WASHINGTON — The Securities and Exchange Commission plans to launch its new office of municipal securities by the end of October, chairman Mary Schapiro said in prepared testimony presented to the Senate Banking Committee Thursday.
Speaking about the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Schapiro said the SEC plans to transfer existing staff working on municipal securities to the new office and begin recruiting for a new director who will report to her.
Schapiro’s comments came as top lawmakers offered starkly different perspectives on the Dodd-Frank law.
Banking Committee chairman Christopher Dodd, D-Conn., said the law that bears his name will eliminate “the gaps, the overlaps, and the shortfalls that have allowed some financial actors to game the regulatory structure and some parts of our financial system to go unregulated entirely.”
However, he added, it will be up to “competent, energetic regulators to make the law work.”
In contrast, the ranking Republican on the committee, Alabama Sen. Richard Shelby, warned the regulatory overhaul will produce “more regulation, more agencies, more bureaucrats, and more spending” and that it is “inevitable” that Congress will to change it.
He also said the law does not address the fact that regulators failed to use their “already broad authorities” to prevent the crisis and that it will only exacerbate existing turf wars between regulators.
But Schapiro and Commodity Futures Trading Commission chairman Gary Gensler, who share joint regulatory authority for over-the-counter derivatives, stressed that their two agencies are closely collaborating to develop new derivatives regulations by next summer.
Schapiro said the relationship between the regulators is “unlike anything I’ve ever seen in all my years in government.”
Shelby noted that Gensler was opposed to provisions in the law that would exempt “end users” from mandatory central clearing for over-the-counter derivatives, and asked what steps he is taking “to ensure that your personal aversion” does not interfere with the CFTC’s mandate to regulate swaps?
Gensler said he took an oath when he became CFTC chairman “and Congress writes the law. So we’re going to adopt exactly what you have” legislated,” he said.
Though the law does not specifically define municipalities as “end users,” many market participants believe they will qualify for the end-user exemption from central clearing, which would exempt them from daily margin requirements that require counterparties to exchange collateral based on the market position of their swaps.
Under the law, an exemption can be granted if the end user is not a financial entity, is using the swaps to hedge or mitigate “commercial risk,” and notifies the CFTC how it will meet its “financial obligations” under the swap contract.
Though “commercial risk” is not commonly associated with states and local governments, the law leaves it up to the CFTC to define that term and whether it applies to the interest-rate risk faced by municipal borrowers, market participants said.
Meanwhile, as the SEC moves forward with establishing its new office of municipal securities, it has already hired the head-hunting firm Korn/Ferry International to find candidates to lead the office. The firm is primarily looking for candidates outside the commission who have broad-based managerial experience, according to market participants familiar with the matter and a nine-page, confidential Korn/Ferry document obtained by The Bond Buyer.
Currently, the muni office is housed within the SEC’s division of trading and markets and has only two permanent, full-time employees — Martha Mahan Haines, its chief, and Mary Simpkins, senior special counsel.
In addition, the commission’s muni office recently hired a two-year attorney-fellow, David Sanchez, who formerly worked as an associate general counsel for Financial Security Assurance, a subsidiary of Assured Guaranty. The muni office also has extended an offer to a second attorney-fellow, according to sources.
But market participants believe it is unlikely that the new director’s job will be filled internally.
The new municipal office is expected to administer rules pertaining to broker-dealers, muni advisers, investors, and issuers of municipal securities as well as coordinate with the Municipal Securities Rulemaking Board on rulemaking and enforcement actions.
In her testimony yesterday, Schapiro also said that the SEC is in the process of establishing a new credit rating agencies office and is actively recruiting for a director who also will report to the chairman. In addition, the commission has posted listings for 25 new rating-agency examination positions.
She said the new office will annually examine each nationally recognized statistical rating organization, report on the exams, and conduct studies relating to credit rating agencies regarding NRSRO independence, conflicts of interest, and standardizing ratings terminology.
To fully implement the numerous Dodd-Frank mandates on the SEC, Schapiro said it will need “approximately 800 new positions over time.” Similarly, Gensler said that the CFTC would need additional funds to fully carry out its mandates.
