Dodd-Frank, the Senate, and the Executive Order – Part I

Early last Friday morning, using an unusual legislative procedure, the Senate voted to repeal a law that was part of Dodd-Frank. Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Act directed the Securities and Exchange Commission to issue rules requiring public companies (issuers) to include in their annual reports information regarding payments by that issuer to a foreign government, or the federal government, for the purpose of the commercial development of oil, natural gas, or minerals. This provision was only tangentially related to the heart of Dodd-Frank reforms. The purpose of this Dodd-Frank provision was to increase transparency, prevent corruption, and allow governments, across the globe, to be held publically accountable. In August, 2012 the SEC, as required, adopted Rule 13q-1, which immediately ran into hurdles.

In October 2012, a number of industry groups, including the American Petroleum Institute, filed suit against the SEC and a district court vacated Rule 13q-1, in part, finding that the exemptions provided by the Rule were arbitrary and capricious. This was not the end of the story. In 2014, Oxfam, along with others, filed suit to compel the Commission to promulgate a new final Rule as required by Dodd-Frank.  A revised 13q-1 went into effect on September 26, 2016 but public companies had until September 20, 2018 to comply.

Thus, the Senate’s action in repealing this provision of Dodd-Frank did not disrupt the mass of regulations that go to the most important parts of Dodd-Frank such as the safety and soundness of banks, new consumer protection laws, and derivative clearing. Unsurprisingly, this seems like the Republican majority flexing its muscles – the lion roaring. It hardly comes as a surprise that the Republican leadership does not like much of Dodd-Frank.

Just hours after the Senate’s action, the President issued an Executive Order setting forth the “Core Principles” for regulating the financial system of the United States. On its face, there does not appear to be a significant departure from previous Republican administrations that view regulation as inefficient and an encumbrance to economic growth and U.S. competitiveness. Yet the Core Principles also reconfirm that future federal bailouts of banks, will not occur due to the problem of “moral hazard.” This, of course, was one of the very purposes of Dodd Frank.  In addition, the principles seem to subscribe to the importance of disclosure to prevent information asymmetries which is in fact a long standing fundamental concept in U.S securities law.

This executive order, however, combined with the January 30th Executive Order intended to reduce regulation, and the federal hiring freeze order, should give us significant cause for concern. My guess is that much of the Volker Rule will not go into effect. Moreover, there is real likelihood that the SEC and CFTC will once again become anemic through lack of funding. Issues of funding are much less dramatic than pre-dawn legislative sessions and flashy executive orders but starving regulators is effective. All we have to do is remember the Madoff scandal.

I fear that we will once again enter the cycle of deregulation-crisis-re-regulation. This, of course, is exactly what led us into the Financial Crisis of 2008.

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