While he may not have a seat on the Securities and Exchange Commission (SEC) for long, Michael Piwowar was able to provide some insights into where the Commission's rulemaking is going during his talk to Investment Company Institute (ICI) members. Piwowar, a Republican commissioner who is leaving the SEC on July 7, had his discussion with Paul Schott Stevens at the ICI's 60th annual General Membership Meeting (ICI GMM) Thursday morning at the Washington Hilton in Washington D.C. Despite the freedom of being a "lame duck," Piwowar warned members that he could not get out in front of SEC Chair Jay Clayton in his comments.

Piwowar told ICI members that he is "looking forward" to receiving comments on the just-released SEC version of a fiduciary reg that would apply across the industry and effectively replace the failed effort by the Department of Labor (DoL). Stevens did tease Piwowar about the SEC releasing one of its "terse and laconic, thousand page releases." "It's almost as long as your comment letters," retorted Piwowar in one of his many quips during the 45 minute long exchange. The SEC released three proposals around the fiduciary topic last month: regulation best interest, form CRS and other disclosure measures, and interpretation of standards for investment advisors.

The soon-to-depart Commissioner (and former Acting Chairman) did not hold back on his views on the DoL's fiduciary rule efforts and then DoL chief Tom Perez be unwillingness to listen to input from other regulators, including the SEC.

"I have a highly nuanced view of their rule: I think it was a terrible, horrible, no good, very bad rule," said Piwowar. He added: "What it was marketed as was a way to increase investor protections around discussions of retirement accounts. What it really was, was a politicized rule from the beginning to enable trial lawyers, period. End of discussion. If you look at the rule in that lens it was a very, very effective rule." He elaborated that it "put in a private right of action" and "set up an unworkable, impossible set of standards that no one could comply with and in that way was a terrible rule."

Piwowar said that then-SEC Chair Mary Jo White tried to assert the SECs jurisdiction in the area, but that she was ignored. "The Secretary of Labor couldn't care less what we thought," he shared. "He couldn't care less what you all thought; He didn't listen to FINRA; He didn't listen to the state regulators; He didn't listen to the insurance regulators and he went forward with a rule that proved to be unworkable and the Fifth Circuit threw it out and said it did not comply with the law and they had no less than seven specific reasons for that."

Piwowar also pointed out that then Secretary Perez — who he did not refer to by name — unveiled the rule at a left-leaning think tank outside of the DoL's offices and included lobbyists in the unveiling. "Imagine if I was the chairman and rolled out the rule at the AEI or Heritage or Cato or something like that. People would be apoplectic." he posited. He also expressed disappointment in the memo that the President's Council of Economic Advisors prepared to support the reg. "They put together a memo that was very skewed in one direction, that put the thumb on the scale against commission-based compensation and said that was completely conflicted and misrepresented the academic literature in the space in a number of ways ... and then they came up with some number and blew it all up ... that the DoL then used as a basis for their economic analysis."

The [SEC] rule is "absolutely a priority" for Chair Clayton to move forward with rules in this space and reassert the SEC's jurisdiction no matter what happened in the 5th circuit, Piwowar shared. PHe added that Clayton had staff working on these rules from his first days in office and that the staff in the trading and markets and investment management divisions had to work on a long rule quickly.

"I kept telling folks to keep it under five hundred pages, so what they did was split it into three pieces," he joked. Actually, Piwowar believes the three pieces all were meant to fit together. The B-D side of the rule is meant to enhance the suitability standard while the investment advisor piece is principals based and relies on past settlements with the SEC and advisors. The final piece was intended as a simple document to explain the standard of care and any conflicts of interest with the advisor. Piwowar admitted that at four pages the relationship summary document may be longer than what investors want to read and that comments around what works would help the SEC.

"The comment process is going to be really, really important to us because it is such a complex area. We think we got most of the things right in there. We think we explains things clearly. One of my criticisms is that we could have done a better job at explaining things, maybe." Yet, it was important to the SEC to get a rule out there.

The fiduciary rule was not all that Piwowar addressed. He also touched on some of the priorities at the SEC going forward. Among the priorities is the ICI's bete noire — the requirement for the use of paper disclosures by default — and the reassertion of the SECs authority to oversee investment managers.

He said that he expects the SEC to continue to "push back" on banking regulators through the Financial Stability Oversight Council (FSOC) and the Financial Stability Board (FSB) that are "trying to impose bank-like capital requirements on mutual funds." The SEC's goal is to "reassert our authority" and remind them that the SEC has been overseeing mutual funds for 78 years. That issue currently revolves around rulemaking on liquidity and derivatives and would require that investment managers disclose "buckets" for different assets. Piwowar noted that the SEC's final rule is down to three buckets and one for cash (so four) from the initially proposed seven buckets. He noted that those rules are a way to "play defense" against the banking regulators who view U.S. mutual funds as shadow banks who need to be "regulated like banks."

"It's funny how European funds and sovereign wealth funds and pension funds seem to be exempted from all of these things and the hit list of all things they were coming after was the large U.S. mutual funds," he said.

He said that he is aware that the rules are more difficult to comply with than the SEC thought and that the fixed costs of these regulations could disproportionately harm smaller fund shops and that the information would be of no use to shareholders and may even mislead them. "We missed an opportunity to take a step back and reevaluate the bucketing requirements themselves ... and potentially move to a more principle-based liquidity risk management program which would be consistent with the Treasury report."

On the potential reproposal of the SEC's derivatives rule, he said that it is "moving in the right direction."

More broadly, how Piwowar feels about international banking regulators is no secret. He admitted to once calling the FSOC the "firing squad on capitalism" and shared that he also calls it the financial services death panel. He praised Mary Jo White for making the SEC the only regulator to put the Office of Financial Research's (OFR) asset management report out for public comment and that she got a lot of flack from other regulators for doing so. That report was so poorly done it was a game changer, in his opinion.

"They did not know what they were doing in trying to designate firms. There was a phrase going around Washington that FSOC wanted to pick two from every industry but insurance had to pick three because AIG was the poster child for the financial crisis."

Piwowar shared that regulators such as the FSB are moving to an activities-based approach in the financial stability and SIFI area, which still scares him "because it gives ways for banking regulators to get their hooks into folks like you all."

Piwowar said he objects even to the term shadow banking. "We are actually pushing back and reminding people that it is not shadow banking but capital markets-based finance."

"I don't like the term 'shadow' because it suggests you are not regulated, and we [the SEC] have been regulating you for 78 years," he said. "And you are not banks."

Another topic was the potential reform of the ETF approvals process. This is an area that "absolutely" needs to be addressed, he agreed. The key decision is the scope of any rule to create a standard process. "We need to get at least something out there" for plain vanilla ETFs, he said, adding that even a simple rule will free up staff to work on and "shake loose" some of the leveraged and non-transparent ETFs that have been sitting in the SEC qeue for sometimes years.

Piwowar holds out hope that the ETF regs may make it out of the staff before his last day on July 7. And don't expect his seat to be filled right away.

"It is amazing once you say you are leaving how quickly people start working on things." 

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