Posted on July
30, 2017 by Jerri-Lynn Scofield
http://www.nakedcapitalism.com/2017/07/sec-punts-unfinished-dodd-frank-agenda-thus-avoiding-cra.html
By Jerri-Lynn Scofield, who
has worked as a securities lawyer and a derivatives trader. She now spends much
of her time in Asia and is currently working on a book about textile artisans.
The chair of the Securities
And Exchange Commission (SEC), Jay Clayton, who assumed his position in May,
has lost no time in signing onto a deregulatory agenda, as I discussed most
recently in Doubling
Down on Deregulation: SEC Extends JOBS Act Benefit in Elusive Quest to Goose
IPO Market.
As its website spells out, the
SEC has a tripartite mission: “to protect investors, maintain fair,
orderly, and efficient markets, and facilitate capital formation,” according to
this basic summary, What We Do, and Clayton pledged in his confirmation
hearings to focus on the third, capital formation objective.
Regulatory Priorities
Like other federal agencies,
the SEC is required to submit its regulatory agenda to the Congressional Budget Office twice
each year. The Wall Street Journal reported earlier this month in Regulators Drop Pursuit of Banker, CEO Pay Restrictions:
Several regulators have
dropped pursuit of a long-running plan to restrict bonuses on Wall Street, as
part of a wider effort to stop working on unfinished rules put in place after
the financial crisis.
…
The six agencies delivered a new proposal in April 2016, but that was too late to push
through a final version of the rule before President Donald Trump took office
in January.
New regulatory agendas unveiled
Thursday by the SEC and others show leaders excluded any mention of the
restrictions, including longer deferment periods for bonuses and the amount of
time payouts are subject to potential clawbacks. The proposal had targeted
executives at some of the nation’s largest financial firms, including
investment managers and mortgage-finance companies Fannie Mae and Freddie Mac,
but the stiffest rules were reserved for big banks.
Now, this doesn’t exactly come
as news to anyone who’s been paying attention, as I wrote last year in Mary
Jo White Leaves Behind a Weakened SEC for Trump to Weaken Further.
The ability to pursue a firm deregulatory agenda — including ignoring or
punting on incomplete initiatives would be seriously complicated if the
SEC under previous chairs Mary Shapiro and Mary Jo White had been more vigorous
in pressing the agency to make rules. It’s far easier not to make rules
than it would be to rescind those already in place.
Instead, failure to complete
regulation in a timely way has handed off an unfinished agenda to a
Clayton-headed SEC. And even before that, I should point out that
according to the Wall Street Journal account:
The SEC’s updated agenda was
crafted in the spring, when an acting executive, Michael Piwowar, ran the
commission. Mr. Piwowar, who is back to serving as an SEC commissioner, said
earlier this year that he wouldn’t prioritize Dodd-Frank rules.
The Wall Street Journal article
also mentions some other significant omissions from the SEC regulatory agenda
as set forth when Piwowar was de facto in charge:
The newly released SEC agenda
also dropped mention of a rule that would require public companies to disclose
a standardized metric comparing executive pay with stock performance.
It also omits any mention of
other unfinished Dodd-Frank rules that govern trading of swaps, a type of
contract that allows investors to bet on asset prices without owning the
underlying stock or bond. The global swaps market is dominated by large banks such
as Goldman Sachs Group Inc.
and Citigroup Inc.
….
The list also dropped two
measures that began under former SEC Chairman Mary Jo White, who was appointed
by Mr. Obama. One rule would make it easier for shareholders to vote on board candidates nominated by investors, as opposed to the
slate backed by the company. Another would have required companies to disclose
more about the racial and gender diversity of corporate boards. Ms. White urged
businesses to do more to recruit women and minorities to their boards, saying the
“low level of board diversity in the United States is unacceptable.”
What Will Clayton Do?
Now, I admit that I’m not sure
exactly what the scope of the agenda will be that Clayton et al will
pursue, going forward. Despite his record thus far, he might intend to
take up some of these issues (or, for that matter, other pending or
long-deferred issues, or even an entirely different set of issues entirely).
In fact, I have written that
though I myself wouldn’t have chosen Clayton as my first choice candidate to
head the agency, he certainly was much more qualified to hold his position than
many other Trump appointees (see my posts, Taking
on Trump’s Agenda: Nine Tough Questions for SEC Chair Nominee Jay Clayton on
the Eve of His Confirmation Hearings andTrump
Selects Jay Clayton, S & C Partner, to Head SEC).
As the Wall Street Journal
points out:
Mr. Clayton took office in
May, so the agenda could further change in the fall when he issues an update.
Let’s assume for the sake of
argument that Clayton does try and pursue some of these overdue rule makings
(of course, as an aside, I must mention that to do this, Trump would
likely need have to nominate other commissioners to fill the two empty SEC
slots, and each would need to be confirmed, as Piwowar would almost certainly
vote against any stringent new rules).
But indulge me in my
hypothetical: what if Clayton succeeded in getting the agency to make any tough
new rules? Well, these would be vulnerable to being overturned by a
hostile Congress, using the authority available under the Congressional Review
Act (CRA). Just last week, the House of Representatives passed a CRA resolution
of disapproval repealing the the Consumer Financial Protection Bureau ’s (CFPB)
mandatory arbitration ban, as I wrote in House
Votes to Overturn CFPB Mandatory Arbitration Ban. Companion legislation has
been introduced in the Senate, and once that is approved, as expected, Trump
has pledged to sign the final bill, thus overturning the agency’s ban.
Once that happens, as I’ve
written in Trump
and Congress Use Congressional Review Act to Roll Back 14 ‘Midnight’ Rules;
More to Follow?:
Crucially and importantly,
once the regulation has been successfully voided, the regulatory agency is
barred from reviving the rule in “substantially the same form”– forever–in the
absence of new legislative authority.
CRA authority is the gift that
keeps on giving– a sword of Damocles hanging over the heads of any regulators
who choose to pursue any tough regulatory agency.
Enforcement Agenda
It’s still too soon to expect
the two new SEC co-directors of enforcement Steven Peikin and Stephanie Avakian
to blaze a clear enforcement trial (although readers might want to refer for
more background to my earlier post on this issue, Two
Questions for the Next SEC Director of Enforcement).
I did want to note, however,
that the SEC announced two whistleblower settlements this week. In the first, made
public on Tuesday, as reported by the FCPA.blog, SEC announces $2.5 million whistleblower award to government
employee, announced Tuesday, the agency made its first ever award to an
employee of a domestic agency– which is elaborated on in the agency’s award
order
In the second, announced on
Thursday, the FCPA blog reported, SEC awards whistleblower $1.7 million; this award went to a
company insider. The SEC usually takes a noisy victory lap whenever it
makes an award and with the most recent award, has now awarded $158 million to
46 whistleblowers since the first award was granted in 2012. Readers won’t be
surprised to find that the full potential of the whistleblower program hasn’t
been tapped– no doubt a feature, not a big, as I previously discussed in SEC
Takes Victory Lap for Pathetic Performance of Whistleblower Program.
