In this 14-minute podcast, Aaron Cutler – a Hogan Lovells Partner & Former Senior Advisor to House Majority Leader Eric Cantor – discusses what the future holds in Washington DC for corporate & market regulation, including:
– Who will be taking the lead in overseeing the markets in Congress going forward?
– What are the prospects of legislative changes in the near term, including a full – or partial – repeal of Dodd-Frank?
– What type of SEC Chair might we see?
– Can the SEC operate with just two Commissioners (Chair White leaves in January bringing the number of Commissioners down to two; I’ll be blogging on this in a few days)?
This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
With SEC White leaving in January – and Commissioner Stein’s term ending a few months later in June – President-Elect Trump will get the opportunity to tap 4 new SEC Commissioners within a short period of time. That has to be unprecedented.
SEC Commissioners serve for a term of 5 years – except if they are appointed to fill a vacancy, they only serve for the remainder of their predecessor’s term. If their term expires and a successor is not yet confirmed, they can remain on the Commission beyond the expiration of their term (but not beyond the expiration of the next term of Congress – so they might stay on as long as 18 months after their term expires). Commissioner Stein filled a vacancy (succeeding Elise Walter) – thus, her term is shorter than 5 years. But she may wind up staying on longer than her 4-year term if a successor isn’t confirmed timely.
I’m pulling all this knowledge straight out of Section 4(a) of the Securities Exchange Act of 1934 – the law that established the creation of the SEC. Now some people are saying that the mixed composition of political party backgrounds of the Commissioners is a “tradition” and not required. I’m not sure why they’re saying that – because Section 4(a) also states:
Not more than three of such commissioners shall be members of the same political party, and in making appointments members of different political parties shall be appointed alternately as nearly as may be practicable.
So while it may be true that some federal agencies don’t have this “mixed political party” requirement for their governing body, the SEC does have it baked into long-standing legislation…
Note this statement – “Their terms last five years and are staggered so that one Commissioner’s term ends on June 5 of each year” – from the SEC’s website. This staggering is subtly called for by the last clause in Section 4(a). It’s what happened when the original set of Commissioners were appointed in 1934 – and it has continued since due to way that vacancies are filled…
Former SEC Commissioner Roberta Karmel delivered this moving speech before the ABA’s “Federal Regulation of Securities Committee” recently. It’s worth reading all 9 pages. Here’s an excerpt:
In my opinion, while a background in government is useful, an agency like the SEC needs some commissioners who have had real world experience in business or the private practice of securities law. Nevertheless, we do not need SEC commissioners who do not believe in the mission of the SEC or who would like to take a hacksaw to all government regulation. I am very afraid that the Trump Administration and the Republican Congress will try to destroy the SEC, or in any event, the SEC’s independence.
Today, neither the SEC Chair nor the President seems to enjoy the freedom to choose non-partisan candidates who will be confirmed by the Senate. Qualifications are based on ideological correctness rather than expertise. This has led to very contentious and partisan decision making with many 3-2 decisions, or even worse, 2-1 votes, on important issues. Moreover, the selection of commissioners in this manner results in strong dissents designed to enable affected constituencies to appeal rulemaking to the United States Court of Appeals for the District of Columbia Circuit and prevail by upending new regulations. I am not opposed to dissents; I authored a few when I was a Commissioner, but these were based on principle, not party. Partisanship has been a historical hallmark of some agencies, like the National Labor Relations Board, where labor and management commissioners are often at odds. It was not traditionally the case at the SEC where the agency’s mission is to police the securities markets and protect investors, and where influence by outside political forces once was rare.
In my opinion, partisanship has undermined the SEC’s mission and credibility and made it very difficult for the SEC to complete rulemaking mandated by statute. It took five years for the SEC to complete the bulk of mandated rulemaking under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), in part because Republicans in the Congress and at the SEC objected to many statutory provisions. In the meantime, Congress passed the JOBS Act, which mandated new deregulatory rules, and again the SEC was slow to pass rules implementing this law because Democrats found it objectionable. When the agency operated in a collegial manner, I believe it was more effective and respected and was able to pass rules without so much rancor.
