Cleary Explores Appeals Court Split Over SEC Administrative Cases

On December 27, the United States Court of Appeals for the Tenth Circuit in Bandimere v. S.E.C.[1] found that the Securities and Exchange Commission’s (“SEC”) use of administrative law judges (“ALJs”) violated the U.S. Constitution. While the court’s opinion relies on a somewhat arcane question of administrative law—whether the hiring of SEC ALJs must comply with the Appointments Clause of the Constitution—its decision to set aside an SEC order imposing sanctions for securities laws violations raises significant questions about future SEC claims brought before ALJs rather than in federal courts, as well as prior adjudications.  With the D.C. Circuit … Read more

Shearman & Sterling Discusses Derivatives Regulation Under Trump

How will derivatives regulation change in the Trump Administration? During the campaign and since the election, President-elect Trump and his advisors, as well as key Congressional Republicans and other market participants, have suggested that aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), should be rolled back, or even repealed outright. Derivatives regulation, however, has not been the focus of much of the discussion around financial regulation more generally, and some market participants have suggested that it would not necessarily be feasible or desirable to roll back the Dodd-Frank reforms completely. It will likely be some time … Read more

Debevoise & Plimpton Explores the Outlook for Financial Reform Under Trump

Many expect Donald Trump’s inauguration as U.S. president and Republican majorities in both houses of the U.S. Congress will result in a revised financial regulatory framework. Preliminary indications from the Trump transition team have signaled substantial changes may be in the offing, although the exact contours of these changes remain unclear. In this Client Update, we review the potential financial regulatory changes that may take place in the legislative, regulatory and international areas. We focus on issues relevant for the banking industry, capital markets and Securities and Exchange Commission (“SEC”) enforcement.

We will continue to monitor developments in these areas … Read more

Shearman & Sterling Examines the Changing Fiduciary Duty Landscape in a Trump Presidency

The fiduciary standards for institutions and individuals providing investment advice throughout the retail investment and municipal securities markets are currently undergoing significant change. Following on the heels of the issuance of a final Department of Labor (the “DOL”) fiduciary rule is the pending effectiveness of new fiduciary standards for municipal advisors, and the expected release of a proposed uniform fiduciary standard for investment advisers and broker-dealers by the U.S. Securities and Exchange Commission (“SEC”). The election of Donald J. Trump as President of the United States, along with a Republican majority in both the House of Representatives and the Senate, … Read more

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The Case Against Repealing Title II of the Dodd-Frank Act

Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) represents a singular development in U.S. resolution law.  It provides a new regime, the so-called Orderly Liquidation Authority, for use in the event that a systemically important U.S. financial company encounters severe financial distress.[1]  Like other provisions in the Dodd‑Frank Act, Title II was designed as a response to perceived inadequacies in U.S. legal and regulatory regimes during the financial crisis.  Title II is intended to be available as an alternative to and substitute for a bankruptcy process, because a bankruptcy process was seen … Read more

Cooley Explains How Dodd-Frank May Come Under Fire

With Congress and the Presidency soon in Republican control, look for the Financial CHOICE Act (or perhaps an enhanced version) to be re-introduced in the next Congress.  The bill, sponsored by Jeb Hensarling, Chair of the House Financial Services Committee, was framed as a Republican proposal to reform the financial regulatory system necessary to undo the burdens of Dodd-Frank, which were characterized as distractions from the SEC’s basic statutory responsibilities. In addition to taking aim at much of Dodd-Frank, among other things, the bill places a heavier burden on proxy advisory firms, regulators and regulations generally and eases some other … Read more

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Quacks or Bootleggers: Who’s Behind Hedge Fund Regulation?

Attempts by U.S. federal officials to regulate corporate governance have been criticized by prominent scholars as “quackery.”[1] Major reforms like Sarbanes-Oxley and Dodd-Frank may in fact do far more harm than good. But what if these efforts at healing our financial system are more than just poorly designed and executed? What if, instead, they are achieving precisely what they were designed to achieve? What if they were designed not by quacks but by bootleggers?

In 1999, Bruce Yandle, emeritus dean and professor of economics at Clemson University, proposed a public-choice economics version of the old saying, “politics makes strange … Read more

John Coffee Headshot

Shareholder Activism in the Era of Trump: What Strategy Works?

