FDIC DEPUTY DIRECTOR GEORGE FRENCH SPEAKS TO CONGRESS

The following statement before the Subcommittee on Financial Institutions and Consumer Credit is an excerpt from the FDIC website:

Statement of George French, Deputy Director, Policy, Division of Risk Management Supervision, Federal Deposit Insurance Corporation on Legislative Proposals Regarding Bank Examination Practices, before the Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services, U.S. House of Representatives; 2128 Rayburn House Office Building
July 8, 2011

Chairman Capito, Ranking Member Maloney, and members of the Subcommittee, I appreciate the opportunity to testify on behalf of the Federal Deposit Insurance Corporation on H.R. 1723, the "Common Sense Economic Recovery Act of 2011." My testimony will briefly describe the condition of the industry and the steps that the FDIC and other federal banking agencies have taken to encourage financial institutions to originate and, when necessary, modify or restructure loans to creditworthy borrowers. I will also describe the FDIC's supervisory approach to troubled loans, our concerns about H.R. 1723 and the impact that this proposed legislation may have on banks' financial reporting and capital adequacy.

Condition of FDIC-Insured Institutions

The economic environment for banks and their borrowers is slowly recovering but remains challenging. As a result of continued high unemployment rates and the cumulative effect of substantial multi-year declines in real estate prices, insured banks face weak loan demand and elevated levels of nonperforming assets. As of March 31, 2011, about 12 percent of insured institutions were on the FDIC's "problem bank list." Notwithstanding these trends, the FDIC is cautiously optimistic regarding the current condition and trends in the banking industry. Experience suggests that the sooner banks are able to address the lingering credit quality issues on their books, the faster will be the pace of recovery.

During the first quarter of 2011, FDIC-insured institutions recorded annual net income of $29 billion, the highest level since before the recession, but still well below the all-time highs of the mid-2000s. The main driver of earnings improvement has been steadily reduced provisions for loan losses. This reflects general improvement in asset quality indicators, including declining levels of noncurrent loans and net charge-offs for all major loan types. However, the ratio of noncurrent loans1 to total loans, at 4.7 percent, is still high and remains above the levels seen in the late 1980s and early 1990s. While the reduced provisions for loan losses are encouraging, it is important to note that net operating revenue2 fell by $5.5 billion in the first quarter of 2011 compared to one year ago. Lower revenues, in part, reflect reduced loan balances, which have declined in ten of the past eleven quarters.

Given the lingering effects of the recent recession, loan demand is generally weak. Recent surveys, such as the Federal Reserve Senior Loan Officers' Opinion Survey and the National Federation of Independent Businesses' Survey on Small Business Economic Trends, indicate that borrower demand remains sluggish. FDIC examiners also report numerous comments from bankers about current weak loan demand and difficulties bankers are having finding qualified borrowers.

Despite the economic challenges, community banks, which comprise the vast majority of banks that we supervise, continue to play a vital role in credit creation across the country, especially for small businesses.3 As of March 31, 2011, community banks, which hold only 10.7 percent of industry assets, extended some 38.1 percent of the entire industry's small business loans.

Recent weakness in both residential and commercial property price trends highlight continued concerns. The S&P/Case-Shiller National Housing Index is down 5.1 percent year-over-year through first quarter 2011 and the Moody's/REAL Commercial Property Price Index has decreased by 13.4 percent for the year ending in April 2011. These indexes are down 29.7 percent and 48.9 percent, respectively from their peaks in 2006 and 2007.

These legacy issues have adversely affected the ability of many institutions to grow their lending activity. The primary reasons banks are not lending more is a combination of tightened underwriting standards based on lessons learned from the recent financial crisis and reduced borrower demand. Industry-wide, banks have plenty of capacity to lend; bank balance sheets are more liquid than before the crisis began in 2008 and capital levels continue to increase.