By the way, Politico ran this profile on former SEC Commissioner Paul Atkins, who is leading Trump’s transition efforts in the financial regulatory area & whom met with the President-Elect yesterday…
Sen. Schumer: “Have Votes to Block Dodd-Frank Repeal”
Incoming Senate Minority Leader Chuck Schumer, drawing a line in the sand for the next administration, said he has the votes to stop President-elect Donald Trump from repealing the Dodd-Frank Act and “the rules we put in place to limit Wall Street.” Schumer predicted that the Senate’s Democratic minority would get help from Republicans in any such fight. “We have 60 votes to block him,” Schumer said in an interview on NBC’s “Meet the Press.”
The Jawing Over “Midnight” Rulemaking
As noted in this blog, a few weeks ago, House Majority Leader Kevin McCarthy sent a letter to government agencies warning them against finalizing any pending rules or regulations in the waning days of the Obama administration. SEC Chair White testified before the House Financial Services Committee that same day & said that there would not be any last-minute rulemaking before she leaves. Then, the House passed legislation – “The Midnight Rules Relief Act” (HR 5982) – that would amend the Congressional Review Act. It’s doubtful that President Obama would enact this if the Senate passed the bill too.
Here’s the intro from this WSJ article by Andrew Ackerman:
Financial regulators are scrambling to complete a series of unfinished rules designed to rein in Wall Street, dismaying congressional Republicans and some business groups that have urged policy makers not to rush new regulations as President Barack Obama’s term winds down. The government’s consumer finance watchdog is pushing to finish a contentious measure that could make it harder for financial firms to force consumers into mandatory arbitration. The Federal Reserve and the Securities and Exchange Commission could each wrap up postcrisis measures that would force banks and swaps dealers to add to their books costly new buffers protecting against big losses during periods of market distress. The SEC also wants to limit risky derivatives in mutual funds sold to the public, while a fellow market regulator wants to adopt new curbs on speculation in oil, gold and other commodities. Other high-profile measures are in doubt. Mr. Obama has for two years pushed a committee of agencies to complete limits on executive compensation, aimed at curbing Wall Street risk-taking. The six agencies required to write the rules are racing to complete them but may run out of time before the change in administration, according to regulatory officials.
The efforts to complete the rules before President-elect Donald Trump takes office on Jan. 20 buck calls from Republicans who want the agencies to wait, even on noncontroversial measures required by the 2010 Dodd-Frank financial overhaul, until the new administration takes over. “This type of ’midnight rulemaking’ is neither conducive to sound policy nor consistent with principles of democratic accountability,” Texas Rep. Jeb Hensarling, chairman of the House Financial Services Committee, told SEC Chairman Mary Jo White at a Nov. 15 hearing. Mr. Hensarling is reportedly under consideration to serve as Mr. Trump’s Treasury Secretary.
Regulators deny they are rushing to finish initiatives ahead of the transfer of power and say they are merely working through their normal process to finish rules that were targeted for completion this year. Ms. White, who plans to leave the agency in January, told lawmakers she is finishing rules she had long publicly described as top priorities.
Before Mr. Trump’s surprise win earlier this month, some financial firms and their lobbying groups backed the regulators’ efforts to complete their work. At the time, these groups assumed a victorious Hillary Clinton, under pressure from progressive Democrats like Massachusetts Sen. Elizabeth Warren, would adopt a more adversarial approach to Wall Street oversight than the Obama administration. With Mr. Trump’s victory, however, they anticipate policy makers who favor a lighter regulatory touch will be appointed.
Wow! It was big news when Gamco Asset Management filed the 1st ever Schedule 14N recently. Now, National Fuel Gas has rejected Gamco’s nominee, as reported in the company’s Form 8-K. Here’s an excerpt from letter from the company to Gamco filed as an exhibit to the 8-K, which lays out the reasoning:
A stockholder that seeks to use the Company’s proxy access By-Law provision must make certain representations and warranties to the Company. If these representations are not correct, the stockholder is not eligible to use proxy access. These representations include that an Eligible Stockholder:
(i) acquired the Proxy Access Request Required Shares in the ordinary course of business and not with the intent to change or influence control of the Corporation, and does not presently have such intent.
