by Cydney Posner
As reported all over the place, a new Executive Order has been signed directing the Secretary of the Treasury to consult with the heads of the member agencies of the Financial Stability Oversight Council (which includes the SEC) and report to the President within 120 days identifying “any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.” The “Core Principles” relate to topics such as individual financial empowerment, corporate competitiveness, fostering economic growth through rigorous regulatory impact analysis, making “regulation efficient, effective, and appropriately tailored,” restoring “public accountability within Federal financial regulatory agencies” and rationalizing “the Federal financial regulatory framework.” The Order doesn’t effect any regulatory change by itself; rather, it provides impetus to financial regulators to rethink their regulatory regimes in light of these Principles — not a signal to start their engines.
While, for the most part, the Core Principles appear to be directed at Dodd-Frank (and similar) regulations aimed at the banking sector, they could also have some impact on the non-bank rules, such as the conflict minerals and the pay-ratio disclosure rules, about which companies have been quite vocal in their criticism. As with the other “two-for-one” regulatory rollback Executive Order (see this PubCo post), however, this order may not directly compel the SEC to act because it is an independent regulatory agency. Nevertheless, according to this article in the WSJ, the SEC “has a record of voluntarily complying with executive actions….Past SEC staff on both sides of the aisle said an incoming agency head would be expected to fall in line with the broad philosophy of the administration that appoints them.”
That seems to be the approach of the current Acting Chair of the SEC, Michael Piwowar. In this Bloomberg article, he announced that he had “no intention of simply being a placeholder and will ensure agency work moves forward.” Indeed, even before this latest Executive Order was issued, Piwowar told Bloomberg that “he might direct SEC staff to review regulations he thinks are too restrictive, which could be the first step toward changing them. ‘We’re not going to sit by and do nothing in the meantime….We have an important mission we need to continue.’” According to Bloomberg, he may ask the staff to review Reg NMS (which was “designed to modernize and strengthen the National Market System for equity securities,” but which Piwowar believes is outdated), as well as “rules stemming from Dodd-Frank requirements for what information public companies must disclose. He said he’s considering other areas as well, and asked staff for suggestions on rule changes.” As discussed in this PubCo post and this PubCo post, the staff has already been tasked with revisiting the 2014 Corp Fin Guidance on conflict minerals reporting and the Dodd-Frank pay-ratio disclosure rules. Piwowar indicated in the interview that he is being cautious not to take actions that will “bind” the nominee for SEC Chair, Jay Clayton.
But what exactly should companies expect from all this sturm und drang? Given the current composition of the SEC, probably not much for the time being. It might be possible to implement some limited interpretive changes through staff guidance, perhaps through staff speeches, but any amendments to or rescissions of rules or adoption of new rules would generally require compliance with applicable procedures, including cost-benefit analyses and public notice and comment, as well as a vote by the SEC. Even significant guidance — for example, guidance that might involve an enforcement delay — would likely implicate some type of SEC approval. Broc Romanek of thecorporatecounsel.net thinks that “a lot more Staff guidance gets run past the Commissioners than ever before.”
Currently, there are only two commissioners, who express diametrically opposed views on many issues. According to the WSJ, Commissioner Kara Stein has signaled that she opposes easing the pay-ratio rule, cautioning perhaps that the Acting Chair might be a bit ahead of his skis: “‘It’s problematic for a chair to create uncertainty about which laws will be enforced.’” As a result, for the most part, deregulatory initiatives will need to wait for Clayton to be confirmed as Chair to break any ties. As described by the WSJ, Clayton is “a critic of what he sees as regulatory overreach.” (Of course, who isn’t a critic of “what he [or she] sees” as “overreach”?)
In addition, changes adopted that significantly reduce obligations may be challenged in litigation by NGOs or other proponents, with the result that some modifications could be tied up in the courts for some time. According to a former SEC general counsel cited in this WSJ article, if the SEC “moves to amend Dodd-Frank rules, the SEC would need to tread lightly to limit the threat of litigation. Staff would have to make sure amendments to the rules don’t run contrary to the underlying law.”
Of course, all of this frenetic activity designed to roll back Dodd-Frank regulations is seriously hamstrung by the fact that the “underlying law” is still in place. But changes to Dodd-Frank itself may not be far off. According to this article in the WSJ, House Republicans are planning to re-introduce a new version of the Financial CHOICE Act (see this PubCo post), which would roll back many provisions of Dodd-Frank, in mid-February. The article reports that House Financial Services Committee Chair Jeb Hensarling, who sponsored the bill last year, “has signaled he will make only modest changes to his earlier bill.” Among other things, the earlier version would have repealed provisions related to disclosure regarding conflict minerals, mine safety, payments by resource extraction issuers, pay-ratio, employee and director hedging and board leadership structure, as well as authorization of the SEC to adopt proxy access rules, and would have imposed a new regulatory regime on proxy advisory firms. Presumably, most of those provisions will continue in the new version, called the Financial Choice Act 2.0. This article reports that the new version is likely to pass the Republican-controlled House; however, the “more difficult task is the Senate, where most legislation requires 60 out of 100 votes to advance. Republicans hold 52 Senate seats.” As a result, some compromise may ultimately be required unless, as the article observes, Republicans turn to “budget reconciliation,” which requires only a majority vote, but is generally limited to policies that affect the federal budget.
SideBar: Although the SEC’s rules on Disclosure of Payments by Resource Extraction Issuers, mandated under Dodd-Frank, appear to have been jettisoned by Congress under the Congressional Review Act (once the President has signed off) (see this Pubco post), this article in the WSJ indicates that, in the absence of repeal of the Dodd-Frank mandate, the SEC has a year to issue a new rule on the same topic because the regulation was mandated by Congressional statute. In addition, according to the article, it’s possible that any new SEC disclosure rule could actually lead to higher compliance costs. That’s because the “disclosure regimes in Europe [and] in Canada were modeled on the original U.S. rule, allowing multinationals to make their reports under one standard.” Ironically, changing that standard could effectively increase the cost burden to the extent that companies would need comply with different jurisdictional rules.
