FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Testimony of Chairman Gary Gensler before the U.S. House Appropriations Subcommittee, Washington, DC
April 12, 2013
Good morning Chairman Aderholt, Ranking Member Farr and members of the Subcommittee. Thank you for inviting me to today’s hearing on the President’s request for the Commodity Futures Trading Commission’s (CFTC) fiscal year (FY) 2014 budget. I’m pleased to testify along with my fellow Commissioner Scott O’Malia.
This hearing is occurring at an historic time in the markets because under Congress’ direction, the CFTC now oversees the derivatives marketplace: not only futures that we have overseen for decades, but also the swaps market. The agency has completed 80 percent of the swap market reform rules required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The public is benefiting from seeing the price and volume of each swap transaction. This information is available free of charge on a website, like a modern-day tickertape. For the first time, the public will benefit from the risk reduction and greater access to the market that comes from centralized clearing. And for the first time, the public is benefiting from the oversight of swap dealers. So far, 75 have registered and must adhere to sales practice and business conduct standards to help lower risk to the overall economy.
The marketplace is increasingly shifting to implementation of these common-sense rules of the road. Now it is all the more clear: the CFTC is not the right size for its new and expanded mission Congress has directed it to perform.
The CFTC’s current funding is $207 million prior to sequestration. We recognize that the federal government is operating under a sequester and that budgets for agencies across government require additional scrutiny. Our mission, however, has expanded dramatically. We have a duty to help protect the economy and taxpayers from risks in the financial system. Thus, the President’ FY 2014 budget requests an appropriation of $315 million and 1,015 FTEs. The overall funding levels requested approximate the plan set forth in the President’s 2013 Budget ($308 million and 1,015 FTE), but also take into account industry progress in implementing financial reform. Although 1,015 FTE resources requested in this budget are at the same level as for FY 2013, adjustments were made across our mission activities to reflect the transition from Dodd-Frank rulemaking to swaps market oversight in 2014. Primarily, the Commission shifted its requested resource allocation to support and maintain direct examinations – a critical component of customer protection. Market events have highlighted that the Commission must do everything within our authorities and resources to strengthen oversight programs and the protection of customers and their funds.
The President’s budget request for the Commission strikes a balance between important investments in technology and human capital, both of which are essential to carrying out the agency’s mandate. This approximately 52 percent increase in funding includes a 62 percent increase in IT services, but only a 44 percent increase in staff.
The CFTC is dedicated to using taxpayer dollars efficiently – nearly a fourth of the overall budget request, $73 million, is for outside IT services. When the CFTC’s dedicated IT staff is included, the request is $94.8 million for IT, or nearly a third of the overall budget. But it still takes human beings to watch for market manipulation and abuses that affect hedgers, farmers, ranchers, producers and commercial companies, as well as the public buying gas at the pump.
The CFTC is operating under a strategic plan for FY 2011-2015. This plan raises the bar on the agency’s performance measures to more accurately evaluate our progress. But the agency’s performance is affected by the challenges of limited resources. For the second year in a row, there are many goals that were not met, as are detailed in the agency’s Annual Performance Report (APR). The CFTC is reviewing the results of the APR and will include the findings in this year’s revision of the strategic plan and consider the results as the agency reevaluates the allocation of resources.
In my remaining testimony, I will review the five areas that make up over 90 percent of our requested budgeted staff increase: registrations, examinations, surveillance and data, enforcement, and economics and legal analysis.
Registration and Product Reviews
A significant task before us in FY 2014 will be the continuation of registration of effected entities, as well as reviews of new products for both the clearing mandate and the trading mandate.
We want to consider registration applications in a thoughtful and timely manner, be efficient in reviewing submissions, and be responsive to market participant inquiries –but this will require sufficient funding. For FY 2014, the President’s request supports $38.9 million and 147 FTEs for these two mission areas, an increase of $22.6 million and 92 FTEs.
The estimated 200 clearinghouses, trading platforms, swap data repositories, swap dealers and major swap participants that are recently registered or may seek CFTC registration within the next year is a dramatic increase over any registration effort the agency has overseen in the past. The Commission needs staff to facilitate the registration of the following:
• Clearinghouses – Entities that lower risk to the public by guaranteeing the obligations of both parties in a transaction. We are working with five entities seeking to register as DCOs and have inquiries from others. These entities would join the 14 we currently oversee.
