September 14, 2018 • 25 mins
Dr. Michael Piwowar first worked for the SEC as a visiting scholar from Iowa State University and in 2002; he joined the SEC in the commission's office of economic analysis.In 2013 he was appointed to the commission by President Obama after having served as chief economist for the Senate Banking Committee and he was designated Acting Chairman of the Commission from January to May 2017. In July of this year he stepped down and ended his long career and term of service to the SEC where he worked on a number of important oversight issues such as investor protection, market structure, and capital formation.This week on a Closer Look, Dr. Michael Piwowar discusses corporate bond liquidity, bond markets, regulation and transparency.
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Speaker 1 (00:00):
This is a closer look with Arthur Levitt. Arthur Levitt
is a former Chairman of the U S Securities and
Exchange Commission, a Bloomberg LP board member, a senior advisor
to the Promontory Financial Group, and a policy adviser to
Goldman Sachs. Dr Michael P. Bevar first worked for the
(00:21):
SEC as a visiting scholar from Iowa State. In two
thousand and four, he joined the SEC in the Commission's
Office of Economic Analysis. In two thousand and thirteen. He
was appointed to the Commission by President Obama after having
(00:42):
served as Chief Economist for the Senate Banking Committee, and
he was designated Acting Chairman of the Commission from January
to May two thousand and seventeen. In July of this year,
he stepped down and ended his long career in term
of service to the Commission, where he worked on a
(01:05):
number of important oversight issues such as investor protection, market structure,
and capital formation. He joins me now for a closer look.
Let's start talking about bond transparency, an issue which has
bedeviled us for nearly fifty years. You reminded me that
(01:30):
twenty years ago I spoke about bond market transparency, and
it seems this is an ongoing issue that never ends.
And you say that you cannot recall any other markets
issue that has generated as much debate with so little
certainty about the extent of the problem or how to
(01:54):
resolve it than the issue of corporate bond market liquidity.
Where do you think we stand and where do you
think we're going well? In terms of transparency? Where we
stand is um we are much further along the spectrum
of transparency. Twenty years after you gave that speech. I
(02:15):
was reminded of that speech. I was putting together some
notes for an event that I'm doing in September, and
it hit me that, wait a second, this is the
twentieth anniversary that Chairman Levin gave that. Levitt gave that speech,
and so I went back and looked at it, and
I said, yes, it has been exactly twenty years. And
so in those twenty years there's been a number of
improvements that the SEC has made in terms of bond
(02:37):
market transparency, most importantly in the issue of post trade
transparency for public investors. After you gave that speech, what
was then the n E s D and what is
now FINRA A self regulatory organization. Along with the m
s RB, the Municipal Securities Rulemaking Board is self regulatory
organization for the municipal bond market. Began a series of
(03:00):
initiatives to add post trade transparency to the bond markets,
to the corporate market. In the municipal bond market, what
post trade transparency means is that for the first time,
public investors were able to see transaction prices that were
affected by other investors, and so then they could make
decisions about whether they wanted to buy or sell or
(03:22):
hold their bonds given the prices that were in the market.
And UH, it took some time to get that done.
I joined the Commission, as you mentioned, UH in two
thousand and two, and I worked on some initiatives that
added the post trade transparency of the market. It took
us a couple of years to get that done, UH.
And now we're at a point where any investor can
(03:43):
go to the Finer Trade system or to the m
s R b m A system and see any of
the recent transactions in any bonds that they would like
to buy or sell. Would you say that there's as
much transparency in our bond markets today as we could
ever expect to say, no, uh, that what I've spoken
(04:06):
about is post trade transparency. We also know there's other
dimensions of transparency, uh, namely what what market structure experts
referred to as pre trade transparency. So, for example, in
the equity markets, I mean not only can see the
transactions that were just made, but we can see bids
and offers or the prices at which market makers or
(04:27):
brokers or dealers are willing to buy and sell securities.
In the bond markets, we see much less pre trade transparency.
There are some mechanisms for some institutional traders to get
some amount of pre trade transparency, but for the average investor, uh,
the bond market is still lacking along that dimension. Would
you choose transparency over liquidity? I think they both go
(04:51):
hand in hand. I think what the transparency initiatives showed
was that when you increased transparency in the bond market,
particularly in the on the post trade dimension, that it
actually improves overall liquidity. And thinking back at the time,
there were concerns that somehow, if you added transparency to
the markets, that somehow it was going to have a
(05:11):
detrimental effect on liquidity, and that was one of the
things that the SEC was very much concerned about moving
forward that to make sure that we made we maintained fair,
orderly and efficient markets, which is one of one of
the one of the parts of the core mission of
the SEC. And to make sure that you know, UH
first do no harm um to the markets and so um.
(05:35):
One of the concerns was that if we added transparency
might harm liquidity. Well, myself and some other academic and
some other SEC economists, namely Larry Harris and Amy Edwards
UH did a study on this and we found that
in fact, by by increasing transparency, it actually improved the
liquidity of the market. And in fact, there were two
other academic studies that were done at the time that
(05:57):
showed UH the the exact same results, although they did
their studies slightly differently. Um it showed that and so um.
