The following is an excerpt from the complete interview, which was published in the Fall 2011 edition of Informer Magazine.Informer: How well positioned is the SEC for the post Dodd-Frank era – both in terms of supervision and rulemaking?
: The Dodd-Frank Act contained over 2,300 pages of text, and takes up over 800 pages of fine print in the U.S. Code. While it was intended to reshape the regulatory landscape by filling gaps, reducing systemic risk and helping to restore confidence in the financial system, in the short run, its biggest impact has been to create regulatory uncertainty. This is because all of the regulatory agencies – the SEC, CFTC and banking regulators – are having great difficulty in meeting the law’s demands for rule-writing.
The SEC was tasked with writing a large portion of the rules. While over 90 of those rulemaking provisions were mandatory, dozens of other Dodd-Frank provisions give the SEC discretionary rulemaking authority. The SEC has been unable even to propose rules for over 20 of the mandated rulemakings under the Act, and like the CFTC, has missed the deadlines for final rulemaking on most of the rules. Clearly, the Act imposed an unrealistic burden on these agencies. Informer: The D.C. Appeals Court recently vacated the proxy-access rule adopted by the SEC – a rule that would have opened up the company’s proxy statement to investor nominees for directors. What does this portend for the fate of many Dodd-Frank regulations? Do regulators need to do more cost-benefit analysis?
: Definitely, yes. In its opinion, the D.C. Circuit pointedly noted two similar decisions by the same court that had invalidated two other SEC rules due to the SEC’s failure to assess their economic effects adequately. This bodes well for similar challenges to controversial SEC rules, particularly those adopted by a 3-2 vote with strong dissents, as was the case here. It will likely prod the SEC to devote more effort toward doing the kind of economic analysis that the court has clearly held is required for new rules under the Administrative Procedures Act, the Exchange Act and the Investment Company Act.Informer: What does this ruling mean, in terms of proxy access for shareholder activists?
: The ball is now in the court of the SEC. It could appeal this decision to the full D.C. Circuit, but the unanimity of the decision may make that unlikely.
… The SEC may instead go back to the drawing board, and consider the same or a similar rule, based on a different and presumably stronger factual record. Whatever course the SEC takes on this, it seems unlikely that proxy access will be with us in the 2012 proxy season. It seems quite likely that the SEC will, in one way or another, undertake to complete a rulemaking on this subject, given that Congress, in Section 971 of the Dodd-Frank Act, expressly authorizes the SEC to require the inclusion of shareholder nominees in an issuer’s proxy materials.Informer: What should companies be doing to prepare for the backlog of Dodd-Frank regulations still to come? In your current practice, what are your clients most concerned about?
: Without a doubt, clients are most concerned about continued uncertainty, which affects many of their business decisions, their budgeting and, of course, their compliance approaches. Recall that this uncertainty was building throughout the legislative process that gave birth to Dodd-Frank, and now, more than a year after the legislation was enacted, much of it remains unimplemented.
It is not just the SEC and CFTC that have so much left on their plates. In the financial services industry, banks are worried about the unfinished business at the Federal Reserve, FDIC and Comptroller. Mutual funds are worried about many of the pending decisions by the Financial Stability Oversight Council.
Regulators have completed less than 20 percent of the 163 required rules that had statutory deadlines during the first year, and only about 12 percent of all 400 rulemaking requirements in Dodd-Frank. As the rulemaking drags on, it is becoming increasingly clear that it will take years before the full impact of Dodd-Frank is understood.Informer: Dodd-Frank has introduced a new rigor into executive compensation arrangements. You initiated this strong focus while at the SEC, having instituted then-controversial elements like Compensation Disclosure & Analysis. What direction do you think executive compensation and the behaviors it is supposed to engender will take, now that the new rules are in place?
: As to where the SEC is going next in this area, we can look to the currently proposed rules. Back in March, the SEC proposed rules to implement Section 952 of the Dodd-Frank Act that would require U.S. exchanges to adopt new corporate governance requirements for compensation committees. The rules would also require new disclosures in proxy statements regarding advice from compensation consultants – which would apply to all public companies, not just listed companies.
Neither Section 952 of the Dodd-Frank Act, nor the proposed SEC rules, mandate that any stock exchange require listed companies to have a compensation committee or have executive compensation approved by independent directors.
…By sticking closely to the text of Section 952 of Dodd-Frank, the SEC has left it to the exchanges to supply the details on important concepts, such as the new definition of “independence” for compensation committee members. Since the exchange rules will be subject to SEC approval, however, the SEC may yet play a significant role in the shaping of those rules, in addition to its suggestions and hints in the proposing release. The longer-term impact of these rules, including the clawback provisions, you can expect to see SEC enforcement actions around them.Informer: George Soros says he is closing down his hedge fund to outside investors because of looming new registration requirements. Some other hedge funds are doing the same thing. How is this trend likely to affect the financial system?
: It will not be surprising to see people and entities try to minimize their compliance costs by structuring around the rules as they unfold. In particular, many non-U.S. entities that could be affected are seeking ways to avoid these costs. The challenge for U.S. regulators will be to strike a balance between achievement of the law’s essential purpose, on the one hand, and the prevention of regulatory flight, on the other. Clear rules, with timelines provided well in advance to all of those affected, will be essential here.Informer: You stepped up the SEC’s involvement in global coordination. What impact is this having now, and what is in store for the future of international regulation coordination?
: This is an enormously important aspect of the SEC’s role. The recent financial crisis demonstrated anew the interconnectedness of markets around the world, and the importance of coordinated international responses. … A sign of the growing internationalization of markets is that in the years I was at the agency, the SEC brought more enforcement actions for foreign bribery than in all prior years combined since the Foreign Corrupt Practices Act became law in 1977. That growth trend is continuing today. Informer: What are the lessons from the financial crisis that you think have not been properly learned and heeded yet?
: It is probable that some of the consequences of financial reform will be unintended. We won’t know what they are for some time, but they will not be what the framers of the law had in mind.
By way of example, a driving element of the law has been to address the “too big to fail” issue. The authors of Dodd-Frank intended to reduce the risk that large firms might take excessive risk because they are in effect guaranteed to be bailed out in the event of failure. But whether the law and the eventual regulations implementing it achieve this result remains to be seen. While the Financial Stability Oversight Council has made this a central issue as it sharpens its mandate, it is not clear that the concept of “too big to fail” has been eliminated, along with the regulatory and market uncertainty that it creates. In my view, a key lesson of the recent crisis is that the freedom to fail – a cornerstone of risk taking in a well-functioning market – has to be restored.
To read more of Christopher Cox’s interview with Thomson Reuters Accelus, download a free copy of the Fall 2011 edition of Informer Magazine
. Chairman Christopher Cox served as the head of the SEC as part of a 23-year Washington career that included 17 years as a member of Congress from California and chairmanship of the Homeland Security Committee in the U.S. House of Representatives. He currently serves as a partner in the Orange County, California, office of Bingham McCutchen LLP, where he advises global companies on strategic issues, corporate governance, securities regulation and other business matters. Mr. Cox is a founding member of the Business Law Partner Advisory Board for Thomson Reuters Accelus.
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