Since Inauguration Day, the Trump Administration has touted its efforts to scale back what it considers to be unnecessary, costly, and business-unfriendly rules and regulations.
Trump and his administration, however, are far less vocal when it comes to the reality that new rulemaking will continue, even if it is at a slower pace. The truth is, the Executive Branch has little authority when it comes to the actions of independent agencies like the Securities and Exchange Commission and the Federal Reserve. Although the White House has done its best to stock those agencies with like-minded proponents of deregulation, it can do little to prevent new rules that are either holdovers from past Congressional mandates or that are considered needed reactions to marketplace abuses.
Securities and Exchange Commission Chairman Jay Clayton has publicly agreed with the government-wide regulatory reductions championed by the President. Nevertheless, he is laying out hints of a regulatory roadmap that even includes catching up on long-lingering mandates of the Dodd-Frank Act.
During a Jan. 22 speech at the Securities Regulation Institute in Washington D.C., Clayton said that completing this rulemaking if important, even if it may not be easy.
How quickly the SEC can complete remaining Dodd-Frank rules “is a multi-variable function” and two key variables, among many, “are mission-critical demands and the complexity of the mandates themselves.”
Clayton grouped the remaining mandates into categories. Among them, and of primary importance, are rules to stand-up the security-based swap regime.
Category one. Rulemaking under Title VII was intended to address the gap in U.S. financial regulation of over-the-counter swaps by providing a comprehensive framework for the regulation of swaps markets.
The Dodd-Frank Act divided regulatory authority over swap agreements between the Commodities Futures Trading Commission (CFTC) and SEC. The SEC has regulatory authority over “security-based swaps,” defined as swaps based on a single security or loan or a narrow-based group or index of securities, or events relating to a single issuer or issuers of securities in a narrow-based security index. Security-based swaps are included within the definition of “security” under the Securities Exchange Act. The CFTC has primary regulatory authority over all other swaps, such as energy and agricultural instruments.
The two agencies share authority over “mixed swaps,” which are security-based swaps that also have a commodity component.
The SEC has finalized many, but not all, of the Dodd-Frank Act’s Title VII rules. “As we seek to complete [these] rules, that final implementation should be done holistically and as a coherent package,” Clayton said. “The rules are substantially interrelated and this approach should allow for more efficient implementation and internal consistency.”
The SEC’s remaining Dodd-Frank workload includes, but is not limited to: data collection and reporting rules for security-based swap execution facilities; rules governing security-based swap execution facilities; rules regarding fraud in the security-based swap market; rules governing security-based swap dealers and major security-based swap participants that are not banks; caily trading recordkeeping requirements; and reporting and recordkeeping rules applicable to security-based swap dealers and major security-based swap participants.
“We are seeking to harmonize our ultimate securities-based swap rules with the CFTC, where appropriate, to increase effectiveness as well as reduce complexity and costs.”
Jay Clayton, Chairman, Securities and Exchange Commission
Clayton noted that “statutory variances and differences in products and markets” have meant that the SEC's final and proposed rules governing security-based swaps have differed, in some cases significantly, from the rules governing swaps that the Commodity Futures Trading Commission adopted pursuant to its own Title VII mandates.
“We are seeking to harmonize our ultimate securities-based swap rules with the CFTC, where appropriate, to increase effectiveness as well as reduce complexity and costs,” Clayton said. This requires “deliberate and constructive engagement” with the sister agency that is “well underway.”
Category two. Another one of Clayton’s categories of remaining mandates to enact is executive compensation rules for both public companies and SEC-regulated entities.
“Those rules are challenging for various reasons, including that we are writing on an already very colorful canvas and different constituencies see the rules as serving different, and sometimes inconsistent, goals,” he said.
Recent interpretive guidance was intended to help companies comply with the new pay ratio rules. “This guidance was true to the statutory mandate, practical, and intended to help companies reduce compliance costs,” he said. “With those same themes in mind, I am discussing with my fellow Commissioners and the staff how best to address the remaining mandatory executive compensation rules.”
The remaining executive compensation workload includes: pay versus performance disclosures; clawback requirements for the recovery of executive compensation; disclosure rules regarding employee and director hedging; and restrictions on certain compensation arrangements.
Category three. Clayton’s third category of remaining mandated encompasses specialized disclosure rules, such as resource extraction disclosure. “Beyond the statutory text, they pose additional challenges, including how the SEC can meet its obligations under the Administrative Procedure Act and, as various court cases demonstrate, still survive legal challenge,” he said.
The rulemaking in question, from Section 1504 of the Dodd-Frank Act, instructed the SEC to create a rule requiring domestic and foreign oil, gas, and mineral companies traded on U.S. stock exchanges to publish the payments they make to foreign governments as the price to operate in those countries.