What what it showed was that transparency and liquidity are
inextricably linked in and in fact it can be a
win win situation. The President recently suggested, after talking to
the outgoing CEO of PEPSI and others, that one cure
(06:20):
for Wall Street short term isn't is for the SEC
to think about ending quarterly reporting and go to twice
a year. What do you think of this idea short
term is UM is certainly an issue that cropped up
and the probably the last six months of of my
term as commissioner. It's something that I hadn't really heard
(06:41):
of UM for about twenty years. When I was an
NBA student in the nineteen early nineteen nineties, there was
a concern at that point that the U S. Securities
markets were too short term focused and we needed to
be long more long term focused like Japan. Now subsequent
to that, we know, fast forward years later, the U
S economy has gone on to bigger and better things,
(07:03):
in the Japanese economy has not. So. First of all,
I questioned the sort of the premise of of whether
short termism is is in fact detrimental to what's going
on UM. Now having said that, UM, what I've noticed
in the debate over this is it is that people
seem to be conflating two different things. One they talk
about quarterly reports. There's there's two different types of reports.
(07:24):
One is UM the quarterly financial statements that the company
public companies file with the Securities and Exchange Commission, the
ten q s, if you will, UH. The second are
earnings reports or earnings guidance um that are given by
companies that are not required by the sec UM. In
the president's tweet, he said quarterly reports, and presumably he
(07:45):
meant ten ques. But subsequent to that, I've seen reporting
talking about this issue of earnings guidance, and this is
an issue that I've been talking to folks in public
companies saying that, uh, there are things that they can
do for self help that that doesn't require the regulators
UH to get involved in this. I certainly think the
president's tweet has isn't re engaged the debate over this.
(08:05):
There was a law firm out there a couple of
years ago that had put forward this concept. It's a
healthy debate. The Commission is always looking at ways in
terms of trying to improve disclosure. They just passed a
rule recently that would that would scale back a bunch
of duplicative disclosures, and so this is certainly something that's
on their radar screen and certainly something they're continuing to
(08:26):
look at. My Bloomberg colleague Barry Ridhols suggests the solution,
UH is to make quarterly earnings less important. We should
be exploring ways to report results more often, not less,
and he suggests that we report earnings monthly with the
goal of eventually moving to near real time daily updates,
(08:50):
then short term earnings obsession will all but disappear. In
its place, he says, we'll have a focus on broader
profit trends and deeper and politics. Do you think this
idea has any merit? It could possibly have merrit. This
is a perfect example of something that if the SEC
is going to look at it, one of the things
(09:10):
they might want to do is consider looking at whether
there is anything right now in the rules and regulations
that that that that prevent companies from doing this voluntarily.
Uh And if not, then companies some companies could choose
to do this, and then the SEC could study the
effects of it. UH. If if there is something that
is prohibiting this, perhaps the SEC could look at potentially
(09:31):
doing some sort of pilot program, as has been suggested
by Georgetown financial economist Jim angel Um. The problem with
doing a pilot study with this type of frequency is
that it would take months, if not years, to actually
find the results from from what happens to this. But
I think it's it's part of a healthy debate and
it is something that the SEC should continue to hear
(09:52):
from folks from all sides on the issue. Let's talk
about regulation best interest that the Commission is using to replace.
I see Department of Labor's Fiduciary standard rule. Federal rules
requires brokers to employ a reasonable belief that their recommendations
are suitable. Regulation best interest elevates the standard to require
(10:16):
broker dealers make recommendations that are legitimately in their client's
best interests. But can best interests be clearly defined? That's
an excellent question. In fact, when when the SEC proposed this,
I was still on the Commission earlier this year, and
one of one of the things I mentioned in support,
I supported putting this out for public comment, and one
(10:38):
of the things I mentioned in my opening statement was
that I thought we could have done a better job
explaining exactly what this meant. And what's nice about the
regulatory processes that at the SEC is that when we
put out a rule proposal, we put it out for
public comment, and that allows us to get feedback from
anyone in the public. Um it doesn't You don't have
to be in the industry. You can just be any
(11:00):
blick investor, UH, and you can on our website you
can submit a comment. I'm hoping that through this public
comment process there are a lot of questions and potentially
UH some solutions in terms of how to better UM
explain more clearly explain what the best interest standard is.
One of the things that's important that goes along with that.
(11:22):
That went along with that rule proposal was at the
same time the sec we proposed to other things. One
was UM something called UM a CRS summary Customer relationship
summary that would when when someone is sitting down in
front of a financial advisor UM, it would be a
disclosure document that would show the customer UM does does
(11:45):
the person sitting in front of them? Do they have
a suitability requirement as is required by brokers, or do
they have a fiduciary requirement which is required by registered
investment advisors? What do those two terms mean? How are
how is the person sitting in front of you, how
are they being compensated? What potential conflicts of interest they have?