• Designated contract markets (DCMs) – U.S. trading platforms that list futures and options and likely will start listing swaps. The CFTC currently oversees 16 DCMs, and by 2014, staff expects another two to three to seek registration.
• Foreign boards of trade (FBOTs) – Regulated trading platforms in other countries that are generally equivalent to DCMs. Since the FBOT rule became effective, 19 FBOTs have filed applications with the CFTC. By 2014, staff expects an additional couple of FBOTs to seek registration with the CFTC.
• Swap data repositories (SDRs) – Recordkeeping facilities created by Dodd-Frank to bring transparency to the swaps market. Three are provisionally registered with the CFTC, and by 2014, an additional SDR may seek registration.
• Swap dealers and major swap participants – Under the Dodd-Frank Act, the CFTC is working to comprehensively regulate swap dealers and major swap participants to lower their risk to the economy. As the result of completed CFTC rules, 75 swap dealers and two major swap participants are now provisionally registered. This initial group includes the largest domestic and international financial institutions dealing in swaps with U.S. persons. Commission staff currently estimates that over time, 25-50 additional swap dealers may request registration with the National Futures Association (NFA). We’ll be overseeing their registration and related questions.
• Swap execution facilities (SEFs) – The new trading platform for swaps. Commission staff estimates that 15 entities may request to become SEFs.
While we will have a system for provisional registration in place, market participants will want the certainty of final registration.
The Commission approved the first clearing requirement last November. A key milestone was reached last week with the requirement that swap dealers and the largest hedge funds clear as of March 11. The vast majority of interest rate and credit default index swaps are being brought into central clearing. Compliance will continue to be phased in throughout this year. Other financial entities begin clearing June 10. Accounts managed by third party investment managers and ERISA pension plans have until September 9. The Commission continues in the resource intensive review for determinations of other swaps that will be subject to the clearing mandate.
Full funding for the agency means that we will be best prepared to review the dramatic increase in requested registrations and to review swaps for the clearing mandate. A partial increase in funding means market participants will see a backlog in registrations, responses to their inquiries, and product review because we won’t have personnel sufficient to review their submissions in a timely and complete manner. Flat funding will mean market participants will wait even longer. There will be significant backlogs for participants seeking to register with the CFTC, as well as for review of swaps for mandatory clearing.
Examinations
Another critical mission for FY 2014 will be more regular and more in-depth examinations of the major market participants the CFTC oversees. Examinations are the CFTC’s tool to check for compliance with laws that protect the public and to ensure the protection of customer funds. The President’s request would provide $44.3 million and 185 FTEs for examinations, an increase of $25.6 million and 104 FTEs. The CFTC would more than double our current allocation for this mission because the number of entities we examine is expected to more than double.
This is an area where the agency has fallen short of our goals in performance reviews. The CFTC directly reviews clearinghouses and trading platforms and will review SDRs. But while the agency reviews them directly, we don’t have the resources to have full-time staff on site, unlike other regulatory agencies that do have on-the-ground staff at the significant firms they oversee. The CFTC also doesn’t do annual reviews. Clearinghouses, for instance, currently are examined on a three-year cycle. For intermediaries such as futures commission merchants (FCMs) and swap dealers, the CFTC relies on what are known as self-regulatory organizations (SROs) to be the primary examiners. Given our lack of resources, we’re only able to double check the SROs’ work on a limited number of FCMs each year, and the agency can spend little time onsite at the firms.
On top of the current lack of staff for examinations, our responsibilities in 2014 will expand to include reviews of many new market participants. For instance, there are currently 117 FCMs, 75 swap dealers and two major swap participants have provisionally registered, and more are expected to do so as the year progresses. More frequent and in-depth examinations are necessary to assure the public that firms have adequate capital, as well as systems and procedures in place to protect customer money. Reviews are critical to ensuring the financial soundness of clearinghouses, and ensuring transparency and competition in the trading markets.
