By Gary Larkin, Research Associate, The Conference Board Governance Center
With a flurry of executive orders in his first two weeks in office, President Trump made one thing absolutely clear. The Dodd-Frank Wall Street Reform and Consumer Protection Act passed by Democrats in 2010 will soon be reformed itself by the current Republican majority.
But the big question for boards is which corporate governance-related Dodd-Frank rules will be eliminated and which will stay.
To answer that question, one has to understand how such a process can take place. For starters, since the SEC is an independent agency, simple executive orders cannot repeal its statutory rules. That would take an act of Congress, which is the same way those rules were written in the first place. However, under new leadership the SEC can reconsider the enforcement of rules it has written. With that said, consider what has transpired over the past three weeks
Jan. 30, 2017: President Trump issues the first of two Dodd-Frank Act-related executive orders. The first one called for regulatory agencies to eliminate two regulations for every new one they issue, and the cost of planned regulations be “prudently managed and controlled through a budgeting process.” The White House later clarified that order did not pertain to such independent agencies as the SEC.
Jan. 31, 2017: Acting SEC Chair Michael Piwowar asks the SEC staff to reconsider if the Division of Corporate Finance’s 2014 guidance regarding the conflict minerals disclosure rule was still appropriate and whether or not additional relief was needed. He has asked that companies given 45 days to comment on the reconsideration.
January 2017: The U.S. House of Representatives approves the SEC Regulatory Accountability Act, which would require the commission to perform a cost-benefit analysis on new and existing rules. Two other bills that passed in the House last year and 2015, respectively (the Midnight Rule Relief Act and the REINS Act, which stands for Regulations from the Executive in Need of Scrutiny) would require congressional approval of any new rule that would cost more than $100 million in compliance spending and require all federal agencies to carefully scrutinize the purpose, costs, and benefits of new rules.
Feb. 3. 2017: The President issues the “Presidential Executive Order on Core Principles for Regulating the United States Financial System.” While light on details, the order spells out seven principles the Trump Administration will use to regulate the financial system. Included is a principle that makes regulation efficient, effective, and appropriately tailored. Also, it includes a directive to the Treasury secretary to meet with the Financial Stability Oversight Council (borne out of the 2008-2009 financial crisis) to decide which “existing laws, treaties, regulations, guidance, reporting and record-keeping requirements” promote and support the new principles.
Feb. 6, 2017: Piwowar asks SEC staff to reconsider the implementation of the CEO pay ratio rule because he has been informed that some companies are encountering “unanticipated compliance difficulties that may hinder them in meeting the reporting deadline” this year. He has also requested a public comment period of 45 days for companies to report any compliance difficulties.
Feb. 6, 2017: House Financial Services Committee Chair Jeb Hensarling (R-Texas) announces the committee’s Financial Choice Act as an alternative for the Dodd-Frank Act. It is the legislation that lays down the specifics for repealing key parts of Dodd-Frank. (This legislation had been approved in the last Congressional session, but never made it to the President’s desk.)
In addition to these actions, consider that the SEC still only has two sitting commissioners. While the President has nominated Sullivan & Cromwell M&A Partner Jay Clayton as a new chair to replace Mary Jo White, who resigned on Jan. 20, the word is that it will be at least a couple of weeks before the Senate confirms him.
So what does this mean for public company boards in 2017?
One thing you can be sure of is that under this administration, the cost benefit of any rule would be a priority, according to our Executive Director Doug Chia.
“We have more and more regulations that create more and more costs on public companies to the point where becoming a public company has become too much of a burden,” Chia told Agenda in its Jan. 30 edtion. “The cost-benefit analysis has tipped in favor of staying private or going public in some markets outside of the U.S.” (See Agenda, Jan. 30, 2017, registration required.)
Advice for directors
Here is what some Conference Board member law firms have been advising their clients about the Trump administration actions aimed at cutting back regulations:
Weil Gotshal & Manges (Feb. 6, 2017)
The firm expects Congress to take the President’s lead and reform parts of the Dodd-Frank Act:
“The [Core Principles] executive order directed the Secretary of the Treasury to consult with the heads of key financial regulatory agencies and report to the President on the extent to which existing laws, regulations and policies promote or inhibit Federal regulation of the US financial system in a manner consistent with the Core Principles. While the President’s order did not specifically name the Dodd–Frank Wall Street Reform and Consumer Protection Act and the regulations promulgated thereunder, it is widely assumed that part of the order’s intent is to identify provisions of that Act that are viewed as inconsistent with the Core Principles as the first step of an effort to repeal or modify them.”
Cleary Gottlieb Steen & Hamilton (Jan. 17, 2017)
The firm cautions that companies should be ready to address almost certain regulatory changes:
“Identify the areas of potential exposure to regulatory change or government actions. It is tempting to start by listing the topics on which political rhetoric has focused, but the list is long (tax reform, trade policy, health insurance, financial regulation, environmental regulation…)—and in most areas it is too soon to predict what specific measures a new administration might take. It might be wise to start instead with the company’s own profile of regulatory and governmental challenges and ask internal specialists to identify the sensitivities, think outside the box about what could happen, and call out areas where change could be sudden.”
Wachtell Lipton Rosen & Katz (Jan. 7, 2017)
The firm focused on compensation-related Dodd-Frank rules that could be rolled back:
“Companies should closely monitor statutory and regulatory developments in the new year. The president-elect and Congressional leaders have articulated an ambitious agenda to reduce business regulations, simplify the tax code and lower tax rates. Any of these changes could have a significant impact on compensation design. Stay tuned…We continue to await final regulations regarding clawbacks, disclosure of pay for performance, disclosure of hedging by employees and directors and financial institution incentive compensation, although the fate of these rules remains uncertain in light of the 2016 election results.”
Latham & Watkins (Dec. 1, 2016)
The firm published a memo that laid out the disclosure ramifications for executive compensation rules this year, with the caveat it could all change under Trump:
“President-Elect Donald Trump previously criticized Dodd-Frank, even suggesting he would consider repealing it. Congressional repeal of Dodd-Frank in part or in whole, or a newly constituted SEC reconsidering any of the SEC’s proposed or final Dodd-Frank rules, could affect some or all of these executive compensation-related rules. Whether (or when) any action will be taken on any of these rules is unclear; we therefore recommend that companies continue monitoring and preparing for these upcoming requirements.”
The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.