Credit Availability

The FDIC recognizes and supports the vital role of community banks in serving the credit needs of their borrowers and helping restore economic growth in cities, towns, and farming communities across the country. Throughout the real estate and economic downturn, the FDIC has advocated for policies to help community banks and their customers navigate this challenging economy. The FDIC's examiners operate out of our 85 field offices nationwide. They are well-versed in the business of community banks and their local markets, and have a keen awareness of the challenges many of these banks and their customers are facing. There are creditworthy borrowers that need flexibility in the current environment and bank regulators have provided financial institutions with that flexibility to help customers through the downturn.

The FDIC has joined several interagency efforts that encourage banks to originate and restructure loans to creditworthy borrowers. For example, the federal bank regulatory agencies issued the Interagency Statement on Meeting the Needs of Creditworthy Borrowers on November 12, 2008, which encourages banks to prudently make loans available in their markets. In October 30, 2009, the FDIC joined in issuing the Interagency Policy Statement on Prudent Commercial Real Estate Workouts, which encourages banks to restructure loans for commercial real estate mortgage customers experiencing difficulties in making payments. This guidance reinforces long-standing supervisory principles in a manner that recognizes pragmatic actions by lenders and small business borrowers are necessary to weather this difficult economic period. The agencies also issued the Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers on February 12, 2010, which encourages prudent small business lending and emphasizes that examiners apply a balanced approach in evaluating loans.

The policy statement on loan workouts addressed two common misconceptions about supervisory policy towards troubled loans. One of those is that regulators require write-downs of loans to creditworthy borrowers because the value of the collateral has deteriorated. This is incorrect. First and foremost, the agencies look to the ability of the borrower to repay the loan. If the borrower is expected to repay the loan in full according to its terms, there is no required write-down or placement in nonaccrual status, regardless of any deterioration in collateral.

Another misconception is that restructured or modified loans remain in nonaccrual status regardless of the borrower's demonstrated performance and prospects for repayment under the modified terms. In fact, the agencies' instructions for the quarterly Reports of Condition and Income (Call Reports) state that after the borrower demonstrates the ability to perform over a period of six months, the loan can be removed from nonaccrual status.

The FDIC believes that the clarification of policy provided by these interagency statements has helped community banks become more comfortable extending and restructuring soundly underwritten loans. In turn, we expect that borrowers will benefit from more flexible credit structures that banks may offer.

Supervisory Approach for Troubled Loans

The FDIC strives for a balanced approach to supervision that relies significantly on the validation of banks' own credit risk management processes and their adherence to generally accepted accounting principles (GAAP). The FDIC does not micro-manage banks in how they deal with individual customer relationships or how they manage their loan portfolios. The FDIC does not instruct banks to curtail prudently managed lending activities, restrict lines of credit to strong borrowers, or require appraisals on performing loans unless an advance of new funds is being contemplated.

During economic expansions, problem credit relationships are relatively rare at most institutions and are handled in the normal course of business without jeopardizing earnings performance or the capital base. On the other hand, recessions and real estate downturns often result in an increase in problem loans. This necessitates an increased level of bank management resources devoted to monitoring credit performance, loan workouts, loan grading and review processes, and accurate accounting entries for problem loans. In carrying out their statutory responsibilities to ensure a safe-and-sound banking system, banking supervisors also need accurate information about problem assets. Supervisors and investors expect the financial statements prepared by banks to be accurate and to adhere to the standards prescribed by the accounting profession for problem loan accounting, troubled debt restructuring, and loss recognition. Adherence to generally accepted accounting principles should render an accurate, transparent depiction of banks' asset quality, earnings, and capital -- which are central aspects of the bank supervision process.

Accurate problem loan reporting which portrays the actual performance and condition of individual loans and groups of credits within a given portfolio is essential. We rely on these loan reporting conventions to determine the condition of financial institutions both during examinations and in interim periods through off-site monitoring. Aggregate past-due and non-accrual data provided by banks in their quarterly Call Reports are critical components of our supervisory evaluation of banks' financial condition and our assessment of necessary corrective actions.

