Securities Industry Commentator by Bill Singer Esq

SECURITIES REGULATION / SEC Could Take Further Actions to Help Achieve Its FINRA Oversight Goals (United States Government Accountability Office ("GAO") Report to Congressional Committees / December 2021)

Former Analyst Pleads Guilty To Securities Fraud For Committing Insider Trading By Front-Running Employer's Pending Trades (DOJ Release)

Former Management Consulting Firm Partner Pleads Guilty To Insider Trading / Defendant Was a Lead Consulting Firm Partner Advising an Investment Bank on Its Acquisition of GreenSky, Inc. (DOJ Release)

Husband and Wife Sentenced to Prison Terms for Operating Ponzi Scheme Relating to Investments in Foreign Currencies (DOJ Release)

Wedbush Securities Charged with Unregistered Sales of Microcap Securities and Failing to Report Suspicious Transactions / Broker-dealer to pay more than $1.2 million (SEC Release)

SEC Proposes Amendments Regarding Rule 10b5-1 Insider Trading Plans and Related Disclosures / The proposal would strengthen the requirements to access the affirmative defense to insider trading and improve related transparency around insider transactions in company securities (SEC Release)

Statement on Rule 10b5-1 and Insider Trading by SEC Chair Gary Gensler

Stock Trading Plans Should Prevent - Not Enable - Insider Trading: Statement on Proposed Amendments to Rule 10b5-1 by SEC Commissioner Allison Herren Lee

Statement on the Proposed Amendments to the Availability of the Affirmative Defense to Allegations of Insider Trading Provided by Exchange Act Rule 10b5-1 by SEC Commissioner Caroline A. Crenshaw

Statement on Rule 10b5-1 and Insider Trading Proposing Release by SEC Commissioner Hester M. Peirce (SEC Release)

Statement on the Proposed Rules Regarding 10b5-1 Plans by SEC Commissioner Elad L. Roisman

SEC Proposes Amendments to Money Market Fund Rules / Proposed amendments would improve the resilience and transparency of money market funds (SEC Release)

Statement on Money Market Fund Reform by SEC Chair Gary Gensler

Statement on Proposed Money Market Fund Reforms by SEC Commissioner Allison Herren Lee

Statement on Proposed Amendments to Money Market Fund Rules by Commissioner Caroline A. Crenshaw

Statement on Money Market Fund Reforms by SEC Commissioner Hester M. Peirce

Statement on Proposed Money Market Fund Reforms by SEC Commissioner Elad L. Roisman

SEC Proposes New Share Repurchase Disclosure Rules / The proposal would establish new Form SR for reporting issuer share repurchases and enhance existing periodic disclosure (SEC Release)

Statement on Share Repurchase Disclosure Modernization by SEC Chair Gary Gensler

Enhancing Transparency Around Stock Buybacks: Statement on Corporate Share Repurchase Proposal by SEC Commissioner Allison Herren Lee

Statement on Issuer Share Repurchase Disclosure Modernization by SEC Commissioner Caroline A. Crenshaw

Dissenting Statement on Buybacks Disclosure Proposal by SEC Commissioner Hester M. Peirce

Dissenting Statement on Proposed Rules Regarding Share Repurchases by SEC Commissioner Elad L. Roisman

SEC Proposes Rules to Prevent Fraud in Connection With Security-Based Swaps Transactions, to Prevent Undue Influence over CCOs and to Require Reporting of Large Security-Based Swap Positions (SEC Release)

Statement on Exchange Act 10B and Rule 9j-1 by SEC Chair Gary Gensler

Standing Up the Security-Based Swap Regime: Statement on Proposed Rules for Antifraud, Position Reporting and CCO Support by SEC Commissioner Allison Herren Lee

Statement on Re-Proposed Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps by SEC Commissioner Caroline A. Crenshaw

Dissenting Statement on Proposed Security-Based Swap Rules by SEC Commissioner Hester M. Peirce

Dissenting Statement on Proposed Security-Based Swaps Rules by SEC Commissioner Elad L. Roisman

FINRA Arbitrators Award $1 In Response to $1 Million In Damages Sought (Sort of) (BrokeAndBroker.com Blog)

In fiscal years 2018-2020, Securities and Exchange Commission (SEC) reviews (such as examinations and inspections) of the Financial Industry Regulatory Authority, Inc. (FINRA) included areas specified in Section 964 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, such as governance, funding, and transparency. GAO analysis of documentation from these 69 reviews showed they typically focused on FINRA's policies and procedures, including execution of such procedures. They also evaluated areas such as the timeliness of FINRA's operations, staffing levels, and sufficiency of training and program risk management. SEC reviews frequently identified deficiencies and FINRA typically proposed corrective actions to address these findings. 

SEC has several opportunities to leverage information obtained from its reviews of FINRA to inform its FINRA oversight goals. Currently, SEC's performance measures (see table) for FINRA oversight are task-oriented (such as conducting meetings) and do not reflect leading practices (such as being outcome-oriented and providing useful information for decision-making). SEC's program for overseeing FINRA also does not have documented policies and procedures for determining which findings and any associated corrective actions to track, or for identifying and communicating the significance of findings from its oversight of FINRA to internal stakeholders and to FINRA. By establishing such measures, policies, and procedures, SEC would gain information that would allow it to better monitor and assess the impact of its reviews of FINRA, better evaluate FINRA responses, and more clearly communicate concerns to FINRA.

From at least in or about 2014 through in or about October 2019, POLEVIKOV was employed as a quantitative analyst at an asset management firm with headquarters in New York, New York (the "Employer Firm").  In his role at the Employer Firm, POLEVIKOV had regular access to information regarding contemplated securities trades on behalf of the Employer Firm's clients, which included investment companies.  During the period charged in the Complaint, POLEVIKOV engaged in a front-running scheme to misappropriate confidential, material, nonpublic information about the securities trade orders of the Employer Firm on behalf of its clients in order to engage in short-term personal securities trading in a brokerage account opened in his wife's name.  POLEVIKOV's trading scheme was designed to take advantage of relatively small price movements in a company's stock that followed from large securities orders executed by the Employer Firm on behalf of its clients.  In total, POLEVIKOV's scheme yielded more than $8.5 million in illicit profits.     

As part of his plea agreement, POLEVIKOV has agreed to forfeit $8,564,977 on or before April 1, 2022. 

Jennifer Wee and Alicbiades Cifuentes engaged in an investment fraud scheme from 2012 through March 2015. They induced victims to invest in the foreign currency and commodity markets through Cifuentes Fund Management (CFM), their hedge fund that purportedly invested in foreign currencies, and then almost immediately spent those investment funds on personal items, such as an Audi R8 automobile and jewelry. The couple would then pay back a portion of the victims' money with money received from newly duped victims. The couple defrauded approximately 30 victims of more than $400,000. 

[F]rom January 2017 through September 2018, Wedbush engaged in unregistered offers and sales of large blocks of low-priced securities that were part of the unlawful, unregistered distribution of securities by Silverton SA (a/k/a Wintercap SA), a former offshore customer. The order finds that Wedbush failed to conduct a reasonable inquiry into the facts surrounding the sales, and therefore Wedbush's offers and sales did not qualify for the usual exemption from registration that applies to brokers' transactions. The SEC's order also finds that, despite the presence of numerous red flags that Wedbush had identified in its written guidance to employees, Wedbush failed to file SARs for certain suspicious transactions that it executed on behalf of Silverton while the account was active, as broker-dealers are required to do when transactions are suspected to involve fraudulent activity.

. . .

In 2018, the SEC and U.S. Attorney's Office for the District of Massachusetts brought parallel actions against a number of related parties, including Silverton's principal, Roger Knox, alleging a fraudulent scheme involving the deposit of blocks of the securities of low-priced microcap companies and their subsequent illegal unregistered offer and sale.

The proposed amendments to Rule 10b5-1 would update the requirements for the affirmative defense, including imposing a cooling off period before trading could commence under a plan, prohibiting overlapping trading plans, and limiting single-trade plans to one trading plan per twelve month period. In addition, the proposed rules would require directors and officers to furnish written certifications that they are not aware of any material nonpublic information when they enter into the plans and expand the existing good faith requirement for trading under Rule 10b5-1 plans.

The amendments also would elicit more comprehensive disclosure about issuers' policies and procedures related to insider trading and their practices around the timing of options grants and the release of material nonpublic information. A new table would report any options granted within 14 days of the release of material nonpublic information and the market price of the underlying securities the trading day before and the trading day after the disclosure of the material non-public information. Insiders that report on Forms 4 or 5 would have to indicate via a new checkbox whether the reported transactions were made pursuant to a Rule 10b5-1(c) or other trading plan. Finally, gifts of securities that were previously permitted to be reported on Form 5 would be required to be reported on Form 4.

First, the Commission is considering proposed amendments to Rule 10b5-1, as well as proposed new disclosure requirements. I support these amendments because, if adopted, they would help close potential gaps in our insider trading regime.

Today's proposal addresses the means by which companies and company insiders - chief executive officers, chief financial officers, other executives, directors, and senior officers - trade in company shares.

The core issue is that these insiders regularly have material information that the public doesn't have. So how can they sell and buy stock in a way that's fair to the marketplace?

About 20 years ago, Exchange Act Rule 10b5-1 was established. This rule provided affirmative defenses for corporate insiders and companies to buy and sell company stock as long as they adopted their trading plans in good faith - before becoming aware of material nonpublic information.

Over the past two decades, we've heard concerns about and seen gaps in Rule 10b5-1 - gaps that today's proposals would help fill.

Today's proposals would add new conditions to the existing affirmative defense under Rule 10b5-1(c)(1), to help address concerns about potentially abusive practices associated with the use of that defense. 

First, the proposal would establish a 120-day cooling off period for officers and directors for any new or changed plan. For companies trading in their own securities, the proposal would establish a 30-day cooling off period. Such a cooling-off period would more distinctly separate establishing a trading plan from the actual trades.

Second, today's proposals would prohibit overlapping plans and limit single-trade plans to one every 12 months. Currently, with the ability to enter into multiple plans, insiders might seek to pick amongst favorable plans as they please.

Third, today's proposal would add a condition that officers and directors certify they're not in possession of material non-public information when adopting or amending plans.

Fourth, all plans must be entered into and operated in good faith.

Additionally, today's proposals would establish a number of new disclosure requirements for issuers about (a) any trading plans adopted during the reporting quarter; (b) insider trading policies and procedures; and (c) the granting of spring-loaded options to executives. Such disclosures would enable shareholders to assess issuers' insider trading policies.

Finally, a word about insider gifting. I'd like to note that charitable gifts of securities are subject to insider trading laws. I'm glad for the improved visibility that this proposal would provide into those gifts (via Form 4).  

These issues speak to the confidence that investors have in the markets. Anytime we can increase investor confidence in the markets, that's a good thing. It helps investors deciding where to put their money. It lowers the cost of capital for businesses seeking to raise capital, grow, and innovate, and thus facilitates capital formation. I'm pleased to support today's proposal and, subject to Commission approval, look forward to the public's feedback.

I appreciate my fellow Commissioners' time and collaboration on this proposal. I'd like to extend my gratitude to the members of the SEC staff who worked on this rule, including:

• Renee Jones, Erik Gerding, David Fredrickson, Adam Turk, Anne Krauskopf, Todd Hardiman, Lindsay McCord, Felicia Kung, and Sean Harrison in the Division of Corporate Finance.
• Jessica Wachter, Vladimir Ivanov, Angela Huang, PJ Hamidi, Robert Miller,  Jill Henderson, Chyhe Becker, Charles Woodworth, Kathryn Schumann-Foster, Walter Hamscher, Mariesa Ho, Julie Marlowe, Hamilton Martin, Robert Miller, Oliver Richard, Kayti Schumann-Foster, Mike Willis, and Charles Woodworth  in the Division of Economic and Risk Analysis;
• Laura Jarsulic, David Lisitza, Dorothy McCuaig, and Bryant Morris in the Office of the General Counsel;
• Melissa Hodgman and Rami Sibay in the Division of Enforcement;
• Laurita Finch in the Edgar Business Office; and
• Last but not least I'd like to thank the counsels to my fellow Commissioners who helped us get here - Robbie Cobbs, Katherine Kelly, Coy Garrison, and Thaya Knight. Your collaboration and commitment is much appreciated.

Working to keep markets fair by protecting against insider trading is one of the most fundamental jobs we have at the Commission. Enforcement in this area is key to our mission, but prophylactic measures designed to prevent the misconduct (rather than punish it after the fact) are vital. Because if companies and corporate insiders profit by trading on information that is available only to them, they not only disadvantage other shareholders, but also erode investor confidence and thereby undermine the integrity of our markets. So today's proposal seeks to ensure our rules are operating as intended to prevent, rather than shield, trading on inside information and bolster investor confidence in our markets.

* * *

Corporate insiders are routinely exposed to material nonpublic information. They also need to be able to trade fairly in the stock of their companies. Thus, the Commission adopted Rule 10b5-1 in 2000 to help clarify when liability may arise for insider trading.[1] The rule sets forth certain conditions, which, if met, give rise to an affirmative defense against insider trading liability. Those conditions created a safe harbor for trading pursuant to a plan entered into in good faith before the person trading under the plan is aware of material nonpublic information.[2] The idea being if a person establishes "a regular, pre-established program of buying or selling [their] company's securities,[3]" that trading, when it later occurs, will not be considered to be on the basis of material nonpublic information potentially acquired after the adoption of the plan.

We've now had over two decades of experience with plans operating under this safe harbor. In that time, 10b5-1 plans have proliferated and lawmakers, regulators, courts, investors, and commentators have all observed the potential for abuse.[4] Our ability to comprehensively evaluate the use of these plans is unfortunately hampered by the lack of related disclosure requirements. Nevertheless academic studies have produced compelling findings that suggest opportunistic use of 10b5-1 plans, including through such practices as trading shortly after the adoption of plans, and the use of multiple overlapping plans and single-trade plans.[5] This is troubling evidence to suggest Rule 10b5-1 may be used to enable rather than avoid trading on the basis of inside information. Our rule should offer a safe harbor, not a pirates' cove.

So I am very pleased that today's proposal contains a package of amendments that would create new, common-sense conditions for the 10b5-1 safe harbor and enhance transparency around the use of 10b5-1 plans. In particular, the proposal requires cooling-off periods for issuers and individuals after the adoption of plans before trading can commence, restricts the use of multiple overlapping plans and single-trade plans, and requires officers and directors to certify they are adopting plans in good faith and are not aware of material nonpublic information, among other measures.[6] In addition, the proposal would impose new disclosure requirements, including quarterly disclosure regarding the adoption, termination, and terms of 10b5-1 plans, and disclosure of a company's insider trading policies and procedures.[7] Taken together with the issuer share repurchase proposal we also consider today, the new disclosure requirements would considerably enhance transparency around issuer and executive trading in a company's securities and related policies, procedures, and practices.[8]

The proposal seeks to curb potential abuses of our rules and enhance transparency for investors, while not unduly restricting issuer and individual trading in a company's securities for foreseeable, appropriate purposes. I hope the public will weigh in to help make sure we got the balance right. For example, are the cooling-off period durations-four months for individuals, 30 days for issuers-adequate? Is there sufficient need for single-trade plans to permit them under the safe harbor, or should they be prohibited altogether? Should the disclosure requirements be more specific regarding the policies and procedures information that investors may find useful? I look forward to reviewing comments on these and other aspects of the proposal.

