by Cydney Posner

On Friday, the House passed H.R. 5485, the Financial Services and General Government Appropriations Act for fiscal year 2017, which includes appropriations for the SEC.  As noted here and here, included as part of the bill were several amendments directed at defunding SEC rules, potential rules and guidance that are generally disfavored by the Republican majority. (Think the Financial CHOICE Act. See this PubCo post.) The House passed the bill on a largely party-line vote, another battle joined over the separation of powers. So what else in new?

Below are some of the sections of the bill that would require defunding [emphasis added]:

  • 625. None of the funds made available by this Act shall be used by the Securities and Exchange Commission to study, develop, propose, finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions to tax exempt organizations, or dues paid to trade associations.
  • 1215. None of the funds made available by this Act may be used by the Securities and Exchange Commission to propose, issue, implement, administer, or enforce any requirement that a solicitation of a proxy, consent, or authorization to vote a security of an issuer in an election of members of the board of directors of the issuer be made using a single ballot or card that lists both individuals nominated by (or on behalf of) the issuer and individuals nominated by (or on behalf of) other proponents and permits the person granting the proxy, consent, or authorization to select from among individuals in both groups. [universal proxy]
  • 1219. None of the funds made available by this Act may be used to implement, administer, or enforce a rule issued pursuant to section 13(p) of the Securities Exchange Act of 1934. [conflict minerals]
  • 1220. None of the funds made available by this Act may be used the Securities and Exchange Commission to finalize, implement, administer, or enforce pay ratio disclosure rules, including the final rule titled “Pay Ratio Disclosure”, published Aug. 18, 2015 (80 Fed. Reg. 50103).
  • 1228. None of the funds made available by this Act may be used to implement, administer, enforce, or codify into regulation, the guidance relating to “Commission Guidance Regarding Disclosure Related to Climate Change”, affecting parts 211, 231, and 249 of title 17, Code of Federal Regulations (as described in Commission Release Nos. 33–9106; 34–61469; FR–82).

There’s a lot more defunding going on in the bill, including this belt-and-suspenders provision — which appears to preclude any type of agency rulemaking — just in case something might have been overlooked:

  • 1211. None of the funds made available in this Act may be used to propose or finalize a regulatory action until January 21, 2017 [the day after inauguration].

Our Government Analytics Practice Group advises that these types of “defunding” provisions tend to be largely symbolic, and the most controversial provisions are likely to be jettisoned when the House and Senate produce compromise legislation. In addition, even if the bill survived intact, it would require the President’s signature, which seems rather unlikely. Remember, however, that a defunding provision related to rulemaking in connection with political spending disclosure did survive in the omnibus spending bill last year.

SideBar: Interestingly, the prohibition last year related only to defunding of efforts “to finalize, issue, or implement” rules, while this year’s provision prohibits the entire panopy of rulemaking activity, defunding efforts to “study, develop, propose, finalize, issue, or implement” rules. The expansion is apparently a reaction to Democratic efforts to develop a work-around last year by encouraging the SEC to develop a rule, but defer final adoption.  (See this PubCo post.) But as discussed in this PubCo post, the prohibition ans work-around were both largely irrelevant because SEC Chair Mary Jo White has been firmly against any such undertaking, contending that the SEC should not get involved in politics.

According to our Group, the penalties for an employee who commits a defunding violation (a violation of the Antideficiency Act) can be quite serious, depending on the nature of the violation: administrative discipline, suspension without pay, fines and even imprisonment.

SideBar: But, just for fun, let’s assume that the bill was signed into law.  What would be impact? To the extent that the SEC was contemplating rulemaking with respect to political spending (not) or universal proxies (likely, see this PubCo post), the bill, if adopted would seem to put the kibosh on those activities. But with respect to those measures that have already been adopted, such as conflict minerals or pay-ratio disclosure, the bill is operative with regard to the SEC; as a technical matter, it does not eliminate those rules, nor does it appear to relieve companies of their obligations.  But could it impede companies’ ability to comply in a way that makes compliance impracticable or impossible?  Presumably, it could prevent the SEC from issuing guidance, reviewing filings or enforcing deficiencies in connection with those rules. But, with regard to existing rules, what other SEC functions do “implement” and “administer” encompass?  For example, could defunding of the SEC’s ability to “implement” or “administer” some of its existing rules be interpreted to prevent the SEC from accepting required filings or even permitting EDGAR to be used by registrants to make the filings called for under the “defunded” rules?  The precise parameters of the impact of “defunding” remain to be seen.

Posted by Cydney Posner