in response to the joint proposal of the Commission and the CFTC for private fund reporting.2 In developing this proposal, the staffs of the Commissions drew heavily on the experience and input of foreign regulators which had conducted or were developing reporting standards for hedge funds. Commission staff are continuing to coordinate with the European Securities and Markets Authority (ESMA), the U.K. Financial Services Authority (FSA) and the International Organization of Securities Commissions (IOSCO) to seek comparability of data and the consistency of reporting requirements. Staff also continue to consult with staff of the other FSOC member agencies.
Conclusion
In conclusion, the Dodd-Frank Act requires the SEC, among other regulators, to conduct a substantial number of rulemakings and studies that, directly or indirectly, may have international implications for U.S. companies and investors seeking to access foreign financial markets. As we proceed with implementation, we look forward to continuing to work closely with Congress, our fellow regulators, and members of the financial and investing public.
Thank you for inviting me to share with you our progress on and plans for implementation. I am happy to respond to your questions.”
It is obvious that more rules and/or the clarification of current rules are needed to keep our financial markets working honestly for the good of investors and the economy however, the wrong rules made by bureaucracies like the SEC could cause a lot of harm to the economy. In regards to international ramifications, the new rules could lead to a great deal of international confusion. Let us hope they get it right.
Wednesday, June 15, 2011
LUIS AGUILAR SPEAKS
The following speech was made by SEC Commissioner and is an excerpt from the SEC website:
Protecting Investors and Their Assets
by
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
SEC Open Meeting
Washington, D.C.
June 15, 2011
Today’s proposal is designed to significantly enhance the objective oversight of broker-dealer compliance with the applicable financial responsibility rules.1 In particular, today’s proposal enhances oversight of broker-dealers’ custody practices. I view today’s proposal as a necessary companion rule to the rules adopted a year and half ago that addressed the custodial practices at registered investment advisers.
While I supported the adoption of those rules, I noted at the time that those rules did not cover the vast majority of investor assets. And, even though we adopted those rules in the aftermath of the Madoff Ponzi scheme, the rules would not have prevented much of the harm that Madoff did. That’s because, for decades, his firm was registered solely as a broker-dealer, not as an investment adviser.
Broker-dealers hold custody of far more investor assets than investment advisers do. In fact, our staff estimates that the customer securities positions held by just the four largest broker-dealers total several trillion dollars. Today’s proposal will make long-overdue improvements to the oversight of broker-dealer custody.
I support the proposal today, but I am particularly interested to hear from commenters whether the objective to strengthen broker-dealer custodial requirements has been fully achieved. After all, investors must have comfort that assets for which they receive confirmations are assets that exist and are securely held. To have it be otherwise, would be disastrous and unacceptable.
In closing, I want to thank all of our staff for their efforts in crafting the proposal before us today. And, in particular, I want to commend the way you have coordinated efforts among the different offices and divisions that have responsibility for the oversight of broker-dealers to put forward this recommendation to the Commission.
Thank you.
1 The “financial responsibility rules” for broker-dealers are Exchange Act Rule 15c3-1, which governs net capital requirements for broker-dealers; Exchange Act Rule 15c3-3, which sets the requirements for custody of securities and for a special reserve account to protect investor funds; Exchange Act Rule 17a-13, which requires periodic counts of all securities held by a broker-dealer; and the rules of self-regulatory organizations requiring that broker-dealers provide quarterly account statements to customers.
Protecting Investors and Their Assets
by
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
SEC Open Meeting
Washington, D.C.
June 15, 2011
Today’s proposal is designed to significantly enhance the objective oversight of broker-dealer compliance with the applicable financial responsibility rules.1 In particular, today’s proposal enhances oversight of broker-dealers’ custody practices. I view today’s proposal as a necessary companion rule to the rules adopted a year and half ago that addressed the custodial practices at registered investment advisers.
While I supported the adoption of those rules, I noted at the time that those rules did not cover the vast majority of investor assets. And, even though we adopted those rules in the aftermath of the Madoff Ponzi scheme, the rules would not have prevented much of the harm that Madoff did. That’s because, for decades, his firm was registered solely as a broker-dealer, not as an investment adviser.
Broker-dealers hold custody of far more investor assets than investment advisers do. In fact, our staff estimates that the customer securities positions held by just the four largest broker-dealers total several trillion dollars. Today’s proposal will make long-overdue improvements to the oversight of broker-dealer custody.
I support the proposal today, but I am particularly interested to hear from commenters whether the objective to strengthen broker-dealer custodial requirements has been fully achieved. After all, investors must have comfort that assets for which they receive confirmations are assets that exist and are securely held. To have it be otherwise, would be disastrous and unacceptable.
