Thursday, August 4, 2011
Good Morning. Thank you Mr. Chairman and thank you to the three teams that have final rules before us today. I want to again acknowledge the excellent staff work that has gone into getting these final documents ready for Commission consideration and let all the team members know how much we appreciate your commitment to the enormous challenge the Commission has in implementing Dodd-Frank.
As I have said many times, finalizing the many complex rule proposals dealing with market structure and business conduct standards will be a difficult uphill climb. I believe it is a mistake for us to begin the process without a plan to logically sequence our consideration of final rules along with a transparent implementation plan. As a result, I intend to vote against setting any additional meeting dates to consider final Dodd-Frank rules until sequencing and implementation plans are in place.
Regarding the final rules we are considering today, I support the Agricultural Swaps final rules because it makes sense to me to treat Ag Swaps like all other swaps. I do have questions on how the repeal of Part 35 will impact the Exemptive Order the Commission recently issued to provide legal certainty to swap transactions and market participants while the comprehensive regulatory regime for swaps is still being established. It appears inevitable that the Commission will need to extend all, or portions of, that Exemptive Order beyond December 31, 2011, the date upon which Part 35 will be repealed. I want to make sure that we and the public clearly understand how we do that so there is no uncertainty as we get closer to December 31st.
I have concerns about the Swap Data Repository rules that are primarily directed at the issues we don’t address in the final rules. The rules require SDRs to establish automated systems for monitoring, screening and analyzing swap data, but we do not address the specific functions we expect SDRs to perform in this respect. Rather, we require that SDR systems be capable of fulfilling any monitoring, screening and analysis tasks that the Commission may require on an ad hoc basis when our knowledge of the markets is more fully developed, and to perform any standing swap surveillance objectives the Commission may establish in the future. The rules also fail to address how the Commission will handle the aggregation of data for surveillance and regulatory purposes, or how those duties will be divided between the Commission and SDRs. For foreign SDRs, we correctly acknowledge that the feasibility of considering a recognition regime with a foreign regulator will depend on the comparability and comprehensiveness of the regulatory regime in that jurisdiction. The Commission has a strong tradition of relying on foreign regulators in other contexts, and I believe we should continue this tradition for the supervision of foreign SDRs, wherever appropriate. Within the Commission, we should have a clear process for relying on foreign regulators while ensuring that we comply with our statutory duties, building upon existing MOUs to the greatest extent possible.
Other issues related to core functions that SDRs will perform, such as real time reporting, record keeping requirements and data standards are intended to be addressed in later rulemakings. It would have made more sense to me to consider these related rules as a group so entities that are considering registering as SDRs would know what specific functions and duties will be required of SDRs. Additionally, I have concerns about how we will access the swap data provided to SDRs which I believe is a critical part of our role as a regulator. I understand that this is not our final bite at the apple for SDRs but wish we would have considered a more holistic approach to this new structure.
Before I finish, I would like to say a few words about the Whistleblower rules. The primary purpose of a Whistleblower program is not to pay awards to whistleblowers. The primary purpose is to prevent, detect and remedy violations of the Commodity Exchange Act as efficiently and cost-effectively as possible. In order to be efficient and cost-effective in this regard, I believe robust internal compliance programs and thorough internal investigations are absolutely necessary to successfully prevent, detect and remedy violations, particularly given the Commission’s resource restraints. I believe that this rule does not sufficiently address the potential for thousands of new tips or complaints and how this new office will prepare for this outcome. I understand establishing this office is required by Dodd-Frank but I do not think we appropriately evaluated the increased costs to the agency of not choosing a less burdensome approach.
Setting up a Whistleblower program that allows all Whistleblowers to by-pass internal compliance programs will likely deprive such programs of the very information they need in order to be robust and effective. The fact that the position of a “Chief Compliance Officer” has been significantly elevated in our proposed rules and appears prominently in what the Commission intends to require of registered entities underscores the importance that is placed on internal compliance programs by the Commission and by Congress.
I believe a better approach to our Whistleblower program would have been to require internal reporting as the norm, with the ability for a Whistleblower to bypass internal reporting upon a good faith showing that such reporting would be impracticable or unsafe for the Whistleblower. Another potential approach would have been to require simultaneous reporting internally and to the Commission. This would have ensured that any internal investigation could be conducted under the watchful eye of the Commission, and would have made certain that the Whistleblower knew that the Commission was watching. We did not explore these options, and I believe we should have.
Last Updated: August 4, 2011