Securities and Exchange Commission Chairman Gary Gensler and his team at the SEC have increasingly come under fire for their aggressive regulatory agenda, and there is a growing push from the securities industry for the agency to give the market more time to digest the many overlapping proposals.
That's the takeaway from the latest House Financial Services hearing entitled "Examining the SEC's Agenda: Unintended Consequences for U.S. Capital Markets and Investors."
"Throughout the last two years, stakeholders, academics and members of Congress from both sides of the aisle have expressed concerns with the volume and pace of new rule proposals from the SEC," said Kenneth Bentsen, president and chief executive officer of the Securities Industry and Financial Markets Association in his written remarks. "The data demonstrates that these concerns are well-founded. According to the Agency Rule List published by the Office of Management and Budget, the SEC is on track to propose and finalize 63 new rules by the end of Chair Gensler's first four years in office. This represents a dramatic increase in the pace of rulemaking from the previous two Chairs, Mary Jo White and Jay Clayton, who finalized 22 rules and 43 rules, respectively, that they had proposed during their terms. Of the number of rules proposed over the last two years, only eight have a specific Congressional mandate."
Many of the participants noted the fact that the U.S. has the most competitive capital markets system in the world, and tacking so many rules onto it only seeks to diminish it. But for others, it's less about the sheer volume and more about the lack of expertise the Commission seems to show in much of the language put forward by the proposals.
"Many of the proposed rules have substantive and procedural flaws," said Dalia Blass, a partner at Sullivan and Cromwell. "Some failed to show an accurate understanding of the markets, the role of intermediaries or the participants they seek to regulate. Others rely on speculative statements rather than a rigorous substantive analysis backed by factual and empirical evidence and generally throughout there is no analysis of the interconnections and interdependencies that we're now starting to see with dozens and dozens of rules in our hindsight. To address at least some of these deficiencies, the SEC should publish a thorough analysis of the cumulative effect of its interconnected proposals, reopen comment periods thereafter to provide stakeholders with an opportunity to understand and assess these interconnections holistically."
Even wider than the Commission's multitude of proposals is the proposal to implement changes to the current U.S. Basel III capital rules, introduced by the Federal Reserve, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation and intended to bring the capital rules up to date. Hearing witnesses took aim at that as well.
"Where we are concerned at SIFMA is that it raises the capital on the trading book by as much as 70% and when you add that to what the US has uniquely, the stress testing regime and something known as the global market shock, it's really a compounding, a double counting effect," Bentsen said. "When you consider that the dealer banks that will be subject to this proposal, comprise the vast majority of the of the underwriting and trading market for traditional assets, whether it's corporate debt, treasuries, munis, equities, securitizations, it's really going to create a squeeze on market capacity," Bentsen said.
Despite the massive pile on and agreement on display among those testifying and those House members holding the hearing, it wasn't all venom.
"We cannot say that we do not want the United States to have a leadership role by actually passing regulations, and then complain about the fact that other people led," said Rep. Sean Casten, D-Ill. "We are sailing down a path whereby if we stop the SEC from acting, we're basically deferring leadership to other countries."
"There may be justification for certain rules such as the transition of the security settlement cycle from two days to one which SIFMA and the industry strongly support, or those mandated by the Dodd Frank Act," Bentsen said. "We remain concerned, however, that the SEC is not sufficiently prioritizing its agenda and in several cases is acting without clear evidence of market failure or direction from Congress."