* * *

I want to thank the staff for their thoughtful work on this proposal. With respect to this proposal and the other items we're considering today, I know you all have worked long and hard through the holiday season, and I'm very grateful for your dedication. I want to particularly commend Corey Klemmer in the Chair's Office for her hard work and thoughtful diplomacy in shepherding this proposal through the Commissioners' offices. Thank you and I'm pleased to support the proposal.

[1] See Selective Disclosure and Insider Trading, Final Rule, Release No. 33-7881 (Aug. 15, 2000) ("This rule provides that a person trades 'on the basis of' material nonpublic information when the person purchases or sells securities while aware of the information.").

[2] Id. (explaining that the safe harbor "will be available only if the contract, instruction, or plan was entered into in good faith and not as part of a scheme to evade the prohibitions" of the rule").

[3] See Selective Disclosure and Insider Trading, Proposed Rule, Release No. 33-7881 (Dec. 20, 1999) ("This provision is designed to apply in the case of an insider who wishes to establish a regular, pre-established program of buying or selling his or her company's securities.").

[4] See, e.g., Waters and McHenry Introduce Bipartisan Legislation to Curb Illegal Insider Trading, Press Release (Jan. 18, 2019) (announcing the introduction of a bill, H.R. 624, the Promoting Transparent Standards for Corporate Insiders Act, to require the SEC to "consider certain types of amendments to Rule 10b5-1 that would ensure corporate insiders are unable to indirectly engage in illegal insider trading through changes to their trading plans"); Letter from Chairman Jay Clayton to Congressman Brad Sherman (Sept. 14, 2020) ("I believe that companies should strongly consider requiring all Rule l0b5-1 plans for senior executives and board members to include mandatory seasoning, or waiting periods after adoption, amendment or termination before trading under the plan may begin or recommence."); In re Immucor Inc. Sec. Litig., 2006 WL 3000133, at *18 n.8 (N.D. Ga. Oct. 4, 2006) (noting that "a clever insider might maximize their gain from knowledge of an impending price drop over an extended amount of time, and seek to disguise their conduct with a 10b5-1 plan."); Prepared Written Remarks of Jeffrey P. Mahoney General Counsel, Council of Institutional Investors, before U.S. Securities and Exchange Commission Investor Advisory Committee (June 10, 2021) ("CII agrees that public confidence that our securities markets are fair to all participants serves the interests of companies and investors. And when public company executives conduct transactions in company stock through a 10b5-1 plan using practices that are inconsistent with the spirit of the rule, public confidence in corporate management teams and the markets can erode."); David F. Larcker, Bradford Lynch, Philip Quinn, Brian Tayan, and Daniel J. Taylor, Gaming the System: Three "Red Flags" of Potential 10b5-1 Abuse, Stanford Closer Look Series (Jan. 19, 2021) ("We show that a subset of executives use 10b5-1 plans to engage in opportunistic, large-scale selling of company shares.").

[5] See Larcker et al., supra note 4 (identifying plans with short cooling-off periods, single-trade plans, and plans adopted in a given quarter that commence trading before the quarter's earnings announcement as "red flags" of 10b5-1 abuses and finding that "[s]ales made pursuant to these plans avoid significant losses and foreshadow considerable stock price declines that are well in excess of industry peers"); see also Artur Hugon and Yen-Jung Lee, SEC Rule 10b5-1 Plans and Strategic Trade around Earnings Announcements (2016) (finding, among other things, "evidence consistent with insiders using 10b5-1 plans to sell stock in advance of disappointing earnings results").

[6] As a condition of the availability of the affirmative defense under Rule 10b5-1, the proposal would impose a 120-day cooling-off period for officers and directors and a 30-day cooling off period for issuers, prohibit multiple overlapping plans for open market purchases or sales of the same class of securities, limit the use of single-trade plans to one per 12-month period, and require officer and director certifications. See Rule 10b5-1 and Insider Trading, Proposed Rule, Release No. 33-11013 (Dec. 15, 2021) [hereinafter Proposing Release].

[7] Specifically, the proposal would require quarterly disclosure of whether the issuer or any officer or director had adopted or terminated a plan during the last fiscal quarter, and information including the date of the adoption or termination, the duration of the plan, and the amount of securities to be purchased or sold under the plan. Proposing Release at 31-32. The proposal would also require issuers to disclose whether (and if not why not) a company has adopted insider trading policies and procedures, and if so, to disclose those policies and procedures. Id. at 35.

[8] Other features of the proposal include requiring that trading plans be operated in good faith as a condition of the safe harbor, requiring the structuring of disclosures under the rule, and requiring the reporting of dispositions of bona fide gifts of equity securities on Form 4.

Thank you, Chair Gensler, and thank you to my fellow Commissioners. And also, as we address the first of several rulemaking proposals today, I'd like to begin by expressing my sincere thanks to all of the many staff members who have worked so hard to make today a reality. Each proposal reflects countless staff hours spent researching, writing, thinking, and working across offices and divisions to promote our agency's three part mission. Fairer outcomes for investors and improved efficiency in our markets are urgent needs, and we are only able to tackle all this work because of the SEC staff's efforts and expertise. We have asked a lot of you, and you have always answered the call. Thank you.

And now, turning to the first proposal under consideration today, regarding proposed amendments to Rule 10b5-1, I'd also like to express my particular thanks to the Divisions of Corporation Finance and Enforcement, the Division of Economic and Risk Analysis, and the Office of the General Counsel, who prepared and contributed to this proposal

Today we are considering several changes to existing Rule 10b5-1 that I am optimistic will better align the interests of corporate insiders, shareholders and regulators. I recognize the important and sometimes competing interests that are present when corporate insiders sell their securities. Corporate executives may need to sell securities to pay for their children's education, to buy a home, or just as part of their personal financial planning. But, those same corporate executives are often exposed to material non-public information, or MNPI. Insider trading laws prohibit trading based on MNPI, in part because it provides an unfair advantage at the expense of the person on the other end of the transaction, as well as corporate shareholders more broadly.[1] As regulators, we seek to balance the legitimate liquidity needs of insiders with our duty to ensure a level playing field to protect investors and the integrity of our markets. Rule 10b5-1 provides an affirmative defense to allegations of insider trading by establishing safeguards and protections around when and how corporate insiders can sell their stock.[2] The goal of the rule is to help ensure that an insider does not have MNPI at the time they make a trade. In turn, that insider is provided some greater certainty that if they comply with the rule, they won't be sued by the SEC for insider trading when they buy or sell their corporation's securities.

The 10b5-1 rule was promulgated twenty years ago. Experience and academic research supports the need for changes so that it can better achieve its stated goals.[3] I believe the proposed amendments represent important improvements, and I support them.

The proposal would require disclosure of all 10b5-1 plans adoptions and cancellations, including salient details about each plan. This empowers corporate boards and shareholders, who have an incentive to scrutinize trades and plan cancellations that occur near in time to the release of news that moves the share price. I believe that, here, increased transparency from issuers and insiders will lead to better outcomes for investors by limiting the temptation for insiders to engage in practices that take unfair advantage or could be perceived to do so.

Importantly, recent academic work shows a concentration of loss avoiding trades by corporate executives made using single trade plans adopted within 60 days of an earnings announcement.[4] Today's proposal may reduce the prevalence of such trades by imposing important additional requirements and restrictions. Under the proposal, going forward all 10b5-1 plans would include a 120 day "cooling off" period between when the plan is adopted and when a trade may be executed under the plan.[5] Also, executives would be limited to adopting only one single trade plan per year, which should further reduce the potential for their abuse.[6]

I believe this combination of changes will help ensure that 10b5-1 plans accomplish the important goal of reducing trading by insiders while in possession of MNPI, while still offering executives a way to safely transact in their corporation's securities. But I also question whether some changes, particularly those impacting single trade plans, go far enough or will be as effective as other available alternatives.[7] I look forward to receiving and reviewing comments on the proposals. And I hope and expect academics and researchers will continue to track how these plans are used in practice. Empirical evidence will help us understand whether this proposal goes far enough or whether there is more work to be done. Our goal is to limit abuses by insiders, and it is important that we consider further modifications in the future if necessary.

I commend the staff on the thoughtful proposed changes, and the insightful questions they pose. I'm pleased to support the proposal.

[1] "Insider trading enables certain investors who have access to inside information or who control the timing or substance of corporate disclosures to profit at the expense of other investors. Due to their access to material nonpublic information, insiders can obtain profits through the strategic timing of trades in the issuer's securities. These profits are gained at the expense of ordinary investors, and essentially transfer wealth from other investors to the insider." Rule 10b5-1 and Insider Trading, Release No. [] (proposed Dec. 15, 2021) [hereinafter the Release].

[2] "Rule 10b5-1(c) established an affirmative defense to Rule 10b-5 liability for insider trading in circumstances where it is apparent that the trading was not made on the basis of material nonpublic information because the trade was pursuant to a binding contract, an instruction to another person to execute the trade for the instructing person's account, or a written plan (collectively or individually a "trading arrangement") adopted when the trader was not aware of material nonpublic information," but did not address or modify any other aspect of insider trading law. The Release at 8-9, fn. 10.

[3] See, e.g., the Release at n. 15 (citing Alan D. Jagolinzer, SEC Rule 10b5-1 and Insiders' Strategic Trade, 55 Mgmt. Sci. 224 (2009); M. Todd Henderson et al., Hiding in Plain Sight: Can Disclosure Enhance Insiders' Trade Returns, 103 Geo. L.J. 1275 (2015); Taylan Mavruk et al., Do SEC's 10b5-1 Safe Harbor Rules Need to be Rewritten?, Colum. Bus. L. Rev., 133 (2016); Artur Hugon and Yen-Jung Lee, SEC Rule 10b5-1 Plans and Strategic Trade around Earnings Announcements (2016))

[4] In March of this year, I co-authored with Wharton Professor Dan Taylor an op-ed that examined academic research regarding the frequency, and profitability, of trades executed by insiders following their adoption of 10b5-1 plans. See Caroline Crenshaw & Daniel Taylor, Insider Trading Loopholes Need to be Closed, Bloomberg (Mar. 15, 2021).

[5] See the Release at 16.

[6] See id. at 24.

[7] For example, should single-trade plans be prohibited outright. See id. at 27, Request for Comment #15.

Thank you, Chair Gensler.  Given our many policy disagreements and-spoiler alert-my resulting dissents on various matters today, I was beginning to feel a bit like the Grinch this holiday season.  Singing in Whoville on Christmas morning caused the Grinch's heart to grow three sizes that day,[1] but it was my fellow Commissioners' willingness to collaborate and engage on this release with the help of Renee Jones and her staff and Corey Klemmer on the Chair's staff that won me over and led me to support this proposal.

I support today's proposal to address potential abuses of Rule 10b5-1(c) trading arrangements.  The proposed cooling-off periods of 120 days for officers and directors and 30 days for issuers, and restrictions on multiple overlapping plans strike me as reasonable changes designed to ward off abuses in this context.  The proposed limitation of one single-trade plan during any twelve-month period also seems narrowly tailored to address problematic behavior while preserving the need of insiders to seek liquidity in an emergency or one-off situation. 

At the risk of sounding like a seasick crocodile,[2] other aspects of the proposal raise concerns for me and I am eager to hear commenters' views on these matters.  First, the proposed certification requirement would require a director or officer to certify at the time of the adoption of a plan that she is not aware of material nonpublic information about the issuer and that she is adopting the plan in good faith.  The director or officer would be expected to retain this certification for ten years.  Is the minimal benefit of reinforcing existing obligations under Rule 10b5-1 outweighed by the burdens associated with this requirement?  The release notes that the proposed certification would not be an independent basis for liability, but should we specify that in the text of the rule itself? 

Second, the proposed condition that the plan be "operated" in good faith may raise an unintended incentive for directors or officers to consider their Rule 10b5-1 plans in connection with corporate actions long after establishing their plans.  The general idea behind a Rule 10b5-1 plan is for the director or officer to "set it and forget it" to ensure that she is not trading on the basis of material nonpublic information.  Are we inadvertently rendering the safe harbor a "sort-of safe harbor" by making its availability contingent on ongoing good faith to be judged in hindsight? 

Third, are the proposed disclosure requirements relating to insider trading policies and procedures necessary?  Fourth, the proposed disclosure requirements relating to spring-loaded options seem designed to discourage the use of such equity-based compensation.  I do not support the indirect regulation of corporate activity through our disclosure rules and hope that commenters will provide insights on the materiality of the proposed disclosures and how it will affect executive compensation decision-making. 

Thank you again to the Chair and his staff, the staff of the Division of Corporation Finance, the Division of Economic and Risk Analysis, the Office of General Counsel, and others throughout the building for your hard work on this release. 

 

[1] The Grinch's heart grows, YouTube (June 7, 2013), https://www.youtube.com/watch?v=fGSs33DQ1F0. 

[2] You're a Mean One Mr. Grinch, Original Version - 1966 (HD), YouTube (Aug. 12, 2011), https://www.youtube.com/watch?v=35WgpMq6e3o. 

Good morning.  Thank you to the staff who worked on this proposal.  I know you spent many hours not only working on this rulemaking, but talking with my team and me about our various questions.  I truly appreciate all of your dedication and efforts. 

That said, I have very mixed feelings about the proposal before us.  I have decided to support it because, as I have said in other contexts, I believe that a so-called "cooling-off" period should take place after individuals have implemented a 10b5-1 plan.  However, I do not feel confident that other requirements we are including in this proposal are necessary, and I have several fundamental concerns about the rulemaking process here.

Fundamental Concerns About Our Rulemaking Process

First, the rulemaking appears designed to address a problem in our marketplace, which we do not have much evidence actually exists.  I feel similarly about the companion proposal that we will consider later this morning, which would place new requirements on companies purchasing their own outstanding shares, the "Share Repurchase Disclosure Modernization" ("buybacks proposal").[1]  These rulemakings seem premised on the justification that 10b5-1 plans and buybacks are being used hand-in-glove by executives to artificially inflate their companies' share prices to benefit themselves and facilitate insider trading.  Underpinning this justification are assumptions that existing rules may not adequately enable us to prosecute illegal insider trading and that 10b5-1 plans are facilitating this evasion.  I have not seen evidence to support this conclusion or these underlying assumptions.

Second, our proposal to amend rule 10b5-1 has overlapping implications with the buybacks proposal as far as trading by issuers.  This overlap muddies the waters in terms of the Commission's or the public's ability to understand the impact that either of these rules will have individually or how they will operate together.  It seems clear that for companies, these rules will potentially affect not just how they can purchase their securities, but arguably more importantly, how they can reallocate capital to their shareholders.

Last, the comment period for this rule is only 45 days.  All but one of the rules that we will consider at this open meeting have the same short comment period (and the other one, which will fundamentally change a $5 Trillion market, allows only 60 days for comment).[2]  Not only is 45 days shorter than our customary comment periods, which have typically been 90 or at least 60 days, these brief comment periods fall over the course of several major holidays.  They also overlap with comment periods for five other proposed Commission rules.[3]  If the Commission votes to propose all four of the new proposals which we are considering at this meeting, the public will be left with hundreds of questions on which we are seeking input in this short amount of time.[4]  I worry that we are not allowing enough time to receive the substantive kind of feedback we will need from the many types of market participants whom these rules will affect in order to adapt each of these proposals into workable rules.

