July 25, 2018

Senate Committee on Banking, Housing, and Urban Affairs “Nominations Hearing”

Key Topics & Takeaways

  • Regulation Best Interest: Roisman said he would like to examine various aspects of the proposed rule, including ensuring access to financial advice, whether customers understand the nature of their relationship with their financial professional, conflicts of interest, and whether the rule is “business model neutral.” Roisman stressed the importance of public comment on the issue.
  • Housing Finance Reform: Asked what role Ginnie Mae would play in housing finance reform, Bright said that Ginnie Mae has a strong process to ensure the explicit guarantee works, to track payments of principal and interest, and ensure shortfalls are made up so investors get their money on time. Bright continued that leveraging those mechanics would be sensible, because the process works.
  • SEC Enforcement: Roisman said it was important for the SEC to enforce the rules on the books and hold bad actors accountable, agreeing that there’s “no place in our markets” for bad actors. Roisman said he does not measure success exclusively with numbers, but rather on the types of cases brought forth and the impact they have on recidivism, noting there is a focus on retail fraud and market integrity cases. 

Witnesses

Opening Statements

Chairman Mike Crapo (R-Idaho), Senate Banking Committee

In his opening statement, Chairman Crapo welcomed the nominees, noting their extensive experience in their fields. Crapo expressed his confidence in Roisman’s ability to execute the Securities and Exchange Commission’s (SEC) mission of protecting investors, maintain fair, orderly and efficient markets, and facilitating capital formation, noting his “impressive command” of securities law and inner workings of the SEC. Crapo noted Bright’s career as a Senate staffer and as a leading voice on housing finance policy, saying he looked forward to working jointly in addressing comprehensive housing finance reform. Crapo applauded Rae Oliver work pursuing accountability throughout her career. Crapo discussed Dino Falaschetti’s long career in economics, noting that if confirmed he will be charged with overseeing the research and data analysis that supports the work of the Financial Stability Oversight Council (FSOC). 

Ranking Member Sherrod Brown (D-Ohio), Senate Banking Committee

In his opening statement, Ranking Member Brown expressed his desire for Roisman to help address the decline in SEC enforcement actions and penalties, emphasizing that the Commission should do more to address misconduct, noting the importance of integrity and fairness in the markets. He praised Bright’s work with Ginnie Mae, though expressed concern about policies he advocated for prior to his nomination. Brown noted the importance of the Inspector General position in assuring a well-functioning HUD. Brown questioned Falaschetti’s past skepticism of regulation and encouraged him to take the OFR’s mandate seriously.

Testimony

Mr. Elad L. Roisman, to be a Member of the U.S. Securities and Exchange Commission

In his testimony, Roisman cited his experience as a securities lawyer, as Chief Council of NYSE Euronext, counsel for an SEC commissioner, and as chief counsel for the Senate Banking Committee as providing him with the necessary skills to serve the  public and carry out the SEC’s mission. He noted his deep appreciation for the oversight role of the SEC and that it plays a key role in the perpetuation of the U.S.’s unmatched capital markets. He expressed the need for the SEC to reexamine its rules and regulations to ensure that they are effectively accomplishing the SEC’s mission, particularly in areas such as data protection, cybersecurity, and new technologies. He voiced a commitment to transparency and promised to enforce the laws that hold market participants accountable. 

Mr. Michael R. Bright, to be President of the Government National Mortgage Association

In his testimony, Bright expressed that his job as Executive Vice President and COO of Ginnie Mae has been focused on ensuring the organization’s growth and keeping up with the evolving nature of the U.S. mortgage market. He pointed to the modernization plan, Ginnie 2020, which was launched during his tenure, as well as his work on counteracting loan churning in the market for VA loans as examples of his commitment to fulfilling the mission of the institution. Bright expressed his desire to ensure that Ginnie Mae continues to ensure the stability of the U.S. housing market. 

Ms. Rae Oliver, to be Inspector General of the U.S. Department of Housing and Urban Development

In her testimony, Oliver discussed her career working with congressional committees, with the Office of the Attorney General, as a U.S. prosecutor, and most recently as an Inspector General in the Postal Service, the Troubled Asset Relief Program, and the Department of Housing and Urban Development (HUD). She emphasized the importance of independent Inspector Generals and expressed commitment to helping ensure HUD’s effectiveness. 

Dr. Dino Falaschetti, to be Director of the Office of Financial Research, U.S. Department of the Treasury

In his testimony, Falaschetti noted his experience in business, research, and policy that prepared him to lead the Office of Financial Research (OFR) in efficiently and effectively providing high quality data and analysis. He voiced his desire to work with the committee and FSOC to help promote a more resilient financial sector.