Cooley’s Cydney Posner blogged later today that: “In this Schedule 13D/A, filed this morning, GAMCO reported that its nominee had “informed GAMCO this morning that he has decided to withdraw [his] name as a candidate for Director of National Fuel Gas Company. GAMCO will not pursue Proxy Access.” So much for that foray.”
As also blogged by Steve Quinlivan, Section 72003 of the FAST Act directs the SEC to carry out a study of Regulation S-K’s requirements and to consult with the SEC’s Investor Advisory Committee and Advisory Committee on Small & Emerging Companies. The SEC snuck out this 26-page report to Congress just before the holiday.
Although not directly tied to Corp Fin’s disclosure effectiveness project, there definitely is some overlap. Steve highlights these recommendations in his blog:
– Relocate “Risk Factors” from Item 503(c) to a new, separate item (Item 105) in Subpart 100 of Regulation S-K.
– Eliminate the Item 512(d), (e), and (f) undertakings because they are obsolete.
– Permit the omission of attachments and schedules filed with exhibits, unless they contain information that is material to an investment decision that has not been disclosed otherwise.
– Revise Item 601(b)(21) to require disclosure of legal entity identifiers (“LEIs”) for the registrant and within the list of significant subsidiaries.
– Require machine-readable tagging of all of the information presented on the cover page of a registrant’s periodic and current reports.
– Require the use of hyperlinks whenever the rules call for the inclusion of a web address, provided the appropriate technology is available to prevent such links from jeopardizing the security and integrity of the EDGAR system.
Conflict Minerals: EU (Sorta) Adopts Regulations
Here’s a note from Lawrence Heim of Elm Sustainability Partners:
In a press conference concluded minutes ago, Bernd Lange, Chair of the International Trade Committee, Iuliu Winkler, rapporteur with Cecilia Malmstrom, Member of the EC in charge of Trade and Council presidency and Ivan Lancaric, Ministry of Economy of Slovak Republic announced what is called “informal deal on a regulation” for the EU conflict minerals scheme. This action will be legally binding and is aligned with the June 2016 political understanding. The final text will be voted on by the member states on December 7, 2016, with a vote in the plenary expected in the first half of 2017.
Details are forthcoming, but what is known now is:
– Due diligence is based on the OECD Guidelines.
– The scheme is mandatory for importers of 3TG and applies to companies with more than 500 employees but small volume importers will be exempt from these obligations. The “small” threshold was not provided in the public announcements. Previous reports place the threshold at 100kg for gold.
– The regulation allows companies to become a responsible importer by declaring in writing to the competent authority in a member state that it follows the due diligence obligations set in the regulation. A list of these importers will be published by the Commission. The competent authorities will carry out checks to ensure that EU importers of minerals and metals comply with their due diligence obligations. Details about the checks were not provided in the public announcement.
– The legal deadline for implementation is January 1, 2021 but the EP specifically invites voluntary early entry into the program by EU manufacturers and sellers not otherwise subject to the law.
– The Commission will draft a handbook including non-binding guidelines to help companies, and especially SME’s, with the identification of conflict-affected and high-risk areas.