With those concerns aside, I will now discuss my views on this particular proposal regarding 10b5-1 plans.

The Proposal's Application to Individuals

Executive trading is an area that the SEC has scrutinized for a long time, and for good reason.[5]  Executives have access to a lot of material information about their companies, which is inaccessible to the general public.  If they and other insiders were allowed to trade their companies' stock while in possession of that information, they could have an unfair advantage in the marketplace and the integrity of our markets would suffer.  Yet, our markets have developed such that a large portion of executives' compensation is made up of their companies' securities.  For this compensation to be valuable, those individuals need to be able to access that wealth.

The Commission adopted Rule 10b5-1 in 2000 to define the scope of when company insiders could be subject to liability for insider trading.[6]  The rule includes affirmative defenses from liability for corporate insiders and issuers when buying and selling company stock if they adopt trading plans in good faith and while not in possession of material nonpublic information.

I believe our rules regarding 10b5-1 plans can be refined for the benefit of our markets and investors.  I support the proposed 120-day, or roughly four-month, cooling-off period for an insider's 10b5-1 plan and disclosure of gifts on Form 4.  A four-month cooling-off period can be viewed as "one quarter plus," which seems to be a reasonable amount of time to ensure that even if an executive were in possession of any material non-public information at the time of establishing the plan (which they are not permitted to have for purposes of the affirmative defenses found in Rule 10b5-1(c)), such information would likely have gone stale by the time the plan became effective.  Commenters should certainly weigh in on whether 120 days is the right amount of time.

I think this proposal would have been better, however, had it stopped here.  In my view, the four-month cooling-off period for individuals will do almost all of the work in ensuring that insiders are not circumventing the purposes of Rule 10b5-1.  To say I have reservations about other aspects of the proposal is an understatement.  I worry that the additional components of this proposal as it applies to individuals (aside from the Form 4 and 5 requirements) will impose real costs and offer, as far as I can tell, few additional benefits.

I hope that commenters will review all aspects of this proposal and send feedback in response to our many questions as well as alert us to the inevitable unintended consequences that could result from implementing these proposed rules as-is.

Questions about the Proposal's Application to Issuers

Another aspect of this proposal about which I am skeptical is how it will apply to issuers and their purchases of their own outstanding stock.  I support requiring issuers to disclose their trading plans.  Companies' plans to use excess capital may be material to investors, and I believe the market likely will benefit from having such information publicly available. 

The proposal, however, includes a 30-day cooling-off period for issuers.  I would have preferred to exclude issuers from the mandatory cooling-off period altogether.  Unlike individuals, issuers' knowledge of material non-public information should be easier to ascertain.  Companies typically have only specific windows during which they engage in open market transactions, specifically to ensure that they are not trading while in possession of material non-public information.  Additionally, issuers must make determinations about whether share repurchases are appropriate-and if so, how many shares to buy and at what price-based on current information about how much cash the company has and what its anticipated uses for it are.  A cooling-off period is more burdensome for an issuer than for an individual because it will make these considerations much more uncertain.

I encourage commenters to provide feedback to the Commission on this provision.  Is a cooling-off period appropriate for issuers?  If so, what is an appropriate length?  What risks exist when a company uses a 10b5-1 plan to buy its own stock?

Conclusion

I will conclude by saying that this is not the rule I would have written.  Nevertheless, its core requirement-the cooling-off period for individuals-is one that I think is appropriate.  For that reason, I am voting to support this proposal.  I encourage commenters to make clear to us the ways in which these proposed changes will benefit the market and the ways in which they may hinder otherwise honest and appropriate activity.  Also, if commenters believe they need more time to provide this feedback, I hope they will write in to let us know as soon as possible.

 

[1] See Securities and Exchange Commission, "Share Repurchase Disclosure Modernization" (Dec. 15, 2021), Rel. No. 34-93783, https://www.sec.gov/rules/proposed/2021/34-93783.pdf.

[2] See Securities and Exchange Commission, "Open Meeting Agenda - December 15, 2021," https://www.sec.gov/os/agenda-open-121521 (noting that the Commission will consider rule proposals on: (1) Rule 10b5-1 and Insider Trading; (2) Share Repurchase Disclosure Modernization; (3) Money Market Fund Reforms; and (4) Security-Based Swap Positions).

[3] See Electronic Submission of Applications for Orders under the Advisers Act and the Investment Company Act, Confidential Treatment Requests for Filings on Form 13F, and Form ADV-NR; Amendments to Form 13F, Rel. No. 34-93518 (Nov. 4, 2021), https://www.sec.gov/rules/proposed/2021/34-93518.pdf (comments due December 20, 2021); Updated EDGAR Filing Requirements, Rel. No. 33-11005 (Nov. 4, 2021), https://www.sec.gov/rules/proposed/2021/33-11005.pdf (comments due December 22, 2021); Proxy Voting Advice, Rel. No. 34-93595 (Nov. 17, 2021), https://www.sec.gov/rules/proposed/2021/34-93595.pdf (comments due December 27, 2021); Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants, Rel. No. 34-93614 (Nov. 18, 2021), https://www.sec.gov/rules/proposed/2021/34-93614.pdf (comments due January 3, 2022); Reporting of Securities Loans, Rel. No. 34-93613 (Nov. 18, 2021), https://www.sec.gov/rules/proposed/2021/34-93613.pdf (comments due January 7, 2022).

[4] See note 2 supra.

[5] See "Fair To All People: The SEC and the Regulation of Insider Trading," Securities and Exchange Commission Historical Society, https://www.sechistorical.org/museum/galleries/it/corporateDisclosure_a.php.

[6] See Securities and Exchange Commission, "Final Rule: Selective Disclosure and Insider Trading" (Aug. 15, 2000), https://www.sec.gov/rules/final/33-7881.htm.

The proposed amendments would increase liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions. The proposed amendments also would remove provisions in the current rule permitting or requiring a money market fund to impose liquidity fees or to suspend redemptions through a gate when a fund's liquidity drops below an identified threshold. These provisions appeared to contribute to investors' incentives to redeem in March 2020 as some funds' reported liquidity levels declined.

To address concerns about redemption costs and liquidity, the proposal would require institutional prime and institutional tax-exempt money market funds to implement swing pricing policies and procedures that would require redeeming investors, under certain circumstances, to bear the liquidity costs of their redemptions.

Further, the proposal would amend certain reporting requirements to improve the availability of information about money market funds and enhance the Commission's monitoring and analysis of these funds.

The SEC began evaluating the need for further money market fund reforms following the events in March 2020. The proposal follows a request for comment the SEC issued to gather public feedback on potential money market fund reforms, including reform options discussed in a December 2020 report of the President's Working Group on Financial Markets.

Today, the Commission is considering amendments to rules that govern money market funds. I support this proposal because, if adopted, it would enhance the resiliency of this crucial $5 trillion asset class during periods of stress.[1]

Money market funds, which came about in the 1970s, have come to be an important way that investors manage their cash. They also are a key source of short-term funding for businesses and governments. They often are considered by investors to be safe, liquid assets.

As Acting Director Sarah ten Siethoff noted in her presentation, in March 2020, growing concerns about the COVID-19 pandemic led many investors to move their assets from certain money market funds into cash and short-term government securities. To put it simply, there was a bit of a "dash for cash." Prime and tax-exempt money market funds, particularly institutional funds, experienced large outflows.

The commercial paper and certificates of deposit that make up a significant part of the portfolios of prime money market funds tend to be illiquid in times of stress. We saw that particularly during the critical early months of 2020. There isn't a lot of trading in CP and CD in good times. In stress times, it almost entirely disappears.

This contributed to stress on short-term funding markets. The outflows significantly slowed following intervention from the Federal Reserve, which established the Money Market Mutual Fund Liquidity Facility and other programs to support short-term funding markets. This intervention by the Fed prevented these funds from having an even greater impact on our financial system.

The events brought particular focus to prime money market funds, and their interrelationship with investments in commercial paper and certificates of deposit.

This wasn't the first time we'd seen some stress in money market funds, though. There were challenges in this market in the 2008 financial crisis. The SEC sought to address structural issues in these funds through a series of reforms adopted in 2010 and 2014.

At the time, I had the honor of serving on the Financial Stability Oversight Council as Chair of the Commodity Futures Trading Commission. As the SEC was considering its rules, my fellow FSOC members at the time, including SEC Chair Mary Shapiro, Federal Reserve Chairman Ben Bernanke, and Secretary of the Treasury Timothy Geithner, were all exploring resiliency issues around money market funds.

Some of my fellow Commissioners have discussed the "first-mover advantage." I like to use an analogy to explain runs on the system, like those we've seen in money market funds.

I enjoy camping. There a saying when you're in the woods. You don't have to outrun the bear; you just have to outrun one of your fellow campers. A bit gruesome, to be sure, but this sort of gets to why investors might try to cash out before the proverbial bear catches them.

And so - here we are again. The events of March 2020 suggest that more can be done to improve the resiliency of money market funds. We've heard from the President's Working Group in the prior Administration,[2] the international community,[3] the Financial Stability Oversight Council,[4] and the public (as part of an SEC request for comment[5]) around the need to enhance the resiliency of this market. This is about systemic risk. Those of us at the SEC have an obligation to the public to once again come back and see if we can shore up this system a bit more.

Today's proposal is, in part, designed to address some concerns about money market funds highlighted by these various events.

First of all, the proposal would increase the liquidity requirements for money market funds. This would provide a larger buffer in the event of rapid redemptions. This proposal is particularly important for prime money market funds, a roughly $875 billion market, about three-quarters of which are institutional money market funds with floating net asset values.

Secondly, the proposed amendments also would prevent money market funds from imposing limits on redemptions in times of stress, such as redemption fees and so-called "gates" - the ability to stop redemptions. The ability to stop or limit redemptions, which were included as part of the earlier reforms, actually may have encouraged runs on money market funds in March 2020 rather than making the system more resilient.

Specifically, the proposal would require institutional prime and institutional tax-exempt money market funds to have policies and procedures to implement swing pricing. In effect, these money market funds would be required to adjust their net asset value per share when they have net outflows. Further, in periods of high redemptions as identified in the proposal, these policies and procedures would further adjust the price to estimate the market impact of redemptions. Thus, institutional investors who cash out would bear the liquidity costs of their redemptions. Again, this is about the institutional product, not the retail product.

Finally, the proposal would amend certain reporting requirements to improve the transparency of money market funds.

So, we're at it again - grappling with how to build greater resiliency into money market funds. Together, these amendments are designed to reduce the likelihood of runs on money market funds during periods of stress. Public input will be critical here. The economics will be critical here. Given the broad reach of short-term funding markets, these proposals speak to our three-part mission, and specifically to our remit to maintain fair, orderly, and efficient markets. I'm pleased to support today's proposal and, subject to Commission approval, look forward to the public's feedback.

I'd like to extend my gratitude to the members of the SEC staff who worked on this rule, including:

• Sarah ten Siethoff, Brian Johnson, Angela Mokodean, Viktoria Baklanova, Blair Burnett, David Driscoll, Adam Lovell, James Maclean, Thoreau Bartmann, Penelope Saltzman, Keri Riemer, Alexis Cunningham, Isaac Kuznits, and Trevor Tatum in the Division of Investment Management;
• Oliver Richard, Alexander Schiller, Diana Knyazeva, Daniel Hiltgen, Taylor Evenson, Juan Echeverri, and Parhaum Hamidi in the Division of Economic and Risk Analysis;
• Meridith Mitchell, Malou Huth, Natalie Shioji, Cathy Ahn, and Amy Scully in the Office of the General Counsel;
• Thu Bao Ta and Julia Gilmer in the Division of Examinations;
• David Becker in the Division of Enforcement; and
• Kathleen Hutchinson, Morgan Macdonald, Magdalena Camillo, and David Buhler in the Office of International Affairs. 

[1] See Division of Investment Management Analytics Office, "Money Market Fund Statistics" (period ending July 2021), available at https://www.sec.gov/files/mmf-statistics-2021-07.pdf.

[2] See "President's Working Group on Financial Markets Releases Report on Money Market Funds" (Dec. 22, 2020), available at https://home.treasury.gov/news/press-releases/sm1219.

[3] See "FSB publishes final report with policy proposals to enhance money market fund resilience" (Oct. 11, 2021), available at https://www.fsb.org/2021/10/fsb-publishes-final-report-with-policy-proposals-to-enhance-money-market-fund-resilience/ to-enhance-money-market-fund-resilience/ Thirdly, the proposal would address the price at which investors in institutional prime and tax-exempt funds can redeem when the fund experiences net redemptions. These particular funds have floating net asset values.

[4] See Gary Gensler, "Money Market Funds Statement" (June 11, 2021), available at https://www.sec.gov/news/public-statement/gensler-fsoc-money-market-funds-2021-06-11.

[5] See "SEC Requests Comment on Potential Money Market Fund Reform Options Highlights in President's Working Group Report" (Feb. 4, 2021), available at https://www.sec.gov/news/press-release/2021-25.

Today, the Commission is once again proposing reforms for money market funds after once again observing vulnerability in these products during times of financial market stress -- this time during the events in March 2020 at the beginning of the pandemic.[1] The 'dash for cash' that occurred at that time put severe stress on these funds and prompted federal intervention in the form of a backstop for the second time in just over a decade.[2]

It is clear that money market funds continue to raise both investor protection and market stability concerns. And while I support the success of these products, and I preliminarily support today's proposed reforms, I look forward to reviewing public comment on how best to address the complex challenges these products pose.

Since their creation in the 1970s, money market funds have grown and evolved to become an integral part of wholesale funding markets.[3] They serve a variety of roles within the financial system and are held by a broad swath of investors - businesses, non-profits, 401(k) plans, and many others.[4] The growth in size of this asset class has been notable, expanding from roughly $2 billion in the mid-1970s to roughly $4.6 trillion today.[5] They serve as a critical source of financing to a variety of borrowers, and have also been large investors in the commercial paper market.[6] These funds are generally designed to provide principal stability and liquidity, and frequently serve as short-term cash management vehicles for investors.[7] As a result, money market fund investors have been considered to be generally less tolerant than other mutual fund investors to incurring even small losses.[8]

But, of course, these funds are indeed capable of incurring losses, and they suffer from inherent structural vulnerabilities. Thus, the Commission engaged in an analysis of the money fund rules in the aftermath of the 2008 financial crisis when the Reserve Primary Fund "broke the buck," prompting widespread redemptions and prompting the Federal Reserve to step in and create a liquidity facility to support credit supply.[9]The 2010 reforms were largely designed to enhance liquidity and create more transparency for the public and the Commission about a money market fund's holdings.[10]

Those reforms were tested in March 2020 when money funds were under stress again. By that time, the Commission had completed additional reforms in 2014, subjecting the funds to valuation and risk-limiting regulations - such as the requirement for institutional prime and institutional tax-exempt funds to use a "floating" net asset value.[11]Perhaps even more significant than the floating net asset value requirement, the Commission gave funds tools to stem heavy redemptions with liquidity fees and redemption gates. Commissioner Stein (and others) expressed concern at that time about the use of fees and gates in this way, noting that the possibility of a redemption gate could instead incentivize investors to redeem ahead of others.[12] Her concerns proved largely correct.

