SEC Commissioner Piwowar Speaks at CA ’40 Acts Group Lunch

HarietBrittThe April meeting of the CA ’40 Acts Group, attended by Oyster Senior Consultant Harriet Britt, had the pleasure of hearing the remarks of SEC Commissioner Michael Piwowar, with an open question and answer session.  Michal Piwowar is the sole Republican of the three current Commissioners.  He discussed the problems the Administration has had gaining approval of the appointees to the Commission by Congress.  The Commissioners were also concerned they would be known as the “do nothing” Commission, so their staff was directed to put together a list of issues where the Commissioners could work towards an unanimous agreement.  Because the Commission is required to have a majority approval of a rule by the Commissioners based on 5 members, all 3 current Commissioners must approve or reject a proposal.

The bulk of the Commissioner’s remarks concerned the Commission’s response to the FSOC’s “too big to fail” initiatives, as the FSOC’s perspective is really bank driven and not compatible with fund advisors and fund companies.  The Commission is responding to FSOC work by focusing on the concepts of “too big to fail,” but in ways that are appropriate for an asset management firm rather than a bank.

The Commission is focused on 5 areas resulting from Dodd Frank mandates that should also address FSOC issues:

  1. Data modernization
  2. Liquidity risk management
  3. Derivatives use in mutual funds
  4. IA transition plans (similar to banks)
  5. Stress testing of asset managers

Most of Mr. Piwowar’s remarks in this area concerned data collection and related issues in the Securities Modernization Act, and stress testing.  The Commissioners have acted on IA transition, data modernization and liquidity, and expect to have the numbers 1 – 3 listed above completed by January.  (This time frame is related to the end of Chair Mary Jo White’s term and the elections.) Derivatives will probably not be resolved by January.  Mr. Piwowar made it clear that in order to appropriately address issues related to liquidity, they must have resolved data collection and have actionable data.

Mr. Piwowar also made interesting remarks about liquidity management.  In order to appropriately address liquidity management, the Commission must complete data gathering, stress testing and identify liquidity “buckets” used to categorize securities by level of liquidity. Concerns about a proposed seven day minimum level of liquidity were discussed.  He relayed a specific and actual example where a seven day minimum level of liquidity would have hampered an asset manager’s ability to make investments that both helped stabilize a segment of the market and make good investment for its clients during the 3rd Avenue Funds closing.  Mr. Piwowar is concerned that imposing very specific liquidity controls may result in asset management firms that all look alike, subjecting those firms, their clients and the industry as a whole to extra systemic risk.  He stated that the SEC must get this liquidity management absolutely right.

During the question and answer period, Mr. Piwowar discussed the concept of the use of third parties to conduct audits to help fill the resource gap.  He suggested that House Republicans would love to use this approach but he doesn’t believe that the House has thought through the costs, who would the resources be and what type of qualifications are required.  While the SEC agrees these issues need to be resolved, he does think that at some point we will be relying on them.

Mr.  Piwowar also commented that “someone” at the SEC would be tasked to FINRA oversight, since the SEC is moving more of its exam resources from the broker-dealer group to the investment advisor group.

Discussion took place regarding the distribution of mutual fund information (and other types of information as well) to investors and clients electronically.  The Commissioners are actively seeking input and data on this topic.  The consensus from the attendees was that this was an important issue.  Clients want the information electronically, and firms want to deliver that information electronically with lower cost.  A few joking remarks were made to the extent that Broadridge was the only advocate on the “paper” side of the debate.

Mr. Piwowar shared his thoughts on the DOL Fiduciary Rule as well.  He asked the important question – will there be a role for the SEC?  According to Mr. Piwowar, the SEC was “outflanked” by the DOL, especially in the view that any commission-based advice is bad advice.  He noted that the DOL actually had video clips on its website that were, in his opinion, staged propaganda.  His view is that the rule will drive compliance costs up significantly, and small households will be priced out of the marketplace and not receive any education or advice.  This rule does not benefit the small investor, but the trial lawyers.

When asked whether or not the SEC would take up the DOL issue of broker-dealers having a fiduciary responsibility, his answer was “no”.

What really scares him?  Cyber-security.  Not just as it impacts our clients, but on companies, the SEC and all government agencies.