In 2011, the Securities and Exchange Commission (SEC) introduced a Whistleblower (WB) program as part of the Dodd-Frank Act to protect investors through greater deterrence of securities law violations and more effective enforcement. The program offers financial incentives to provide original information that leads to a successful enforcement action. SEC officials have called the program a “game changer,” improving their ability to detect illegal conduct and speed investigations with fewer resources. Since the program’s introduction, the SEC has received over 18,000 tips, with the highest number coming in three categories: corporate disclosures and financials (financial reporting fraud); Ponzi schemes … Read more
Early 2018 will likely see the most significant progress on reforming the Dodd-Frank Act (“DFA”) since its passage in 2010 thanks to four key efforts: the Financial CHOICE Act and activity in the House Financial Services Committee, an appropriations effort, President Trump’s executive actions, and bipartisan legislation in the Senate.
The Reform Efforts
Last June, the Financial CHOICE Act (H.R. 10) passed the House of Representatives by a party line vote of 233–186. This moved the bill to the Senate, where it would have required 60 votes for passage. At that time, the Senate had 52 Republicans and … Read more
In recent years, there has been an increase in the number of firms opting to either forgo the public equity market or exit the market in favor of private financing. Increasingly, financing for private firms comes from private funds, such as private equity, venture capital, and hedge funds. In 2015, private funds owned stakes in over 7,500 firms and had over $4 trillion in capital under management. This amounts to a significant portion of the overall economy relative to the total U.S. market capitalization of $25 trillion.
As the privately-held sector of the economy grows, the financial … Read more
An often-over-looked aspect of regulation is how agencies are organized. Regulatory agencies for many industries, including banking, pharmaceuticals, mining, and agriculture, rely on a mix of centralized decision-making and delegated monitoring. For instance, in the case of banking, federal agencies design regulations in Washington, D.C. but monitor banks at the local level by utilizing semi-autonomous field offices.
A major advantage of this dispersed presence is that it allows local examiners and supervisors to interact with regulated firms more frequently and to collect “soft information” about firms’ performance that is often imperfectly captured through accounting-based reporting measures. The approach may, however, … Read more
Bank failure was almost unthinkable in Europe long before “too big to fail” became a byword for U.S. regulatory policy on big banks. But the 2007−2009 global financial crisis, which for some countries grew to a full-blown crisis, made the unthinkable a real possibility.
U.S. and EU regulators were responsible for much of the increase in bank size and concentration over the previous three decades, and the crisis forced them not only to contemplate allowing banks to fail, but to plan for banks’ orderly demise. To that end, they have proposed and implemented remedies for the too-big-to-fail, or TBTF, problem. … Read more
Whistleblowers play a significant role in detecting corporate fraud. For example, recent high-profile financial frauds such as the Enron scandal and Bernard Madoff’s Ponzi scheme were brought to light by whistleblowers. To encourage more whistleblowers to come forward, the Securities and Exchange Commission (SEC) implemented in 2011 the Dodd-Frank whistleblower program, which provides enhanced protection and financial rewards to whistleblowers. According to the program’s 2016 annual report, the SEC received over 4,200 tips for the fiscal year 2016 and has awarded more than $111 million to 34 whistleblowers since the inception of this program. In a recent paper, I … Read more
An October 2017 Treasury Department report on the asset management and insurance industries includes an important—and fundamentally flawed—recommendation that could change the way U.S. regulators monitor risk in the financial system. The Treasury report recommends that regulators focus on identifying and overseeing potentially risky financial activities rather than systemic firms like AIG, Lehman Brothers, and Bear Stearns.
This proposal, long favored by the insurance sector, would represent a sharp departure from U.S. and global regulators’ approach to systemic risk since the financial crisis. When Congress created the Financial Stability Oversight Council as part of the Dodd-Frank Act, it gave the … Read more
Item 402(u) of Regulation S-K was adopted in 2015 to implement the pay ratio disclosure provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and will require pay ratio disclosure with respect to the first fiscal year beginning on or after January 1, 2017 (i.e., such disclosure will be required during the 2018 proxy season). The required disclosures consist of the total compensation of the registrant’s principal executive officer, the median total compensation of the registrant’s employees other than its principal executive officer, and the ratio of the first of these amounts to the second.
One … Read more
On June 8, 2017, the House of Representatives passed, by a 233-186 vote (with all Democrats and one Republican voting against), the Financial CHOICE Act of 2017, a bill principally designed to reverse many features of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). The House Financial Services Committee majority has provided both an executive summary and a comprehensive summary of the current bill. It is unclear at this time what action the U.S. Senate will take with regard to the bill in its current form.