As uncertainty about the pandemic loomed, investors sought stability and capital preservation by moving into cash and short-term government securities.[13] This created severe pressure in short-term funding markets, and investors sought heavy redemptions in institutional prime and tax-exempt money funds.[14]In fact, the potential imposition of fees and gates as a result of decreases in fund liquidity appeared to fuel redemption behavior.[15]

Hence today's proposal is a necessary continuation of our focus on addressing weaknesses of these funds, and providing investors and markets with key information about them. I'd like to highlight three significant areas of today's reforms: increasing liquidity thresholds, removing the fees and gates requirements, and an obligation for certain funds to use swing pricing they have net redemptions.[16]

I look forward to comment in each of these areas. Specifically, I'm interested in the foreseeable impacts of swing pricing. Will it disincentivize first movers to help stem a run as contemplated? How might it impact investor choice?

In addition, I'm pleased to see the proposal includes a requirement to notify both boards and the public when liquidity drops below certain thresholds. Broadly, the idea is not to discourage the use of liquidity in times of stress, but to offer transparency once significant amounts of liquidity have been drained (essentially once half of the liquidity reserves have been utilized). But, is that enough? Should the Commission require reporting whenever a fund's liquidity drops below the regulatory requirements? Are investors likely to overreact to such reporting or would the increased transparency help them make better decisions? These are just a few of my questions - and I welcome the public's views and robust, data-driven analysis and comment on all of the questions in today's proposal.

Finally, before I conclude my remarks today, I want to thank the staff in the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of the General Counsel- some of whom have worked on money fund reform for over a decade. You have been tireless and astutely inquisitive in developing today's recommendations. I greatly appreciate your continued dedication to developing a strong regulatory framework so that money market funds can better withstand inevitable future market stresses.

Thank you.

[1] See infra text accompanying nn.13-15.

[2] See, e.g., Press Release, U.S. Department of Treasury: Treasury Announces Temporary Guaranty Program for Money Market Funds (Sept. 29, 2008), available at https://www.treasury.gov/press-center/press-releases/Pages/hp1161.aspx; Press Release, Federal Reserve Board announces establishment of a Commercial Paper Funding Facility (CPFF) to support the flow of credit to households and businesses (Mar. 17, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200317a.htm (CPFF will provide a "liquidity backstop to U.S. issuers of commercial paper" as a result of the strain on the commercial paper market in March 2020).See also Federal Reserve Policy Tool, Money Market Mutual Fund Liquidity Facility, available at https://www.federalreserve.gov/monetarypolicy/mmlf.htm (establishing the Money Market Mutual Fund Liquidity Facility on March 18, 2020 in an effort to enhance market functioning and flow of credit to the economy).

[3] Protecting Investors: A Half Century of Investment Company Regulation (May 1992), at 506, available at https://www.sec.gov/divisions/investment/guidance/icreg50-92.pdf (providing a high-level description of the process through which money market funds were borne).

[4] See ICI Report of the COVID-19 Market Impact Working Group: Experiences of US Money Market Funds During the COVID-19 Crisis (Nov. 2020) ("2020 ICI Report"), at Figure 3.2, available at www.sec.gov/comments/credit-market-interconnectedness/cll10-8026117-225527.pdf.Money market funds typically invest in short-term assets.See, e.g., 2020 ICI Report, at Figure 3.3; Federal Reserve Money Market Funds: Investment Holdings Detail (Oct. 1, 2021), available at https://www.federalreserve.gov/releases/efa/efa-project-money-market-funds-investment-holdings-detail.htm. See, e.g., Matthew P. Fink, The Rise of Mutual Funds: An Insider's View (Jan. 2011), at 80-82.

[5] ICI Money Market Fund Assets (Dec. 9, 2021), available at https://www.ici.org/research/stats/mmf; 2020 ICI Report, at 3 (noting that in 1980, assets in money market funds totaled $75 billion and by 2020, they exceeded $4.6 trillion).See also Matthew P. Fink, The Rise of Mutual Funds (Jan 2011), at 82 (noting that money market fund assets went from less than $2 billion in 1974 and exceeded $3 trillion in 2007).

[6] See, e.g., 2020 ICI Report, at 6 (noting that "[p]rime money market funds provided $432 billion in financing to businesses and financial institutions through holdings of commercial paper ($213 billion; 21 percent of commercial paper outstanding) and CDs ($217 billion; 12 percent of CDs outstanding), and Eurodollar deposits ($2 billion).").

[7] See 2020 ICI Report, at 6 (noting that "[m]oney market funds provide the bulk of their funding to the federal government. As of June 2020, money market funds had assets of $4.6 trillion. Of that, $4.1 trillion (88 percent) was in short-term US Treasury securities, US agency debt, and repos, most of which is collateralized by US government securities").See also Financial Stability Board, Final Report: Policy Proposals to Enhance Money Market Fund Resilience (Oct. 11, 2021), at 13 (available at https://www.fsb.org/wp-content/uploads/P111021-2.pdf). ICI Report of the Money Market Working Group (Mar. 17, 2009) ("2009 ICI Report"), at 15, available at https://www.ici.org/system/files/attachments/pdf/ppr_09_mmwg.pdf.

[8] Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release No. 31166 (July 23, 2014) [79 FR 47735 (Aug. 14, 2014)] ("2014 Amendments"), at text accompanying n.34, available at https://www.sec.gov/rules/final/2014/33-9616.pdf.See also 2009 ICI Report, at 15; Patrick E. McCabe, The Cross Section of Money Market Fund Risks and Financial Crises (Sept. 12, 2010), at 6, available at https://www.federalreserve.gov/pubs/feds/2010/201051/201051pap.pdf, (noting that "[b]ecause of the relative safety of their portfolios and sponsors' practice of absorbing losses when they have occurred, MMFs are usually recipients of flight-to-quality inflows during periods of high uncertainty and market turmoil.").

[9] See, e.g., Press Release, U.S. Department of Treasury: Treasury Announces Temporary Guaranty Program for Money Market Funds (Sept. 29, 2008), available at https://www.treasury.gov/press-center/press-releases/Pages/hp1161.aspx.See also 2014 Amendments, at pp.29-32.

[10] Money Market Fund Reform, Investment Company Act Release No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)], available at https://www.sec.gov/rules/final/2010/ic-29132.pdf. But see Statement of SEC Chairman Mary L. Schapiro on Money Market Fund Reform (Aug. 22, 2012), available at https://www.sec.gov/news/press-release/2012-2012-166htm (stating that the three Commissioners at the time would not support a proposed structural reforms to money market funds that were intended to "reduce their susceptibility to runs, protect retail investors and lessen the need for future taxpayer bailouts").

[11] The floating NAV requirement was designed to disincentivize heavy redemptions in times of market stress.See 2014 Amendments, at Section III.B.

[12] Statement of Commissioner Kara M. Stein (Jul. 23, 2014), available at https://www.sec.gov/news/public-statement/2014-07-23-open-meeting-statement-kms (noting that "while a gate may be good for one fund because it stops a run in that fund, it could be very damaging to the financial system as a whole").

[13] Report of the President's Working Group on Financial Markets: Overview of Recent Events and Potential Reform Options for Money Market Funds (Dec. 2020) ("2020 PWG Report"), at 11, available at https://home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-2020.pdf.

[14] Staff of the Division of Investment Management, Primer: Money Market Funds and the Commercial Paper Market (Nov. 9, 2020), at 2, available at https://www.sec.gov/files/primer-money-market-funds-commercial-paper-market.pdf (discussing the commercial paper market in March 2020, and particularly noting that money market funds may have decreased their commercial paper holdings due to anticipated investor redemptions).See also 2020 PWG Report, at 14 (noting that "[a]mong institutional prime MMFs offered to the public, outflows as a percentage of fund size exceeded those in the September 2008 crisis.").

[15] Shelly Antoniewicz, Previous Reform Made Prime Funds Less Resilient This Time Around, (Apr. 21, 2021), at 3, available at https://www.ici.org/system/files/2021-05/21_view_covid_mmf2_print.pdf (noting that "respondents to the ICI's survey reported that a major factor for accessing the MMLF was to bolster their prime funds' weekly liquid asset ratios-keeping them well above the 30 percent tripwire.").See also 2020 PWG Report.

[16] Today's reforms also include recommendations to specify calculations for "dollar-weighted average portfolio maturity" and "dollar-weighted average life maturity," require money market funds to file reports on Form N-CR in a structured data language, and require money market funds to disclose more information about the composition and concentration of their shareholders.

Thank you to the staff in the Division of Investment Management, the Office of the General Counsel, and Division of Economic and Risk Analysis for their thoughtful work to advance today's proposal and for their steadfast commitment to improving the resilience and transparency of money market funds.

Money market funds are popular cash management vehicles for both retail and institutional investors largely as a result of their limited principal volatility, diversification of portfolio securities, payment of short-term yields, and liquidity. Money market funds also provide an important source of short-term financing for businesses, banks, and Federal, state, municipal, and Tribal governments.

However, money market funds can be vulnerable to liquidity runs during times of market stress.[1] While the Commission has taken action on several occasions over the past decade or so with the goal of addressing the various sources of risks that can contribute to liquidity runs,[2] our experience during March 2020, when prime institutional money market funds experienced heavy redemptions amid growing economic concerns relating to the COVID-19 pandemic, demonstrated that risks remain and we need to consider whether further action is appropriate.   

Today's proposed amendments thoughtfully seek to address vulnerabilities in this market. Among other changes to money market funds, the proposal would remove the liquidity fee and redemption gate provisions in the existing rule in order to reduce investors' incentive to engage in preemptive redemptions during times of stress. This change could also better enable funds to use their daily and weekly liquid assets to meet redemptions in times of stress.  The proposal also would require funds to increase their minimum daily liquid assets from 10% to 25% and their minimum weekly liquid assets from 30% to 50%.  These adjustments are designed to provide a more substantial buffer in the event of rapid redemptions. The proposal also would improve the availability of information about money market funds in order to put the Commission and investors in a better position to monitor funds' activities and evaluate the impact of market stress on those funds.

In addition to the changes just highlighted, the proposal also requires institutional prime and institutional tax-exempt money market funds to implement swing pricing policies and procedures to help ensure that redeeming investors bear the liquidity costs of their decisions to redeem.  Swing pricing, like the other proposed changes, is designed to reduce investors' incentives to run during times of market stress.  I am pleased that we are including swing pricing and initiating a discussion, though it is certainly an idea that deserves careful consideration. The proposal is thorough and asks many questions to help inform the Commission's understanding of how swing pricing might operate in practice.  I am looking forward to hearing commenter's views on all these questions. However, I am particularly interested in commenter's views and analysis on how we can best operationalize swing pricing requirements from a regulatory perspective and how funds will implement their swing pricing policies and procedures. Is there a way we should be thinking about guarding against excessive levels of variability in the application of swing factors across money market funds, and should we be concerned about the amount of discretion funds and swing pricing administrators might use when determining their swing factors?  And, finally, how will investors respond to swing pricing generally and during market stresses?

I look forward to reviewing the comment letters and working with the staff as we move toward a final rule. Thank you and thank you again to the staff, the Chair's office, and my fellow Commissioners.

 

[1] In 2007-2008, some prime money market funds were exposed to substantial losses from their holdings. One money market fund "broke the buck" and suspended redemptions, and many fund sponsors provided financial support to their funds. These events led to a run primarily on institutional prime money market funds and contributed to severe dislocations in short-term credit markets. In March 2020, in the midst of growing economic concerns relating to the COVID-19 pandemic, prime money market funds experienced heavy redemptions. One institutional prime fund's weekly liquid assets fell below the 30% minimum threshold set forth in rule 2a-7.  These heavy asset flows placed stress on short-term funding markets.

[2] After the 2008 financial crisis, the SEC adopted a number of amendments to its money market fund regulations in 2010 and 2014. In 2010, the Commission adopted amendments to rule 2a-7 that, among other things, required that money market funds maintain liquidity buffers in the form of specified levels of daily and weekly liquid assets. See Money Market Fund Reform, Investment Company Act Release No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)]. In 2014, the Commission further amended the rules that govern money market funds. In these amendments, the Commission, among other things, provided the boards of directors of non-government money market funds with new tools to stem heavy redemptions by giving them discretion to impose a liquidity fee or temporary suspension of redemptions (i.e., a gate) if a fund's weekly liquid assets fall below 30%. Additionally, the 2014 amendments required institutional non-government money market funds to transact at a floating NAV. See Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release No. 31166 (July 23, 2014) [79 FR 47735 (Aug. 14, 2014)].

I thank the staff of the Divisions of Investment Management ("IM") and Economic and Risk Analysis ("DERA") and the Office of the General Counsel for their hard work on this release and on money market mutual fund issues over the years. The March 2020 COVID-instigated market crisis renewed public and regulatory interest in money market funds. In the almost two years since, the Division of Investment Management has been at the center of the discussion-including by contributing to last year's President's Working Group ("PWG") report.[1] Members of the IM staff, along with their colleagues in DERA, have pored over the PWG's findings and recommendations, as well as the more than 50 comment letters[2] generated by the Commission's February request for comment.[3] Under greater than usual pressure, brought on by heightened public interest and aggressive deadlines, the staff has produced a thoughtful recommendation. I cannot support today's proposal, however, because it suffers from the same flaw as the existing rule: too much regulatory prescription and too little room for experimentation by funds.

The proposal does include one important reform: eliminating the link between a liquidity threshold and fees and gates. Hindsight being what it is, the folly of the link seems obvious, but I did not anticipate when the Commission adopted the rules making the availability of fees and gates contingent on breaching the liquidity threshold that investors would react as they did in March 2020-redeeming as the funds neared the threshold allowing the imposition of fees and gates. Accordingly, to promote money market fund stability during times of market stress, I support the proposed removal of this link from Rule 2a-7.

The rest of the proposal, however, could undermine the objective of making money market funds more resilient. Not only would the proposal remove the link between the liquidity threshold and fees and gates, it would limit funds' ability to use these tools as they deem appropriate. As proposed, a fund could only suspend redemptions as part of winding down the fund, and a fund's board would be restricted from imposing redemption fees of more than 2% of the value of shares redeemed, pursuant to rule 22c-2. In addition, the proposed amendments would increase the daily and weekly liquid asset minimums to 25% and 50% respectively, up from their current levels of 10% and 30%, and put in place a breach reporting regime when a fund falls below half of its daily and weekly liquid asset minimums. Will the desire to remain on the right side of these high regulatory thresholds cause funds to sell illiquid securities during times of stress, as some did during March 2020? Will anxious shareholders get skittish and redeem as funds near these arbitrary thresholds?

The proposal also would require a complex mandatory swing pricing regime for institutional prime and institutional tax-exempt money market funds. Swing pricing is supposed to result in redeemers bearing the costs associated with their redemptions during times of market stress, but commenters question the efficacy of swing pricing. One commenter, for instance, questioned whether swing pricing's effect on a money market fund's net asset value would be large enough to move the needle on an investor's decision to redeem -- a point augmented by the fact that investors will have no foreknowledge of when swing pricing might be activated.[4] Further, this same commenter suggested that having to bear a portion of remaining investor costs would have no effect on redemption behavior.[5] The proposed version of swing pricing-with its market impact factors-may differ from what commenters envisioned, but I remain unconvinced that the addition of complexity and subjectivity to swing pricing calculations will succeed in altering investor decision making. Commenters also pointed to the real operational difficulties associated with swing pricing,[6] something today's release also acknowledges.