Fully funding the increase for examinations means the Commission can move toward annual reviews of all significant clearinghouses and trading platforms and adequate reviews of other market participants. A partial increase for examinations means cutting back our monitoring plans for new market participants and more in-depth risk reviews. Flat funding means we will continue lacking the ability to assure the public that the CFTC’s registrants are financially sound and in compliance with regulatory protections.
Surveillance and Data
Effective market surveillance is dependent on the CFTC’s ability to acquire and analyze extremely large volumes of data to identify trends and events that warrant further investigation. For FY 2014, the President’s request would support $61.7 million and 174 FTEs for surveillance, data acquisition, and analytics, an increase of $18.3 million and 53 FTEs. Of the $61.7 million request, 55 percent would be directed toward IT.
The Dodd-Frank swaps market transparency rules mean a major increase in the amount of incoming data for the CFTC to aggregate and analyze. The agency is taking on the challenge of establishing connections with SDRs and aggregating the newly available swaps data with futures market data. This requires high performance hardware and software and the development of analytical alerts. But it also requires the corresponding personnel to manage this technology effectively for surveillance and enforcement.
As the CFTC also receives ownership and control information for trading accounts, it will have data to better detect intraday position limit violations and analyze high frequency trading.
A full increase for surveillance means the CFTC will have the ability to analyze futures and swaps data to protect market participants and the public. A partial increase would limit the agency’s investments in analysis-based surveillance tools. And flat funding will limit our capacity to effectively utilize and aggregate the new data we now are receiving.
Enforcement
The CFTC’s enforcement arm protects market participants and other members of the public from fraud, manipulation and other abusive practices in the futures and swaps markets. Our efforts range from pursuing Ponzi schemers who defraud individuals across the country out of life savings; to abuses that threaten customer funds; to false reporting of prices; to schemes to manipulate prices, including of goods, such as oil, gas and agricultural products. The Commission has opened more than 800 investigations in the past two fiscal years. The President’s FY 2014 request would provide $57.7 million and 213 FTEs for enforcement, an increase of $18.1 million and 51 FTEs.
In 2002, we had 154 people devoted to enforcement, and that number is nearly flat with our current staff of 158. This staff has been called upon to enforce laws and rules that are new to our arsenal. The Dodd-Frank mandate closed a significant gap in the agency’s enforcement authorities by extending the enforcement reach to swaps and prohibiting the reckless use of manipulative or deceptive schemes. In addition, the CFTC will be overseeing a host of new market participants.
A full increase for enforcement means more investigations and cases that the agency can pursue to protect the public. A less than full increase means that the CFTC will be faced with difficult choices. We could maintain the current volume and types of cases, but we would have to shift resources from futures cases to swaps cases or not cover all of the swaps market. Flat funding means not only that the Commission’s enforcement volume likely would shrink, but parts of the markets would be left with little enforcement oversight.
The Commission’s engagement in targeted enforcement efforts in the public interest include its historic actions regarding the rigging of benchmark rates, such as the London Interbank Offered Rate (LIBOR), a reference rate for much of the U.S. futures and swaps markets. Barclays, UBS and RBS were fined approximately $2.5 billion for manipulative conduct by the CFTC, the UK Financial Services Authority (FSA) and the Justice Department. At each bank, the misconduct spanned many years, took place in offices in several cities around the globe, included numerous people, and involved multiple benchmark rates and currencies. In each case, there was evidence of collusion. In the UBS and RBS cases, one or more inter-dealer brokers painted false pictures to influence submissions of other banks, i.e., to spread the falsehoods more widely. Barclays and UBS also were reporting falsely low borrowing rates in an effort to protect their reputation. While the cases led to $2 billion in fines flowing to the U.S. Treasury, what this is about is ensuring for financial market integrity.
Economics and Legal Analysis
For FY 2014, the President’s budget would support $24.6 million and 97 FTEs to invest in robust economic analysis teams and Commission-wide legal analysis, a decrease of $3.6 million and 20 FTEs from our estimate under the pre-sequester continuing resolution. The CFTC’s economists support all of the Commission’s divisions, including surveillance and complex enforcement cases. They have served on Dodd-Frank rule teams to carefully consider the costs and benefits of each rule.
