Recent rulemaking under the Dodd-Frank legislation of 2010 and the new JOBS Act give a frightening window into the way financial reform regulation has fallen victim to highly charged battles between commercial interests and investor advocates.
The results of this clash do not bode well for the markets.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed after the financial crisis of 2007-2008, contains approximately 400 specific mandates, to be implemented by agency rulemaking, intended to “promote the financial stability of the United States by improving accountability and transparency in the financial system.”
Although the Securities and Exchange Commission bears the burden of issuing nearly 100 of these rules under strict statutory timelines, nearly two years after the passage of the statute, its progress has become hopelessly bogged down. A startling number — nearly two-thirds — of mandated regulations have yet to be released.
The high volume of rulemaking alone is not the chief culprit for this paralysis. Instead, industry groups opposed to Dodd-Frank from its inception have done a remarkably effective job of ensnaring commission financial reform rulemaking in legally unprecedented “cost-benefit” analysis.
The first blow was struck with a challenge by the Business Roundtable and Chamber of Commerce to the SEC's Dodd-Frank-mandated “proxy access” rule, intended to increase shareholders' ability to participate in corporate elections. After the commission issued a proposed rule on Nov. 15, 2010, the chamber sued the SEC in the U.S. Court of Appeals for the District of Columbia, arguing the SEC had failed to perform a sufficiently detailed economic analysis of the impact of the proposed rule. This argument was surprising in that the SEC had not previously been required to perform such an intensive analysis for statutorily mandated rulemaking. Moreover, a strictly monetary analysis of the impact of financial reform rules will almost inevitably skew against investor interests: While it is relatively easy to calculate costs associated with compliance, it is much more challenging to “monetize” systemic benefits such as financial stability or investor confidence.
On July 22, 2011, a three-judge panel of the appellate court struck down the rule, finding that the SEC had not properly considered the impact of the rule on capital markets, concluding its cost/benefit analysis “relied upon insufficient empirical data” and ignored “commenters that reached the opposite result.”
The proxy access rule was only the first to fall. After the commission issued a rule Aug. 22, implementing the section of Dodd-Frank designed to improve transparency and empower citizens of resource-rich countries to hold their governments accountable for the management of revenues derived from natural resources, industry interests saw another opportunity to halt rulemaking for a statute they were unable to defeat in the Congress.
On Oct. 10, the Chamber of Commerce and the American Petroleum Institute filed a petition arguing the SEC failed to adequately weigh the rule's costs and benefits. It also alleges the SEC “grossly misinterpreted its statutory mandate” in claiming that Dodd-Frank gave the agency no choice but to adopt the rule in the form that it did. The groups say the law requires companies only to provide a “compilation” of the payment data — and not a detailed list of every payment, as the SEC's final rule requires. The case was filed in both the U.S. District Court and the U.S. Court of Appeals, both in the District of Columbia, until it can be determined which court will have jurisdiction to hear the case.
As a result of the cumulative effect of these cases being brought, and the enormous pressures from business lobbyists and lawmakers, the SEC is now required to perform extensive economic analyses for every rule promulgated under Dodd-Frank, virtually guaranteeing new rules will be proposed at a snail's pace.
Given the demands for cost-benefit analysis of agency rulemaking under the investor-friendly provisions of the Dodd-Frank Act, investor advocates were curious whether the commission would be held to a similar standards in its rulemaking under the Jumpstart Our Business Startups Act, signed into law by President Obama in April. Unlike Dodd-Frank, the JOBS Act is effectively deregulatory rulemaking, weakening disclosure and accounting requirements intended to protect investors, in an effort to promote more small-company IPOs. Would the agency be required to perform a strict economic analysis of the costs these rollbacks would pose to investors?
Some early rulemaking under the JOBS Act suggests the answer, surprisingly, is no. Although the SEC is still struggling to meet its rulemaking commitments under Dodd-Frank, now more than 2 years old, some legislators already are arguing that the SEC has been too slow in issuing business-friendly rules under the brand-new JOBS Act. Under considerable pressure to act quickly, the commission issued its first JOBS Act related rule on Aug. 29.
The proposed rule, which would lift the ban on the advertising of private offerings to mom-and-pop non-accredited investors, was virtually bereft of any cost-benefit analysis, stating only that it “would likely reduce search costs associated with finding accredited investors who may be interested in a particular private offering, thus enhancing efficiency. The increase in the number of potential investors could result in greater competition among investors interested in investing in an issuer, which may result in a lower cost of capital for issuers.”
In this rulemaking, however, few industry commentators suggested that further economic analysis was necessary. Instead, it fell to consumer advocates and state regulators such as the North American Securities Administrators Association to point out that the proposed rule's ambiguities left investors exposed to danger.
Rulemaking that requires intensive economic analysis of only investor protection rules, while giving a free pass to rules favoring business interests, will inevitably skew the markets against investors. The irony is that, in the long run, economic growth depends on investor confidence — and without proper investor protections, it will be the businesses that ultimately pay the price. n