The proposal, if finalized in its current form, likely would continue the trend of driving more money into government funds. Doing so may serve the government's need for a buyer for its securities, but would leave investors, issuers of commercial paper, and markets worse off.

My preferred approach to addressing money market funds' vulnerability to redemptions during times of market stress is to let funds and investors find a model that works for them. Instead of higher thresholds and prescriptive mandates, the Commission could propose a more principles-based approach. Such a rule would allow fund managers, and in turn, investors, to decide the best approach or combination of approaches to increasing money market fund resilience. For example, some might implement swing pricing; others might choose liquidity fees and gates; others might find ways to reward non-redeeming shareholders; and others might opt for contractual share reductions, a method this proposal would forbid. The resulting heterogeneity would allow for market choice, enable us to see what works, and make the financial system more resilient by diminishing the likelihood that problems at one money market fund would spill over to other funds, which in turn might reduce the urge of those in government to rush in with industry-wide rescues. George Mason University economist Lawrence White said it well when he observed that "[t]he goal of a robust financial system calls for a diverse ecosystem of mutual funds, not a monoculture that is susceptible to a single disease. Top‐down restrictions promote a monoculture."[7]

A principles-based approach puts the responsibility for fund resilience where it belongs-with the fund and its shareholders. By contrast, some might assume that an approach that relies on regulatory micromanagement comes with a promise of government support if the regulator's design proves faulty under market stress.

I appreciate that the proposal includes alternative approaches and many questions, which should make for a productive comment period. I look forward to learning from the wisdom of the commenting public and to continuing my discussions with my colleagues and the staff in Investment Management and DERA. I am always open to revising my position based on what I learn.

[1] The Report is appended to the Commission's release (infra note 3) and also is available on the Treasury Department's website at home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-2020.pdf.

[2] Comments are available at https://www.sec.gov/comments/s7-01-21/s70121.htm.

[3] See Request for Comment on Potential Money Market Fund Reform Measures in President's Working Group Report, Release No. IC-34188 (February 4, 2021), available at https://www.sec.gov/rules/other/2021/ic-34188.pdf.

[4] Letter of Fidelity Management and Research Company LLC to the Secretariat of the Financial Stability Board (Aug. 16, 2021), P.20 https://www.fsb.org/wp-content/uploads/Fidelity.pdf ("Even in periods of stress, we do not believe that the swing factor would move the NAV by an amount sufficient to deter redemptions.").

[5] Id. ("In our experience managing a wide array of U.S. money market funds for more than 45 years and interacting directly with investors through our broad and extensive distribution businesses, investors in U.S. money market funds are not motivated to redeem by the potential for bearing a portion of the costs that others' redemption behavior may impose on the fund.").

[6] One commenter, for instance, stated that funds will be unable "to receive and review complete daily investor flow information in sufficient time to know, or make reasonable high confidence estimates of, investor activity to determine if a fund's NAV should be swung." Comment Letter of Fidelity Management & Research Company LLC (Apr. 12, 2021), Pp.28-9 https://www.sec.gov/comments/s7-01-21/s70121-8662947-235324.pdf. As other commenters have pointed out, for money market funds that offer pricing multiple times a day and same-day settlement - features that are critical to corporate and other institutional investors using these funds to manage daily operating cash or meet payroll, for instance - swing pricing may make it impossible for these funds to meet basic institutional investor needs. See, e.g., Comment Letter of the Investment Company Institute (April 12, 2021), P.20 https://www.sec.gov/comments/s7-01-21/s70121-8662926-235321.pdf.

[7] Lawrence H. White, "Money‐​Market Mutual Funds: Restrictions, Run‐​Proofing, and Regulatory Pretense," Cato Institute - Cato At Liberty, March 1, 2016, 10:18 a.m., https://www.cato.org/blog/money-market-mutual-funds-restrictions-run-proofing-regulatory-pretense. Accessed December 13, 2021.

Money market funds are one of the most widely used financial products within the Commission's regulatory purview.  Everyday Americans invest in them; large institutions do too, including corporate treasurers, state and municipal treasurers, as well as a multitude of pooled investment vehicles.  Beyond their utility to end-users, money market funds play an important role in our fixed income markets as buyers of ultra-short and short-term debt.  In such a far-reaching and interconnected ecosystem, one thing is certain: whatever changes we make to one part of the system will ripple through and affect other parts as well.

The work of the SEC staff reflects an appreciation for the importance and complexity of money market funds.  Throughout the Spring of 2020, our staff engaged with money fund managers as well as many other participants in the treasury, municipal, and commercial paper markets to understand, in real time, the market developments related to Covid-19.  They poured over the data we have on all of these markets to understand the dynamics of their interconnection.[1]  They also worked with other federal agencies and international regulators to share observations and collaborate on possible changes to make to our money market fund regime.[2]  And, of course, our staff has been attentive to feedback that members of the public have provided to our agency following requests for comment.[3]

I want to thank our rulemaking team from the Division of Investment Management and our colleagues in the Division of Economic and Risk Analysis for bringing to bear all of this experience in the proposal they have prepared for us today.[4]  Ultimately, I cannot support it, for reasons that I will explain.  But, I think it is important to point out its many positive attributes as well as what I see as its shortcomings.

The proposal eliminates the current requirement for non-government money market funds that their boards consider implementing redemption gates when the funds' weekly liquid assets fall below the required threshold.  We heard repeatedly at the onset of Covid-19 (and as market participants provided feedback thereafter) that this requirement, which was part of our 2014 amendments, exacerbated institutional investors' incentives to redeem their shares.[5]  The possibility that investors might not be able to immediately access their funds was so undesirable that they wanted to avoid it altogether, and they watched information about their funds' portfolio liquidity to see if weekly liquid assets got close to 30%.  The proposal responds to this identified market dynamic by eliminating our 2014 requirement that boards consider gates if weekly liquid assets in a portfolio fall below the required threshold.  I believe this represents a positive example of retrospective review that the Commission should seek to emulate in other policy undertakings.

It is less clear to me that we should prohibit the use of gates altogether, as the proposal contemplates doing, or that we should eliminate the current requirement for boards to consider charging liquidity fees to redeeming investors when the fund's liquidity drops.  However, these are reasonable ideas to consider, and the release asks helpful questions on each proposed action.

The release also does a good job of exploring several other measures that could reduce run risk for money market funds.  In particular, it describes several possible new fee structures intended to diminish the first mover advantage investors may see in redeeming early if they sense impending market turmoil.  One of these alternatives is a detailed swing pricing regime,[6] which the proposal contemplates applying to all institutional non-government funds when they experience a certain level of net redemptions.  Other potential liquidity fee structures have been considered as alternatives set forth in the proposal's Economic Analysis.[7]  The proposal asks several questions to get feedback from the public on each potential structure and its possible implications.  I encourage commenters to consider the merits of each and share their viewpoints with the Commission.

I have strong reservations about the proposal requiring that all institutional non-government money market funds use a uniform approach to charge fees to redeeming investors.  Whether it would be the proposed swing pricing framework or one of the alternative liquidity fee frameworks, I am not persuaded that one-size-fits-all is a prudent approach.  From what we have seen, investors have different needs for liquidity and different risk tolerances; they may well prefer different fee frameworks.  Intermediaries who serve fund investors may also have preferences.  We should propose rules that offer money market funds some options for which anti-run measures they can implement.  I appreciate that the proposal asks some questions about this and would be interested in market participants' feedback-not only which fee structures they prefer, but also whether the Commission should offer money funds some choice.

I also have reservations about the proposed increases to required liquidity thresholds for all money market funds.  The proposal would raise the daily liquid asset threshold by 150% (from 10% to 25%), and the weekly liquid asset threshold would increase by 67% (from 30% to 50%).[8]  Most funds already maintain thresholds that are higher than our current requirements, so it is not clear to me why we need to mandate these increases-especially for retail funds, from which we have not seen heavy redemptions.  It is concerning that we would introduce such drastic changes without a clear reason to do so, especially when other aspects of this proposal would already bring dramatic changes to the operation (and possibly the desirability) of non-government funds.

I am interested in feedback from the public on whether funds' incentives to maintain high levels of liquidity would decrease if we remove the regulatory tie between gates and fees, as proposed.  The proposal also introduces a new requirement for fund boards to be notified if liquidity levels drop certain amounts below the required thresholds;[9] new public filing requirements would be triggered as well.  Would either or both of these new requirements be enough to counteract any new incentive for funds to lower their liquidity levels beyond the thresholds we currently require?

The release asks questions on all the points I have discussed above.  I hope a wide range of market participants will consider each of questions and respond with insights from their vantage point in the market.  Only with robust feedback can we hope to detect possible unintended consequences and adapt this proposal so that it is workable for all market participants.[10]

This brings me, however, to a major shortcoming I see in today's proposal.  The comment period is 60 days long, falling over the course of several holidays.  It coincides with comment periods for five other proposed Commission rules.[11]  If you include the four new proposals on which we are voting today,[12] the public is left with hundreds of questions on which we are seeking input in this short amount of time.  Unfortunately, I have very little confidence that we are allowing enough time to receive feedback from the many types of market participants whom these rules will affect.[13]

So, while I thank the staff for their hard work on this proposal, I respectfully dissent.

 

[1]    See SEC Staff Report on U.S. Credit Markets Interconnectedness and the Effects of the COVID-19 Economic Shock (Oct. 2020) ("SEC Staff Interconnectedness Report") at 2, available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf.

[2]    See, e.g., Report of the President's Working Group on Financial Markets, Overview of Recent Events and Potential Reform Options for Money Market Funds (Dec. 2020), available at https://home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-2020.pdf; Financial Stability Board, "Policy proposals to enhance money market fund resilience: Final report" (Oct. 11, 2021), https://www.fsb.org/2021/10/policy-proposals-to-enhance-money-market-fund-resilience-final-report/.

[3]    See, e.g., Dalia Blass, Director, Division of Investment Management, "Staff Statement on the President's Working Group Report on Money Market Funds" (Dec. 23, 2020), https://www.sec.gov/news/public-statement/blass-pwg-mmf-2020-12-23 (comments available at: https://www.sec.gov/comments/s7-01-21/s70121.htm).

[4]    See Securities and Exchange Commission, "Money Market Fund Reforms," Rel. No. IC-34441 (Dec. 15, 2021), https://www.sec.gov/rules/proposed/2021/ic-34441.pdf (hereinafter "Proposed MMF Amendments").

[5]    See id. (discussions in Section II.A.1 and III.C.1).

[6]    See id. (discussions in Section II.B).

[7]    See id. (discussion in Section III.D.4-5).

[8]    See id. (discussion in Section II.C).

[9]    See id. (discussion in Section II.C.2).

[10]   Several Executive Orders have addressed the need for federal agencies to allow a meaningful opportunity for the public to comment on rulemakings, stating that such comment periods "should generally be at least 60 days."  See Commissioner Hester M. Peirce, "Rat Farms and Rule Comments - Statement on Comment Period Lengths" (Dec. 10, 2021), https://www.sec.gov/news/statement/peirce-rat-farms-and-rule-comments-121021#_ftn1, note 1.

[11]   See Electronic Submission of Applications for Orders under the Advisers Act and the Investment Company Act, Confidential Treatment Requests for Filings on Form 13F, and Form ADV-NR; Amendments to Form 13F, Rel. No. 34-93518 (Nov. 4, 2021), https://www.sec.gov/rules/proposed/2021/34-93518.pdf (comments due December 20, 2021); Updated EDGAR Filing Requirements, Rel. No. 33-11005 (Nov. 4, 2021), https://www.sec.gov/rules/proposed/2021/33-11005.pdf (comments due December 22, 2021); Proxy Voting Advice, Rel. No. 34-93595 (Nov. 17, 2021), https://www.sec.gov/rules/proposed/2021/34-93595.pdf (comments due December 27, 2021); Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants, Rel. No. 34-93614 (Nov. 18, 2021), https://www.sec.gov/rules/proposed/2021/34-93614.pdf (comments due January 3, 2022); Reporting of Securities Loans, Rel. No. 34-93613 (Nov. 18, 2021), https://www.sec.gov/rules/proposed/2021/34-93613.pdf (comments due January 7, 2022).

[12]   See Securities and Exchange Commission, "Open Meeting Agenda - December 15, 2021," https://www.sec.gov/os/agenda-open-121521 (noting that the Commission will consider rule proposals on: (1) Rule 10b5-1 and Insider Trading; (2) Share Repurchase Disclosure Modernization; (3) Money Market Fund Reforms; and (4) Security-Based Swap Positions).

[13]   While the release notes that the Commission "in its discretion, may accept and include in the public record" written comments filed after the closing date, it is not clear to me how the Commission will make determinations to exercise that discretion.

The proposed rules would require an issuer to provide a new Form SR before the end of the first business day following the day the issuer executes a share repurchase. Form SR would require disclosure identifying the class of securities purchased, the total amount purchased, the average price paid, as well as the aggregate total amount purchased on the open market in reliance on the safe harbor in Exchange Act Rule 10b-18 or pursuant to a plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c).

The proposed amendments also would enhance existing periodic disclosure requirements regarding repurchases of an issuer's equity securities. Specifically, the proposed amendments would require an issuer to disclose: the objective or rationale for the share repurchases and the process or criteria used to determine the repurchase amounts; any policies and procedures relating to purchases and sales of the issuer's securities by its officers and directors during a repurchase program, including any restriction on such transactions; and whether the issuer is making its repurchases  pursuant to a plan that it intends to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) and/or  the conditions of the Exchange Act Rule 10b-18 non-exclusive safe harbor.

The proposed rules apply to issuers that repurchase securities registered under Section 12 of the Securities Exchange Act of 1934, including foreign private issuers and certain registered closed-end funds.

Today, the Commission is considering enhancing the disclosures around share buybacks. I support these amendments because, if adopted, they would increase transparency into the market.

Share buybacks have become a significant component of how public issuers return capital to shareholders. I think we can lessen the information asymmetries between issuers and investors through the timeliness of the disclosures.

Today's proposed amendments would require an issuer to provide more timely information on their share repurchases - one business day after a trade is executed. This is in contrast to the current reporting requirements, which provide only quarterly disclosure of aggregated monthly data.

I think investors would benefit from the timeliness and granularity that today's proposal would provide. The amendments also would enhance existing buyback disclosure requirements, including on Form 10-K and Form 10-Q.

Other countries, such as Australia and the United Kingdom, have long required more timely share buyback disclosures next day for certain disclosures.[1] I believe freshening up our own share buyback disclosures would help the U.S. capital markets remain the most competitive in the world.

Therefore, I'm pleased to support today's proposal and, subject to Commission approval, look forward to the public's feedback.

I'd like to extend my gratitude to the members of the SEC staff who worked on this rule, including:

• Renee Jones, Erik Gerding, Betsy Murphy, Luna Bloom, Deanna Virginio, and Steve Hearne and in the Division of Corporation Finance;
• Joan Collopy, Josephine Tao, and Elizabeth Sandoe in the Division of Trading and Markets;
• Brad Gude and Brian Johnson in the Division of Investment Management;
• Bryant Morris, Evan Jacobson, Natalie Shioji, Monica Lilly, and Sean Bennett in the Office of the General Counsel;
• Jessica Wachter, Oliver Richard, Vlad Ivanov, Angela Huang, Chantal Hernandez, Jill Henderson, PJ Hamidi, Dennis Hamilton, Walter Hamscher, Mariesa Ho, Angela Huang, Julie Marlowe, Robert Miller, Matthew Pacino, Erin Smith, Mike Willis, and Charles Woodworth in the Division of Economic and Risk Analysis; and
• Melissa Hodgman and Rami Sibay in the Division of Enforcement.