The decision to make downward adjustments in the resources requested for this critical mission activity was not an easy one. However, given the increasing number of intermediaries the CFTC now oversees, examination teams needed to be bolstered.
In 2014, the CFTC’s economists will be integral in developing tools to analyze automated surveillance data and continue to evaluate new products for clearing.
Flat funding means a strained ability to analyze the market and detect problems that could be negative for the economy. Flat funding also means the Commission’s legal analysis team will be cut back even further to support front-line examinations, adding to the delays in responding to market participants and processing applications and straining the team’s ability to support of enforcement efforts.
Conclusion
The CFTC’s hardworking team is just 8 percent more in numbers than at our peak in the 1990s. Yet since that time, the futures market has grown five-fold, driven by rapid advances in technology. The swaps market is eight times larger than the futures market. Effective market implementation of swaps reforms by the CFTC requires additional resources. We are not asking for eight times the funding or staff. Investments in both technology and people, however, are needed for effective oversight of these markets by regulators.
Though data has started to be reported to the public and to regulators, we need the staff and technology to access, review and analyze the data. With 77 entities having registered as new swap dealers and major swap participants, we need people to answer their questions and work with the NFA on the necessary oversight to ensure market integrity. Furthermore, as market participants expand their technological sophistication, CFTC technology upgrades are critical for market surveillance and to enhance customer fund protection programs.
This is an incredibly strained budget environment. But without sufficient funding for the CFTC, the nation cannot be assured this agency can closely monitor for the protection of customer funds and utilize our enforcement arm to its fullest potential to go after bad actors in the futures and swaps markets. Without sufficient funding for the CFTC, the nation cannot be assured that this agency can effectively enforce essential rules that promote transparency and lower risk to the economy.
Thank you again for inviting me today, and I look forward to your questions.
FROM: SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., April 11, 2013 — The Securities and Exchange Commission charged the former partner in charge of KPMG's Pacific Southwest audit practice and his friend with insider trading on nonpublic information about firm clients.
The SEC alleges that Scott London tipped Bryan Shaw with confidential details about five KPMG audit clients and enabled Shaw to make more than $1.2 million in illicit profits trading ahead of earnings or merger announcements. The two men had met at a country club several years earlier and became close friends and golfing partners. London has said that he provided the inside information about his clients to help Shaw overcome financial struggles after his family-run jewelry business began faltering in the economic downturn. In exchange for the illegal trading tips, Shaw paid London at least $50,000 in cash that was usually delivered in bags outside of his Encino, Calif. jewelry store. Shaw also gave London an expensive Rolex watch as well as other jewelry, meals, and tickets to entertainment events.
London, who lives in Agoura Hills, Calif., and worked at KPMG for nearly 30 years, recently informed the firm that he was under investigation by the SEC and criminal authorities for insider trading in the securities of several KPMG clients. The firm immediately terminated him.
"London was honored with the highest trust of public companies, and he crassly betrayed that trust for bags of cash and a Rolex," said George S. Canellos, Acting Director of the Division of Enforcement.
Michele Wein Layne, Director of the SEC's Los Angeles Regional Office, added, "As a leader at a major accounting firm, London's conduct was an egregious violation of his ethical and professional duties."
In a parallel action, the U.S. Attorney's Office for the Central District of California today announced criminal charges against London.
According to the SEC's complaint filed in federal court in Los Angeles, London began providing Shaw with nonpublic information in October 2010 and the misconduct continued for the next 18 months. Shaw and London communicated almost exclusively using their cell phones, although on at least one occasion London disclosed nonpublic information in the presence of others during a golf outing.
According to the SEC's complaint, London was the lead partner on several KPMG audits including Herbalife and Skechers USA, and he was the firm's account executive for Deckers Outdoor Corp. Therefore, London was able to obtain material, nonpublic information about these companies prior to their earnings announcements or release of financial results. Shaw, who lives in Lake Sherwood, Calif., routinely traded at least a dozen times on the inside information he received from London. He grossed profits of more than $714,000 from trading based on confidential financial data about Herbalife, Skechers, and Deckers.
