No one should ever accuse the Trump Administration of not being clear and persistent when it comes to its deregulation agenda.
Beyond the streamlined rhetoric of restoring “core principles” to the nation’s regulatory regime, there are also reports, prepared by the Treasury Department, to offer detailed blueprints for execution. The latest of those reports, mandated by the White House with an Executive Order, outlines ways to “streamline and reduce burdens of capital markets regulation.”
Treasury found that the federal financial regulatory framework and processes could be improved by:
Evaluating the regulatory overlaps and opportunities for harmonization of Securities and Exchange Commission and Commodity Futures Trading Commission regulation;
Incorporating more robust economic analysis and public input into the rulemaking process in order to make the rulemaking process more transparent;
Opening up private markets to more investors through proposals to facilitate pooled investments in private or less liquid offerings, and revisit the “accredited investor” definition;
Limiting imposing new regulations through informal guidance, no-action letters or interpretation, instead of through notice and comment rulemaking; and
Reviewing the roles, responsibilities and capabilities of self-regulatory organizations and making recommendations for improvements.
Treasury’s review of the derivatives market found the need for greater harmonization between the SEC and CFTC, more appropriate capital and margin treatment for derivatives, and resolution of cross-border frictions that fragment global markets.
Additional recommendations in the report include:
Repealing Section 1502, 1503, 1504, and 953(b) of the Dodd-Frank Act;
Investigating how to reduce costs of securities litigation for issuers with the goal of protecting all investors’ rights and interests;
Increasing the amount that can be raised in a crowdfunding offering from $1 million to $5 million;
Examining the impact of Basel III capital standards on secondary market activity in securitized products; and
Advancing U.S. interests and promoting a level playing field in the international financial regulatory structure.
Subsequent to the report’s release, its approach to reform was bolstered by the support of Jay Clayton, chairman of the SEC, and Christopher Giancarlo, chairman of the CFTC.
“This is a more organized and focused effort. The agencies have teams looking at these reports and figuring out how they are going to do these things. You are going to wind up taking a scalpel to the regulatory regime. You are not going to end up cutting everything.”
Oliver Ireland, Partner, Morrison Foerster
Oliver Ireland, a partner at law firm Morrison Foerster, has seen it all before, and he had a front-row seat.
From 1985, until joining the firm in 2000, he was associate counsel for the Federal Reserve Board, advising it on issues relating to retail and wholesale financial transactions, including developing and interpreting regulations, establishing positions on legislation, and pursuing legislative initiatives.
In that role, he was in the middle of a “regulatory burden reduction” effort in the 1990s that was demanded by President George W. Bush.
“It is organized and focused in a way so that most of what they are seeing is achievable without statutory change,” Ireland says of the current effort. “There are things in the report that the administration, with new people in these agencies can follow through on. It is realistic. You are looking at something that is almost all doable.”
Ireland reflected on his time amidst the Bush Administration effort and sees a more cautious effort now underway than most would surmise.
“We looked at a lot of rules and ways to make them less complicated and easier to comply with,” he said. “This is a more organized and focused effort. The agencies have teams looking at these reports and figuring out how they are going to do these things.
You are going to wind up taking a scalpel to the regulatory regime. You are not going to end up cutting everything.”
The Treasury report outlines specific plans of action, such as:
The following are recommendations for annual meetings and proxy access, as outlined by the Treasury Department.
Proxy Advisory Firms
During outreach meetings, Treasury staff heard differing views on proxy advisory firms. Public companies expressed concerns with the role of proxy advisory firms in advising shareholders on how to vote their shares and the limited competition between, and the resulting market power of, the two dominant firms.
Public companies also expressed their desire for greater transparency into the process by which proxy advisory firms develop recommendations. Public companies also had concerns about potential conflicts of interest that arise when a proxy advisory firm provides voting advice to its clients on public companies while simultaneously offering consulting services to those same companies to improve their corporate governance rankings.
In addition, others have expressed concern that institutional investors have become too reliant on proxy advisory firms, which may reduce market discipline.
On the other hand, institutional investors, who pay for proxy advice and are responsible for voting decisions, find the services valuable, especially in sorting through the lengthy and sig- ni cant disclosures contained in proxy statements.
Several government agencies have identified and studied these issues. For example, in a recent report on proxy advisory firms, the U.S. Government Accountability Office (GAO) reviewed studies and obtained stakeholders perspectives. The report concluded that proxy advisory firms influenced shareholder voting and corporate governance practices, but was mixed on the extent of their influence and whether it was helpful or harmful.
The SEC also raised issues with respect to proxy advisory firms in a concept release in 2010 and a roundtable held in December 2013. Treasury recommends further study and evaluation of proxy advisory firms, including regulatory responses to promote free market principles if appropriate.
Concerns on shareholder proposals
Exchange Act Rule 14a-859 allows a shareholder to have his or her proposal placed in a company’s proxy materials. e rule requires the company to include the proposal unless the shareholder has not complied with procedural requirements or it falls within one of 13 bases for exclusion. To be eligible under the rule, a shareholder must have held, for at least one year before the proposal is submitted, either (1) company securities with at least $2,000 in market value, or (2) at least 1 percent of the company’s securities entitled to vote on the proposal.