[1] See, e.g., Australian Securities Exchange Listing Rule 3.8A requiring listed issuers to file a notification disclosing acquisitions before the commencement of trading on the business day after any day on which shares are bought back; and Financial Conduct Authority (United Kingdom) Listing Rule 12.4.6R requiring certain issuers to file a notification disclosing acquisitions no later than 7:30 a.m. on the business day following the day that the purchase occurred. 

In recent years, corporate share repurchases, or buybacks, have grown exponentially. Even amidst a relative slump in share repurchases in 2020, buybacks reached nearly $700 billion in volume.[1] And interest in, and the need to understand, these share repurchases has grown accordingly. Today's proposal would enhance transparency for investors and markets around share repurchases by requiring more detailed, timely, and structured disclosures.

Companies may determine to allocate capital towards share repurchases for a number of different reasons. However, one of those reasons should not be for the opportunistic, short-term benefit of executives. The proposal we consider today does not prescribe how or why companies may elect to engage in share repurchases. Rather it requires disclosures intended to enhance the ability of investors to evaluate how, why, and to what effect companies are engaging in buybacks. In other words, to help put investors on more equal informational footing with companies and their officers and directors who make the decisions to engage in these transactions.

The Commission last addressed disclosure requirements for share repurchases in 2003.[2] In recent years, amidst record high volumes of share repurchases and increased interest in that activity, there have been calls for the Commission to revisit its rules to ensure they are keeping pace with market developments and getting investors timely and relevant disclosures.[3] Indeed, in comments in response to the Commission's 2016 Regulation S-K concept release, commenters favored enhanced share repurchase disclosure requirements by a margin of nearly two to one.[4]

Today, based on thoughtful analysis by the staff, the Commission is proposing rules that would require more detailed and more frequent disclosures of share repurchase activity and would provide greater insight into issuers' share repurchase programs. In particular, the proposal introduces new Form SR, which would require repurchase disclosure within one business day of the repurchase, thereby providing investors with more timely and more granular information on repurchases.[5] At present, investors may have to wait months to get repurchase data and then only in aggregated form.[6] In addition, the proposal would add new narrative disclosure requirements in periodic reports, including disclosure of the objective and rationale for repurchases, and any policies and procedures governing officer and director purchases or sales of a company's shares during a repurchase.[7] Finally, and importantly, the proposal would require information under both new and existing disclosure requirements to be structured in a machine-readable data language.[8]

Share repurchases have increased by orders of magnitude in recent decades.[9] In fact, public markets have been described by one incisive commentator as a "place where companies return money to shareholders" rather than one where capital is raised.[10] This phenomenon should be thoroughly and accurately disclosed and well understood by investors and markets. To the extent companies are making smart and thoughtful choices regarding buybacks, this increased transparency will serve them well. On the other hand, if anticipated disclosure operates to dampen enthusiasm for buybacks, that may well arise from flaws in the strategy behind the practice at certain companies.

I hope the public will weigh in to help us get the final rules right. For instance, is the proposed timing of these disclosure what it should be? Is it appropriate to require furnishing rather than filing of Form SR as proposed? Is there additional information that investors need to understand share repurchase activity? I look forward to reviewing comments on these and other aspects of the proposal.

I'll conclude by thanking our staff for their excellent work. I'm happy to support publishing the proposal for comment.

[1] See Share Repurchase Disclosure Modernization, Proposed Rule, Release No. 34-[] (Dec. 15, 2021) ("During 2020, share repurchases accounted for approximately $670 billion.") [hereinafter Proposing Release].

[2] The Commission adopted Item 703 of Regulation S-K in 2003 to require quarterly disclosure of share repurchase information. See Purchases of Certain Equity Securities by the Issuer and Others, Final Rule, Release No. 33-8335 (Nov. 10, 2003).

[3] See, e.g., Letter from Council of Institutional Investors (Jul. 8, 2016) (expressing support for enhanced repurchase disclosures, noting that "[r]eturning cash to shareholders instead of reinvesting in the business may impact overall leverage, incentive-based compensation and long-term profitability"); Letter from the SEC Investor Advisory Committee (June 15, 2016) (observing that current Item 703 repurchase disclosure "does not result in the identification of information that many investors would likely find material"); Testimony of Jesse M. Fried on Stock Buybacks before the U.S. House of Representatives Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets (Oct. 17, 2019) (suggesting that requirements should be tightened to require disclosure of share repurchases within two days).

[4] See Comments on Concept Release: Business and Financial Disclosure Required by Regulation S-K, File No. S7-06-16.

[5] See Proposing Release at 11.

[6] Current repurchase data is required in periodic reports aggregated at the monthly level. See 17 CFR § 229.703.

[7] See Proposing Release at 22.

[8] See id. at 29.

[9] The Proposing Release provides that "[a]ggregate repurchases have grown significantly over the past four decades, but the increase relative to aggregate market capitalization has been significantly more modest due to the accompanying growth in aggregate market capitalization." Further "[f]irms that exclusively pay dividends are increasingly rare whereas the proportion of firms that regularly conduct repurchases has increased over time, consistent with repurchases being a partial substitute for dividends." Proposing Release at 37-38; see also Karen Langley, Buybacks Hit Record After Pulling Back in 2020, Wall Street Journal (Dec. 12, 2021) ("S&P 500 buybacks plunged from nearly $199 billion in the first quarter of 2020 to just under $89 billion in the second, as companies reeling from the onset of the pandemic moved to conserve cash. Share repurchases increased in each following quarter, approaching $199 billion again in the second quarter of 2021.").

[10] Matt Levine, Money Stuff: Public Markets Don't Matter Like They Used To, Bloomberg (August 5, 2020).

To start, as with all the items on the agenda today, thank you to the staff across the multiple divisions and offices who have worked on this rulemaking. It is an incredibly busy time at the Commission that has required a strong and sustained push from the dedicated civil servants here. So I will reiterate my sincere thanks and appreciation to each of you.

Improving the manner in which share repurchases, or stock buybacks, are reported to investors is an important goal. Beyond the enhanced disclosures contemplated in this rule that Director Jones and Steven Hearne have just described, we have proposed structured data requirements that would ensure that the proposed disclosures are machine-readable. This is an important element of the rule that can meaningfully improve transparency. Data structuring can lower costs and increase the usefulness of our disclosures by enabling automatic processing and analysis, especially when it comes to granular data,[1] like some of the disclosures in this proposal.[2] I look forward to exploring the best application of data structuring as it relates to this proposal, but also throughout our disclosure regime.[3]

One concern I want to highlight as we open the comment file is possible opportunistic trading by insiders around the announcement of an issuer's stock buyback program. Typically, a jump in the share price follows that announcement, creating a window for an advantageous trade. And evidence suggests that insiders can personally benefit from this window and sell shares in the days after an announcement.[4] We have proposed specific disclosures to help address this,[5] and I look forward to hearing feedback from the public on how best to calibrate the relevant disclosures and whether they appropriately address this concern.

I would also note that, to some extent, this rule should be read in conjunction with the proposal on Rule 10b5-1 and Insider Trading. Specifically, an issuer's use of 10b5-1 plans to conduct share repurchases and whether issuer 10b5-1 plans should be subject to the same cooling-off period as such plans for individuals.[6]

Thank you again to the staff across the Commission for their work. I support this proposal, I look forward to reviewing the comment file and engaging with the public.

[1] See Caroline Crenshaw, Commissioner, Sec. & Exch. Comm'n, The Lessons of Structured Data (Nov. 10, 2021) ("It allows the automation of all manner of disclosure analysis - identifying what is and is not reported, identifying data quality errors, comparing results across data sets, performing other analytics, generating time series charting and benchmarking, and much more.").

[2] See Share Repurchase Disclosure Modernization, Release No. [] at 11-22 (proposed Dec. 15, 2021) [hereinafter the Release]

[3] The Commission has an office dedicated to designing structured approaches for required disclosures. Office of Structured Disclosures, What Is Structured Data? (last visited Dec. 15, 2021).

[4] See Robert J. Jackson, Jr., Commissioner, Sec. & Exch. Comm'n, Stock Buybacks and Corporate Cashouts (June 11, 2018) (finding that a buyback announcement leads to a jump in stock price 30 days after the announcement and that in half of the 385 buybacks studied "at least one executive sold shares in the month following the buyback announcement. In fact, twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day so right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell").

[5] The Release at 22-23 (specifically, the proposed disclosure of policies and procedures relating to purchases and sales of the issuer's securities by its officers and directors during a repurchase program, including any restriction on such transactions and a proposed requirement that issuers disclose if any of their officers or directors subject to the reporting requirements under Section 16(a) of the Exchange Act (15 U.S.C. 78p(a)) purchased or sold shares within 10 business days before or after the announcement of an issuer purchase plan or program by checking a box before the tabular disclosure of issuer purchases of equity securities,

[6] See Rule 10b5-1 and Insider Trading, Release No. [] at 16 (proposed Dec. 15, 2021) (proposing a minimum 120-day cooling-off period after adoption of a 10b5-1 trading plan by any director or officer and then a minimum 30-day cooling off period after adoption of a 10b5-1 trading plan by an issuer).

Thank you, Chair Gensler.  Both dividends and share repurchases are ways companies return cash to shareholders.  Yet, say "dividend," and nobody gets angry, but say "share buyback," and the rage boils over.  Today's proposal channels some of that rage against repurchases in a way that only a regulator can-through painfully granular, unnecessarily frequent disclosure obligations.  This proposal requires daily repurchase disclosure to be furnished with the Commission one business day after execution.  Because I do not support the indirect regulation of corporate activity through disclosure requirements, I respectfully dissent. 

Today's proposal unpersuasively attempts to justify itself by pointing to information asymmetries that may exist between issuers and affiliated purchasers, on the one hand, and investors, on the other.  Let me quote from the release here:

[W]e are concerned that, because issuers are repurchasing their own securities, asymmetries may exist between issuers and affiliated purchasers and investors with regard to information about the issuer and its future prospects.  This, in turn, could exacerbate some of the potential harms associated with issuer repurchases.[1] 

Why not address such a concern through a more tailored requirement to disclose buyback announcements and terminations? 

The release justifies a more burdensome approach by pointing to "opportunistic share repurchases" that may be designed to enhance executive compensation and insider stock value.  However, as the footnotes in the economic analysis reveal, studies on the issue are decidedly mixed as to whether this is a real issue.  Indeed, as noted in the release, last year the SEC staff reported the results of its study of the 50 firms that repurchased the most stock in 2018 and 2019 and concluded that "82% of the firms reviewed either did not have EPS-linked compensation targets or had EPS targets but their board considered the impact of repurchases when determining whether performance targets were met or in setting the targets."[2]  The staff's overarching conclusion is also helpful context for today's proposal:

[R]easons for repurchases where the connection to efficient investment is less clear are unlikely to motivate the majority of repurchases since stock prices typically increase in response to repurchase announcements, suggesting that, at least on average, repurchases are viewed as having a positive effect on firm value.[3]

Why are we so quick to discount our own staff's recent study on the matter?  All data sets and studies have their limitations, and this study is not determinative, but today's proposal might accord it at least as much weight as it accords rumors of opportunism.   

Opposition to buybacks is often rooted in the idea that surplus corporate cash ought to be reinvested in the company-in the form of higher salaries for employees, more research and development, new property, plant, and equipment, and so forth-rather than being returned to shareholders.  Such an argument assumes that the politician, regulator, or academic making it is in a better position than management to assess corporate opportunities and determine appropriate levels of cash in company coffers.  History is replete with examples of central planners allocating resources poorly, and I expect this experiment will end no better.

Thank you to the staff of the Division of Corporation Finance, Division of Economic and Risk Analysis, and Office of General Counsel for your hard work on this release.  Although I cannot support it, I greatly appreciate your efforts in preparing it and engaging with my office.  I look forward to reviewing comments on the proposal and welcome engagement from the public regardless of your viewpoint. 

 

[1] Share Repurchase Disclosure Modernization Proposing Release at 10. 

[2] SEC Staff Response to Congress: Negative Net Equity Issuance (Dec. 23, 2020), at 42, available at https://www.sec.gov/files/negative-net-equity-issuance-dec-2020.pdf.

[3] Id. at 6-7.

Thank you to the staff for your work on this rule, and thanks especially for the time you spent working with my office and me.  Today's proposal is targeted at company share repurchases, otherwise known as "buybacks."  In 2020, U.S. public companies conducted over $700 billion of buybacks, and the figure in 2021 has already eclipsed that number.[1]  This proposal would require more timely disclosure on a new Form SR regarding a company's purchases of its equity securities for each day that it, or an affiliated purchaser, makes a share repurchase.  The proposal would also enhance the existing periodic disclosure requirements about these purchases.

While I appreciate the effort that the staff put into this rulemaking, I am not able to support it.  This is disappointing because I believe that there are regulatory enhancements in this area that would benefit the marketplace.  However, I believe that the proposed rule is not the right approach and could likely result in companies reducing their use of buybacks, even when they believe that conducting a buyback would be in the best interest of the company and shareholders; it could also have other negative effects on the market and investors.

Unnecessary Confusion

Taking a step back, I think it is important to note that we cannot look at this proposal in isolation; rather, it is inextricably linked with the proposed rule on 10b5-1 plans that we just considered[2] since both proposals involve rules that apply to issuers' purchases of their own outstanding stock.  We should have combined these two proposals so that we and commenters could better consider their individual and combined effects.  In addition, I am skeptical that we can develop an appropriate baseline for the economic analysis of either rule, given that a realistic baseline should have taken assumptions about the markets with the companion rule either in place, or not in place.  In other words, the baseline for the current rule looks different depending on whether the rule on 10b5-1 plans is adopted or not.  If both are adopted, each will influence actions of boards and executives as well as affect the markets.

Demystifying Buybacks

Buybacks have grown to be a political hot button issue.  They are frequently a topic in financial news and in discussions by politicians.  But it is important for us to understand how buybacks actually occur as well as the purposes they serve in our markets as we consider making changes to our rules.

Unfortunately, missing from today's proposal is a detailed discussion about how a company makes a decision to conduct a buyback including: the levels of thought, analysis, and work done by company employees when they make recommendations to the board about whether a buyback is appropriate; the board's process for approving a buyback; the delegation to management; and management's execution of the buyback.  I hope commenters provide this insight because I think it could help educate the Commission and the public about how buybacks are effectuated across different companies and also the diligence and care companies take when they make these decisions.  I also believe this information could help illuminate how companies and boards address the risk of buybacks being misused by insiders.

My understanding is that a company can initiate a buyback for a multitude of reasons, including that the board believes the company has excess cash, which the shareholders can make better use of directly, or the company's shares are undervalued in the market.  Additionally, since a large part of executive compensation now takes the form of equity grants, buybacks can be partially about ensuring that executive compensation does not dilute other shareholders but better aligns the executives' incentives with shareholders' interests.