Exodus, movement of Jah people! At the SEC, in addition to Chair White, the exodus that occurs when an Administration changes has begun: Trading & Markets Director Stephen Luparello and Enforcement’s Chief Litigation Counsel Matt Solomon are the first. And Chief Accountant Jim Schnurr retired, with Wes Bricker taking Jim’s spot – Wes has been serving as Interim Chief Accountant since July. Many more to come I would imagine…
Yesterday, ISS issued its 2017 policy updates, which applies to meetings starting in February (here’s the policy updates for outside the US). Similar to Glass Lewis, the ISS’ updates aren’t too significant for existing public companies – but there are several new & revised policy changes related to equity plans, including on director compensation. Davis Polk’s Ning Chiu gives a rundown of the most significant changes in this blog…
CDIs: A Big One on Reg D’s Integration; Three Small Ones for Reg A
Nicely timed with the annual “Small Business Capital Formation Forum,” Corp Fin released 3 CDIs on Regulation A & one on Reg D last Thursday. As noted in this Stinson Leonard Street blog, the Reg D one is about integration – only fitting as I was taping a podcast with Stan Keller that day, the “Dean of Integration”:
Corp Fin Updates Financial Reporting Manual (Been a While)
Recently, Corp Fin indicated that it updated its “Financial Reporting Manual” to add guidance relating to the implementation of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (as amended by Accounting Standards Update No. 2015-14) and IFRS 15, Revenue from Contracts With Customers, Accounting Standards Update No. 2016-02, Leases (Topic 842) and IFRS 16, Leases, and Accounting Standards Update No. 2015-09, Disclosures about Short-Duration Contracts (Topic 944); clarify guidance on emerging growth company financial statements; clarify filings required after effectiveness of Form 10; and clarify guidance on impact of loss of smaller reporting company status on filing deadlines, among others. Think it’s been nearly a year since the last change (other than for the FAST Act)…
As noted on their blog, Glass Lewis posted 49 pages of “Guidelines for the 2017 Proxy Season” on Friday, which includes a summary of the policy changes on the first page. Dorsey & Whitney has a new blog – and Kimberley Anderson has blogged some analysis of the policy changes there…
Glass Lewis: Companies Allowed to Review Rudimentary Draft Reports! Get In Early!
On Friday, Glass Lewis also announced “open enrollment” in its “Issuer Data Report” program. This enables companies a chance to access – for free! – a data-only version of their Glass Lewis report. This is an opportunity for companies to weigh in prior to Glass Lewis completing its recommendations for the upcoming proxy season!
As Glass Lewis doesn’t provide drafts of its voting recommendations report for companies to review like ISS does (for the S&P 500), this is your only chance to review what Glass Lewis factors into its recommendations. Open enrollment ends on the earlier of January 6th – or when Glass Lewis decides its annual limit has been reached. So do it now!
PCAOB: New ’17 Budget & 5-Year Plan – & Hanson Dissents!
Last week, as noted in this press release, the PCAOB approved its 2017 fiscal-year budget of $268.5 million and its 2016-2020 strategic plan. The total accounting support fee for 2017 is $268 million, with $232.6 million allocated to public companies and $35.3 million to brokers. The budget still has to be submitted to the SEC for its approval.
The big news is that there was one dissent among the 5 PCAOB Board members when voting on their budget! Jay Hanson dissented, as noted in his statement. Here’s a note from Lynn Turner on this:
I understand this is the first vote since the PCAOB was created in 2002, in which a board member voted not to approve their budget. It appears the principle point of disagreement is over economic analysis. Interesting, the US Treasury Committee did recommend the PCAOB do more analysis through a fraud center. However, as I understand it, some on the board do not support research that may result in unfavorable data for the profession becoming public.
Interestingly, the PCAOB inspects only a couple hundred audits each year of the total audits of public companies and broker-dealers which totals over 10,000 entities. Those inspections have consistently found a 20-40% rate of non-compliance with generally accepted auditing standards, despite the auditor saying in their report they had complied.
They’re doing it again! Just like in 2013, some companies are receiving letters from the St. Petersburg Stock Exchange stating that they have been admitted into the non-quotation section of the list of securities admitted to regular trading of the exchange. This is happening without the company’s consent!
If you go to this page and scroll down, you will see many well-known – and non-Russian – NYSE/Nasdaq companies included on the list. Look to the far right column – those are the dates that companies are effectively listed (a bunch became effective yesterday).
According to the letter that companies are now receiving, the admission of the securities into the non-quotation section of the list does not impose any obligations on the company. Specifically, the company is not required to disclose information and perform any other obligations under the Russian securities and insider trading legislation.
Remember that back in 2013, as noted in this blog, a number of companies responded to those original letters and requested that their securities not be admitted to trading on the Exchange – and the Exchange generally did not proceed with the admissions.