And the idea is to create one clear disclosure for
(12:07):
the investor so that they can they can distinguish between
the two. The third thing that was that we proposed
at the same time was it was a notice of
proposed interpretation or a clarification of exactly what the fiduciary
standard is for registered investment advisors UM. It is a
principle based standard. A lot of the specifics have been
(12:27):
UM are come through common law, and so what the
SEC wanted to do was put out for public comment
what we think some of the specific requirements are and
make sure that that that people understand exactly where the
state of play is on the fiduciary standard. You've said
that public comments will be crucial in shaping the agency's
(12:51):
Best interest rule. What kinds of comments have you gotten
up to now and what are people most concerned about?
And and do you expect the rule to be finalized? Well,
we just started receiving comments the comment period. I've lost
track of time whether it's just ending or or about
to end, but we expect to receive comments, or the
(13:13):
SEC expects to receive comments throughout the fall. UM. A
lot of the comments are on the best interest standard,
clarifying exactly what that means, clarifying the definition of retail
investor trying to clarify how the regulation best interest UH
is similar to or different than the existing FINRA suitability
(13:34):
requirement UH. And what's nice about the public comment process
is that the first stage of it is that we
that the SEC receives the public comments, and then the
SEC then the staff will will either reach out to
people who have submitted comments are oftentimes UH folks that
have submitted comments will request to meet with UH Commission
staff UH and throughout the fall, anticipate there will be
(13:56):
a number of meetings to try to clarify some of
these concepts and and listen to as many people as possible.
At the same time, Chairman Clayton has been going out
throughout the country and meeting investors retail investors outside of Washington,
d C. And trying to listen to them and hear
their comments. UM. They may getn be aware that the
public comment process is happening, but it's a way for
(14:19):
him to get out and get direct feedback from people
explaining what regg best interest is trying to achieve and
then getting interesting comments from them. Turning to cryptocurrency, the
Virtual Commodity Association, created by Geminy Trust co founders Cameron
(14:40):
and Tyler Winklevas and several of the world's large digital exchanges,
just announced it's forming its own group to help self
regulate their expanding industry. They say it's a step toward
improving regulation of cryptocurrency and the criticism that regulators have
(15:01):
been lax and slow. Have regulators been too lax and
slow to make rules? What's holding it up? Absolutely not.
The I can say that for about the last year
year and a half of my term at the Commission,
the most number of meetings that I took were in
the fintech space, financial technology space generally UM, and then
(15:24):
more specifically within the crypto space, whether it's the crypto assets,
cryptocurrencies themselves like bitcoin, light coin, ethereum, those types of things,
or whether it was in the realm of initial coin offerings. UH.
The SEC has been very very busy in this area. UM.
A little a little over a year ago, we put
(15:46):
out something called the d a Oh Report or DOW Report,
based upon an investigation of an initial coin offering that
the Commission determined in fact was a security is offering
and the offering was actually the money was paid back
in the in the SEC decided not to bring an
enforcement action, but we also felt it was important to
(16:07):
tell the world how we are thinking about whether a
particular type of initial coin offering is in fact a security,
and therefore, if it is a security, then it has
to comply with existing securities laws. And and in that report,
what the SEC basically said was that they were thinking
about it in terms of something called the Howie test,
and this is a test that has been around since
(16:27):
ninety six that was involved in the courts about whether
something was deemed to be what's called an investment contract
and therefore security under the federal securities laws. The case
itself in six involved least back arrangements in orange groves,
and um from that it flowed that you know, things
like least back arrangements and orange growths can in fact
be securities. And it turns out that the prongs of
(16:50):
the Howie test are actually very useful in determining whether
UH an initial coin offering is in fact to securities
offering as well. And so in this report, what we
the SEC did was we told the world this is
how we are thinking about whether something is a security,
and if it is a security, you need to comply
with existing federal securities laws. And in addition to that,
(17:12):
put out press releases, statements, speeches, tweets, everything we could
to tell people. If you have questions as to whether
or not this is in fact a security, come talk
to us, and our doors have been open ever since.
Um I was very pleased to see that we have
one of our experts in this in the cryptocurrency area,
who UM previously had been in our Enforcement division, has
(17:33):
been moved over to our corporation Finance division. That's important
because it gives people comfort that they can come in
and talk to the SEC UH and get UM and
and get good information as to whether or not they're
offering its in fact a security. It also helps the
SEC gather information uh I know for a fact, commissioners
and staff at the SEC are trying to do as
(17:55):
much as they can to learn about this very very
fast changing market. Mike, what will it take to make
regulators approve a bitcoin exchange traded fund? The SEC has
done a number of things to try to communicate the
number of hurdles that need to be overcome for the
SEC to approve a retail product that would that would
(18:17):
have bitcoin or other types of assets in them. A
couple of them have been done through the orders where
staff has disapproved particular types of offerings and In there
they talk about the standards for disapproval. One of the
big concerns is is the manipulation of the underlying spot market.