The SEC alleges that London also gained access to inside information about impending mergers involving two former KPMG clients - RSC Holdings and Pacific Capital. London tipped Shaw with the confidential details. Shaw made nearly $192,000 by purchasing RSC Holdings stock the day before its Dec. 15, 2011, merger announcement. He made more than $365,000 in illicit profits from his well-timed purchase of Pacific Capital securities prior to a merger announcement on March 9, 2012.
According to the SEC's complaint, in addition to the bags of cash and the Rolex watch valued at $12,000, Shaw gave London several pieces of expensive jewelry for his wife and routinely covered the costs of dinners and concerts the two men shared along with their families.
The SEC's complaint charges London and Shaw with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment permanently ordering them to disgorge ill-gotten gains plus pay prejudgment interest and financial penalties, and enjoining them from future violations of these provisions of the federal securities laws.
The SEC's investigation, which began in mid-2012 and is continuing, has been conducted by William Fiske and Marc Blau of the Los Angeles Regional Office. The SEC's litigation will be led by Lynn Dean. The SEC appreciates the assistance of the U.S. Attorney's Office for the Central District of California and the Federal Bureau of Investigation. The SEC also appreciates assistance from the Financial Industry Regulatory Authority (FINRA), Options Regulatory Surveillance Authority (ORSA), and Chicago Board Options Exchange (CBOE).
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., April 8, 2013 — The Securities and Exchange Commission today charged a former employee at a California-based medical device manufacturer with illegally tipping confidential financial data to her brother, who illegally traded in the company's stock and enabled his hedge fund clients to do the same.
The SEC alleges that ThanhHa Bao, who worked in the finance department at Abaxis Inc., regularly provided material nonpublic information to Tai Nguyen, whose insider trading in advance of the company's quarterly earnings announcements generated $144,910 in illicit profits. Nguyen, who was charged by the SEC last year, also passed confidential information to clients of his equity research firm Insight Research, including hedge fund managers.
To settle the SEC's charges, Bao has agreed to pay $144,910 and be barred from serving as an officer or director of a public company for five years.
"When corporate insiders leak confidential information to a select few, the integrity of our markets is undermined," said Sanjay Wadhwa, Senior Associate Director of the SEC's New York Regional Office. "Abaxis entrusted ThanhHa Bao with market-moving information, and she violated that trust to financially benefit her family."
The SEC's charges stem from its ongoing investigations into expert networks that have uncovered widespread insider trading at several hedge funds and other investment advisory firms. The investigations have so far resulted in enforcement actions against 40 entities or individuals who have reaped more than $430 million in alleged insider trading gains.
According to the SEC's amended complaint filed in federal court in Manhattan, Bao regularly passed Abaxis quarterly earnings data to Nguyen from 2006 to 2009. Besides illegally trading in his own account, Nguyen passed the inside information to hedge fund managers Barai Capital Management and Sonar Capital Management, which were paying Insight Research tens of thousands of dollars per month as clients. These hedge fund managers traded Abaxis securities based on the inside information provided by Nguyen for more than $7.2 million in illicit gains for the hedge funds. Those who caused the trading at these hedge funds were later charged by the SEC with insider trading.
In a parallel criminal proceeding, Nguyen pleaded guilty and has been sentenced to a year and a day in prison. He also agreed to a criminal forfeiture of $400,000.
The SEC's amended complaint charges Bao with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The settlement, which is subject to court approval, requires Bao to pay $144,910 in penalties and be barred from serving as an officer or director of a public company for a period of five years. She also would be permanently enjoined from future violations of the federal securities laws.
The SEC's investigation, which is continuing, has been conducted by Daniel Marcus and Joseph Sansone - members of the SEC's Market Abuse Unit in New York - and Matthew Watkins, Neil Hendelman, Diego Brucculeri, and James D'Avino in the New York Regional Office. The investigation has been supervised by Sanjay Wadhwa. The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation.