We must also understand the existing regulatory structure that governs buybacks.  For example, companies' management and boards of directors have fiduciary duties to shareholders.  One of the main jobs of management and boards is to decide how to use the capital that shareholders have provided and the assets that a company owns.  For a long time, companies have had to make the decision of whether it is better to use cash on hand to grow or whether the cash would be best redistributed to shareholders because they are in a better position to use it outside of the company.  Buybacks and dividends are just two examples of this, and some have argued that companies should be redeploying money even more often than they do today. 

Buybacks can have important benefits for shareholders and our capital markets.  Receiving payments for shares, investors ostensibly redeploy the money elsewhere, investing in other companies that may have more valuable uses for the funds.  Buybacks also can communicate information to shareholders about how a company believes its shares are valued. 

What Problem are We Trying to Solve?

The proposal we are considering today provides a few justifications for new regulation of buybacks.  One, which I do not believe is well enough substantiated in our analysis yet seems to be the most heavily discussed, is the concern that company insiders are using buybacks to manipulate companies' stock prices as a way to increase the value of their own equity compensation. 

Although today's proposal includes considerable discussion of this purported problem, it includes very little discussion of substantial contrary evidence.  Relegated to a footnote in the release is the mention of a study conducted by our own staff-less than one year ago!-containing analysis and findings running counter to the release's premise about such a problem.[3]  This study, sent to Congress on December 23, 2020, stated, among other things, that "the relatively low incidence of firms having earnings-per-share (EPS)-based performance targets, as well as the rate at which boards of directors consider the impact of repurchases when setting EPS-based performance targets or determining whether they have been met, further supports the conclusion that efforts to increase compensation are unlikely to account for most repurchase activity."[4]  More succinctly, the study found that it was unlikely that most buybacks were motivated by a desire to inflate share prices to benefit insiders compensated in stock.

It is surprising that, not even one year after reaching this conclusion, our staff would now find not only that buybacks are indeed often motivated by a desire to manipulate stock prices for executive gain but also that this has been occurring on such a scale as to merit a dedicated rulemaking to address it.  In light of what we at the SEC actually know about buybacks, I cannot accept that we would propose these new rules to the extent they aim to prevent behavior our own staff has not found occurs. 

I find another justification more compelling.  This is related to a concern that issuers may initiate buybacks when (1) the board and management both believe that the company is undervalued and (2) the company may not inform the market or may provide insufficient information to the market about the buyback, in an appropriate amount of time.  The issuer will therefore be able to buy its shares at a reduced price, exploiting this information asymmetry to the benefit of itself and external shareholders who do not sell (and to the detriment of those external shareholders who do decide to sell).

Dangers of Overcorrecting

Should we find a way to get a company's intent to conduct a buyback and the relevant buyback information out into the market?  Yes.  Should we do it in a way that does not deter companies from conducting buybacks?  Yes.  Does this rule achieve that goal?  Unfortunately, I do not believe it does. 

I worry that the proposed daily reporting of buyback transactions will be overly burdensome to companies.  They will likely reduce buyback activity below optimal levels and keep cash, even when they do not need it.  Allowing some companies to hoard cash will not only hurt other companies, who could put the money to very good use, but will likely hurt the broader economy. 

In the instances where companies would decide to continue repurchasing their shares in spite of the new proposed burdens, I also worry that the proposed daily activity reports could provide a roadmap for traders to figure out the company's upcoming trades and trade ahead of them.  This would artificially raise the stock price for everyone and reduce market efficiency.

Conclusion

I think a better approach to address the potential information asymmetries involved in stock buybacks would be for companies to disclose, ahead of time, their plans to do a buyback and provide the relevant buyback information in such disclosure.  Companies could provide this information in a Form 8-K; if a company were to later decide not to conduct the buyback, or to modify the buyback in a material way, it could file a new Form 8-K.  This approach would communicate necessary information to the market without creating a daily burden for companies, discouraging buybacks, or having the same foreseeable negative consequences for the market as those I discussed with this proposal.  Unfortunately, that is not the rule before us today. 

Finally, I am extremely concerned about the short comment period for this proposal.  It will be only 45 days.  There are several items included in this rule that would benefit from robust and thoughtful comment from the public.  But our comment period will fall during several major holidays.  It will also coincide with comment periods for five other proposed Commission rules.[5]  If you include the four new proposals on which we are voting today, the public is left with hundreds of questions on which we are seeking input in this short amount of time.[6]  I am not at all confident that this rushed schedule will provide the needed feedback that is essential to a well-functioning rulemaking process. 

For these reasons, I respectfully dissent.

 

[1]     See Wiltermuth, Joy, "Companies On Pace To Pencil in $1 Trillion in Share Buybacks in 2021, As Proposed New Tax Looms," MarketWatch (Oct. 23, 2021), https://www.marketwatch.com/story/companies-on-pace-to-pencil-in-1-trillion-in-share-buybacks-in-2021-as-proposed-new-tax-looms-11634938002; see also Langley, Karen, "Buybacks Hit Record After Pulling Back in 2020," Wall Street Journal (Dec. 12, 2021), https://www.wsj.com/articles/buybacks-hit-record-after-pulling-back-in-2020-11639263140?page=1.

[2]     See Securities and Exchange Commission Proposed Rule, "Rule 10b5-1 and Insider Trading," Rel. No. 33-11013, (Dec. 15, 2021), https://www.sec.gov/rules/proposed/2021/33-11013.pdf?utm_medium=email&utm_source=govdelivery.

[3]     Securities and Exchange Commission, "Share Repurchase Disclosure Modernization" (Dec. 15, 2021), Rel. No. 34-93783, note 58, citing Staff of the Securities and Exchange Commission, "Response to Congress: Negative Net Equity Issuance" (Dec. 23, 2020), https://www.sec.gov/files/negative-net-equity-issuance-dec-2020.pdf ("There are several possible reasons why firms conduct repurchases, only some of which are consistent with efficient investment. Three facts suggest that the theories inconsistent with firm value maximization cannot account for the majority of repurchase activity. First, repurchase announcements are accompanied by stock price increases. This announcement effect does not dissipate over time, as one would expect if repurchases were based on efforts to manipulate share prices. Second, most of the money spent on repurchases over the past two years was at companies that either do not link managerial compensation to EPS-based performance targets or whose boards considered the impact of repurchases when determining whether EPS-based performance targets were met or in setting the targets, suggesting that other rationales motivated the repurchases. Third, option-based managerial compensation cannot account for the increased substitution from dividends to repurchases, since option pay has declined over the past 20 years. Collectively, these findings potentially suggest that most repurchase activity does not represent an effort to artificially inflate stock prices or influence the value of option-based or EPS-linked compensation.")

[4]     See id.

[5]     See Electronic Submission of Applications for Orders under the Advisers Act and the Investment Company Act, Confidential Treatment Requests for Filings on Form 13F, and Form ADV-NR; Amendments to Form 13F, Rel. No. 34-93518 (Nov. 4, 2021), https://www.sec.gov/rules/proposed/2021/34-93518.pdf (comments due December 20, 2021); Updated EDGAR Filing Requirements, Rel. No. 33-11005 (Nov. 4, 2021), https://www.sec.gov/rules/proposed/2021/33-11005.pdf (comments due December 22, 2021); Proxy Voting Advice, Rel. No. 34-93595 (Nov. 17, 2021), https://www.sec.gov/rules/proposed/2021/34-93595.pdf (comments due December 27, 2021); Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants, Rel. No. 34-93614 (Nov. 18, 2021), https://www.sec.gov/rules/proposed/2021/34-93614.pdf (comments due January 3, 2022); Reporting of Securities Loans, Rel. No. 34-93613 (Nov. 18, 2021), https://www.sec.gov/rules/proposed/2021/34-93613.pdf (comments due January 7, 2022).

[6]     See Securities and Exchange Commission, "Open Meeting Agenda - December 15, 2021," https://www.sec.gov/os/agenda-open-121521 (noting that the Commission will consider rule proposals on: (1) Rule 10b5-1 and Insider Trading; (2) Share Repurchase Disclosure Modernization; (3) Money Market Fund Reforms; and (4) Security-Based Swap Positions)

Specifically, the proposed new Rule 9j-1 would prohibit fraudulent, deceptive, or manipulative conduct in connection with all transactions in security-based swaps, including misconduct in connection with the exercise of any right or performance of any obligation under a security-based swap. Further, proposed new Rule 15Fh-4(c) would prohibit personnel of an SBS Entity from taking any action to coerce, mislead or otherwise interfere with the SBS Entity's CCO.

Finally, proposed new Rule 10B-1 would require any person, or group of persons, who owns a security-based swap position that exceeds the threshold amount set by the rule to promptly file with the SEC a statement containing the information required by Schedule 10B on the SEC's EDGAR filing system. The filings will be publicly available. Such transparency could provide relevant parties with advance notice that certain market participants are building large positions and could facilitate risk management and inform pricing of security-based swaps.

Today, the Commission is considering a suite of three rules related to the security-based swaps market. I support these proposals because, if adopted, they would improve the transparency and integrity of the security-based swaps market.

The '08 crisis had many chapters, but a form of security-based swaps - credit default swaps - played a lead role throughout the story.

A London affiliate of the large insurance company AIG built up a credit default portfolio, largely in mortgages. The U.S. government stepped in to lend AIG $180 billion in the midst of this terrible crisis in which millions of Americans lost their jobs and their houses.

Thus, as part of the Dodd-Frank Act of 2010, Congress granted this agency broad authority with regard to security-based swaps, including three important authorities we're acting upon here today.

First, Congress under Exchange Act section 10B gave us "large trader reporting" authority - authority to mandate disclosure for positions in security-based swaps and related securities.

Today's proposed rule would require public reporting of large security-based swap positions. This aggregated reporting is another step toward increasing transparency in this previously opaque market.

In March, 13 years after the collapse of AIG, when Archegos Capital Management collapsed, we saw once again the risks that might arise from the use of another security-based swap - total return swaps. At the core of that story was Archegos' use of total return swaps based on underlying stocks, as well as significant exposure that the prime brokers had to the family office.

It wasn't just Archegos and AIG, though. In 1998, Long-Term Capital Management failed, bringing with it a $100-billion balance sheet and more than $1 trillion of derivatives contracts, many of which were total return swaps. I was a young person serving at the U.S. Department of the Treasury at the time, sent along with the Federal Reserve to examine the failure of this firm.

Thus, the jitters and lack of transparency in 1998, 2008, and 2021 inform how I think about the security-based swaps market.

Second, under Section 9(j), Congress gave us authority to strengthen investor protection in security-based swaps. Today's second proposed rule would do just that. Specifically, we are re-proposing new Exchange Act rule 9j-1 to prevent fraud, manipulation, and deception in connection with security-based swap transactions.

The rule is designed to take into account the unique features of a security-based swap. Namely, it would explicitly reach misconduct in connection with the ongoing payments and deliveries that typically occur throughout the lifecycle of these instruments. Thus, this rule is designed to guard against problematic behavior while protecting beneficial activity. I encourage commenters to give us feedback on how we can strike the right balance here.

Third, I support the proposal under section 15F of Dodd-Frank to prohibit the personnel of security-based swap dealers from unduly influencing their chief compliance officers. This gets to our mission to protect investors and safeguard market integrity.

I'm pleased to support today's proposals and, subject to Commission approval, look forward to the public's feedback.

I'd like to extend my gratitude to the members of the SEC staff who worked on this rule, including:

• David Saltiel, Carol McGee, Andrew Bernstein, Pam Carmody, Kateryna Imus, Roni Bergoffen, Meredith MacVicar, Josh Nimmo, and Laura Gold in the Division of Trading and Markets;
• Jessica Wachter, Oliver Richard, Juan Echeverri, Jovan Stojkovic, Taylor Evenson, Julie Marlowe, PJ Hamidi, Mike Willis, Maxwell Miller, and Jill Henderson in the Division of Economic and Risk Analysis.
• Meridith Mitchell, Malou Huth, Robert Teply, Donna Chambers, Sean Bennett, Rachel McKenzie, James Cappoli, Erin Nelson, David Lisitza, and Brooks Shirey in the Office of the General Counsel;
• Gregory Smolar and Stephanie Reinhart in the Division of Enforcement;
• Michele Anderson, Ted Yu, Nicholas Panos, and Valian Afshar in the Division of Corporation Finance; and
• Jane Patterson in the EDGAR Business Office.

This year marks the thirteenth anniversary of the 2008 financial crisis and the 11th anniversary of the Dodd Frank Act.[1] Title VII of Dodd-Frank, which established a new regulatory framework for swaps and security-based swaps, and was among the Act's most significant reforms.[2]

Today, with a new generation of Wall Street bankers who were in high-school or college at the time of the crisis, the Commission has finally completed most of those reforms. The proposed antifraud and anti-manipulation rules comprise a critical component of the overall rule package. That's because it is vital to have antifraud rules that are tailored to the specific structure and trading patterns of the security-based swap market. Thus, the Commission is re-proposing an antifraud rule that would prohibit specific misconduct in connection with security-based swaps, accounting for their unique characteristics by, among other things, explicitly addressing misconduct involving the ongoing payments and deliveries occurring during the life of a security-based swap. The re-proposed rule reflects the Commission's experience with the security-based swap market as well as more recent market developments such as the proliferation of manufactured credit events and other opportunistic credit default swap strategies.

Today's proposal also includes a rule aimed at protecting the independence and objectivity of security-based swap entities' chief compliance officers (CCOs) by prohibiting actions to coerce, manipulate, mislead, or otherwise interfere with them. CCOs play a very important role in preventing fraud and manipulation, and today's proposal is designed to help promote their independence and effectiveness by targeting undue influence and encouraging forthright communication.

Finally, today's proposal would include proposed new rule 10B-1 generally requiring any person with a security-based swap position that exceeds a certain threshold to file with the Commission a schedule disclosing certain information related to its security-based swap position, its position in any security or loan underlying the security-based swap, and its position in other instruments related thereto.[3] This increased transparency could benefit both regulators and market participants, including promoting enhanced risk management by security-based swap counterparties.[4]

I'm pleased to support today's proposal which is thoughtfully tailored to address the specific fraud risks in this complex market, and, importantly, to facilitate enhanced transparency and oversight for the protection of investors. I want to thank the staff for their diligent and thoughtful work on these proposed rules, and I look forward to reviewing comments.

[1] See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (July 21, 2010) ("Dodd-Frank Act").

[2] See Pub. L. 111-203, 701 through 774.

[3] The public disclosure in proposed rule 10B-1 would cover the reporting of the security-based swap position, positions in any security or loan underlying the security-based swap position and any other instrument relating to the underlying security or loan, or group or index of securities or loans. See Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps; Prohibition against Undue Influence over Chief Compliance Officers; Position Reporting of Large Security-Based Swap Positions, Exchange Act Release No. 93784 (Dec. 15, 2021).

[4] See e.g., https://www.federalreserve.gov/supervisionreg/srletters/SR2119.htm (discussing the March collapse of Archegos Capital Management and the significant losses sustained by certain prime brokers showed, among other things, the risks of concentrated exposure to a counterparty and the importance of robust due diligence and risk management practices to identify, assess and mitigate risks).

Thank you, Chair Gensler.