So typically in in a in a retail product that
(18:39):
the SEC and exchange traded fund or a mutual fund,
the SEC has to be comfortable that whatever the underlying
thing is that's in that e t F, whether that
underlying thing is a stock or a bond or a bitcoin,
that the SEC has to be comfortable that there are
rules and regulations in place to try to minimize the
amount of price manipulation in secure purities. If if you
(19:01):
have an e t F, say with the SMPI index, well,
the underlying things are smp stocks, those are already regulated
by the SEC, and so there's there's not not much
of a concern there. If it's gold, for example, what's
regulated by a guard gold futures, it's regulated by the CFTC.
But bitcoin spot transactions occur all over the world, and
(19:21):
it's it's changing rapidly. A couple of years ago, most
of the transactions were occurring in China. UH. This Chinese
government crackdown UH. Subsequent to that, the Japanese government set
up a regulatory regime, and a lot of the transactions
have moved to Japan, and the market moves very, very rapidly.
So one of the concerns that the SEC has is
that this, this fast evolving market can go to places
(19:43):
where the where they're not comfortable that there is good
regulation in terms of trying to prevent price manipulation. And
that's just one to mention. Another is valuation, So how
how are these things valued if they're training on multiple
exchanges at different prices at the same time, how do
you strike a net asset value, say at the end
of the day, for for something that offers daily liquidity.
(20:05):
Another big concern is custody. Right, these transactions occur on
the blockchain, many of them, but many do not. Um
if if if there's an exchange that you know, can
can offer bitcoins off of the blockchain, and they hold
them in these so called wallets, whether they're hot wallets
or cold wallets, those things get hacked all the time.
And if there's an investment company or an investment advisor
(20:28):
that wants to hold these assets crypto assets, they have
to they have to meet existing custody requirements. So those
are just some of the areas now, how do people
know that this is what the SEC is thinking. While
a few months ago, the head of our division of
investment Management, Dahia Blast, put out an open letter. The
letter was actually addressed to the Investment Company Institute, but
(20:48):
it's a public letter that's available on the website stating here,
I think it was like thirty or forty questions that
the SEC wants would like to have answered, UH, in
order to try to get comfortable with approving a product
that would that would be sold to retail investors that
would include cryptocurrencies such as such as bitcoin. What's nice
is that just in the past few weeks, UH, the
(21:11):
SEC has opened up a file on the website UM
so that anybody that submits answers to the SEC on
any one of those questions through a letter or through
an email UM, the SEC will put make those available
to the public so that everyone has benefit to the conversation.
And I know this is something that Commissioner hester Purse
(21:32):
had been pushing to try to make this debate more
public and and try to get more people involved in
the conversation. And so folks that are interested in this
can go to the SEC's website UH and look for
this and and see how the debate is evolving over time,
and you can bet and then then in the coming
weeks and months, the SEC officials will be out there
(21:52):
talking about this, either in speeches or through staff letters
or staff guidance to see how see how each one
of these the answers to each one of these sctions
is evolving. I followed the progress of Geminy Trust co
founders Cameron and Tyler Winklevoss through the years, and I
noted that the Commission turned down their recent request and
(22:21):
they've formed their own trade group to help self regulate
their industry. What was the problem with the Geminy Trust
filing and do you think it's something that they will
be able to easily address if you look at the
original denial was done through what's called delegated authority by
(22:43):
the staff, and that happened in two thousand seventeen when
when I was acting chairman UM and what the staff
identified was the concern about price manipulation, that the underlying
spot market could be manipulated. Even though the Winkelvoss brothers
had set up a Gemini Exchange UH to price the
bitcoin prices off of for for their exchange traded product
(23:07):
application UM. There were it had very little trading on
that exchange and a lot of the trading occurred elsewhere.
So price manipulation was was one of the big concerns
UH for for the staff denial UM. So what happened
after that was that either a commissioner could have called
it up for a review or they could have appealed UH.
(23:29):
They decided not to appeal UM. The commission right after
the election. We were down to two commissioners. The Winklevoss
twins did ask for review UM and UM and and
so staff was reviewing that and it reviewed it over
a number of months. UM they were not ready to
make another recommendation to the Commission. The Commission was not
ready to make its vote final until after I left
(23:53):
UM in July. UH and they most recently did that,
and it was a split vote. It was a three
one vote. Three commissioners voted to deny the application and
one commissioner voted to approve the application. UM. And now
there are other applications before the Commission that have subsequently
been denied at the staff level and have been called
(24:13):
up for review at the commission level. He was appointed
to the SEC by President Obama and two thousand and thirteen,
and briefly served as acting chair in two thousand and seventeen.
He ended his long association with the SEC when he
resigned this past or lie. Prior to joining the Commission,
(24:35):
he served as a senior economist at the President's Council
of Economic Advisors in both the Bush and Obama administrations,
and he was the Chief Economic Advisor to the Senate
Banking Committee. Dr Michael Pivov, thank you for joining us.
