SIFMA must stay active as regulatory rules are drawn up

The following are remarks delivered by RBC Wealth Management (U.S.) chief executive John Taft, the incoming chairman of the Securities Industry and Financial Markets Association, at the organization’s annual meeting Nov. 8 in New York.

Two hundred and thirty-five rulemakings, 41 reports, 71 studies authored by 11 different federal agencies, bureaus and the Government Accountability Office.

That’s what the Dodd-Frank Act requires be accomplished over the next two to five years.

This massive undertaking — the single largest delegation of rulemaking authority by Congress to regulators in modern history — is a daunting task. But fortunately, in contrast to last fall and spring, work on Dodd-Frank has become somewhat depoliticized.     

During the legislative phase of financial regulatory reform, we all listened to and witnessed a lot of misinformation, heated rhetoric and anger.

Now we’ve moved from a hot medium to a cool one. From rhetoric to analysis. From emotion to fact. From political theatre to operating realities.

SIFMA can and must step up to provide the critical input regulatory bodies need to write these rules.

Frankly, our biggest fear is that regulators will be overwhelmed by the assignment — not because there aren’t good, smart people working there, but there simply aren’t enough of them.

And many of these agencies are being asked to take an oversight role that is outside of anything they’ve done in the past. There’s simply not a legacy of core competency around certain issues.

They need help. They know they need help. And believe it or not, they welcome it.

So we are doing everything we can to provide fact-based, content-rich analysis to provide the expertise required to create rules that will help the financial services industry do what we do best — when we stay focused on and remain true to our mission — which is to facilitate and foster economic growth … something our country desperately needs right now.

As your chair-elect for the past year, I am proud of the way SIFMA embraced responsible financial reform from very outset of the Dodd-Frank debate.

Even before the crisis of 2008, we discussed in SIFMA board meetings the fact that the rules under which we were operating, many of which written at the beginning of the last century, were simply not adequate to govern the functioning of our modern financial system.

SIFMA was then, and continues to be, a leading advocate for financial regulatory reform — but reform that balances the creation of a safer, sounder, more secure financial system with the recognition that that system is critical to economic growth.

In order to achieve that balance, we need to help regulators write regulations that prevent the broad and deep contagion that infected the entire system two years ago, without inhibiting the ability of our financial institutions to promote economic growth.

Does Dodd-Frank do that?

We simply don’t know yet. Certainly, in broad strokes, that was its intent.

But whether it will deliver on the intentions of its congressional authors depends entirely on just how, over the next two to five years, legislative mandates get translated into regulations.

Some new rules are coming down fast. The [Commodity Futures Trading Commission] wants the new regs governing derivatives written by Christmas.

But this phase of reform shouldn’t just be about meeting rulemaking deadlines; it’s about getting it right. We need to get it right. The stakes are too high for anything less.

Poorly crafted regulations could have unintended consequences that constrain capital formation or even increase systemic risk — the exact opposite of the intent of Dodd-Frank.

How is SIFMA responding?

We recognize that to be most effective, we need to prioritize. So for the past several months, since Dodd-Frank was enacted, and through 2011, SIFMA is focusing primarily, but not exclusively, on the following priority issues:

Systemic risk. SIFMA has unequivocally supported the need to eliminate the risk of firms’ being “too big to fail.” But what institutions will be designated as systemically significant? How will they then be regulated? Who will have a 360-degree view of all systematically important financial institutions?

Dodd-Frank created two new entities: the Financial Stability Oversight Council and the Office of Financial Research.

As currently written, the FSOC will oversee bank holding companies with total consolidated assets of more than $50 billion, and can also designate non-bank financial institutions as systemically significant by a two-thirds vote of its members.

What criteria will be in place to designate a firm as systemically significant? We believe assets alone should not be the standard — the $50 billion cited in the bill is likely too low — and interconnectedness of business lines needs to play a role. Here, as throughout the rulemaking process, details need to be hammered out.