During each on-site examination, examiners exercise a fact-based, informed judgment to evaluate the quality of individual assets and groups of assets held by an insured institution. Loans that present heightened risk of not being repaid, usually already noted by the bank itself, are subject to adverse classification (Substandard, Doubtful, or Loss) and warrant increased management attention to limit loss exposure. During the credit review process, examiners also review the accuracy and reliability of internal grading systems used by management and in the vast majority of cases, the examiners' results validate bank management findings.

The findings of each on-site examination are discussed with bank management and, as warranted, the bank's board of directors. Such communication provides management with an opportunity to discuss the examiner's conclusions and for examiners to consider management's views, as appropriate. The findings of each examination are also subject to a secondary internal review to ensure that our examination policies and procedures were followed, before the Report of Examination is issued to the bank – this internal review process ensures consistency in our supervisory approach to evaluating loans and other aspects of institution risk. On March 1, 2011, the FDIC issued Financial Institution Letter-13-2011, Reminder on FDIC Examination Findings, which encourages an open dialogue between examiners and bank management regarding our examination findings and process.

FDIC Concerns about H.R. 1723

The purpose of the risk management examination is to ascertain the financial condition of an institution. In order to do so, transparent and accurate disclosure and reporting are key requirements. Under the proposed legislation, as long as an amortizing loan is current and has performed as agreed in the recent past, institutions could disregard currently available borrower financial information indicating that the borrower lacks the ability to fully repay the principal and interest on the loan going forward. This, in turn, would enable institutions to include accrued but uncollected interest income in regulatory capital when its collection in full is not expected. Prospective information about the borrower's ability to repay the loan would be disregarded for purposes of placing loans in nonaccrual status and measuring capital, including for purposes of Prompt Corrective Action determinations.

This proposed legislation would result in an understatement of problem loans on banks' balance sheets and an overstatement of regulatory capital. This would be contrary to GAAP and the exercise of our supervisory responsibilities. Compromising the quality of information about nonaccrual or troubled loans, or preventing supervisors from acting on such information, would detract from supervisors' and investors' ability to properly evaluate the safety and soundness of banks or require corrective action as needed.

Changing the agencies' regulatory capital standards to allow institutions to avoid treating certain loans as nonaccrual loans would result in institutions reporting higher regulatory capital than GAAP capital. Such regulatory capital forbearance would detract from investors' confidence in the reliability of all banks' financial statements. Moreover, historical experience has been that policies to systematically delay the recognition of bank losses can ultimately increase losses to the FDIC Deposit Insurance Fund, and thus the cost that healthy banks pay for their deposit insurance premiums.

In our judgment, a safe-and-sound banking system that serves as a foundation for economic growth needs a strong base of high quality capital. We have been strong supporters of recent efforts to strengthen banking industry capital and we believe that under-reporting of nonaccrual loans for purposes of capital measurement would be inconsistent with the direction regulators should be taking with respect to bank capital.

Conclusion

By and large, the banking industry today has ample lending capacity, but the challenge facing many banks is weak loan demand. For some banks, the primary challenge continues to be cleaning up balance sheets from the lingering effects of the crisis, recognizing existing losses, and in some cases raising new capital. This is a painful process, but it is a necessary process.

The FDIC recognizes the challenges in this difficult environment and encourages banks to prudently originate new credits and work with distressed borrowers. At the same time, we believe that accurate, transparent financial reporting is the cornerstone of sound banking practice and we will continue to advocate for standards that promote confidence in the nation's financial institutions.

Thank you and I would be glad to answer any questions from the members of the committee.


1 Noncurrent loans are those that are 90 or more days past due or are on nonaccrual.

2 Net operating revenue equals net interest income, plus noninterest income.

3 Small business lending defined here as under $1 million for commercial and industrial loans and nonfarm nonresidential real estate financing; and under $500,000 for agricultural production and agricultural real estate financing

BUSINESS AND TWO EXECUTIVES CHARGED BY SEC WITH TAKING INVESTOR FUNDS

July 6, 2011
The followign is an excerpt from the SEC website:

