SEC ticks off accomplishments, outlines priorities

The following is an edited version of testimony by Securities and Exchange Commission Chairwoman Mary Jo White May 5 before the Senate Appropriations Subcommittee on Financial Services and General Government.

Understanding the growth in the size and complexity of the [SEC’s] responsibilities with regard to market participants and investment products is critical to assessing the agency’s funding needs. From fiscal 2001 to the start of this fiscal year:

• Assets under management of SEC-registered investment advisers increased approximately 254% from $17.5 trillion to approximately $62 trillion.

• Assets under management of mutual funds grew by 143% from $6.4 trillion to $15.6 trillion.

• Annual trading volume in the equity markets more than doubled to in excess of $67 trillion.

During this same period, the SEC’s responsibilities have also dramatically increased, adding or expanding jurisdiction over securities-based swaps, private fund advisers, credit rating agencies, municipal advisers and clearing agencies, among others. Improvements to technology and operations have made the agency more efficient and effective, but to continue to meet our mission, we must be able to keep pace with the growing size and complexity of our markets and the entities participating in them.

The agency today oversees more than 25,000 market participants, including nearly 12,000 investment advisers, approximately 10,500 mutual funds and exchange-traded funds, nearly 4,500 broker-dealers and about 450 transfer agents. The agency also oversees 18 national securities exchanges, 10 credit rating agencies and eight active registered clearing agencies, as well as the Public Company Accounting Oversight Board, the Financial Industry Regulatory Authority Inc., the Municipal Securities Rulemaking Board, the Securities Investor Protection Corp. and the Financial Accounting Standards Board. The SEC also has responsibility for reviewing the disclosures and financial statements of 9,000 reporting companies and for enforcing compliance with federal securities laws.

The SEC’s FY 2016 budget request seeks to address our current needs and the challenges we face by providing resources to allow the SEC to hire an additional 431 staff in critical, core areas and enhance our information technology. Specifically, the requested budget level would allow the SEC to advance several key and pressing priorities, including:

• Increasing examination coverage of investment advisers and other key entities that service retail and institutional investors.

• Further leveraging cutting-edge technology to permit the SEC to better keep pace with the entities and markets we regulate.

• Protecting investors by expanding our enforcement program’s investigative capabilities and strengthening our ability to litigate against wrongdoers.

• Strengthening the SEC’s economic and risk analysis functions.

CRITICAL REFORMS

This year, the SEC has accomplished a great deal in many areas important to our mission and in fulfilling congressional mandates. Over the last year, informed and supported by rigorous and robust economic analyses, the commission has adopted a series of critical reforms, including rules that directly respond to the financial crisis and that protect the integrity of our markets. We have made substantial progress implementing the rule makings mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups Act. The rules on which the commission has taken action in the last year include:

Asset-backed securities. The commission completed rules requiring significant enhancements to registered offering disclosures for asset-backed securities, a market with $4.8 trillion in issuances over the past decade that includes the types of securities backed by residential and commercial real estate that played a central role in the financial crisis.

Credit rating agencies. The commission finalized over a dozen rules that will reduce conflicts of interest and strengthen the integrity of nationally recognized statistical ratings organizations and the transparency of their ratings.

Money market funds. The commission completed reforms designed to enhance the structure and operation of the $3.7 trillion money market fund market to enhance the protection of investors and to support financial stability.

Security-based swaps. The commission proceeded with the next critical phase of its implementation of Title VII of the Dodd-Frank Act, adopting new rules for previously unregulated derivatives and establishing registration and reporting requirements for security-based swap data repositories.

Capital formation. On March 25, the commission voted to adopt a potentially transformative rule under the JOBS Act to significantly enhance the existing Regulation A exemption from registration for small offerings of securities. The commission also advanced rules to implement JOBS Act provisions concerning registration and reporting thresholds.

Risk retention. As required by the Dodd-Frank Act, the commission approved a joint agency rule requiring sponsors of securitization transactions to retain risk in those transactions.