Thank you, by the way. If you have comments about
(24:57):
the program or suggestions for top please email me at
a Closer Look at Bloomberg dot net. That's closer Look
one word at Bloomberg dot net and follow me on
Twitter at Arthur Levin one word. This is a Closer
Look with Arthur Levin.
This is a closer look with Arthur Levitt. Arthur Levitt
is a former Chairman of the U S Securities and
Exchange Commission, a Bloomberg LP board member, a senior advisor
to the Promontory Financial Group, and a policy adviser to
Goldman Sachs. Dr Michael P. Bevar first worked for the
(00:21):
SEC as a visiting scholar from Iowa State. In two
thousand and four, he joined the SEC in the Commission's
Office of Economic Analysis. In two thousand and thirteen. He
was appointed to the Commission by President Obama after having
(00:42):
served as Chief Economist for the Senate Banking Committee, and
he was designated Acting Chairman of the Commission from January
to May two thousand and seventeen. In July of this year,
he stepped down and ended his long career in term
of service to the Commission, where he worked on a
(01:05):
number of important oversight issues such as investor protection, market structure,
and capital formation. He joins me now for a closer look.
Let's start talking about bond transparency, an issue which has
bedeviled us for nearly fifty years. You reminded me that
(01:30):
twenty years ago I spoke about bond market transparency, and
it seems this is an ongoing issue that never ends.
And you say that you cannot recall any other markets
issue that has generated as much debate with so little
certainty about the extent of the problem or how to
(01:54):
resolve it than the issue of corporate bond market liquidity.
Where do you think we stand and where do you
think we're going well? In terms of transparency? Where we
stand is um we are much further along the spectrum
of transparency. Twenty years after you gave that speech. I
(02:15):
was reminded of that speech. I was putting together some
notes for an event that I'm doing in September, and
it hit me that, wait a second, this is the
twentieth anniversary that Chairman Levin gave that. Levitt gave that speech,
and so I went back and looked at it, and
I said, yes, it has been exactly twenty years. And
so in those twenty years there's been a number of
improvements that the SEC has made in terms of bond
(02:37):
market transparency, most importantly in the issue of post trade
transparency for public investors. After you gave that speech, what
was then the n E s D and what is
now FINRA A self regulatory organization. Along with the m
s RB, the Municipal Securities Rulemaking Board is self regulatory
organization for the municipal bond market. Began a series of
(03:00):
initiatives to add post trade transparency to the bond markets,
to the corporate market. In the municipal bond market, what
post trade transparency means is that for the first time,
public investors were able to see transaction prices that were
affected by other investors, and so then they could make
decisions about whether they wanted to buy or sell or
(03:22):
hold their bonds given the prices that were in the market.
And UH, it took some time to get that done.
I joined the Commission, as you mentioned, UH in two
thousand and two, and I worked on some initiatives that
added the post trade transparency of the market. It took
us a couple of years to get that done, UH.
And now we're at a point where any investor can
(03:43):
go to the Finer Trade system or to the m
s R b m A system and see any of
the recent transactions in any bonds that they would like
to buy or sell. Would you say that there's as
much transparency in our bond markets today as we could
ever expect to say, no, uh, that what I've spoken
(04:06):
about is post trade transparency. We also know there's other
dimensions of transparency, uh, namely what what market structure experts
referred to as pre trade transparency. So, for example, in
the equity markets, I mean not only can see the
transactions that were just made, but we can see bids
and offers or the prices at which market makers or
(04:27):
brokers or dealers are willing to buy and sell securities.
In the bond markets, we see much less pre trade transparency.
There are some mechanisms for some institutional traders to get
some amount of pre trade transparency, but for the average investor, uh,
the bond market is still lacking along that dimension. Would
you choose transparency over liquidity? I think they both go
(04:51):
hand in hand. I think what the transparency initiatives showed
was that when you increased transparency in the bond market,
particularly in the on the post trade dimension, that it
actually improves overall liquidity. And thinking back at the time,
there were concerns that somehow, if you added transparency to
the markets, that somehow it was going to have a
(05:11):
detrimental effect on liquidity, and that was one of the
things that the SEC was very much concerned about moving
forward that to make sure that we made we maintained fair,
orderly and efficient markets, which is one of one of
the one of the parts of the core mission of
the SEC. And to make sure that you know, UH
first do no harm um to the markets and so um.
(05:35):
One of the concerns was that if we added transparency
might harm liquidity. Well, myself and some other academic and
some other SEC economists, namely Larry Harris and Amy Edwards
UH did a study on this and we found that
in fact, by by increasing transparency, it actually improved the
liquidity of the market. And in fact, there were two
other academic studies that were done at the time that
(05:57):
showed UH the the exact same results, although they did
their studies slightly differently. Um it showed that and so um.