In closing, I want to thank all of our staff for their efforts in crafting the proposal before us today. And, in particular, I want to commend the way you have coordinated efforts among the different offices and divisions that have responsibility for the oversight of broker-dealers to put forward this recommendation to the Commission.
Thank you.
1 The “financial responsibility rules” for broker-dealers are Exchange Act Rule 15c3-1, which governs net capital requirements for broker-dealers; Exchange Act Rule 15c3-3, which sets the requirements for custody of securities and for a special reserve account to protect investor funds; Exchange Act Rule 17a-13, which requires periodic counts of all securities held by a broker-dealer; and the rules of self-regulatory organizations requiring that broker-dealers provide quarterly account statements to customers.
SEC GETS SUMMARY JUDGEMENT AGAINST COMPANY FOR FRAUD
There are so many ponzi scheme cases brought by the SEC that perhaps Ponzi should be made into a criminal business game to compete against the popular legitimate Monopoly Game. The following is an excerpt from the SEC website:
"The Securities and Exchange Commission announced today that on June 6, 2011, the Honorable Dale A. Kimball of the United States District Court for the District of Utah granted the SEC’s motion for summary judgment and entered final judgment against defendants Brian J. Smart of Lehi, Utah, and his company Smart Assets, LLC. The Court found that Smart and his company violated the antifraud provisions of the federal securities laws, and ordered defendants to pay $4.7 million in disgorgement and civil penalties.
The SEC filed this action against the defendants on March 11, 2009, alleging that Smart and his company had engaged in a Ponzi-like scheme in the offer and sale of promissory notes and other securities. The complaint alleged that Smart falsely represented to investors, including senior citizens, that he was providing a conservative, liquid investment opportunity. Instead, according to the complaint, Smart was misappropriating investor funds for his own personal use, investing in illiquid and ill-fated real estate ventures, and using proceeds from new investors to make payments to earlier investors.
On the day this action was filed, the Court granted the SEC’s motion for a temporary restraining order, asset freeze, and other preliminary relief. Subsequently, on August 21, 2009, the Court granted the SEC’s motion for a preliminary injunction against the defendants.
After completion of discovery in this case, the parties moved for summary judgment. In granting the SEC’s motion for summary judgment and entering final judgment, the Court found that Smart and his company misappropriated over $2.05 million from investors through a “systematic program of deception and fraud.” The Court found that Smart targeted elderly investors and that he falsely represented that he would place investor funds in safe, principal guaranteed investments. Instead, the Court found, Smart used investor money to pay personal expenses, to invest in risky real estate ventures and hard money loans, and to pay purported “dividends” to other investors.
The Court’s final judgment against Smart and Smart Assets permanently enjoins the defendants from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5, and orders defendants to pay $2,059,077 in disgorgement, $597,426 in prejudgment interest, and a $2,059,077 civil penalty."
"The Securities and Exchange Commission announced today that on June 6, 2011, the Honorable Dale A. Kimball of the United States District Court for the District of Utah granted the SEC’s motion for summary judgment and entered final judgment against defendants Brian J. Smart of Lehi, Utah, and his company Smart Assets, LLC. The Court found that Smart and his company violated the antifraud provisions of the federal securities laws, and ordered defendants to pay $4.7 million in disgorgement and civil penalties.
The SEC filed this action against the defendants on March 11, 2009, alleging that Smart and his company had engaged in a Ponzi-like scheme in the offer and sale of promissory notes and other securities. The complaint alleged that Smart falsely represented to investors, including senior citizens, that he was providing a conservative, liquid investment opportunity. Instead, according to the complaint, Smart was misappropriating investor funds for his own personal use, investing in illiquid and ill-fated real estate ventures, and using proceeds from new investors to make payments to earlier investors.
On the day this action was filed, the Court granted the SEC’s motion for a temporary restraining order, asset freeze, and other preliminary relief. Subsequently, on August 21, 2009, the Court granted the SEC’s motion for a preliminary injunction against the defendants.
After completion of discovery in this case, the parties moved for summary judgment. In granting the SEC’s motion for summary judgment and entering final judgment, the Court found that Smart and his company misappropriated over $2.05 million from investors through a “systematic program of deception and fraud.” The Court found that Smart targeted elderly investors and that he falsely represented that he would place investor funds in safe, principal guaranteed investments. Instead, the Court found, Smart used investor money to pay personal expenses, to invest in risky real estate ventures and hard money loans, and to pay purported “dividends” to other investors.
The Court’s final judgment against Smart and Smart Assets permanently enjoins the defendants from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5, and orders defendants to pay $2,059,077 in disgorgement, $597,426 in prejudgment interest, and a $2,059,077 civil penalty."
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