But then the Russian securities laws were amended in July 2014 to relieve foreign issuers from Russian reporting & disclosure obligations with the listing of their securities and allowing the Exchange to proceed with the listing without a company’s consent. Since then, the Exchange has been actively admitting foreign securities to the “non-quotation section” of the list of securities admitted to trading – but it’s really picking up steam now. So far, it appears that attempts by companies to cease the listings have been unsuccessful. Thanks to Brian Breheny & Justin Kisner of Skadden for their help on this!
FCPA: JPMorgan Chase Pays $264 Million!
Yesterday, as noted in this DealBook article, it was announced that JPMorgan Chase agreed to pay more than $264 million in FCPA sanctions resulting from the firm’s referral hiring practices – the regulatory breakdown is $130 million to settle SEC charges; $72 million to the DOJ and $61.9 million to the Federal Reserve…
The “Financial Choice Act” is much more than merely repealing big chunks of Dodd-Frank. There are a handful of provisions that would render the SEC’s ability to conduct rulemaking much more difficult. But this provision in particular – infamous “Section 631” – just blows me away:
SEC. 631. CONGRESSIONAL REVIEW. If the agency classified a rule as “major,” according to specified criteria, the rule would require a joint resolution of Congress to go into effect, unless the President finds that an emergency requires that it be effective (for 90 days). Congress would also have the right to disapprove certain non-major rules.
Read that provision again. A joint Congressional resolution to adopt a “major” rule – and even some non-major ones! It’s goal appears to be neutering the so-called “independent” federal agencies that govern our financial institutions & markets. Talk about putting partisan politics into “independent” agencies. And here I was worried that having Congress involved in the SEC’s budget process was too much meddling with a federal agency!
Remember that federal agencies are part of the executive branch of government. Not to mention that members of Congress don’t have the expertise, resources or time to understand what the various rules of an agency are. This would be a major windfall for lobbyists who would be able to effectively pay Congress to stop an agency from doing anything. Either the Senate or the House could stop a rulemaking – by simply sitting on their hands. The polar opposite of needing an “Act of Congress” to change something. It’s brazen & breathtaking – and a whole lot of other things that I can’t mention in this family-oriented blog.
The ironic thing is that many of those rules that you despise are the product of Congress. Since SOX was enacted 15 years ago, the vast majority of the SEC’s rulemakings have been mandated by one piece of Congressional legislation or another. Not many initiated by the agency itself…and here’s a nugget from this blog by Steve Quinlivan:
President-Elect Trump’s “Contract with the American Voter” contains a pledge to implement a requirement that for every new federal regulation, two existing regulations must be eliminated. So it would place many in a conundrum. If you want to implement a universal proxy card, what two SEC regulations do you want to jettison? Maybe SEC Rule 14a-8? What else?
Here’s another reason why I can’t comprehend Section 631. As I understand it from Wikipedia, a joint Congressional resolution is essentially the equivalent of a bill being enacted into law – which includes the slew of procedural rules that would make it fairly easy for someone in Congress to throw up roadblocks to anything that they didn’t like. Both the Senate & the House have to approve it by a majority of their members – and then it’s presented to the President for signature. If so, it really would take legislation – an “Act of Congress” – to get a rule adopted by the SEC. Wow…
Here’s a WSJ profile of former SEC Commissioner Paul Atkins, who is serving as the point man for President-Elect Trump’s transition team on issues related to the markets & regulation…
Poll: What’s a “Major” Rule?
Please participate in this anonymous poll about what you think a “major” rule might mean in the context of Section 631 of the “Financial Choice Act”:
Nearly a decade after its last study on proxy advisors, the GAO issued this 49-page report yesterday on the state of the proxy advisor industry. Taking a quick swing through it, I didn’t see anything all that surprising. Several factors have led to increased demand for proxy advisor guidance (eg. rise of institutional investing & voting requirements) – but views are mixed on the extent of their influence. Proxy advisors have increased the level of shareholder engagement. And more.
It’s a nice summary of the state of the industry as we know it. Nice graphic on page 22 to illustrate how ISS & Glass Lewis communicate their policy-formulating process. All that might change soon enough with Section 1082 of the “Financial Choice Act” or whatever reform legislation gets enacted with a new Administration coming in soon…
The “GAO” is the “Government Accountability Office,” the investigative arm of Congress charged with examining matters relating to the receipt & payment of public funds…and of course, if you really want to know about the proxy advisors, read my “Proxy Advisors Handbook“…
SEC’s Budget Request: Not Going Anywhere? HQ May Move?