FROM: COMMODITY FUTURES TRADING COMMISSION
CFTC Charges New York Firm 4X Solutions, Inc. and its Principal, Whileon Chay, with Forex Fraud Ponzi Scheme
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of an enforcement action in the U.S. District Court for the Southern District of New York, charging Defendants 4X Solutions, Inc. (4X) and its principal, Whileon Chay, both of New York City, with fraud and misappropriation in a $4.8 million foreign currency (forex) trading Ponzi scheme.
The CFTC Complaint alleges that Chay and 4X fraudulently solicited approximately $4.8 million from at least 19 pool participants by falsely enticing prospective participants with the prospect of earning returns of 24 percent to 36 percent per year and claiming the ability to profit even in adverse market conditions, "when most have lost and lost dearly." At the same time, Defendants minimized the risks of forex trading, claiming, for example, that Defendants had not suffered a single losing month in 14 years and that 4X provides "a safe haven in our current financial environment," according to the Complaint.
The CFTC Complaint also alleges that Chay, who controlled 4X, lost approximately $2 million trading forex in corporate proprietary accounts and misappropriated approximately $2.8 million, using that money to fund 4X’s operations, make purported profit and investment return payments to their customers, and pay for Chay’s personal expenses, including paying for luxury resorts, expensive restaurants, limousine service, and exotic car rentals. The Complaint further alleges that Chay concealed the trading losses and misappropriation by, among other things, issuing or causing to be issued false monthly account statements and checks that purported to represent trading profits and investment returns. All or nearly all of the purported trading profits or returns made by Defendants came from the principal of other participants, the Complaint alleges.
In its continuing litigation, the CFTC seeks restitution to defrauded customers, disgorgement of ill-gotten gains, civil monetary penalties, trading and registration bans, and permanent injunctions against further violations of the Commodity Exchange Act, as charged.
CFTC Division of Enforcement staff members responsible for this case are Kara Mucha, August A. Imholtz III, James Garcia, Michael Solinsky, Gretchen L. Lowe, and Vincent A. McGonagle.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
April 9, 2013
CFTC Orders Florida-based Forex Global Solutions Inc., Forex Global Solutions Ltd., Barry Sendach, and Joshua Kershner to Pay $750,000 for Foreign Currency (Forex) Fraud and Violating CFTC Registration Requirements
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against Barry Sendach of Boca Raton, Fla., Joshua Kershner of Boynton Beach, Fla., and their Boca Raton-based companies, Forex Global Solutions Inc. and Forex Global Solutions Ltd. (together, Forex Global), for fraudulently soliciting customers to trade foreign currency (forex) and violating CFTC registration requirements. The Order requires Forex Global, Sendach, and Kershner, jointly and severally, to pay a $750,000 civil monetary penalty and imposes permanent trading and registration bans against them.
The CFTC Order finds that since October 18, 2010, Forex Global fraudulently solicited customers to open off-exchange forex trading accounts and grant discretionary trading authority over those accounts to Forex Global. In its solicitations, Forex Global published false historical performance returns on its website and in its solicitation emails and failed to disclose that it calculated the performance returns inaccurately, including by reflecting only one of the three fees that customers are charged, the Order finds.
The Order also finds that since October 18, 2010, Forex Global, Sendach, and Kershner failed to register with the CFTC as required under comprehensive new CFTC forex rules that became effective on that date.
Under those rules — which are designed to protect individual investors that buy forex contracts from or sell forex contracts to forex firms — entities that obtain or exercise discretionary trading authority over forex trading accounts must be registered with the CFTC as Commodity Trading Advisors (CTAs), and entities that solicit or accept forex trades must be registered with the CFTC as Introducing Brokers (IBs). The CFTC forex rules also require certain persons associated with a CTA or IB to be registered as Associated Persons (APs) of the CTA or IB. The Order finds that Forex Global violated those rules by acting as a CTA and IB without registering in those capacities, and further finds that Sendach and Kershner violated those rules by acting as APs of Forex Global without registering as APs.
The CFTC Division of Enforcement staff responsible for this action are Stephanie Reinhart, Joseph Patrick, Susan Gradman, Scott Williamson, Rosemary Hollinger, and Richard Wagner.
CFTC Customer Protection Information
The CFTC strongly urges members of the public to check with the National Futures Association (NFA) whether a company is registered before investing funds. If a company is not registered, an investor should be wary of providing funds to that company.