While the vast majority of the bill relates to the … Read more
Notwithstanding decidedly hostile testimony last month from this humble columnist, the U.S. House of Representatives will soon pass legislation (probably on a strict party-line basis) entitled, “The Financial CHOICE Act of 2017” (H.R. 10) (which acronym stands for “Creating Hope and Optimism for Investors, Corporations, and Entrepreneurs”). Despite this cutesy and innocuous title, the CHOICE Act proposes dangerous and radical surgery that would gut those provisions of the Dodd-Frank Act that seek to prevent the failure of a single major bank from setting off a chain reaction that could bring down all interconnected banks. Indeed, the Act reads as … Read more
Tucked into the Financial Choice Act (FCA), the recent endeavor in the House of Representatives to overturn significant segments of the Dodd-Frank Act, was an entirely unrelated provision. Section 844 of the FCA proposed a number of changes to Rule 14a-8, including tougher eligibility standards. To submit a proposal, shareholders would have to own at least 1 percent of a company’s outstanding voting shares continuously for three years. Instead of holding around 15 shares of Apple for 12 months, the proposed standards would require something closer to 5 million shares for 36 months. Instead of acquiring $2000 worth … Read more
Attacks on the authority of the Financial Stability Oversight Council (“FSOC”) to designate non-bank financial firms as systemically important, and thus subject to the Fed’s oversight, are misguided.  Such authority is essential to the long-term maintenance of financial stability, because financial intermediation will increasingly move outside the current regulatory perimeter. The most effective way for FSOC to use designation authority, however, is prospectively: to negotiate size and regulatory constraints with firms to avoid designation, because the optimal number of additional systemic firms is zero.
Historically, financial crises have been of two general types: foreign exchange and domestic banking. A … Read more
We may stand at the threshold (or is it precipice?) of repeal of important parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”) in the House of Representatives. (Prospects for repeal in the Senate seem much dimmer.) At the time of its enactment in 2010, the Dodd-Frank Act was regarded as the most important financial reform legislation since the time of the Great Depression. Now, scarcely seven years after its enactment, significant elements of the Dodd-Frank Act are targeted by the Republicans in the House of Representatives for outright repeal or significant modification in the … Read more
The Financial Stability Oversight Council is the only regulatory body in the United States with an express mandate to “identify risks to the financial stability of the United States” and to “respond to emerging threats to the stability of the United States financial system.” But the FSOC is not a stand-alone agency; rather it is a council of regulators, lacking sufficient staff or resources to operate on its own. To function, the FSOC must leverage the expertise of its component agencies – including the Securities and Exchange Commission.
There have been several subtle (and not-so-subtle) tugs-of-war between the FSOC and … Read more
A federal court in Utah recently held that the Securities and Exchange Commission may bring an enforcement action based on allegedly foreign securities transactions involving non-U.S. residents if sufficient conduct occurred in the United States.
The March 28, 2017 ruling in SEC v. Traffic Monsoon, LLC (D. Utah) appears to be the first decision squarely resolving whether the Dodd-Frank Act succeeded in allowing the Government to pursue such claims. The court recognized that the Act’s grant of “jurisdiction” to federal courts over enforcement actions relating to non-U.S. securities transactions had inartfully responded to the Supreme Court’s ruling in Morrison v. … Read more
Bailing out big financial institutions during the financial crisis was unpopular from the beginning. It was done in part because the bankruptcy code provision for the resolution of big institutions was widely considered inadequate to preserve the nation’s financial stability. Congress approved Title II of Dodd-Frank in 2010 to provide better safeguards by enhancing the FDIC’s authority and creating the Orderly Liquidation Fund. However, the changes remain unpopular in the financial world. Title II opponents in Congress now propose amending the bankruptcy code to include a new Chapter 14 to create special provisions for the bankruptcy of large … Read more
In his statement announcing the appointment of Jay Clayton to run the Securities and Exchange Commission (SEC), President Donald Trump said that “we need to undo many regulations which have stifled investment in American businesses, and restore oversight of the financial industry in a way that does not harm American workers.” Taken together, President Trump’s emphasis on deregulation, his statement in connection with Clayton’s appointment and Clayton’s professional experiences indicate a clear intention to shift the SEC’s agenda in terms of both regulation and enforcement priorities.
Leadership changes throughout the SEC will position the agency to implement these changes this … Read more
One of the most elegant legal innovations to emerge from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is the FDIC’s Single Point of Entry (SPOE) initiative, whereby regulatory authorities will be in a position to resolve the failure of large financial conglomerates (corporate groups with regulated financial entities as subsidiaries) by seizing a top-tier holding company, down-streaming holding company resources to distressed subsidiaries, wiping out holding company shareholders while simultaneously imposing additional losses on holding company creditors, and allowing the government to resolve the entire group without disrupting business operations of operating subsidiaries (even those operating … Read more
Less than two weeks into the new congressional session, the U.S. House of Representatives passed by a vote of 239 to 182 the Commodity End-User Relief Act1 (the Bill or House Bill), marking the first step by the new post-election Congress to pare down elements of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act (Dodd-Frank). The Bill would reauthorize the Commodity Futures Trading Commission (CFTC or Commission) for five years, at an annual budget level that would be unchanged from last year.2 Many key provisions in the House Bill, including some added on the House floor … Read more
“What does Sarbanes-Oxley mean? That’s when two members of U.S. Congress fiddle and half a million accountants in Europe start dancing.”
President Donald Trump pledged during his electoral campaign to repeal some of the reforms that came about after the 2008 financial crisis, including the Dodd-Frank Act of 2010, declaring that the coming administration would seek to remake the way the U.S. oversees the financial sector. This has led some commenters to go even further back in time and call for the repeal of the Sarbanes-Oxley Act of 2002 (‘Sarbanes-Oxley”).