Market stability and oversight. The commission adopted Regulation Systems Compliance and Integrity, creating for the first time mandatory technology and systems standards and reporting for significant market participants intended to reduce systems issues and improve the overall resiliency of our markets. Also on March 25, the commission voted to propose rule amendments to enhance the supervision of large proprietary trading firms, including those engaged in high-frequency trading, which would require that broker-dealers trading in off-exchange venues become members of a national securities association.

ENFORCEMENT RESULTS

The Division of Enforcement continued to achieve significant results, filing 755 enforcement actions and obtaining orders for more than $4.16 billion in disgorgement and penalties in fiscal year 2014. Notable actions include the first series of cases involving violations of the “market access” rule, the first action enforcing the rule against investment advisers participating in “pay to play” arrangements, the first action against a private- equity firm relating to its allocation of fees and expenses, and the first anti-retaliation case to protect a whistleblower who reported improper trading activity. Structural and strategic enhancements within our Office of Compliance Inspections and Examinations have led to a more effective, efficient examination program.

Despite significant progress, there is much that the SEC still needs to do. Outlined below is a brief overview of some of the key components of our request.

1. Expanding oversight of investment advisers. Our current level of resources is not sufficient to permit the SEC to adequately examine investment advisers in a way that investors expect and deserve. The number of registered advisers has increased nearly 35% over the last decade, and the assets managed by these advisers have more than doubled. At the same time, the industry has become more complex, as evidenced by the increasing use of new and sophisticated products such as derivatives and structured products; the increased use of technologies that facilitate high-frequency and algorithmic trading; and the growth of companies with integrated operations that include both broker-dealer and investment adviser affiliates.

Even with the SEC’s efficient use of limited resources to improve its risk assessment capabilities and focus its examination staff on areas posing the greatest risk to investors — efforts that helped to increase the number of investment adviser examinations approximately 20% from FY 2013 — the SEC was only able to examine 10% of registered investment advisers in FY 2014.

Under the FY 2016 request, a top priority will be to hire 225 additional examiners, primarily to conduct additional examinations of investment advisers. The examiners would assist the agency in increasing its examination coverage of advisers to an anticipated rate of approximately 14% per year.

The agency also would add positions to improve oversight and examinations of broker-dealers, clearing agencies, transfer agents, self-regulatory organizations, swap data repositories, municipal advisers and, in the future, crowdfunding portals, among others.

2. Continue to leverage technology. In FY 2016, the SEC plans to build on the substantial progress made over the past few years to modernize its technology systems, streamline operations and increase the effectiveness of its programs. [It] would support a number of information technology initiatives, including:

• Data analytics tools, to assist in the integration and analysis of huge volumes of financial market data, employing algorithms and quantitative models that can lead to earlier detection of fraud or suspicious behavior.

• Electronic data gathering, analysis and retrieval modernization, an ongoing, multiyear effort to simplify the financial reporting process to promote automation and reduce filer burden. With a more modern EDGAR, both the investing public and SEC staff will benefit from having improved access to better data.

• Examination improvements, aimed toward improving risk assessment and surveillance tools that will help the staff monitor for trends and emerging fraud risks, as well as improving the workflow system supporting SEC examinations.

• Tips, complaints and referral system enhancements, to bolster the flexibility, agility and adaptability of the system.

• Enforcement investigation and litigation tracking, to support enforcement teams with handling the substantial volume of materials produced during investigations and litigations.

BOLSTER ENFORCEMENT

It is vital to the SEC’s mission to bring timely, high-quality enforcement actions when violations of the federal securities laws are identified. The agency must adapt its enforcement function to keep pace with the growing size and complexity of the nation’s markets and to send strong messages to wrongdoers that misconduct will be swiftly and aggressively addressed. For FY 2016, the SEC is requesting 93 new positions for the Division of Enforcement.

Analysis of large data sets, including SEC filings and trading data in equities, options, municipal bonds and other securities, helps to limit investor harm by permitting earlier detection of misconduct. The SEC’s enforcement program expects that both an increasing number of high-quality tips, complaints and referrals, and its improved data analysis capabilities will yield additional case leads through FY 2016.

In addition, in recent years an increasing percentage of enforcement actions have been filed as contested matters, as opposed to being fully settled at the outset. This has led to more trials than in the past, a volume that is expected to continue to grow.

Related Topics: Securities and Exchange Commission