Resolution authority. How do we, going forward, handle a failure of a large, interconnected firm? To preserve market stability and prevent risking taxpayer money, SIFMA supports having a comprehensive resolution authority wind down any failed financial institution.

Dodd-Frank now grants that authority to the FDIC. Also, large complex companies are required to submit living wills periodically to both the [Federal Deposit Insurance Corp.] and the [Federal Reserve].

Derivatives regulation. As we all know, the watchword here is transparency. SIFMA supports using clearing organizations for standardized transactions, and data repositories for all other OTC derivative transactions — all under federal regulatory oversight that ensures the availability of complete trading information.

Starting almost immediately, the trading of derivatives will move from a primarily over-the-counter market to central clearinghouses and exchange trading, overseen by the CFTC and the [Securities and Exchange Commission]. The rules under which the CFTC and SEC carry out their oversight remain to be written.

When it comes to securitization, Dodd-Frank mandates risk retention of 5%, with an exemption for securitizations of “qualified” mortgages — your plain-vanilla, well-underwritten, 30-year home loan. It also states that regulators should reduce their use of credit-rating agencies. What that means in real terms still needs to be determined through the rulemaking process.

We are also focusing on capital and liquidity requirements. Dodd-Frank has moved in the same direction as the Basel III proposals, but again, numerous details need to be resolved to avoid unintended negative consequences.

The legislation requires systematically important companies to maintain a debt-to-equity ratio of 15-1, with preferred and hybrid capital counting as Tier 2, not Tier 1, capital. Banks are required to hold a 30-day liquidity buffer. A counter-cyclical means of permitting banks to build in capital buffers has yet to be formulated.

Under the part of Dodd-Frank known as the Volcker rule (our next priority) — created in an attempt to get at the root cause of the financial crisis (which, by the way, we don’t believe it does) — all proprietary trading by bank holding companies is prohibited. And bank holding companies are generally prohibited from investing in, advising on or owning hedge funds or private-equity funds.

Pure proprietary trading for one’s own account is a limited activity for most banks. But trading and taking positions in securities has been an essential market-making tool. It keeps markets liquid, too.

In light of that fact, we’re working with regulators to implement the Volcker rule in a way that does not inadvertently limit market making and, in turn, reduce liquidity — outcomes that would increase volatility and risk.

Fiduciary standard. Our final rulemaking priority is the creation of a federal fiduciary standard that would apply uniformly to all investment advisers and broker-dealers who provide personalized investment advice to retail investors about securities, regardless of their business model. We need to make sure the standard is written in a way that preserves investor choice of the products and services that best fit individual investment needs.

Systemic risk, resolution authority, derivatives regulation, securitization, capital and liquidity requirements, Volcker, a new fiduciary standard of care. Those are just the primary areas SIFMA is addressing.  I haven’t even mentioned the fact that these and other new regulations need to work with existing global regulations, and will need to coordinate with rules still evolving overseas.

The good news is that we have the expertise within SIFMA — our staff, our board, our members — and we will commit the necessary resources to provide regulators with the guidance, data, facts and intellectual content they need to get it right.

Here’s my [request] to all of you: Get involved. Understand how we’ve organized and how we’re mobilizing. Join the committee that represents your particular area of expertise.

If you can’t make that kind of commitment, communicate with committee members. You don’t have to know who to call — call who you know. Send us your thoughts on how we can most effectively operationalize Dodd-Frank.

Remember, this is an evolving process. Follow the rulemaking with us. Every commentary we provide to the regulators will be posted the day it is submitted on sifma.org — which, by the way, has been totally redesigned and reorganized to be more user-friendly than ever.

This is a messy process. But it is the process that will create the rules we will operate under for years and years to come. It’s a process we are deeply involved in. It’s a process that you all, as SIFMA members, have a responsibility to be part of. We know what we need to do. Help us get it done for the sake of our industry, our economy and our country.

Only by working together can we maximize the chances that we will get this right.

Related Topics: Securities Industry And Financial Markets Association (SIFMA), SIFMA