On paper, the next several months mark the final stretch for the Securities and Exchange Commission’s implementation of Dodd-Frank Act rulemaking requirements. In reality, expect continued attacks on the legislation in Washington and new battles waged by both Republicans and Democrats.
The semi-annual regulatory agenda, published by the Office of Management and Budget on Nov. 19, details the state of play for the SEC’s Dodd-Frank obligations in the months ahead. As the SEC punches its way through that checklist, new executive compensation rules will be finished, a uniform fiduciary standard of conduct for broker-dealers and investment advisers will hit the books, the orderly liquidation of large broker-dealers will be outlined, and there will be stress testing requirements for large asset managers.
The agenda—perhaps not as ambitious as it might seem, given its long-delayed rules and propensity for regulators to ignore it—nevertheless cracks open a new chapter in Dodd-Frank debates.
Despite tough words from the Obama Administration against any efforts to erode current and forthcoming Dodd-Frank rulemaking, the president did the SEC no favors when he nominated Hester Peirce, a senior research fellow at the Mercatus Center, to replace departing Republican Commissioner Dan Gallagher. Assuming she is confirmed by the Senate (no date set for that vote yet), Peirce has a reputation as one of the fiercest Dodd-Frank critics in academia. Expect the usual, partisan 3-2 votes on SEC policy to continue.
The biggest battles, however, will be away from the Commission’s table. Exhibit A on that point: a string of hearings the House Financial Services Committee held in the days leading up to its Thanksgiving recess, and nearly two dozen Dodd-Frank “fixes” Republicans advanced in new and updated legislation.
SEC Chair Mary Jo White appeared before the committee on Nov. 18, defending her fiscal 2017 budget request (a 9.3 percent increase to $1.89 billion). “We have responsibilities that go far beyond our resources,” she said. “We obviously try to make the smartest decisions we can in core areas given the new areas we have been assigned since the Dodd-Frank Act and the JOBS Act, but clearly [budget constraints] becomes a zero-sum game at some point.”
There wasn’t much else in the way of budget discussions, aside from a smattering of references to the fact that the Commission’s budget has increased 64 percent since FY 2005. Instead, House Republicans returned to the oft-argued issue of how the SEC spends its money.
“The SEC continues to squander its resources on rulemakings that harm U.S. companies and investors,” committee Chairman Rep. Jeb Hensarling (R-Texas) said. “The SEC delayed completion of rules under the JOBS Act and instead expended resources on extraneous and sometimes highly politicized regulatory undertakings outside its mission and core competencies.”
Those remarks underline a frustrating reality for the SEC that will continue for the foreseeable future: everyone in Congress has their own ideas about which legislative mandates White should prioritize or ignore.
Hensarling attacked common targets like the Conflict Minerals Rule, and a controversial pay ratio rule “which may appease left-wing activists but does nothing to protect investors.” Democrats, meanwhile, chastised White for not being more active on some of those politicized undertakings.
The most controversial rulemaking in 2016 may be one not even included in the Dodd-Frank Act, and that White shows little interest in pursuing. Two separate petitions calling for companies to disclose political spending have garnered more than 1 million comment letters, 2,000 of them unique.
“The SEC continues to squander its resources on rulemakings that harm U.S. companies and investors.”
Rep. Jeb Hensarling, Chairman, House Financial Services Committee
While Republicans preemptively blasted such rulemaking, Massachusetts Democrat Michael Capuano tore into White for ignoring it.
“Clearly America has spoken, in every capacity they can, and want to prioritize this,” he said. “It is not that difficult. The fact that you refuse to do it raises lots of questions.”
White’s response was to reiterate that her focus was “on the regulatory agenda, congressional mandates, and mission-critical initiatives,” among them the ongoing review of the Commission’s disclosure regime, oversight of the asset management industry, and rules focused on equity market structure. (The SEC, she added, will not stand in the way of shareholder proposals that demand information about political spending.)
House Democrats are also pressuring White to get moving on Section 956 of the Dodd-Frank Act. Designed to limit excessive incentive compensation by financial institutions, it prohibits these firms from offering any pay incentives deemed as excessive or encouraging excessive risk taking, or that could expose the entity to material financial losses.