The Securities and Exchange Commission yesterday charged a New York-based brokerage firm and two executives with misappropriating investor funds.
The SEC alleges that Windham Securities, Inc., Windham’s owner and principal Joshua Constantin, and former Windham managing director Brian Solomon fraudulently induced investors to provide more than $1.25 million to Windham for securities investments and fees by making false claims concerning the intended use of investor funds as well as Windham’s investment expertise and historical returns. Instead of purchasing securities for investors as represented, the defendants misappropriated the investors’ funds and then provided false assurances to investors to cover up their fraud.
According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, Windham, Constantin, and Solomon misappropriated investor funds from an investment opportunity they had recommended to investors in Leeward Group, Inc., then a private company they told investors Windham was helping to take public. Constantin and Solomon raised more than $1.1 million for investments in Leeward and collected an additional $135,000 in fees purportedly for access to Windham investment opportunities or other related investment services. Constantin then transferred approximately $668,000 of the funds raised from investors to his personal bank account and to the account of Constantin Resource Group, Inc. (CRG), an entity he owned and controlled. Constantin used these funds to pay his personal and business expenses and to pay Solomon, among other things. Constantin also transferred $450,000 of investor funds to purchase Leeward securities in the name of Domestic Applications Corp. (DAC), an entity he controlled and in which none of the investors held any ownership interest. Constantin and Solomon then attempted to conceal their fraud and falsely reassure investors by fabricating phony promissory notes and Windham account statements that falsely showed that the investors had purchased Leeward securities.
The SEC’s complaint charges Windham, Constantin, and Solomon with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and charges Constantin with liability as a control person for Windham’s Exchange Act violations and as an aider and abettor of Windham’s and Solomon’s Exchange Act violations. In its complaint, the SEC also names CRG and DAC as relief defendants. The SEC’s complaint seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and penalties against Windham, Constantin, and Solomon, and disgorgement of ill-gotten gains plus prejudgment interest against CRG and DAC as relief defendants.
The SEC’s investigation is continuing.”

Substituting the word "misappropriate" for the word "stealing" seems to diminish an inappropriate action from a crime to a merely overlooked caveat. If one were to hack into a major bank and drain it of money perhaps they just "misappropriated" the funds and hence, should be held to a much lower level of accountability than someone who steals.

SEC COMMISSIONER PAREDES PROPOSES BUSINESS CONDUCT STANDARDS FOR SECURITY-BASED SWAPS

The following is an excerpt from the SEC website:

"Speech by SEC Commissioner:
Statement at Open Meeting to Propose Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants
by
Commissioner Troy A. Paredes
U.S. Securities and Exchange Commission
Washington, D.C.
June 29, 2011
Thank you, Chairman Schapiro.

The Dodd-Frank Act sets out a new regime to regulate the security-based swap (“SBS”) market. To this end, Section 764 of Dodd-Frank amends the Exchange Act to provide for new rules, to be promulgated by the SEC, that establish business conduct standards for security-based swap dealers and major security-based swap participants (“SBS Entities”). Pursuant to this authority, the Commission is advancing the proposal we are considering this morning.

I support the recommendation before us. But we need to be mindful that, depending on how the new regulatory regime ultimately takes shape, certain parties – most notably, certain special entities – could lose access to the security-based swap market, and those states, municipalities, pension plans, endowments, and other counterparties of SBS Entities that can access the SBS market could find it more costly to transact. If SBS Entities become less willing to transact with certain counterparties because the business conduct standards prove to be too burdensome and unpredictable, those counterparties may lose out on the benefits that SBS transactions afford them, such as more efficient risk management. To this point, it is worth recognizing that the Commission’s proposed business conduct standards go beyond what the agency is mandated by Dodd-Frank to promulgate.

The proposing release solicits comment on a range of topics and asks a number of thoughtful questions. As always, I look forward to considering the comments we will receive. I am particularly interested in comments that address the following:

The release acknowledges that the Commission is proposing more business conduct obligations than Dodd-Frank requires. “Know your counterparty” requirements and “suitability” standards are just two features of the proposal that would add to what Dodd-Frank mandates. What are the potential consequences of these additional obligations when layered on top of what Dodd-Frank requires? To what extent, and in what ways, might these additional regulatory demands impact a market participant’s access to SBS transactions?

