Piwowar: Bank Regulators Pose an 'Existential Threat' to SEC

With a fiery speech before the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, Michael Piwowar, one of the newest members of the Securities and Exchange Commission, elaborated on his priorities for the term ahead and addressed the “existential threat” posed to his commission by bank regulators steadily creeping onto its turf.

Speaking on Monday morning, he railed against “banking regulators trying to impose their bank regulatory construct on SEC-regulated investment firms and investment products.” The Commission, he said, is responsible for regulating markets, but those agencies, through the Financial Stability Oversight Council, are trying to stake a claim.

One of Piwowar's first acts as a Commissioner was to request an observational role at FSOC meetings. Created by the Dodd-Frank Act, the FSOC is a multi-agency body tasked with identifying risks to the nation's financial stability. SEC Chairman Mary Jo White is the Commission's only designated voting member.

The request to attend FSOC meetings as a non-participating guest was denied. “I did not ask for any special favors,” he said. “I simply asked it to treat the SEC the same way it treats the Federal Reserve…and extend the same courtesy to the SEC and other member agencies.”  Minutes from past meetings, show the Chairman of the Federal Reserve Board of Governors (the Federal Reserve's voting member), and two guests -- Federal Reserve Governor Daniel Tarullo and the President of the Federal Reserve Bank of New York William Dudley – regularly attended meetings, he said.

“One of the responses I received to my request was that, if the SEC started bringing multiple people to the Council meetings, then every agency would want to do the same,” Piwowar said. “My answer to that concern is that the FSOC should get a bigger table. Or, it should stop allowing the Federal Reserve to bring three people to the Council meetings when other member agencies are afforded only one seat. This issue is not just an abstract one for me. The FSOC, within which the banking and prudential regulators exert substantial influence, represents an existential threat to the SEC and the other member agencies.”

Another issue where the SEC “ceded ground to the FSOC and banking regulators” is money market fund reform, Piwowar said. “One of the most shocking decisions in the 80-year history of the SEC was the wholesale abdication of the Commission's responsibility to the FSOC on money market funds,” he said, referencing a move by former Chairman Mary Schapiro to break a longstanding impasse among commissioners by pushing proposed reforms onto its plate.

“Instead of the FSOC spending time enabling bank regulators to encroach on the SEC's jurisdiction in securities regulation, where we have superior expertise, it should focus on fulfilling its own mission of identifying threats to financial stability,” he added, suggesting three controversial additions to its ongoing designations of non-bank systemically important financial institutions: the Federal Government, the Federal Reserve, and the Basel Committee on Banking Supervision.

“The government is a significant source of systemic risk, and therefore it falls under the mandate of the FSOC to monitor and study it,” Piwowar said. Complex regulations, such as Basel's risk-weighted capital standards, are not only costly and cumbersome, but suboptimal for preventing and controlling financial crises, he added.

Piwowar detailed his near- and long-term priorities at the SEC: a multi-year review of equity market structure; creating a pilot program for alternative minimum tick sizes; improve how fixed-income markets operate, and curbing the “unhealthy over-reliance” on proxy advisory firm recommendations.

He also urged compliance with an Executive Order issued by the White House that directs regulators to develop and implement ongoing retrospective analyses of existing rules and determine, determining whether any should be modified, streamlined, expanded, or repealed. “The Commission has not yet undertaken a serious effort to conduct a retrospective analysis of our existing rules in accordance with the directive,” he said. “This must change.”