Political power in United States shifted in an unexpected and unprecedented way. As of January 20, 2017, Republicans will hold the White House and both Houses of Congress. President-elect Donald Trump will also have the opportunity to appoint two SEC Commissioners and a new Chair. He and his party will have the ability to reshape securities law and regulation. As this was unanticipated, there was little discussion before the election as to what it would mean for securities law and regulation. We believe the following seven issues are likely to be part of the discussion in the weeks and months ahead.
1.Dodd-Frank-Act-Volcker Rule
The Volcker Rule, a 900-plus-page rule adopted in December 2013, was intended to limit proprietary trading by banks. Championed by former Federal Reserve Chairman Paul Volcker, the rule was a last-minute addition to the 2010 Dodd-Frank Act. For years, it stalled as regulators and commentators tried to distinguish between speculation (deemed bad) from investment (deemed good). Few believe that the regulators were successful in properly drawing this distinction. Making the rule more susceptible to criticism, many experts have determined the rule "would have done nothing to mitigate the worst financial crisis since the Great Depression."
2.Delegated Authority for Enforcement
The SEC delegated authority to the Director of Enforcement to open formal orders of investigation of persons and entities. The Director of Enforcement then took the unprecedented step of sub-delegating authority to Regional Directors, Associate Directors, and Specialized Unit Chiefs. The delegation supports Chair White's "broken windows" approach by which deficiencies and misconduct of every size and nature are addressed. This approach has resulted in a record number of enforcement proceedings. However, many commentators have raised concerns about the ease with which proceedings can be brought and subpoenas issued and whether enforcement is now less effective because it is uncoordinated. If the new administration wishes to end the delegation, it can appoint SEC Commissioners and a Chair that will withdraw the delegation with an order not subject to the lengthy formal rule making process.
3.Fiduciary Rule
The Department of Labor finalized the so-called "Fiduciary Rule" in April 2016 and announced it would go into effect in April 2017.According to the DOL, investors lose billions of dollars in fees each year because their advisors are not acting in their best interests. The goal of the Fiduciary Rule, therefore, is to "stop advisers from putting their own interests in earning high commissions and fees over clients' interests in obtaining the best investments at the lowest prices."However, the net effect of the rule is unclear. Among the potential negative effects of the rule are investors losing access to competent advice, skyrocketing costs for affected accounts, decreases of 25 to 50% in annuities sales, and unnecessary corporate restructuring.
4.Consolidated Audit Trail
The SEC and CFTC attempted to trace the root cause of the Flash Crash, it became abundantly clear that the financial market regulators were ill-equipped to police modern markets. Out of this realization came the idea for the Consolidated Audit Trail (the "CAT"). CAT is conceptualized as a market-wide system that tracks equity and option trades. It would help in both investigations and monitoring. Proving manipulation and fraud, as well as identifying systemic risk, should become easier with CAT in place. However, despite years of work, "a fully baked, centralized trail is still years away."
5.Pay Ratio Disclosure
The Dodd-Frank Act instructed the SEC to adopt a rule requiring each publicly traded company to disclose "the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees." The ratio would appear in registration statements, proxy and information statements, and annual reports that call for executive compensation disclosure. This seemingly simple calculation may "actually entail herculean bookkeeping for large, diverse companies."
6.Polotical Contributions Disclosure
A group of college professors argued that the Supreme Court's Citizens United ruling necessitated an SEC rule requiring public companies to disclose their political expenditures. The SEC received more than 1 million public comments - a record. Yet, the SEC did not act. Senator Elizabeth Warren, less than a month before the recent election, openly urged President Obama to remove SEC Chair Mary Jo White for refusing "to develop a political spending disclosure rule despite her clear authority to do so." This was perhaps a bit unfair. Not only was the SEC restricted by law from working on the rule at that time, but the rule has faced tremendous opposition. Business groups and Republicans have long argued that "a company's political contributions are not related to its financial performance and that the disclosures are unnecessary." A Republican Congress or appointments to the SEC may find 2017 is an ideal time to revisit this issue.
7.Liquidity Risk Management
The SEC announced that it had finalized a rule that would require open-ended investment companies to develop liquidity risk management programs and make additional disclosures related to liquidity. The rule, among other things, requires an investment company's board of directors to adopt a formal plan for managing liquidity risk and make disclosures classifying fund investments into one of four categories according to liquidity. In a letter to the SEC supporting the rule, Senator Sherrod Brown cited several sources for the proposition that the fund industry was growing and offering investments in less-liquid assets. Tellingly, Senator Brown cited widely-available public sources such as Barron's and Bloomberg articles. If the public has access to multiple news stories about liquidity risk, risk disclosures in regulatory filings, and lists of fund holdings online, it is fair to ask whether the rule carries a benefit to investors along with its cost. If the determination is made the costs of this rule substantially outweigh the benefits, then the SEC may engage in a formal rule making process to repeal the rule.
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