What what it showed was that transparency and liquidity are
inextricably linked in and in fact it can be a
win win situation. The President recently suggested, after talking to
the outgoing CEO of PEPSI and others, that one cure
(06:20):
for Wall Street short term isn't is for the SEC
to think about ending quarterly reporting and go to twice
a year. What do you think of this idea short
term is UM is certainly an issue that cropped up
and the probably the last six months of of my
term as commissioner. It's something that I hadn't really heard
(06:41):
of UM for about twenty years. When I was an
NBA student in the nineteen early nineteen nineties, there was
a concern at that point that the U S. Securities
markets were too short term focused and we needed to
be long more long term focused like Japan. Now subsequent
to that, we know, fast forward years later, the U
S economy has gone on to bigger and better things,
(07:03):
in the Japanese economy has not. So. First of all,
I questioned the sort of the premise of of whether
short termism is is in fact detrimental to what's going
on UM. Now having said that, UM, what I've noticed
in the debate over this is it is that people
seem to be conflating two different things. One they talk
about quarterly reports. There's there's two different types of reports.
(07:24):
One is UM the quarterly financial statements that the company
public companies file with the Securities and Exchange Commission, the
ten q s, if you will, UH. The second are
earnings reports or earnings guidance um that are given by
companies that are not required by the sec UM. In
the president's tweet, he said quarterly reports, and presumably he
(07:45):
meant ten ques. But subsequent to that, I've seen reporting
talking about this issue of earnings guidance, and this is
an issue that I've been talking to folks in public
companies saying that, uh, there are things that they can
do for self help that that doesn't require the regulators
UH to get involved in this. I certainly think the
president's tweet has isn't re engaged the debate over this.
(08:05):
There was a law firm out there a couple of
years ago that had put forward this concept. It's a
healthy debate. The Commission is always looking at ways in
terms of trying to improve disclosure. They just passed a
rule recently that would that would scale back a bunch
of duplicative disclosures, and so this is certainly something that's
on their radar screen and certainly something they're continuing to
(08:26):
look at. My Bloomberg colleague Barry Ridhols suggests the solution,
UH is to make quarterly earnings less important. We should
be exploring ways to report results more often, not less,
and he suggests that we report earnings monthly with the
goal of eventually moving to near real time daily updates,
(08:50):
then short term earnings obsession will all but disappear. In
its place, he says, we'll have a focus on broader
profit trends and deeper and politics. Do you think this
idea has any merit? It could possibly have merrit. This
is a perfect example of something that if the SEC
is going to look at it, one of the things
(09:10):
they might want to do is consider looking at whether
there is anything right now in the rules and regulations
that that that that prevent companies from doing this voluntarily.
Uh And if not, then companies some companies could choose
to do this, and then the SEC could study the
effects of it. UH. If if there is something that
is prohibiting this, perhaps the SEC could look at potentially
(09:31):
doing some sort of pilot program, as has been suggested
by Georgetown financial economist Jim angel Um. The problem with
doing a pilot study with this type of frequency is
that it would take months, if not years, to actually
find the results from from what happens to this. But
I think it's it's part of a healthy debate and
it is something that the SEC should continue to hear
(09:52):
from folks from all sides on the issue. Let's talk
about regulation best interest that the Commission is using to replace.
I see Department of Labor's Fiduciary standard rule. Federal rules
requires brokers to employ a reasonable belief that their recommendations
are suitable. Regulation best interest elevates the standard to require
(10:16):
broker dealers make recommendations that are legitimately in their client's
best interests. But can best interests be clearly defined? That's
an excellent question. In fact, when when the SEC proposed this,
I was still on the Commission earlier this year, and
one of one of the things I mentioned in support,
I supported putting this out for public comment, and one
(10:38):
of the things I mentioned in my opening statement was
that I thought we could have done a better job
explaining exactly what this meant. And what's nice about the
regulatory processes that at the SEC is that when we
put out a rule proposal, we put it out for
public comment, and that allows us to get feedback from
anyone in the public. Um it doesn't You don't have
to be in the industry. You can just be any
(11:00):
blick investor, UH, and you can on our website you
can submit a comment. I'm hoping that through this public
comment process there are a lot of questions and potentially
UH some solutions in terms of how to better UM
explain more clearly explain what the best interest standard is.
One of the things that's important that goes along with that.
(11:22):
That went along with that rule proposal was at the
same time the sec we proposed to other things. One
was UM something called UM a CRS summary Customer relationship
summary that would when when someone is sitting down in
front of a financial advisor UM, it would be a
disclosure document that would show the customer UM does does
(11:45):
the person sitting in front of them? Do they have
a suitability requirement as is required by brokers, or do
they have a fiduciary requirement which is required by registered
investment advisors? What do those two terms mean? How are
how is the person sitting in front of you, how
are they being compensated? What potential conflicts of interest they have?
