Thank you, Chairman Schapiro.
I often boil down what we do as regulators to this: We draw regulatory lines that influence – and sometimes definitively determine – the economic activity that can and will occur. The hard part is deciding where to draw the lines because every option we face when deciding whether and how to regulate has both costs and benefits associated with it. It should come as no surprise, then, that there can be disagreement over where to draw the regulatory lines that establish how far the government will reach into the private sector and how heavy the government´s hand will be.
Having said this, there should be widespread agreement over one thing: We need to be thorough and even-handed in assessing the potential consequences of our regulatory line drawing, carefully evaluating the intended goals of our actions while giving due regard to the possible undesirable effects of our choices. In other words, the SEC must engage in rigorous cost-benefit analysis when fashioning the securities law regime. Regulatory decision making should be supported by data, to the extent available, and demanding economic analysis.
A rigorous cost-benefit analysis that empowers us to make informed tradeoffs across a range of potential outcomes is the best way of achieving the common good. A less diligent analysis might miss many impacts, leading to regulatory missteps. The failure to account for certain benefits, for example, might lead to lost opportunities if we choose not to regulate when circumstances warrant that we do. Conversely, the failure to account for certain costs runs the risk that we do more harm than good when we do regulate. For example, in addition to out-of-pocket compliance costs, adverse consequences such as lost innovation and decreased competition must be weighed. Just as we emphasize the benefits of our rulemakings, we need to identify and consider the potential downsides. If not, our decision making will be skewed.
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With this in mind, let me turn to the recommendation that is before the Commission this morning – a recommendation that I support.
In accordance with the Dodd-Frank Act, the recommendation before us is to further define certain terms, including "security-based swap dealer" and "major security-based swap participant." These definitions are very significant in that they determine which entities will be subject to additional registration, capital, margin, and business conduct mandates as a result of Dodd-Frank.
No rule is perfect, and I do have some disagreement with aspects of the recommendation. But that should not detract from what I believe are meaningful improvements to the final rule as compared to the proposal and other outcomes that this rulemaking could have led to.
To single out one important change from the proposal, I would like to compliment the staff for your thoughtfulness in crafting the phase-in for setting the threshold for the de minimis exception to the "security-based swap dealer" definition. The phase-in reflects a measured approach that enables the Commission to continue evaluating where the de minimis line should be drawn with the benefit of what we learn from how the security-based swap market develops under the new regulatory regime.
I am even more encouraged by two developments that occurred over the course of the rulemaking that particularly resonate with what I said earlier about the need for rigorous cost-benefit analysis.
First, data ultimately came to play a key role in the rulemaking, especially in shaping the de minimis exception, including the phase-in. The Division of Risk, Strategy, and Financial Innovation´s analysis gave the Commission a solid basis for evaluating the impact of different possible de minimis thresholds.* To my mind, until our attention turned to the data, it was difficult to find adequate support for the various de minimis thresholds that were considered. As is the promise when decisions are rooted in data, Risk Fin´s analysis allowed the Commission to make a more informed, disciplined choice in discharging our regulatory duties and to steer clear of what otherwise could have been an arbitrary conclusion about where to draw the de minimis line. In future rulemakings, we need to ensure that we take advantage of whatever data are available as early as possible.
Second, how behavior will change and how the marketplace will adapt cannot truly be known until a new regulatory requirement goes into effect. Traditional cost-benefit analysis allows us to anticipate potential consequences, but at some point we will have experienced actual consequences. Accordingly, I am pleased that the Commission has directed the staff to undertake a serious study of the regulatory regime once it is in place. The staff report should reflect a thorough assessment of the regulatory regime´s actual impact on the security-based swap market with an eye toward providing the Commission with data and other information that will empower the agency to better calibrate the regime in the future if warranted. Put differently, there is a commitment to what amounts to a retrospective analysis – the kind of analysis that will allow the Commission to account for the real-life consequences of the rules we adopt so that we can ensure that the regulatory regime is achieving its intended benefits at an acceptable cost.
In concluding, I want to join my colleagues in thanking the staff – most notably, those from the Division of Trading and Markets and the Division of Risk, Strategy, and Financial Innovation – for your dedicated efforts on this rulemaking. I look forward to the continued collaboration of the two Divisions. Indeed, I welcome the early and often engagement of Risk Fin in all of the Commission´s regulatory initiatives.
Thank you.