Tags: Luparello | SEC | Garrett | market

House Subcommittee Looks at SEC and Equity Markets

By    |   Wednesday, 02 Jul 2014 07:56 AM

The House Financial Services Committee's Subcommittee on Capital Markets and Government Sponsored Enterprises, chaired by Rep. Scott Garrett, R-N.J., conducted a hearing June 27 titled "Oversight of the SEC's Division of Trading and Markets." The sole witness was Stephen Luparello, director of the division.

This is the third article devoted to hearings that appear to have been spawned by the recent Michael Lewis book, Flash Boys. Rep. Randy Neugebauer, R-Texas, quipped that policymakers have still not full digested Lewis' earlier book, Liar's Poker. The next article in this series will be based on a presentation of Flash Boys.

The Securities and Exchange Commission (SEC) is organized, if that is the word, as an array of divisions and offices that operate as semi-autonomous fiefdoms. Another way of looking at this agency is that it is modeled after a church that pursues a three-part mission and grants indulgences known as "no-action letters" that can be procured from the priesthood of the agency through minister/lawyers who pass through the revolving door.

For example, prior to joining the SEC, Luparello was a partner at the law firm of WilmerHale and worked at several entities associated with the regulation, or self-regulation, of the securities industry, including FINRA, the CFTC, the DTCC and, of course, the SEC. He received his undergraduate and law degrees, respectively, from LeMoyne College and Washington and Lee University, two institutions off the beaten path of Wall Street recruitment.

The catechism of the SEC goes something like this and will be heard from virtually every witness who represents the agency as well as committee members who are willing to accept this message: The SEC's three-part mission is "to protect investors; maintain fair, orderly and liquid markets; and facilitate capital formation." America's capital markets are the broadest, deepest, most liquid markets and the envy of the world. (Fannie Mae and Freddie Mac used to claim that America's mortgage finance system was "the envy of the world." How did that work out?) To balance the dogma and the catechism, it would be fair to point out that the failure of the SEC's Consolidated Supervised Entity Program for regulation of the too big to fail investment firms Goldman Sachs and Morgan Stanley contributed mightily to the ongoing, permanent financial crisis.

In a comprehensive opening statement, Garrett identified two major areas where he would like to see change at the SEC — a thorough analysis of the markets in order to achieve a level playing field and Regulation National Market System, presumably to be measured against the SEC's mission to maintain fair, orderly, liquid markets.

Rep. Carolyn Maloney, D-N.Y., praised SEC Chair Mary Jo White for doing an "admirable" job, and she referred to White's denial that the markets are rigged.

Rep. Stephen Lynch, D-Mass., questioned how it could by possible that two firms that engage in high-frequency trading could go four and five years without ever having a losing day. (The answer might be, "I've got algorithm. Who could ask for anything more?")

Luparello's testimony provides a catalog of the many activities it conducts on behalf of the agency's mission. If the SEC's Division of Trading and Markets were an agency in its own right, it would be a significant one.

Garrett began his questioning by asking Luparello whether the markets are rigged and whether investors should have confidence. Luparello admitted that the agency needs to do more to reassure investors. (Alex Pollock of the American Enterprise Institute has challenged the notion that the SEC should foster investor confidence, warning that "a confident investor is a stupid investor."

(Archived video and the staff memorandum can be found here.)

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Robert-Feinberg
The House Financial Services Committee's Subcommittee on Capital Markets and Government Sponsored Enterprises conducted a hearing June 27 titled "Oversight of the SEC's Division of Trading and Markets." The sole witness was Stephen Luparello, director of the division.
Luparello, SEC, Garrett, market
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2014-56-02
Wednesday, 02 Jul 2014 07:56 AM
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