If adopted, how will the proposal likely impact the ability of special entities to transact in security-based swaps? What consequences will special entities face if they find it more difficult to access the SBS market?

Just as one recognizes the benefits of the new regulatory regime, one also should consider that certain costs of the proposal might ultimately be borne by special entities and other counterparties of SBS Entities. Accordingly, to what extent should an intended beneficiary of the regime be afforded more choice to decide for itself the degree of protection it wants from regulation? In other words, under what circumstances, if any, should the counterparty of an SBS Entity be allowed to opt out of some or all of the new regulation?

The proposing release explains, “[A]bsent special circumstances, it would be appropriate for SBS Entities to rely on counterparty representations in connection with certain specific requirements under the proposed rules.” The release offers two alternatives for when it might not be appropriate for an SBS Entity to rely on a counterparty’s representations. Under one alternative, an SBS Entity could rely on a counterparty’s representation “unless [the SBS Entity] knows that the representation is not accurate.” Under the second alternative, an SBS Entity could rely on a counterparty’s representation “unless the SBS Entity has information that would cause a reasonable person to question the accuracy of the representation.”

I am keenly interested in commenters’ views on the pros and cons of these two alternatives. For example, under which alternative would an SBS Entity have greater legal certainty concerning its business conduct obligations? If an SBS dealer is not confident that it can rely on a special entity’s representations in establishing that the dealer is not advising the special entity, will the SBS dealer be less willing to transact with the special entity?

The proposal states that an SBS dealer “acts as an advisor to a special entity,” thus triggering a duty to act in the “best interests of the special entity,” when the SBS dealer makes a recommendation, unless certain conditions are met. Should a dealer have to do more than make a recommendation to be found to be acting as an advisor? How, if at all, should the “best interests” standard be defined to address the tension that may arise if an SBS dealer finds itself acting as both a counterparty and an advisor to a special entity?

I am interested in hearing from commenters on how, if at all, the Commission’s rulemaking should account for any concerns that are presented when the SEC’s business conduct regime and the Department of Labor’s ERISA fiduciary regime interact.

I join my colleagues in thanking the staff – particularly those from the Division of Trading and Markets – for your hard work on this rulemaking."

DISSENT AT THE CFTC

THE FOLLOWING EXCERPT IS FROM THE CFTC WEBSITE:

