As the leaves start to turn and the last quarter of the year is just weeks away, some burning regulatory questions remain.
Congress adjourned, and regulators had breathing room to work on the various proposals and final rules that will demand their attention for the remainder of the year.
As we head into the homestretch of 2014, the Senate Banking Committee recently called in top financial regulators to discuss their plans for the weeks and months ahead. What they told Congress helps answer several lingering questions regulators face as autumn arrives.
When can we expect to see the final pay-ratio rule and other unfinished Dodd-Frank Act compensation rules?
Executive compensation rules that Congress included in the Dodd-Frank Act are a priority for the Securities and Exchange Commission heading into the fall, and that work includes finalizing the controversial “pay-ratio” rule proposal.
In Sept. 2013, the SEC proposed a rule that would require companies to disclose a comparison of their CEO pay to that of the median employee. Under that proposal, companies need to produce a median compensation figure for all workers, domestic and overseas. Whether good news or bad depends on your perspective, but expect the final rule to arrive soon.
“It is certainly a priority to be completed this year, and it is my hope and expectation that it will be completed this year,” SEC Chair Mary Jo White told the Senate committee, adding that her staff is still going through the voluminous comments received to formulate a final recommendation.
Among the suggestions offered in comment letters for the simple-sounding, but complex and costly, rule:
The calculation should be limited to full-time, U.S.-based employees.
If the SEC extends the mandate to non-U.S. employees, companies should receive at least two years to prepare before they have to include those overseas workers in their calculations.
If part-time and seasonal employees are included, the SEC should permit companies to annualize their pay data.
White added that the Commission is “focused for the balance of the year” on Dodd-Frank rulemaking, specifically pertaining to executive compensation. Other rules in the offing include: requiring shareholder advisory votes on golden parachutes; disclosure about the role of compensation consultants in developing pay plans and potential conflicts; and directing exchanges to prohibit the listing of securities for issuers that have not implemented compensation claw-back policies.
“[Disclosure reform] is moving along. In terms of the ‘when’ question, I can’t answer precisely, but it is something we are actively engaged in.”
Mary Jo White, Chairman, Securities and Exchange Commission
Is the SEC considering disclosures of corporate political contributions?
Don’t expect the same attention White promised for compensation matters when it comes to disclosure of political contributions. “The staff is currently not working on a proposal in that area,” White said, stressing her focus on completing Dodd-Frank and JOBS Act rulemaking. “I appreciate the intense interest of investors and others on this issue, but it is not part of our current regulatory agenda.”
The push for these disclosures initiated with a Petition for Rulemaking filed in 2011 by prominent law professors, among them Robert Jackson, an associate professor at Columbia Law School, and Harvard Law School Professor Lucian Bebchuk. Recently, the petition broke an SEC record for the most comment letters ever received, surpassing the 1 million mark.
The decision to punt on the petition isn’t sitting well with those supporters who flooded the SEC’s inbox. Earlier this month, a group calling itself the Corporate Reform Coalition picketed the Commission’s Washington D.C. headquarters and demanded action.
“The overwhelming support from public comments provide a strong case for SEC initiation of a rulemaking process,” Bebchuk says. “Opponents of the petition have failed in their comments to provide any good basis for avoiding such a process.”
Where is the SEC on Disclosure Reform?
Conventional wisdom is that the SEC’s ongoing review of its disclosure regime may take years to complete. But, according to Chairman White, the process is full steam ahead and may start showing results sooner than expected. Don’t expect an overhaul by the end of the year, but an initial step the Commission is already cracking into involves User Guides, industry- and sector-specific disclosure guidelines that haven’t been properly updated since the 1980s. A particular focus is being placed on guidance for bank holding companies.
“[Disclosure reform] is moving along,” White said of the process. “In terms of the ‘when’ question, I can’t answer precisely, but it is something we are actively engaged in.”
What’s on the horizon for big banks?
The big news this fall for banks is that the largest of them may face a game-changing choice: stay complex and incur greater costs; shrink and take less of a hit. This is because the Fed is moving forward a capital surcharge that will require the biggest banks to maintain larger capital reserves, beyond even what is demanded by Basel III international standards, Tarullo said.