And the idea is to create one clear disclosure for
(12:07):
the investor so that they can they can distinguish between
the two. The third thing that was that we proposed
at the same time was it was a notice of
proposed interpretation or a clarification of exactly what the fiduciary
standard is for registered investment advisors UM. It is a
principle based standard. A lot of the specifics have been
(12:27):
UM are come through common law, and so what the
SEC wanted to do was put out for public comment
what we think some of the specific requirements are and
make sure that that that people understand exactly where the
state of play is on the fiduciary standard. You've said
that public comments will be crucial in shaping the agency's
(12:51):
Best interest rule. What kinds of comments have you gotten
up to now and what are people most concerned about?
And and do you expect the rule to be finalized? Well,
we just started receiving comments the comment period. I've lost
track of time whether it's just ending or or about
to end, but we expect to receive comments, or the
(13:13):
SEC expects to receive comments throughout the fall. UM. A
lot of the comments are on the best interest standard,
clarifying exactly what that means, clarifying the definition of retail
investor trying to clarify how the regulation best interest UH
is similar to or different than the existing FINRA suitability
(13:34):
requirement UH. And what's nice about the public comment process
is that the first stage of it is that we
that the SEC receives the public comments, and then the
SEC then the staff will will either reach out to
people who have submitted comments are oftentimes UH folks that
have submitted comments will request to meet with UH Commission
staff UH and throughout the fall, anticipate there will be
(13:56):
a number of meetings to try to clarify some of
these concepts and and listen to as many people as possible.
At the same time, Chairman Clayton has been going out
throughout the country and meeting investors retail investors outside of Washington,
d C. And trying to listen to them and hear
their comments. UM. They may getn be aware that the
public comment process is happening, but it's a way for
(14:19):
him to get out and get direct feedback from people
explaining what regg best interest is trying to achieve and
then getting interesting comments from them. Turning to cryptocurrency, the
Virtual Commodity Association, created by Geminy Trust co founders Cameron
(14:40):
and Tyler Winklevas and several of the world's large digital exchanges,
just announced it's forming its own group to help self
regulate their expanding industry. They say it's a step toward
improving regulation of cryptocurrency and the criticism that regulators have
(15:01):
been lax and slow. Have regulators been too lax and
slow to make rules? What's holding it up? Absolutely not.
The I can say that for about the last year
year and a half of my term at the Commission,
the most number of meetings that I took were in
the fintech space, financial technology space generally UM, and then
(15:24):
more specifically within the crypto space, whether it's the crypto assets,
cryptocurrencies themselves like bitcoin, light coin, ethereum, those types of things,
or whether it was in the realm of initial coin offerings. UH.
The SEC has been very very busy in this area. UM.
A little a little over a year ago, we put
(15:46):
out something called the d a Oh Report or DOW Report,
based upon an investigation of an initial coin offering that
the Commission determined in fact was a security is offering
and the offering was actually the money was paid back
in the in the SEC decided not to bring an
enforcement action, but we also felt it was important to
(16:07):
tell the world how we are thinking about whether a
particular type of initial coin offering is in fact a security,
and therefore, if it is a security, then it has
to comply with existing securities laws. And and in that report,
what the SEC basically said was that they were thinking
about it in terms of something called the Howie test,
and this is a test that has been around since
(16:27):
ninety six that was involved in the courts about whether
something was deemed to be what's called an investment contract
and therefore security under the federal securities laws. The case
itself in six involved least back arrangements in orange groves,
and um from that it flowed that you know, things
like least back arrangements and orange growths can in fact
be securities. And it turns out that the prongs of
(16:50):
the Howie test are actually very useful in determining whether
UH an initial coin offering is in fact to securities
offering as well. And so in this report, what we
the SEC did was we told the world this is
how we are thinking about whether something is a security,
and if it is a security, you need to comply
with existing federal securities laws. And in addition to that,
(17:12):
put out press releases, statements, speeches, tweets, everything we could
to tell people. If you have questions as to whether
or not this is in fact a security, come talk
to us, and our doors have been open ever since.
Um I was very pleased to see that we have
one of our experts in this in the cryptocurrency area,
who UM previously had been in our Enforcement division, has
(17:33):
been moved over to our corporation Finance division. That's important
because it gives people comfort that they can come in
and talk to the SEC UH and get UM and
and get good information as to whether or not they're
offering its in fact a security. It also helps the
SEC gather information uh I know for a fact, commissioners
and staff at the SEC are trying to do as
(17:55):
much as they can to learn about this very very
fast changing market. Mike, what will it take to make
regulators approve a bitcoin exchange traded fund? The SEC has
done a number of things to try to communicate the
number of hurdles that need to be overcome for the
SEC to approve a retail product that would that would
(18:17):
have bitcoin or other types of assets in them. A
couple of them have been done through the orders where
staff has disapproved particular types of offerings and In there
they talk about the standards for disapproval. One of the
big concerns is is the manipulation of the underlying spot market.