White said the Commission is “actively working” on the rule, a lengthy process because it is joint rulemaking with bank regulators. Democrats prodded White to move more quickly, complaining that the proposed rule has lingered at the Commission since 2011 despite its support of a final rule by banking regulators.
GOOD INTENTIONS BACKFIRED?
While the Securities and Exchange Commission’s conflict minerals rule lingers in legal limbo, Republicans on the House Financial Services Committee are seeking to undermine it with evidence of unintended consequences. The following is an excerpt from Nov. 17 testimony by Evode Imena, minister of state in charge of mining for the Republic of Rwanda’s Ministry of Natural Resources.
Today, Rwanda is the country with the best mineral traceability system in the region. Currently, 100 percent of 3T minerals mined in Rwanda are traceable from the mine site to the export point, and a modern database exists with information on mining operations, production records, and mineral trading transactions. Despite all that has been accomplished, our efforts to improve are hampered by the fact that Rwanda was lumped together with nine other countries in Section 1502 of Dodd-Frank.
Despite all these efforts and the costly investments in due diligence, we have noted since 2013 a negative international market bias against Rwandan minerals, and in particular against tungsten, as Dodd-Frank has been fully implemented. This situation worsened in 2014, when companies that process tungsten ore stopped buying from all Central African countries – despite the fact that Rwanda was fully implementing both OECD due diligence recommendations related to conflict minerals and the ITRI minerals traceability mechanism.
The region is now suffering from an “Africa-free” and not a “conflict-free” minerals situation. Section 1502 has caused a de-facto boycott by companies in the US and much of Europe on our most valuable resources. The result is a very limited customer base, which further drives down mineral prices because these customers know they have no competition for our resources.
The situation has largely impacted the livelihood of thousands of miners and their families, as the costs for due diligence are passed down from mineral exporters to mining companies, and then on to mine workers. Based on our calculation, the revenues for mining companies and wages for mine workers have decreased by 3 to 6 percent in the last year. Coupled with price fluctuation, the situation has become very difficult to miners and to an industry with tight profit margins.
Source: Evode Imena, Minister of State, Republic of Rwanda
“It’s the SEC that is holding things up,” Capuano said.
A priority for White in the months ahead—one that will engender fresh debates—is developing stress tests for large asset managers and registered funds. A key challenge, she says, is that regulatory stress testing is a new concept for most asset managers, with the exception of money market funds.
“They are not banks,” she said. “One cannot just transfer stress testing for banks into this space. To come up with a meaningful test for very different funds, with different kinds of assets for kinds of stresses that matter, is a real challenge.”
While committee Republicans were skeptical of that approach, their ire was focused (in two hearings that week) on the Financial Stability Oversight Council. They especially complain about designating non-banks as systemically important financial institutions (SIFIs) subject to heightened capital and regulatory requirements. Much of the consternation applied to current and future designations for insurance companies.
“The concern we have is that there is a rubber stamp effect with FSOC with regard to insurance SIFIs,” said Rep. Blaine Luetkemeyer (R-Mo.). “When you have the insurance industry expert on FSOC say no, but everybody else goes along with the international designations despite what we think is good for our companies here in our country, it raises some questions and concerns.”
The SEC’s planned focus on asset managers in the months ahead raises similar fears of SIFI designations, he added.
White’s answer was less than assuring: “FSOC hasn’t ruled out designations of asset managers.”
Another issue already causing a commotion is Section 913 of the Dodd-Frank Act. It gave the SEC authority to adopt rules establishing a uniform fiduciary standard of conduct for broker-dealers and investment advisers who provide personalized advice to retail customers. Democrats on the committee described the rule as an important investor protection; Republicans were concerned about excessive liability and a chilling effect on needed advice. The Labor Department’s efforts on this front are currently deadlocked with a party-line split.
And for all those attacks on Dodd-Frank rules, including complaints about costs and their adoption under the Administrative Procedures Act, Republicans may still try another avenue—that the rules simply aren’t effective. They raised such complaints in one House hearing about the Conflict Minerals Rule; the strategy has also been used to undermine the still-not-fully effective Volcker rule, with critics citing a lack of liquidity already occurring in financial markets.
“It is not a conflict minerals boycott, but an African boycott,” Rep. Bill Huizenga (R-Mich.) said, claiming that the Conflict Minerals Rule has sent “millions of Congolese miners deeper into poverty.”