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SEC Chairman White Wows House Committee

By    |   Wednesday, 29 May 2013 03:09 PM

On May 16, the newly installed chairman of the Securities and Exchange Commission (SEC), Mary Jo White, made her first appearance before the House Financial Services Committee and sat for nearly three hours of intense questioning by legislators on a wide variety of political rants and regulatory issues of concern to constituents and clients.

This article will cover the atmospherics and some key issues, with more details to come. The articles will seek to provide perspective that was lacking at the hearing, despite its length, because questioners, particularly on the committee, tend to repeat questions over and over, as they each want credit from their constituents and clients and because of the sheer number of members who serve on the committee because of its legendary reputation as a platform for campaign fundraising from an extensive array of special interests, especially in the financial sector.

Members congratulated White on her unanimous confirmation as chairman, and even members who asked questions with a critical tone regarding the agency's performance usually ended with remarks about how much they are looking for improvement under her chairmanship.

Of course, if the agency continues to languish, the tone could change, and the pressure of constituent lobbying is so great that the honeymoon could end as soon as the SEC issues its first regulation under the new regime.

Committee Chairman Emeritus Spencer Bachus, R-Ala., was clearly enthralled by White, smiling broadly throughout his speech and promising to work for bipartisan support for the budget increase she seeks. In all the questions, not a single discouraging word was uttered regarding the fact that White is married to a former division head of the SEC and that both have practiced law at one of the most prominent Democratic law firms, Debevoise, which represents an abundance of Wall Street clients. The potential for a mom and pop operation to develop that would create untold conflicts of interest appears to be hidden in plain sight.

As for the specific issues raised, the theme, as it has been since before the enactment of the Dodd-Frank Act, to give regulators new powers to make sure that the decades-old and ongoing financial crisis will "never happen again," is gradually to exempt the clients and either to repeal it piecemeal or render it almost totally ineffective.

The financial industry has demonstrated with previous major regulatory bills that it knows how to accomplish this, which is why I pronounced the Dodd-Frank Act dead before it was even enacted.

The following are three examples of the tone and content of the questioning:

1. Disclosure of political contributions. Several Republican members expressed alarm at the prospect that the SEC might issue regulations that would require companies to disclose their political contributions, suggesting that this is an infringement of First Amendment rights and vaguely tying it to disclosures of politically motivated activities at other federal agencies.

Successive questioners extended the potential reach of their concern to encompass the possibility that the regulations might require disclosure of the political contributions of officers, directors and managers of the enterprises. Members also criticized the SEC for straying into regulatory areas that are merely discretionary while neglecting to complete its agenda of Dodd-Frank and Jumpstart Our Business Startups (JOBS) Act regulations.

White responded that the SEC is considering a petition to require such disclosure, but that it is not currently working on a regulation. She repeatedly assured the committee that the SEC would not pursue a political course and that she herself is a very independent person.

The committee is clearly giving her the benefit of the doubt, because the honeymoon is very much in effect. It fell to Brad Sherman, D-Calif., to make the argument that corporate CEOs should not have a unique constitutional right to fund their political expression with other people's money, but he stumbled a bit when he asserted that since the petition to the SEC came from nine professors, they wouldn't have corporate or other interests or motives of their own.

2. JOBS Act regulations. Republicans pestered White repeatedly about when the JOBS Act regulations will be completed, and one of them went down the list of each part of the act, which is designed to facilitate capital raising by startup companies.

The underlying premise is that there has been a precipitous decline in the number of initial public offerings (IPOs) and that this is causing the United States to lose its global competitive edge. Another way of putting this is that Wall Street is falling behind its expectations as to fees from IPO and merger and acquisition activity.

There was no mention of the likelihood that former Chairman Mary Schapiro chose to slow down the process as a way of paying the Republicans back for their efforts to delay Dodd-Frank regulations by insisting on strict cost/benefit analyses and holding up funding for the agency.

Also, an advisory committee to the SEC has warned that the JOBS Act has the potential to unleash a new wave of securities fraud upon state regulators. White gave the legislators rhetorical satisfaction by repeatedly assuring them that promoting capital formation by the small business sector is one of her highest priorities.

3. Cross-border application of derivatives regulations. As reported in an earlier article, banking industry opponents of derivatives regulation have enlisted the SEC in an effort to discredit the lonely campaign by Commodity Futures Trading Commission Chairman Gary Gensler to apply U.S. derivatives regulations, including capital and margin requirements, to all transactions with a U.S. nexis, even if they are conducted abroad.

Gensler's argument is that regardless of where these transactions are conducted, when they go bad, the risk comes back to the United States. He has said he speaks from experience because he designed some of these devices while he worked for Goldman Sachs.

The SEC's rule would permit covered entities to avoid the U.S. rules through so-called "substituted compliance" by showing that the regulations of the foreign jurisdictions are sufficient. The banks have enlisted foreign institutions and even regulators to lobby U.S. congressmen, and these complaints that the United States is becoming uncompetitive in the global market have been raised at every opportunity.

Interestingly, when Treasury Secretary Jack Lew was asked about this during his testimony before this committee, he shot back that his colleague finance ministers don't know what they're talking about and that the United States must set a good example for the other countries to follow.

That's clearly not what the bankers have in mind, so this issue will continue to fester and to be raised at every hearing of the congressional banking and agriculture committees.

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On May 16, the newly installed chairman of the Securities and Exchange Commission (SEC), Mary Jo White, made her first appearance before the House Financial Services Committee and sat for nearly three hours of intense questioning.
Wednesday, 29 May 2013 03:09 PM
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