It was on the losing end of a legal challenge by oil and gas interests. In February 2017, President Trump signed legislation repealing the rule using the Congressional Review Act.
In April, Senate Democrats demanded that the SEC “promptly re-issue a new anti-corruption rule…that is consistent with both Congressional intent and the extractive industry transparency laws in effect in thirty other countries.”
He said he has asked SEC staff “to craft rules for consideration by the Commission that meet the objectives of Congress, take into account this array of procedural and substantive constraints, and bring finality to these matters.” Category four. Clayton added a final category to his list: mandates for which market developments. including developments resulting from shareholder engagement, have, at least in part, mitigated some of the concerns that motivated the statutory requirements.
His chosen example was those companies that have already made public their policies regarding compensation clawbacks.
“Some of these policies go beyond what would be required under Dodd-Frank. We have seen a few companies attempt to clawback compensation from their executives under these policies. Our rulemaking priorities, as well as the rules themselves, should reflect these observable developments.”
Initial coin offerings. Clayton has singled out problems with initial coin offerings that have many of the key features of a securities offering, but their promoters ignore securities law, ostensibly because they don’t see their product as a security. To Clayton, this deprives investors of the protections afforded by securities regulations, and he has instructed SEC staff to be on the lookout for suspiciously novel approaches to ICOs.
“The SEC is undertaking significant efforts to educate the public that unregistered securities investments offered by unregistered promoters, with no securities lawyers or accountants on the scene, are, in a word, dangerous,” he said. “The SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the securities laws, particularly in the case of an offering.”
Fiduciary duty. Among the bigger items on the SEC’s to-do list is proposing its own “fiduciary duty rule” as an alternative to Labor Department requirements for broker-dealers offering retirement advice.
On June 1, Clayton set the stage for the SEC developing its own rule, cheered on by those who see it as the proper agency to do so. He opened a public comment period to solicit advice and guidance.
“The Department of Labor’s Fiduciary rule may have significant effects on retail investors and entities regulated by the SEC,” Clayton wrote. “It also may have broader effects on our capital markets. Many of these matters fall within the SEC’s mission.”
Everything else. Other SEC proposals in the pipeline include:
Amendments to financial disclosures about acquired businesses;
Amendments to the financial disclosures for registered debt security offerings;
Rules pertaining to the issuance of new exchange traded funds;
Amendments to Securities Act rules under the Fair Access to Investment Research Act of 2017;
Prohibitions and restrictions on proprietary trading and certain relationships with hedge funds and private equity funds;
Harmonization of Title VII rules;
Auditor independence with respect to loans or debtor-creditor relationships;
Amendments to the Commission's whistleblower program rules;
Amendments to the Interactive Data (XBRL) program;
Modernization of property disclosures for mining registrants;
Disclosure updates and simplification; investment company reporting modernization (an option for website transmission of shareholder reports);
The regulation of NMS stock alternative trading systems;
The disclosure of order handling information; and
Amendments to municipal securities rules.
But for all of this, the SEC is not the only agency with a regulatory backlog. Also ahead in the coming weeks are also compliance deadlines for the Financial Crimes Enforcement Network’s Customer Due Diligence/Beneficial Ownership Rule and the New York Department of Financial Services cyber-security guidelines and attestation/certification requirements.
Centralized review process. Speaking at a Brookings Institution event on Jan. 26, Office of Information and Regulatory Affairs Administrator Neomi Rao, President Trump’s “regulatory czar,” said that what was initially a plan to purge two old regulations for every new one ended up having a ratio of 22 for 1.
Those efforts will continue in Year Two of the Trump administration, she said. “We want to make sure that they are working to solve an actual problem,” she said of rules and the agencies that craft them. “We want to make sure here is some reason for the government to act, such as a substantial market failure… Even when we are satisfied that an agency has legal authority and a regulation may be necessary, we what to make sure that agencies work in a manner that gives fair notice to the public and respects due process.”
Rao added that regulators should be deterred from using guidance, letters, FAQs, and speeches as a way to implement new regulations without due process.
“Agencies are continuing to move forward with regulations that are required by statute or that they think are necessary to meet certain statutory goals,” she added. “I don’t think there is anything in our system that is really stopping that from happening.”
Rao, however, hinted that efforts may be afoot to bring independent agencies (SEC, Federal Reserve, and IRS) further into the centralized review process.
"It's something we're thinking about and considering," she said. While Trump appointments are already likely reform minded, there may still be room to give agencies “a bigger push” in areas like cost/benefit assessments and paperwork reduction.