So typically in in a in a retail product that
(18:39):
the SEC and exchange traded fund or a mutual fund,
the SEC has to be comfortable that whatever the underlying
thing is that's in that e t F, whether that
underlying thing is a stock or a bond or a bitcoin,
that the SEC has to be comfortable that there are
rules and regulations in place to try to minimize the
amount of price manipulation in secure purities. If if you
(19:01):
have an e t F, say with the SMPI index, well,
the underlying things are smp stocks, those are already regulated
by the SEC, and so there's there's not not much
of a concern there. If it's gold, for example, what's
regulated by a guard gold futures, it's regulated by the CFTC.
But bitcoin spot transactions occur all over the world, and
(19:21):
it's it's changing rapidly. A couple of years ago, most
of the transactions were occurring in China. UH. This Chinese
government crackdown UH. Subsequent to that, the Japanese government set
up a regulatory regime, and a lot of the transactions
have moved to Japan, and the market moves very, very rapidly.
So one of the concerns that the SEC has is
that this, this fast evolving market can go to places
(19:43):
where the where they're not comfortable that there is good
regulation in terms of trying to prevent price manipulation. And
that's just one to mention. Another is valuation, So how
how are these things valued if they're training on multiple
exchanges at different prices at the same time, how do
you strike a net asset value, say at the end
of the day, for for something that offers daily liquidity.
(20:05):
Another big concern is custody. Right, these transactions occur on
the blockchain, many of them, but many do not. Um
if if if there's an exchange that you know, can
can offer bitcoins off of the blockchain, and they hold
them in these so called wallets, whether they're hot wallets
or cold wallets, those things get hacked all the time.
And if there's an investment company or an investment advisor
(20:28):
that wants to hold these assets crypto assets, they have
to they have to meet existing custody requirements. So those
are just some of the areas now, how do people
know that this is what the SEC is thinking. While
a few months ago, the head of our division of
investment Management, Dahia Blast, put out an open letter. The
letter was actually addressed to the Investment Company Institute, but
(20:48):
it's a public letter that's available on the website stating here,
I think it was like thirty or forty questions that
the SEC wants would like to have answered, UH, in
order to try to get comfortable with approving a product
that would that would be sold to retail investors that
would include cryptocurrencies such as such as bitcoin. What's nice
is that just in the past few weeks, UH, the
(21:11):
SEC has opened up a file on the website UM
so that anybody that submits answers to the SEC on
any one of those questions through a letter or through
an email UM, the SEC will put make those available
to the public so that everyone has benefit to the conversation.
And I know this is something that Commissioner hester Purse
(21:32):
had been pushing to try to make this debate more
public and and try to get more people involved in
the conversation. And so folks that are interested in this
can go to the SEC's website UH and look for
this and and see how the debate is evolving over time,
and you can bet and then then in the coming
weeks and months, the SEC officials will be out there
(21:52):
talking about this, either in speeches or through staff letters
or staff guidance to see how see how each one
of these the answers to each one of these sctions
is evolving. I followed the progress of Geminy Trust co
founders Cameron and Tyler Winklevoss through the years, and I
noted that the Commission turned down their recent request and
(22:21):
they've formed their own trade group to help self regulate
their industry. What was the problem with the Geminy Trust
filing and do you think it's something that they will
be able to easily address if you look at the
original denial was done through what's called delegated authority by
(22:43):
the staff, and that happened in two thousand seventeen when
when I was acting chairman UM and what the staff
identified was the concern about price manipulation, that the underlying
spot market could be manipulated. Even though the Winkelvoss brothers
had set up a Gemini Exchange UH to price the
bitcoin prices off of for for their exchange traded product
(23:07):
application UM. There were it had very little trading on
that exchange and a lot of the trading occurred elsewhere.
So price manipulation was was one of the big concerns
UH for for the staff denial UM. So what happened
after that was that either a commissioner could have called
it up for a review or they could have appealed UH.
(23:29):
They decided not to appeal UM. The commission right after
the election. We were down to two commissioners. The Winklevoss
twins did ask for review UM and UM and and
so staff was reviewing that and it reviewed it over
a number of months. UM they were not ready to
make another recommendation to the Commission. The Commission was not
ready to make its vote final until after I left
(23:53):
UM in July. UH and they most recently did that,
and it was a split vote. It was a three
one vote. Three commissioners voted to deny the application and
one commissioner voted to approve the application. UM. And now
there are other applications before the Commission that have subsequently
been denied at the staff level and have been called
(24:13):
up for review at the commission level. He was appointed
to the SEC by President Obama and two thousand and thirteen,
and briefly served as acting chair in two thousand and seventeen.
He ended his long association with the SEC when he
resigned this past or lie. Prior to joining the Commission,
(24:35):
he served as a senior economist at the President's Council
of Economic Advisors in both the Bush and Obama administrations,
and he was the Chief Economic Advisor to the Senate
Banking Committee. Dr Michael Pivov, thank you for joining us.
Thank you, by the way. If you have comments about
(24:57):
the program or suggestions for top please email me at
a Closer Look at Bloomberg dot net. That's closer Look
one word at Bloomberg dot net and follow me on
Twitter at Arthur Levin one word. This is a Closer
Look with Arthur Levin.
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