By Richard Baker
| SEC Chairman Mary Jo White; Photo: (Bloomberg)
Former U.S. attorney Mary Jo White assumes the chairmanship of the Securities and Exchange Commission with the table set for a number of reforms that could benefit investors and markets. While she will have no shortage of issues to address, there are several priorities that she should focus on early in her administration.
With Chairman White’s experience as a prosecutor, she will continue the SEC’s focus on enforcement in the marketplace and we support her in this mission. Rooting out bad actors, wherever they may be, is essential to the fair, efficient and transparent function of our capital markets. The SEC must continue to take a hardline approach, enforcing the rules of the road for the benefit of all investors.
As for the rules awaiting implementation, which Chairman White noted in her Senate testimony, the SEC needs to adopt the Jumpstart Our Business Startups, or JOBS, Act rules for Regulation D offerings. Last April, with broad bipartisan support, Congress enacted the JOBS Act to modernize several aspects of the securities laws and ignite job growth. President Barack Obama supported the bill and signed it into law. Among the provisions in the bill, Congress instructed the SEC to amend its rules to help companies raise funds in “private placements” under SEC Regulation D, that is, certain securities offerings not involving sales to the public. Old Regulation D prohibits virtually any type of public communication, effectively silencing all private offerings, including offerings for private funds. The SEC proposed rules to implement these JOBS Act provisions last August but has not adopted them.
The value of these changes is not only in greater transparency for investors, but in helping to realize one of the main goals of the JOBS Act: helping businesses raise capital. There is real consensus that our economic recovery could stall if capital does not get off the sidelines. By adopting the rule the SEC proposed last August, Chairman White can help increase business investment, an important national priority.
As the JOBS Act would apply to hedge funds and other private companies, the SEC has been pressured to narrowly implement this law with respect to the way these companies are allowed to communicate with qualified investors, for fear it will endanger retail investors. It will not. The JOBS Act changes only who may know about a company conducting a Regulation D offering; it does not change who may buy into a Regulation D offering. The JOBS Act limits investments in such companies to qualified investors, including individuals with at least $1 million of net worth, excluding their primary residence. Congress has also constructively asked the SEC to review this qualification level in 2014 and increase it if appropriate.
Another issue significant to investors and market efficiency is the coordination of regulation between the SEC and the U.S. Commodity Futures Trading Commission. The Dodd-Frank Act and other regulatory mandates have required many hedge fund managers to register with both the SEC and the CFTC. In addition to having separate and different registration procedures, each agency requires its own systemic risk reporting.
While the SEC and CFTC made efforts to coordinate some rules, others have been implemented in a piecemeal fashion, resulting in burdensome and sometimes conflicting regulations that have been damaging to investors and the capital markets. The U.S. is perhaps the only industrialized country that separates securities and futures regulation, and as a matter of international competitiveness, the SEC and CFTC must coordinate more effectively. We urge Chairman White to work with CFTC chairman Gary Gensler to develop a better-coordinated regulatory framework.
Finally, the SEC should also work to finalize the Dodd-Frank rules for security-based swaps. These derivatives are essential financial tools to manage risks for investors. Dodd-Frank imposes an extensive regulatory framework on derivatives to prevent a repetition of events such as the collapse of AIG. Although the SEC has issued proposals related to many of the security-based swap rules, the SEC has yet to finalize many of those rules.
Among Dodd-Frank’s most important requirements is a law that requires the most active market participants to clear swaps through a central clearinghouse, as is commonly done with stock trades. Clearinghouses process trades, eliminating credit risk between the parties to the original trade and reducing the likelihood of systemic problems. These rules can provide extensive protections and reduce unneeded cost.
We urge Chairman White to swiftly complete all of the SEC’s clearing rules for security-based swaps. The CFTC largely has completed its work; the SEC must do its part.
Rulemaking is challenging and complex. The SEC has done an admirable work in soliciting views from a range of stakeholders before finalizing rules, but Chairman White’s SEC must now focus on finishing the job. There is no need for further delay. As she said in her confirmation hearing, “The SEC needs to get the rules right, but it also needs to get them done.”
As investors, we could not agree more.
Richard Baker is president and CEO of the Managed Funds Association of Washington, D.C., the largest hedge fund industry trade group in the U.S.