According to one study, six individual investors were responsible for 33 percent of all shareholder proposals in 2016, while institutional investors with a stated social, religious, or policy orientation were responsible for 38 percent. During the period between 2007 and 2016, 31 percent of all shareholder proposals were a resubmission of a prior proposal.
One trade association asserted that it costs companies tens of millions of dollars and significant management time to negotiate with proponents of shareholder proposals, seek SEC no-action relief to exclude proposals from proxy statements, and prepare opposition statements, all of which divert attention from operating the business.
During outreach meetings with Treasury, however, some groups representing investors countered that the ability to submit proposals is a key right that allows them to hold management accountable and that many shareholder proposals have been adopted that have become widely accepted best practices in corporate governance.
Treasury recommends that the $2,000 holding requirement, which was instituted over 30 years ago, be substantially revised. The SEC might also want to explore options that better align shareholder interests (such as considering the shareholder’s dollar holding in company stock as a percentage of his or her net liquid assets) when evaluating eligibility, rather than basing eligibility solely on a fixed dollar holding in stock or percentage of the company’s outstanding stock.
Treasury also recommends that the resubmission thresholds for repeat proposals be substantially revised from the current thresholds of 3 percent, 6 percent, and 10 percent to promote accountability, better manage costs, and reduce unnecessary burden.
Source: Treasury Department
Rationalizing how much capital a bank needs to hold against its securitization exposure, relative to capital requirements to be held against underlying assets.
Adjusting bank liquidity standards to consider inclusion of senior securitizations with a track record of performance as high-quality liquid assets.
Revising and expanding the underwriting criteria for certain assets that back securitizations to exempt the sponsors from risk retention requirements.
Reducing “burdensome non-material disclosure requirements” while maintaining transparency into the underlying assets of a securitization.
Recalibrating derivatives regulation.
Harmonizing SEC and CFTC rules through more appropriate capital and margin treatment for derivatives, allowing for innovation and flexibility in execution processes, and improving market infrastructure.
Improving cross-border regulatory cooperation between the CFTC and the SEC with non-U.S. jurisdictions to minimize market fragmentation, redundancies, undue complexity, and conflicts of law.
Ensuring appropriate oversight of clearinghouses and other financial market utilities.
Addressing systemic risk management issues left unresolved by post-crisis regulation.
Ensuring greater transparency into the process by which proxy advisory firms develop recommendations.
Addressing “concerns on shareholder proposals” and proxy access standards.
Limiting the imposition of substantive new requirements by the SEC and CFTC through guidance or no-action letters rather than through notice and comment rulemaking.
This is the second report issued by the Treasury Department on its regulatory initiatives. The first went public on June 12, and focused on capital, liquidity and leverage rules can be simplified to increase the flow of credit; the United States must ensure that banks are globally competitive; and improving market liquidity is critical for the U.S. economy.
Subsequent reports will be issued over the coming months and will focus on markets, liquidity, central clearing, financial products, asset management, insurance, and innovation.
Michael Philipp, a partner at law firm Morgan Lewis, counsels financial services clients in futures and securities transactions. He refers to the Treasury report as a “220-page monster” for its length and detail.
“From the perspective of market and industry participants, overall, it is a positive step in the right direction,” Philipp says. “It appears that there was input from the SEC and the CFTC, as evidenced by the respective statements that came out from their chairmen within minutes of the release. It appears to me that there was input and the Treasury Department paid pretty careful attention to that input.”
“I would call it a targeted and direct set of recommendations, but not by any means a call for radical change in direction or repeal of the Dodd-Frank Act,” he added. “I don’t think it can be taken as that and that may actually disappoint some people. It is more of a recalibration to what Dodd-Frank did.”
Philipp views it as positive that there is an attempt to “address the Basel III rules that really clobbered the capital markets.” Treasury is also “appropriately calling for a more realistic approach to derivatives risk measurement, and that is good.” Demands for greater coordination between the CFTC and SEC were also praiseworthy.
It is notable that the report rejects a commonly resurrected effort to merge the two agencies.
“One might argue that some of the treasury derivatives recommendations didn’t go far enough,” Philipp says. One bit of potential contention: an endorsement of the CFTC finally putting position limits in place.
“The question is how much of this is akin to a white paper or a blueprint and how much will actually be taken on is the big, open question,” he adds.
The Federalist Society, a reform-minded think talk with conservative and libertarian viewpoints, recently held a teleforum on the Treasury’s efforts.
During the call, Compliance Week asked Wayne Abernathy, executive vice president for financial institutions policy and regulatory affairs for the American Banker’s Association, about whether the government was taking on too much, too soon. This fear could be stoked by memories of how the Dodd-Frank Act’s haste led to troubling ambiguities and unintended consequences?
“The Dodd-Frank Act mandated close to 400 new regulations and for the seven years it has been in place they haven’t finished writing the rules they are asked to,” Abernathy said. “When you put too much on the table it is hard to eat it all.
“What I think is going to happen is that the regulators will look at all these various proposals and recommendations and start asking, ‘What are the things we can do now? What is doable? What needs to be done now?’ It is going to be an iterative process,” he added.