The Basel standards require banks to tuck aside 2.5 percent of risk-weighted assets to cushion against risk; the imminent U.S. standard could be as high as 4.5 percent. “We intend to improve the resiliency of these firms,” Tarullo said. “While we will use the risk-based capital surcharge framework developed by the Basel committee as a starting point, we will strengthen that framework.” The plan may “create incentives for banks to reduce their systemic footprint and risk profile” in the process.
Also ahead, are risk retention rules banks would need to abide for loans and securitizations. “We are in the end game, and I would hope that we could complete that rulemaking by the end of the year,” Federal Deposit Insurance Corporation Chairman Martin Gruenberg said.
Tarullo added that regulators are also expected to act soon on a proposal that would completely exempt community banks from the Volcker rule’s prohibitions on proprietary trading.
Is it time for new federal regulations on cyber-security?
No SEC plans are afoot to introduce new rules regarding cyber-security, White said. In 2011, the Commission issued guidance pertaining breach notifications, and those disclosures are continually reviewed, she said. The SEC also recently formed an interdivisional Cyber Working Group to pool its resources and expertise. The Office of Compliance Inspections and Examinations has also embarked on an exam initiative that will assess “cyber-security preparedness in the securities industry,” targeting registered broker-dealers and investment advisers.
As for legislation, despite other cyber-security bills that linger in limbo, such as the Cyber Information Sharing Act, a push is on in Washington to pass a bill that would empower, and better staff, the Department of Homeland Security for an enhanced role in combating the growing threat.
What does the future hold for FSOC?
In the weeks ahead, the regulatory super-group known as the Financial Stability Oversight Council will continue its powerful role in designating systemically important financial institutions. Most recently, it initiated the process for MetLife to be classified as a SIFI, thereby subjecting it to greater regulatory expectations and capital requirements.
Unless it’s likely appeal stands, MetLife would become the fourth non-bank to face SIFI status. Last year, the FSOC added American International Group, Prudential Financial, and GE Capital to the list because, it said, their size and scope make insolvency a threat to the broader financial marketplace.
At the Senate hearing, Senator Mike Crapo (R-Idaho) bemoaned the “cloak of secrecy” that accompanies the designation process. Adding insurance companies, “threaten to disrupt a carefully forged regulatory balance for an industry that has traditionally been under the purview of state regulators,” he said.
The push to classify non-banks may not stop with insurance companies; mutual funds could be next, with Fidelity and BlackRock rumored to have a SIFI bull’s-eye painted on them.
Some good news may be on the horizon this fall to help allay SIFI-phobia. Regulators may raise the capital threshold that factors into an FSOC designation, upwards from $50 billion in total assets, a figure many critics say is too low (the Bipartisan Policy Center, for example, has advocated increasing the asset threshold to $250 billion). Fed governor Daniel Tarullo, speaking at the hearing, agreed that asset level thresholds should be rethought and urged Congress to boost them to $100 billion.
What’s Next for the CFPB?
The Consumer Financial Protection Bureau will “continue to broaden its scope in the weeks ahead,” according to Director Richard Cordray. In the pipeline are proposed rules for prepaid cards, debt collection, student loan originators, credit reporting companies, and payday lending.
An effort to step into the auto industry arena, however, is garnering significant pushback and looks to be an ongoing debate as the year draws to an end. A bipartisan collection of 14 House members have introduced a bill that would squash CFPB auto finance guidance and instead require a full notice and comment period before issuing any new rules for that industry. The guidance under fire pertains to “indirect” auto loans, provided to dealers by a third party. It sought to curb the practice of dealers marking up loan rates and other acts deemed as “discriminatory pricing.”
“The CFPB is attempting to change the $905 billion auto loan market and limit market competition without prior public comment and without analyzing the impact of its guidance on consumers,” National Automobile Dealers Association Chairman Forrest McConnell says.
Undaunted, Cordray has promised that a greater focus on auto loans is still on his agenda in the weeks ahead.