SEC Punts on Unfinished Dodd-Frank Agenda, Thus Avoiding Congressional Review Act

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.

The chair of the Securities And Exchange Commission (SEC), Jay Clayton, who assumed his position in May, has lost no time in signing onto a deregulatory agenda, as I discussed most recently in Doubling Down on Deregulation: SEC Extends JOBS Act Benefit in Elusive Quest to Goose IPO Market.

As its website spells out, the SEC has a tripartite mission: “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation,” according to this basic summary, What We Do, and Clayton pledged in his confirmation hearings to focus on the third, capital formation objective.

Regulatory Priorities

Like other federal agencies, the SEC is required to submit its regulatory agenda to the Congressional Budget Office twice each year. The WSJ reported earlier this month in Regulators Drop Pursuit of Banker, CEO Pay Restrictions:

Several regulators have dropped pursuit of a long-running plan to restrict bonuses on Wall Street, as part of a wider effort to stop working on unfinished rules put in place after the financial crisis.

…

The six agencies delivered a new proposal in April 2016, but that was too late to push through a final version of the rule before President Donald Trump took office in January.

New regulatory agendas unveiled Thursday by the SEC and others show leaders excluded any mention of the restrictions, including longer deferment periods for bonuses and the amount of time payouts are subject to potential clawbacks. The proposal had targeted executives at some of the nation’s largest financial firms, including investment managers and mortgage-finance companies Fannie Mae and Freddie Mac, but the stiffest rules were reserved for big banks.

Now, this doesn’t exactly come as news to anyone who’s been paying attention, as I wrote last year in Mary Jo White Leaves Behind a Weakened SEC for Trump to Weaken Further.  The ability to pursue a firm deregulatory agenda — including ignoring or punting on incomplete initiatives  would be seriously complicated if the SEC under previous chairs Mary Shapiro and Mary Jo White had been more vigorous in pressing the agency to make rules.  It’s far easier not to make rules than it would be to rescind those already in place.

Instead, failure to complete regulation in a timely way has handed off an unfinished agenda fto a Clayton-headed SEC.  And even before that, I should point out that according to the WSJ account:

The SEC’s updated agenda was crafted in the spring, when an acting executive, Michael Piwowar, ran the commission. Mr. Piwowar, who is back to serving as an SEC commissioner, said earlier this year that he wouldn’t prioritize Dodd-Frank rules.

The WSJ article also mentions some other significant omissions from the SEC regulatory agenda as set forth when Piwowar was de facto in charge:

The newly released SEC agenda also dropped mention of a rule that would require public companies to disclose a standardized metric comparing executive pay with stock performance.

It also omits any mention of other unfinished Dodd-Frank rules that govern trading of swaps, a type of contract that allows investors to bet on asset prices without owning the underlying stock or bond. The global swaps market is dominated by large banks such as Goldman Sachs Group Inc. and Citigroup Inc.

….

The list also dropped two measures that began under former SEC Chairman Mary Jo White, who was appointed by Mr. Obama. One rule would make it easier for shareholders to vote on board candidates nominated by investors, as opposed to the slate backed by the company. Another would have required companies to disclose more about the racial and gender diversity of corporate boards. Ms. White urged businesses to do more to recruit women and minorities to their boards, saying the “low level of board diversity in the United States is unacceptable.”

What Will Clayton Do?

Now, I admit that I’m not sure exactly what the scope of the  agenda will be that Clayton et al will pursue, going forward. Despite his record thus far, he might  intend to take up some of these issues (or, for that matter, other pending or long-deferred issues, or even an entirely different set of issues entirely).

In fact, I have written that though I myself wouldn’t have chosen Clayton as my first choice candidate to head the agency, he certainly was much more qualified to hold his position than many other Trump appointees (see my posts, Taking on Trump’s Agenda: Nine Tough Questions for SEC Chair Nominee Jay Clayton on the Eve of His Confirmation Hearings andTrump Selects Jay Clayton, S & C Partner, to Head SEC).

As the WSJ points out:

Mr. Clayton took office in May, so the agenda could further change in the fall when he issues an update.

Let’s assume for the sake of argument that Clayton does try and pursue some of these overdue rule makings (of course, as an aside, I must mention that  to do this, Trump would likely need have to nominate other commissioners to fill the two empty SEC slots, and each would need to be confirmed, as Piwowar would almost certainly vote against any stringent new rules).

But indulge me in my hypothetical: what if Clayton succeeded in getting the agency to make any tough new rules? Well, these  would be vulnerable to being overturned by a hostile Congress, using the authority available under the Congressional Review Act (CRA). Just last week, the House of Representatives passed a CRA resolution of disapproval repealing the the Consumer Financial Protection Bureau ’s (CFPB) mandatory arbitration ban, as I wrote in House Votes to Overturn CFPB Mandatory Arbitration Ban. Companion legislation has been introduced in the Senate, and once that is approved, as expected, Trump has pledged to sign the final bill, thus overturning the agency’s ban.

Once that happens, as I’ve written in Trump and Congress Use Congressional Review Act to Roll Back 14 ‘Midnight’ Rules; More to Follow?:

Crucially and importantly, once the regulation has been successfully voided, the regulatory agency is barred from reviving the rule in “substantially the same form”– forever–in the absence of new legislative authority.

CRA authority is the gift that keeps on giving– a sword of Damocles hanging over the heads of any regulators who choose to pursue any tough regulatory agency.

Enforcement Agenda

It’s still too soon to expect the two new SEC co-directors of enforcement Steven Peikin and Stephanie Avakian to blaze a clear enforcement trial (although readers might want to refer for more background to my earlier post on this issue, Two Questions for the Next SEC Director of Enforcement).

I did want to note, however, that the SEC announced two whistleblower settlements this week. In the first, made public on Tuesday,  as reported by the FCPA.blog, SEC announces $2.5 million whistleblower award to government employee, announced Tuesday, the agency made its first ever award to an employee of a domestic agency– which is elaborated on in the agency’s award order

In the second, announced on Thursday, the FCPA blog reported,  SEC awards whistleblower $1.7 million; this award went to a company insider. The SEC usually takes a noisy victory lap whenever it makes an award and with the most recent award, has now awarded $158 million to 46 whistleblowers since the first award was granted in 2012. Readers won’t be surprised to find that the full potential of the whistleblower program hasn’t been tapped– no doubt a feature, not a big, as I previously discussed in SEC Takes Victory Lap for Pathetic Performance of Whistleblower Program.