In 2010, Congress passed the Dodd-Frank Act, which established a comprehensive framework for the regulation of the security-based swap market. Over the past four years, the Commission took the final steps required to implement the core components of this framework. The first security-based swap dealers began registering this fall, and market participants finally began reporting details of their security-based swap transactions to security-based swap data repositories last month. I expect that this new regulatory regime will require significant changes in the way market participants do business, but I am reasonably confident that these changes will enhance the quality of the market and increase investor confidence and transparency.

I am less confident that the recommendations we are considering today will achieve similar benefits. Certainly, proposed Rules 9j-1 and 10B-1 address important issues-namely, fraud, manipulation, and transparency in the security-based swap market. In doing so, however, both proposed rules take a maximalist approach that seems disproportionate to the regulatory concerns they are designed to address and that may exceed our statutory authority. The expansive scope of both rules risks disrupting a market in which sophisticated participants have developed a set of norms that, on the whole, appear to meet their investment and hedging needs and that satisfy their commercial expectations.

Proposed Rule 9j-1 is an anti-fraud rule for the security-based swap market that draws on existing language in Exchange Act Rule 10b-5 and in Section 17(a) of the Securities Act,[1] while expanding its scope in significant ways. The prohibitions of the rule reach not just activity around the entry into a security-based swap, or the novation or termination of a security-based swap, but to any actions taken (or, in some cases, not taken) in connection with a obligations or rights under security-based swaps, including, for example, margin payments or early terminations of the transaction.[2] To take one example, every time a dealer issues a margin call, it may expose itself to potential liability under the proposed rule. The proposed rule prohibits not just the fraud, deceit, and manipulation already prohibited under Exchange Act Rule 10b-5 and Section 17(a) of the Securities Act. For the first time in the Commission's rules, as far as I am aware, attempted fraud, deceit, and manipulation are also covered, which may create additional uncertainty for market participants who may be concerned about how the Commission or counterparties will assess even innocuous conduct in retrospect.

The proposal recognizes that the application of the rule to every action taken pursuant to a transaction may interfere with market participants' normal use of security-based swaps and offers two limited safe harbors to mitigate these effects. The safe harbors would allow firms to perform certain routine actions in connection with security-based swaps even when in possession of material non-public information. These safe harbors are important concessions to market practicalities, but they almost certainly will prove insufficient to avoid market disruption. For example, the safe harbors provide no comfort to lenders seeking to enter into a credit default swap to hedge credit exposure to borrowers, and it is unclear whether the safe harbors would apply to margin payments that have been the subject of dispute and negotiation between the parties to a transaction. Moreover, the narrow scope of the safe harbors highlights the extensive compliance framework that firms will need to implement to ensure that they do not fall afoul of the rule's prohibitions each time they take action-or refrain from taking action-in connection with their rights and obligations under each security-based swap if they do not fall within the safe harbors.

Other elements of this proposed antifraud rule also cause me concern. For example, the release devotes particular attention to concerns about manufactured credit events and other opportunistic strategies involving security-based swaps. I am not convinced that these problems are significant enough to warrant Commission rulemaking or even susceptible of being addressed through Commission rulemaking or guidance. Drawing lines that distinguish between conduct taken to effect such strategies and conduct taken in the normal course of business is exceedingly difficult. The release attempts to do so by articulating several indicia of improper strategies that the proposal is designed to address (as distinct from actions taken in the ordinary course of a security-based swap transaction). However, these indicia are necessarily broad and ambiguous and will likely discourage firms from taking actions that would interfere with the natural course of a security-based swap transaction. The proposal identifies, for example, the following indicator of impropriety: "when a party takes action for the purposes of avoiding or causing, or increasing or decreasing, a payment under a security-based swap in a manner that would not have occurred, but for such actions."[3]

In addition to being a little circular, that statement could describe a legitimate and ordinary course of action, a point that the proposing release acknowledges. The release notes, however, that whether the rule reaches such conduct all comes down to facts and circumstances. Don't worry, there will be a fair consideration of those facts and circumstances during the enforcement investigation. The potential for Commission scrutiny of any action that affects payment under the security-based swap-and the unpredictability of the outcome of any facts-and-circumstances inquiry-will almost certainly create a bias toward market participants' taking no action as the termination of the security-based swap draws nearer. The consequence may be to deprive struggling firms of assistance from those most able or willing to provide it.[4]

Proposed Rule 10B-1 likewise may serve to squelch legitimate market activity. It requires firms to report publicly large security-based swap positions, along with their positions in any related securities. I appreciate the proposal's objective of providing the Commission and the public greater transparency into large, concentrated positions in particular reference entities.[5] I do not appreciate the proposal's method of achieving this objective. Given that reporting under the Commission's security-based swap data reporting rules began only last month, it seems premature to issue a proposal to require additional disclosures until the Commission has had some experience with the data reported and publicly disseminated under these existing rules.

In addition, as is apparent in the economic analysis of this proposal, because transaction reporting under our rules has only just begun, the Commission lacks the necessary information to determine with any confidence whether the thresholds for reporting under this proposal are appropriate and whether the firms required to report are likely to be the firms that raise the concerns motivating the proposal in the first place. For example, if, as the economic analysis suggests, many of the reports likely will be filed by security-based swap dealers,[6] how will their reporting advance the stated objectives of the rule? The release provides no evidence that security-based swap dealers are more likely than other market participants (or, indeed, likely at all) to engage in opportunistic strategies.[7] More fundamentally, the fact that a security-based swap dealer holds large, concentrated security-based swap positions in any particular reference entity is unlikely to be breaking news to us or to market participants.[8] Given the information the Commission currently has available to it, it is entirely possible that this new disclosure regime will result primarily in continuously updated reports of positions held by security-based swap dealers. Other firms that need to monitor their positions pursuant to the complicated calculations required under the rule's thresholds will face significant compliance costs, and any firm that exceeds the thresholds will be forced to disclose information that these firms may have a legitimate interest in keeping confidential.[9] I cannot support a proposed rule that would produce so little at such great cost.[10] In any event, the regulatory concerns driving this rule are not so urgent that we could not have waited until we had a year or two of security-based swap transaction data to consider a recommendation for additional transparency measures.

Although I cannot support this proposal, I would like to conclude by expressing my appreciation to the staff in Trading and Markets and in DERA, as well as in the Division of Enforcement and Office of General Counsel, for their hard work over the last several months. In particular, I would like to thank Carol McGee and Andrew Bernstein in the Office of Derivatives Policy for your extensive engagement with my office, your responsiveness to my many concerns with the recommendation, and your unceasing hard work on a very difficult set of issues. I do hope the entire team is able to get some well-deserved rest over the coming holidays.

[1] See Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps; Prohibition against Undue Influence over Chief Compliance Officers; Position Reporting of Large Security-Based Swap Positions ("Proposing Release"), Exchange Act Rel. No. 93784, Dec. 15, 2021, at 27-29.

[2] See id. at 29.

[3] Id. at 48.

[4] In addition to these concerns, I am not convinced that the Commission has the authority under Section 9(j) of the Exchange Act to promulgate proposed Rule 9j-1(c) or (d). The release notes that proposed Rule 9j-1(c) is modeled on Section 20(d) of the Exchange Act, which provides that trades in certain derivatives are unlawful if made while in the possession of material non-public information if a trade in the underlying security would be unlawful if made while in possession of such information. See 15 U.S.C. 78t(d). The release, however, gives no weight to the possibility that Congress specifically determined not to include security-based swaps in that provision, even though the proposal's inclusion of limited safe harbors demonstrates why Congress might have chosen not to include them.

Similarly, nothing in Section 9(j) of the Exchange Act appears to give us authority to apply rules promulgated under that provision to the equities or fixed income markets. Although the proposal contains language attempting to cabin application of the provisions of proposed Rule 9j-1(a) and (b) to those markets to very limited circumstances, it is unclear that the rule language itself so limits application of these provisions or why our existing antifraud provisions are not up to the task of addressing the concerns used to justify proposed Rule 9j-1(d).

[5] See Proposing Release at 20-23.

[6] See id. at 160. Because of limitations in the data about the bond holdings of firms with CDS positions and the very narrow data set available to the Commission regarding equity swaps, the Commission has insufficient data to reach even this conclusion with any degree of confidence.

[7] See id. at 20-23 (stating that purposes of proposed Rule 10B-1 include providing more information about market participants that may intend to use their positions to engage in net-short debt activism or in manufactured or other opportunistic strategies).

[8] Moreover, security-based swap dealers are subject to a comprehensive regulatory framework that includes capital and risk management requirements, as well as to ongoing supervision by the Commission.

[9] The usefulness-either to the Commission or to market participants-of any position-related information reported under the rule is also questionable. The rule generally requires these positions to be reported on a gross basis, meaning that the reports are likely to be too noisy to provide any useful information regarding either the reporting person's likelihood of engaging in an opportunistic strategy or the risk that the person may present to counterparties.

[10] In addition to the direct costs of complying with the proposed rule, there are likely to be indirect costs. In particular, some number of market participants will likely reduce their use of security-based swaps to avoid the extensive disclosure of those positions and related positions required by the rule. Decreased participation in the market will likely decrease market efficiency and deter capital formation as market participants find it more difficult to hedge risks associated with their investment and financing activities.

I thank the rulemaking team for their work on the proposal we are considering today.  I would also like to thank the broader team in the Division of Trading and Markets that worked on our Title VII registration and trade reporting rules that went live last month.  Finalizing these rules, and the related implementation guidance, was no easy task.  Your efforts, particularly over the last few months, are very much appreciated.  As today's proposal makes clear, there is more work on the horizon regarding Title VII.  Unfortunately, in their current form, I cannot support the proposed rules we are considering today.

In 2010, we made our first attempt at fulfilling the directive in Section 763(g) of the Dodd-Frank Act to adopt rules addressing fraud, manipulation, and deception in connection with security-based swaps by proposing Rule 9j-1.[1]  In response, we received feedback from market participants about the potential unintended consequences of that initial proposal on the day-to-day operations of both the security-based swaps market and the underlying cash markets.[2]

Today, we are considering a re-proposal of Rule 9j-1.  This second attempt has made some changes to respond to several comments that we received on the 2010 proposal.  But, in other respects, I see this re-proposal as doubling down on our prior approach.  I believe that the re-proposed rule will lead to confusion for market participants that could have detrimental effects on their ability to use security-based swaps for hedging and risk management.

The extent of potential confusion regarding how this re-proposed rule could operate is broad and could touch many aspects of our capital markets.  The re-proposed rule has implications for the ability of security-based swaps to serve as a means through which lenders manage credit risk from their loan portfolios and trading desks hedge cash positions they have entered into.  Re-proposed Rule 9j-1 also would affect trading in underlying securities markets in a manner that could raise doubts for firms regarding their secondary market trading activity, even if trading is done by an affiliate of the security-based swap counterparty.   

Fostering market integrity is a key means by which the Commission carries out its three-part mission and instills fairness and confidence in securities markets.  The antifraud provisions of the federal securities laws are time-tested, and in this instance, perhaps we could have considered an approach that hewed more closely to those safeguards.  Such an alternative approach might mitigate areas of potential confusion, allowing the security-based swaps market to continue serving its important risk management function that benefits both issuers and investors.      

I also have concerns about proposed Rule 10B-1 regarding public large position reporting.  The release explains that the goals of public reporting are: (1) providing information about the build-up of large positions that could be indicative of potentially fraudulent or manipulative purposes; (2) flagging the existence of concentrated positions, which may not be known to all counterparties; and (3) providing advance notice of a potential manufactured credit event or other opportunistic strategy.  Unfortunately, it is not clear that the large amount of information to be reported will be effective for achieving these goals.

At this time, we are unable to determine what types of entities will ultimately be obligated to publicly report as large traders.  Thus, we cannot be sure that these entities are the ones that may be engaging in activities that the proposed rule seeks to address.  Nor is it readily apparent that the information to be reported will necessarily be helpful in shining a light on these activities.  I question seeking public comment on a proposal that provides for public reporting of a significant amount of information on positions in both swaps and underlying or related securities, involves complex threshold calculations (particularly for equity security-based swaps), and imposes a one-day reporting timeframe, without having a better sense of whether our proposed approach is fit for this purpose.

Last month, dealers began reporting their security-based swaps trades under Regulation SBSR.[3]  Today's release states that we will evaluate this new data in considering changes to the reporting thresholds upon adopting any final rule.  I believe the more prudent approach would be to analyze this new data in the first instance and use that analysis to inform our proposal.  Such an approach would put us in a position to craft a rule that we are confident is calibrated to achieve its stated goals and also enable commenters to respond to the data and help further inform us.  Unfortunately, our staff has not been able to take that additional time to use the new information and tools at our disposal to inform this policymaking.  Hopefully, commenters will nonetheless be able to evaluate the bases for the proposed thresholds and provide relevant information that can assist us in closing some of the many data gaps.

Lastly, as with the other matters we have considered today, I am troubled by the decision to provide a comment period that is only 45 days long.  The comment period for this proposal runs not only over several holidays, but is also concurrent with five other rule proposals that have open comment periods,[4] not including the four additional rules we are considering at today's meeting.[5]  Public feedback on Commission rule proposals is a critical part of the rulemaking process.  I am not sure we are providing enough time to adequately review and provide meaningful comment on this proposal or the others under consideration today.

So, I thank the team again for all their work on this recommendation, but I respectfully dissent.

[1]     See Securities and Exchange Commission, Prohibition Against Fraud, Manipulation, and Deception in Connection with Security-Based Swaps, Rel. No. 34-63236 (Nov. 3, 2010), https://www.sec.gov/rules/proposed/2010/34-63236.pdf (hereinafter, "2010 Rule 9j-1 Proposing Release").

[2]     Comments on the 2010 Rule 9j-1 Proposing Release are available at: https://www.sec.gov/comments/s7-32-10/s73210.shtml.

[3]     See 17 CFR 242.900-909.

[4]     See Electronic Submission of Applications for Orders under the Advisers Act and the Investment Company Act, Confidential Treatment Requests for Filings on Form 13F, and Form ADV-NR; Amendments to Form 13F, Rel. No. 34-93518 (Nov. 4, 2021), https://www.sec.gov/rules/proposed/2021/34-93518.pdf (comments due December 20, 2021); Updated EDGAR Filing Requirements, Rel. No. 33-11005 (Nov. 4, 2021), https://www.sec.gov/rules/proposed/2021/33-11005.pdf (comments due December 22, 2021); Proxy Voting Advice, Rel. No. 34-93595 (Nov. 17, 2021), https://www.sec.gov/rules/proposed/2021/34-93595.pdf (comments due December 27, 2021); Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants, Rel. No. 34-93614 (Nov. 18, 2021), https://www.sec.gov/rules/proposed/2021/34-93614.pdf (comments due January 3, 2022); Reporting of Securities Loans, Rel. No. 34-93613 (Nov. 18, 2021), https://www.sec.gov/rules/proposed/2021/34-93613.pdf (comments due January 7, 2022).

[5]     See Securities and Exchange Commission, "Open Meeting Agenda - December 15, 2021," https://www.sec.gov/os/agenda-open-121521 (noting that the Commission will consider rule proposals on: (1) Rule 10b5-1 and Insider Trading; (2) Share Repurchase Disclosure Modernization; (3) Money Market Fund Reforms; and (4) Security-Based Swap Positions).

• Securities Industry Commentator
• Bill Singer