"Dissent of Commissioner Scott D. O’Malia to the Fiscal Year 2011 Commission Spending Plan
Commissioner O’Malia
June 15, 2011
I respectfully dissent from signing the fiscal year 2011 Commission Spending Plan allocating funding per the direction provided in Public Law 112-10, The Department of Defense and Full-Year Continuing Appropriations Act, 2011. The Commission's spending plan continues to concentrate resources on an ever-expanding staff hiring plan that is both fiscally unsustainable and detrimental to the Commission's already ailing technology programs. This spending plan proposes to hire 50 additional federal employees—12 of which will implement internal reorganization in support of new Dodd-Frank authorities—and an undisclosed number of contractors.1· Instead of complying with the explicit Congressional directive establishing a $37.2 million floor for technology spending, the proposal caps spending at this minimum level while completely ignoring clear statutory direction to prioritize such funding for higher priority information technology activities. I am mindful of the challenge of adjusting the budget priorities within the resources provided. However, in the face of the broad new statutory authority to oversee and monitor both the futures and derivatives markets, the Commission cannot afford delays in the development and deployment of automated surveillance tools, or in real-time trade monitoring, integration of trade data provided from the swap data repositories and the development of new risk analytics.
Statutory Direction Ignored and Investments Delayed
Not only has the Commission provided the minimum level of funding for technology, but it has failed to delineate "highest priority information technology" from basic operational responsibilities such as telephones, blackberry devices, laptops and printer toner, which are included in the overall technology account. The Commission's own fiscal year 2011 request provided for $53 million in technology funding, of which $18 million was set aside for Dodd-Frank Act implementation with the remaining $35 million budgeted for ongoing pre-Dodd-Frank Act mission critical functions. Rather than seizing the opportunity and support provided by Congress to invest in technology reserved for Dodd-Frank reforms, the Commission spending plan now proposes to invest just $5.4 million of the $18 million requested for Dodd-Frank.
Technology 2.0: The Budget that Should Have Been
Congress couldn't have been more clear about the direction the Commission should take in developing a technology-focused spending plan. Congress included statutory direction to provide a minimum level of funding and to be expended on the "highest priority information technology activities of the Commission.”2 Instead, the Commission failed on two counts to follow statutory direction regarding technology. First, the Commission ignored Congressional intent by capping its investment in technology at $37.2 million, which Congress clearly provided as a floor. Second, the Commission's spending plan doesn't distinguish between "highest priorities" and other investments, as directed in the statute. By failing to distinguish between priorities, it appears that the Commission has no priorities, which is abundantly clear in this spending plan.
For the past several years, the Commission has spent roughly $18 million annually to provide basic telecommunication, computing, and mobile connectivity to Commission staff in its technology account. Considering the challenges before the Commission, I certainly do not believe such funding constitutes “the highest priority information technology.” Instead, it should be added to $37 million provided in this plan for an overall technology spending level of $55 million. The Commission’s own FY’11 request totaled $53 million including critical investments in additional hardware, software, expanded analytical capabilities.
There are numerous and relevant technology needs the Commission could begin to address if it would allocate $55 million in technology funding. For example, the Commission must address upgrading its capabilities to establish a more sophisticated approach to overseeing swaps, options and futures markets, including electronically-filed forms that automatically populate our surveillance programs. In addition, the Commission must be prepared to integrate transaction data from swap data repositories, an essential element of monitoring for systemic risk and improving market transparency. As of yet, there is no technology strategy to serve this essential function. The Commission staff has also expressed a strong desire to expand oversight capabilities and is working to develop multiple automated surveillance and analytical tools, as well as the development of real-time market monitoring capabilities. Finally, there are critical investments in hardware and software, totaling $6 million that were requested as part of the FY’11 request, but are not funded in this spending plan and should be restored. This investment would represent a down payment on the investments that must be made if the Commission is going to perform any critical analysis of order book data, rather than transaction level data".

CFTC COMMISISONER COMPLAINS ABOUT SLOW GOVERNMENTAL REFORM

The following is an excerpt from the CFTC website:

"The Waiting"
Statement by Commissioner Bart Chilton Regarding Anti-Fraud and Anti-Manipulation Final Rules, Washington, DC
July 7, 2011
It has been almost a year since the Dodd-Frank Act became law. If we were in school, we couldn't receive a grade. We'd get an incomplete since we still have so much work.
Folks have been waiting on issues like position limits, yet we haven't acted. We have said we won't get things done on time, and for many final rules that makes sense. For me, delaying on limits does not make sense. However, that's a matter for another time.
There is an old Tom Petty song, "The Waiting" in which he sings, "The waiting is the hardest part," and later "Don't let it get to you." Well, I'm trying not to let it get to me and very pleased that today we are moving forward and we may not have to wait any longer.
Before the Commission today are several final rules, including new anti-fraud and anti-manipulation authorities, which will be critical ammo in the Commission’s enforcement arsenal.
I particularly thank Senator Maria Cantwell for her leadership on the anti-fraud and anti-manipulation provisions. Without Senator Cantwell these provisions wouldn’t exist.
Currently, we have a nearly impossible manipulation standard, winning only one case in 35 years. We have had to prove intent, artificial price, market control and that the manipulators actually caused the artificial price. A very tall order. With the adoption of this new rule, the Commission will be able to prosecute a broader array of commodity law violations. Here are a few of them:
First, it will give us the ability to go after fraudulent practices that manipulate prices—like disseminating misinformation about the global availability of crude oil to manipulate the market.
Pocketing profits from the misuse of privileged information will now be prosecuted. We’ll be able to get at, for example, bad actors akin to insider traders.
Also, this new regulation moves us toward a reckless standard similar to that under securities laws as defined by the courts, and the law specifically gives us a reckless standard for false reporting.
The ability to effectively prosecute this type of unscrupulous activity is critically important. We now will be able to swiftly and aggressively “get at” these types of fraudulent market practices, which can contribute to uneconomic or false prices in commodities markets.
The waiting has been a hard part of this process. Hopefully, we will conclude some very important work today.
For the other regulations that we have not yet been able to complete, I'll take heed of Tom Petty’s advice and, "Don't let it kill ya’ baby, don't let it get to you."
Thanks.”