Question & Answer

Regulation Best Interest

Senators asked Roisman about his views on the SEC’s proposed Regulation Best Interest. While Roisman said he did not want to “pre-judge” the proposal, he said it was important that the SEC acted, and now that interested parties meet with staff and commissioners to examine what the proposal “got right” and what can be improved. Roisman noted that he would like to examine issues including ensuring access to financial advice, whether customers understand the nature of their relationship with their financial professional, conflicts of interest, and whether the rule is “business model neutral.” Roisman said that with a looming retirement crisis and some areas of the country having only a small number of financial services providers, it is important to preserve access, especially for small savers.

Roisman added that the SEC has long been disclosure-based agency, focused on providing information to investors so they can make informed decisions, and that financial professional should provide adequate disclosure of the nature of their relationship with their client and their conflicts of interest. Roisman added it is important for investors to be able to choose between different types of services and understand their relationship with the service provider.

Roisman stressed the importance of public comment on the issue. 

Housing Finance Reform

Bright stated that there is an affordability crisis in the housing system, and there is need for a comprehensive approach to solving it, and that he is focused on using the Ginnie Mae platform to support vital programs to ensure Americans have access to an affordable mortgage. Bright noted that the 2013 legislative attempt to produce housing finance legislation was a “good starting point” for reform, but that affordable housing has continued to elude many low- and moderate-income Americans.

When asked what role Ginnie Mae would play in housing finance reform, Bright said that Ginnie Mae has a strong process to ensure the explicit guarantee works, to track payments of principal and interest, and ensure shortfalls are made up so investors get their money on time. Bright continued that leveraging those mechanics would be sensible, because the process works.

Asked about the proposals set forth in his 2016 paper, Bright said he does not advocate for those proposals in his role at Ginnie Mae. Asked about the proposal in the paper that Ginnie Mae be “spun off” from the Department of Housing and Urban Development (HUD), Bright said he does not think it is necessary, and he was surprised how good the working relationship is between Ginnie Mae and HUD. 

Ginnie Mae Challenges

Multiple senators asked about the challenges at Ginnie Mae. Bright pointed to pay scale and hiring practices limiting his ability to retain talent, which requires a legislative fix. Bright added that Ginnie Mae has begun stress testing issuers, but the current process is lengthy, while other regulators have freedoms Ginnie Mae does not have.

Bright also noted the long credit cycle, saying that if the credit cycle “runs its course” while interest rates increase, it could put substantial liquidity stress on Ginnie Mae’s issuer base, particularly non-bank issuers. 

SEC Enforcement

Asked about SEC enforcement, Roisman said it was important for the SEC to enforce the rules on the books and hold bad actors accountable, agreeing that there’s “no place in our markets” for bad actors. Roisman said he does not measure success exclusively with numbers, but rather on the types of cases brought forth and the impact they have on recidivism, noting there is a focus on retail fraud and market integrity cases. Asked by Sen. Bob Menendez (D-N.J.) if changes made last year to subpoena and investigative authority for some SEC enforcement staff was “problematic,” Roisman responded that having that authority at the director level has benefits, but he would discuss with SEC staff whether the changes have limited their ability to investigate or bring forth cases should he be confirmed. 

Cybersecurity

In response to a question from Sen. Jack Reed (D-R.I.), Roisman stated it is important for the SEC to monitor whether companies are appropriately disclosing their cyber risk profiles. 

MSRB

Sen. John Kennedy (R-La.) explained that the Municipal Securities Rulemaking Board (MSRB) is a self-regulating organization (SRO) that oversees the municipal securities market, and that eleven of its board members are public and meant to represent consumers, asking Roisman his thoughts on how those members are chosen. Roisman replied that the SEC has oversight over the SROs including the MSRB, and that he supports greater accountability and transparency at these entities. 

OFR Independence

Multiple senators asked about Office the Financial Research (OFR) independence. Falaschetti said the OFR is data-driven and firmly grounded in analytics, describing it as a central source for research and data. Falaschetti noted that the research, and how it is carried out, is independent.

Asked about any weak points in OFR, Falaschetti said that in 2006, the Council of Economic Advisors was discussing risks to financial stability, and the question is why people did not listen. He said the power of OFR is as a central place relying on firmly-grounded, data-driven, independent research. 

Insider Trading

Sen. Jon Tester (D-Mont.) asked about traders with material non-public information. Roisman replied that he opposes weakening insider trading rules, and that if people are using material nonpublic information to “line their pockets,” it should be quickly addressed through enforcement. 

Access to Capital

Asked how capital markets can be strengthened, Roisman said it was important to promote responsible capital formation and improve secondary market liquidity for smaller and less liquid stocks. Regarding small business access to capital, Roisman stressed the importance for the SEC to talk to business owners, review crowdfunding and Reg A offerings, and other issues that affect public companies.

For more information on this hearing, please click here.