FROM: U.S. SECURITIES AND EXHANGE COMMISSION
Opening Statement at the SEC Open Meeting
by
Chairman Mary Jo White
Washington, D.C.
April 10, 2013
Good morning. This is an open meeting of the United States Securities and Exchange Commission being held on April 10, 2013.
Commissioner Walter is participating by telephone conference, and Commissioner Aguilar is participating by video conference.
Today, the Commission is considering whether to issue final rules to help protect investors from the risks of identity theft. The rules, required by the Dodd-Frank Act, would be issued jointly with the Commodity Futures Trading Commission (CFTC).
Under the rules, certain businesses regulated by the SEC and CFTC would be required to adopt and implement programs to detect and respond to indicators of possible identity theft.
Identity theft is a type of fraud that robs millions of Americans of their hard-earned money. Current estimates are that about five percent of American adults fall victim to identity theft fraud each year. It is a risk for everyone, and as technology continues to advance, the risks increase.
These rules are a common-sense response to the growing threat of identity theft to all Americans who invest, save, or borrow money. Any person who entrusts money to a financial institution or who receives money on credit can be vulnerable to those who may falsely pose as the individual and divert the money to a third party. The costs to victims can be great, including loss of individuals’ money and significant damage to their credit history.
In 2007, six federal agencies jointly adopted identity theft rules under the Fair Credit Reporting Act. Those agencies were the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Administration, and the Federal Trade Commission. Their rules applied to business entities that qualify as "financial institutions" or "creditors" under the Fair Credit Reporting Act and offer or maintain certain types of accounts.
However, neither the SEC nor the CFTC adopted those identity theft rules in 2007, because the laws at that time did not authorize either of the Commissions to do so. Instead, entities that the SEC and CFTC regulate such as broker-dealers and futures commission merchants were covered by the rules of the six agencies.
The Dodd-Frank Act changed this approach by transferring rulemaking and enforcement authority for identity theft rules to the SEC and CFTC for the entities we regulate.
The SEC rules, if adopted, would apply to entities such as broker-dealers, investment companies, and investment advisers. The CFTC’s rules would apply to entities such as futures commodity merchants, commodity trading advisors, and commodity pool operators.
If these rules are approved, both Commissions will issue them in one joint adopting release.
The rules the SEC is considering today are substantially similar to the rules that the other six federal agencies adopted in 2007, but they also include examples and guidance to help the relevant businesses determine how to comply with the new rules. I look forward to the issuance of these rules and to the protections that these rules will afford investors against the growing threat of identity theft.
Before I turn to the Commission staff, I would like to say one personal word about today’s meeting. This is my first public meeting as Chair of the SEC. It is my privilege and honor to join today in these important efforts to protect investors and to ensure the strength, efficiency, and transparency of the securities markets. I look forward to working hard with my fellow Commissioners and with the dedicated staff of the Commission. I would also like to specifically thank my predecessor in this office, Elisse Walter, who has been so helpful in welcoming me to the agency and in providing strong leadership to the agency.
I would like to thank the Division of Investment Management and the Division of Trading and Markets for bringing this rule recommendation before us today. From Investment Management, I would like to thank the Director, Norm Champ, and Diane Blizzard, Hunter Jones, Thoreau Bartmann, Andrea Ottomanelli Magovern, and Amanda Wagner. From the Division of Trading and Markets, I would like to thank Acting Director John Ramsay, Jim Burns, David Blass, Joe Furey, and Brice Prince. I am also grateful for the important participation of the Commission’s economists in the Division of Risk, Strategy and Financial Innovation, in particular Director and Chief Economist Craig Lewis, Jennifer Marietta-Westberg, Matthew Kozora, and Stephen Lenkey. From the Office of General Counsel, I would like to thank the General Counsel Geoffrey Aronow, Meridith Mitchell, Lori Price, Cathy Ahn, Jill Felker, and Mykaila DeLesDernier.
And now let me turn the proceedings over to Norm Champ, the Director of the Division of Investment Management, and John Ramsay, the Acting Director of the Division of Trading and Markets, who will tell us more about the rules we are considering today.
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