Given how the SEC may soon dramatically change – President-Elect Trump will be selecting three new Commissioners right off the bat! – I read SEC Chair White’s testimony before the House yesterday about the SEC’s budget with curiosity. For the 2018 fiscal year, the SEC’s request is $2.227 billion, a $445 million increase over the 2017 request – a 25% increase. Approval of this request isn’t likely – as this Gibson Dunn memo notes, the new Administration may seek to reduce, or least stop the growth in, the SEC’s annual budget.
Even more interesting was the fact that the SEC’s HQ may relocate – here’s an excerpt about that:
The current leases for the SEC’s headquarters buildings (Station Place I, II, and III) will expire in FY 2019, 2020, and 2021. In accordance with the memorandum of understanding (MOU) between the GSA and the SEC, we have begun work with GSA to begin the procurement process for a new headquarters lease. The SEC is working collaboratively with GSA to develop a package of materials to submit through the prospectus lease process. We have been informed by GSA that the SEC must be prepared to obligate the funds necessary for the build out of a new headquarters, if relocation is required, before a new lease can be executed. GSA’s current schedule calls for a new lease to be executed in FY 2018.
Thus, the SEC’s FY 2018 authorization request reflected the GSA’s estimate at that time for the build-out of which would cover expenses for construction, IT cabling and equipment, security-related equipment, and appropriate GSA fees were we required to re-locate. The estimate will continue to be refined as the prospectus lease process unfolds.
Tomorrow’s Webcast: “This Is It! M&A Nuggets”
Tune in tomorrow for the DealLawyers.com webcast – “This Is It! M&A Nuggets” – to hear Weil Gotshal’s Rick Climan, Kaye Scholer’s Joel Greenberg and McDermott Will’s Wilson Chu impart a whole lot of practical guidance!
Yesterday, the SEC announced that Chair Mary Jo White will leave her position when President Obama leaves office on Inauguration Day. Last week, Broc blogged that Mike Piwowar will almost certainly become interim Chair since he’s the sole sitting GOP Commissioner. Former Commissioner Paul Atkins is heading the financial regulatory transition team for the incoming Administration – and speculation about White’s possible successor has already begun…
Brexit: UK Parliament Must Okay EU Withdrawal
These memos in our “Europe” Practice Area address the recent UK High Court decision to require the UK government to seek approval of British Parliament before notifying the EU of its intention to withdraw. A few weeks ago, the High Court held that the government did not have the constitutional authority to notify the European Council of the UK’s decision to leave the EU without the prior approval of Parliament. The UK government has announced that it intends to appeal the judgment to the UK Supreme Court. That appeal will be heard in December, with a ruling expected in January…
Brexit: Topics for Audit Committees & Management
This Grant Thornton memo gives some advice to audit committees about the topics that they should discuss with management as a result of Brexit. These include:
– Does management have a strategic plan to manage risks and lessen negative effects? Has the organization done a thorough Brexit risk assessment? What hedging strategies are in place for foreign exchange exposure and how does Brexit affect those strategies? To what extent is the company exposed to debt denominated in pounds sterling?
– How will Brexit affect the carrying value of assets or business units exposed to the UK or EU?
– Will the company see significant translation gains and losses in terms of functional currency? Are foreign subsidiaries using the right functional currency?
– How will Brexit affect historical guidance? How will Brexit affect customers and suppliers and the company’s interactions with them? How will this affect existing guidance?
– What are the implications for communications? How and what does the company plan to communicate to stakeholders about the effect of Brexit – including investors, customers, vendors and employees?
– How will Brexit affect the company’s financial statements? For entities that have significant exposure, what should they expect to see in the June 30 quarter, and what might they see going forward?
The audit committee & management should also discuss what kind of additional regulatory compliance and reporting burdens might result from Brexit, as well as whether there are potential benefits – such as lower borrowing costs resulting from a delay in Fed interest rate increases.