SEC CHAIRMAN SCHAPIRO SPEAKS AT SEC OPEN MEETING

The following is from the SEC website:

"Speech by SEC Chairman:
Opening Statement at SEC Open Meeting
by
Chairman Mary Schapiro
U.S. Securities and Exchange Commission
Washington, D.C.
June 29, 2011
Good morning. This is an Open Meeting of the United States Securities and Exchange Commission on June 29, 2011.

Today, we will consider proposing new rules that would establish business conduct standards for security-based swaps dealers and major security-based swap participants.

As with our prior proposals regarding security-based swaps, today’s proposal stems from Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. That Act authorizes the Commission to implement a comprehensive framework for regulating the over-the-counter swaps markets.

In laying the groundwork for this new regulatory regime, Congress recognized the importance of having a regulatory framework that adequately protects investors. The rules we are proposing today would level the playing field in the security-based swap market by bringing needed transparency to this market and by seeking to ensure that customers in these transactions are treated fairly.

Among other things, the proposed rules would require security-based swap dealers and major security-based swap participants to communicate in a fair and balanced manner and to disclose conflicts of interest and material incentives to potential counterparties. Additional requirements would be imposed for dealings with special entities, which include municipalities, pension plans, endowments and similar entities.

In particular, when acting as a counterparty to a special entity, a security-based swap dealer or major security-based swap participant would need to have a reasonable basis to believe that the special entity has a qualified independent representative that can help it assess the transaction. In addition, a security-based swap dealer that is acting as an advisor to a special entity would need to act in the best interests of the special entity.

The standards we propose today are intended to establish a framework that protects investors and also promotes efficiency, competition, and capital formation. They are also intended to take into account the nature of the security-based swap market and existing business conduct requirements applicable for broker-dealers and other market participants. In this regard, the Commission staff has worked closely with CFTC staff in consulting with the public and other regulators including the Department of Labor. Indeed, we have had dozens of meetings with a broad range of interested parties including regulated entities, consumer and investor advocates, institutional investors, financial institutions, endowments, SROs, state and local governments, and end-users.

We look forward to public comment on today’s proposed rules. We welcome and need the input of commenters, and we hope they will provide analysis, data, and other information to help the Commission further evaluate the proposal and make any appropriate changes.

Before I ask Robert Cook, Director of the Division of Trading and Markets, and Lourdes Gonzalez, Co-Acting Chief Counsel of the Division of Trading and Markets, to discuss the proposed rules, I would like to express my thanks to the CFTC for their effort in crafting these proposed rules along with our team at the SEC.

I would also like to thank Robert, as well as James Brigagliano, Lourdes Gonzalez, Joanne Rutkowski, Cindy Oh, Leila Bham, Jack Habert, Peter Curley, Tom Eady, Gregg Berman, Catherine McGuire, and David Sanchez from the Division of Trading and Markets for their tremendous work on this rulemaking.

Thanks as well to David Blass, Bob Bagnall and Jeff Berger from the Office of the General Counsel; Scott Bauguess, Burt Porter and Adam Glass from the Division of Risk, Strategy, and Financial Innovation; Amy Starr and Tamara Brightwell from the Division of Corporation Finance; and Douglas Scheidt from the Division of Investment Management.

Finally, I would like to thank the Commissioners and all of our counsels for their work and comments on the proposed rules.

Now I'll turn the meeting over to Robert Cook to hear more about the Division's recommendations."