Thursday July 7, 2011
Good Morning. Thank you Mr. Chairman and thank you to the five teams who have final rules before us today. Over the past year you have all been under an incredible amount of pressure to complete drafts by certain deadlines. We are all aware that you have worked late nights and weekends to meet those deadlines and we are very grateful to all of you for your dedication to your work and to this agency. Obviously we could not do this without you.
We are starting the process of finalizing rules today with a group of rules that do not relate to the structural and broader issues of trading and clearing swap transactions. Nonetheless, we are beginning without a plan. There have been no Commission decisions regarding the internal process or the implementation schedule for this very important and complicated task we have in front of us to finalize the rules and regulations required by the Dodd Frank Act. We have been discussing the appropriate sequencing of final rules as well as an implementation plan for many months and at this point I am still hopeful that the Commission will move forward to adopt a reasonable phased-in approach supported by market participants. A tentative calendar for consideration of final rules has been provided to Commissioners. That schedule would require the Commission to vote on no less than 17 rules during July and August, 20 rules in September and October, and nine rules in November and December. While a few of these rules will be relatively straightforward and noncontroversial, the vast majority are based on extremely complex proposals for which staff has yet to even complete a comment summary. If we stick to such a schedule, I foresee a process that haphazardly requires votes to be taken when the Commission has not had time to sufficiently consider all of the implications of the final rules. This schedule would also make it very difficult to coordinate with fellow regulators domestically or internationally.
As I have said on a number of occasions, while we were proposing rules last fall there was room for error. When we finalize rules this fall, we do not have that luxury. I reiterate, yet again, that we should adopt a plan that starts with finalizing the entity and product definitions, and builds from there, driven by a logical progression rather than an arbitrary deadline.
I believe another issue that we as a Commission need to address is the consideration of material changes to our proposed rules. I am comfortable admitting that we probably did not get everything right in our proposals. That is why the notice and comment period required by the Administrative Procedures Act is so critical to the rulemaking process. Through that process we have received many excellent and very helpful comment letters that go a long way toward helping us get it right. It is apparent to us that market participants, trade associations and law firms have spent many long hours developing detailed comments and alternative solutions to our proposals. In my view, if we truly consider and take into account the merits of these excellent comment letters, we will have no choice but to re-propose a number of the rules from last fall. And I believe it is important for us to do just that. We need to plan for this inevitability and start discussing internally which rules need to be re-proposed. I have no indication that we are doing that yet, and it concerns me. Our goal should be to promulgate the best final rule possible, without regard to whether that requires us to re-propose. Our objective should never be to reject valid comments in order to avoid re-proposing a rule.
I support all of the rules we are voting on today, but I have lingering concerns and questions about the anti-manipulation rules. Prior to the enactment of Dodd-Frank, the Commission had broad anti-fraud, false reporting, and anti-manipulation authority. Section 753 expands that authority by amending CEA Section 6(c) to, among other things; include the concept of a fraud-based manipulation. This fraud-based manipulation has a lower scienter standard than manipulation under Section 9(a)(2), and does not require an artificial price or an effect on prices to be proven. This aspect of Section 753’s amendments to Section 6(c) is clear.
Where the amendments to Section 6(c) are not clear, and where the final rules shed no additional light, is when we will prosecute false reporting under Section 9(a)(2), as opposed to the new “manipulation by false reporting” prohibition under new Section 6(c)(1)(A) and Regulation 180.1(a)(4), or what set of circumstances will give rise to a charge under the existing manipulation prohibition under Section 9(a)(2), as opposed to the new manipulation prohibition under new Section 6(c)(3) and Regulation 180.2.
In the end, we are left with Section 753 as it is written. The final rules are true to the language of Section 753. For that reason, I support them. However, as the Commission begins to exercise this new authority, I want to make sure that they are applied in a reasonable manner that seeks to address activity that affects or threatens the integrity of our markets and does not result in unfair surprise to market participants. Using this new authority in areas with little to no connection to our markets would not be a good use of our resources.
Thank you again to all the teams. I look forward to the discussion of these rules.
Last Updated: July 7, 2011