In the approaching Era of Trump, we are likely to see much deregulation, reduced public enforcement, and possibly some curbs on private enforcement.  Corporate compliance efforts may also be downsized, and compliance officials may learn again to defer to the judgment of the entrepreneurs in the corporation’s profit centers.  If a bubble develops in financial stocks (as seems more than possible), some corporate debacles and scandals become predictable.  What defenses do shareholders have in this brave new world?

Here, Wells Fargo & Co’s decision to claw back a record $60 million from two senior executives ($41 million from CEO John … Read more

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SEC Investor Advocate Talks Dodd-Frank and Regulation’s Future

Today (November 16), we will consider the future of financial regulation and, more specifically, whether the Dodd-Frank Act went too far.[1].  I am I happy to share my views with you, but before I begin, I must give the standard disclaimer that my remarks are my own and do not necessarily reflect the views of the Commission, the Commissioners or my colleagues on the Commission staff.

The Dodd-Frank Act, of course, was adopted in the wake of the financial crisis—which, as you’ll recall, was no ordinary crisis.  As of January 2011, when the Financial Crisis Inquiry Commission issued

Read more

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Global Banks: Good or Good-Bye?

Prior to the 2008 financial crisis and the Great Recession, global banks were big, broad and borderless.  They operated as integrated groups.  Separate legal entities within a group were an afterthought: The results that mattered were those for lines of business and for the group as a whole.   Global banks were also considered good for growth, facilitating the allocation of capital to its most efficient uses.

The financial crisis changed that judgment.  Governments bailed out global banks, and global banks came to be seen as a source of instability.  Consequently, in 2009, G-20 leaders mandated officials to devise a new … Read more

Latham & Watkins Discusses New SEC Guidance on CEO Pay Ratio Rules

The staff of the Division of Corporation Finance of the Securities and Exchange Commission (SEC) has issued new guidance on the SEC’s rules requiring companies to disclose the pay ratio between their CEO and median compensated employee. The staff’s new Compliance and Disclosure Interpretations (the C&DIs) provide helpful clarity on how to determine the relevant employee population and the median employee for purposes of the ratio, although questions remain.

Background

In  August 2015, pursuant to Section 953(b) of the Dodd Frank Act, the SEC adopted the CEO pay ratio rules (the Rules), which added a new Item 402(u) of Regulation … Read more

Morrison & Foerster explains why CFPB Makes FinTech Headlines

The Consumer Financial Protection Bureau (the “CFPB” or “Bureau”) made headlines in FinTech on October 24, 2016. First, the Bureau released its first-ever Project Catalyst report on promoting consumer-friendly innovation (the “Report”). The Report summarizes the work conducted by Project Catalyst to date and sets forth in broad strokes some of the financial innovations that the CFPB is encouraging. While the Report does not represent new policy, it provides a helpful glimpse into the key developments in financial services that the Bureau is encouraging or monitoring.

On the same day, Director Richard Cordray addressed Money 20/20 in Las Vegas, Nevada, … Read more

Steven Schwarcz, J.D.
Stanley A. Star Professor of Law & Business
Faculty

Too Big to Fool: Moral Hazard, Bailouts, and Corporate Responsibility

There is an increasing worldwide focus on trying to end the problem of “too big to fail” (“TBTF”). Regulators are concerned that systemically important financial firms might engage in excessive risk-taking because they would profit from a success and be bailed out by the government in case of a failure. This is primarily a problem of moral hazard, that persons protected from the negative consequences of their risky actions will be more tempted to take more risks.

My new article, available here, argues that, contrary to accepted regulatory wisdom, the problem is exaggerated. The central evil of TBTF is … Read more

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Breaking Up (Banks) Is Hard to Do

The latest Wells Fargo bank scandal has rekindled debates about breaking up banks that are too big to fail, too big to manage or too big to comply.

Echoing the debate between Louis Brandeis and Teddy Roosevelt in the Progressive Era, politicians propose either to break up our huge banks — as Brandeis advocated — or to regulate them, which was Roosevelt’s position. Most Republican presidential primary candidates argued that, while the Dodd-Frank financial reform law overregulates small community banks, the law did not go far enough to eliminate the threat that the huge banks are too big to fail … Read more

Sullivan & Cromwell Discusses D.C. Circuit Ruling Invalidating CFPB Structure

On October 11, 2016, a panel of the U.S. Court of Appeals for the D.C. Circuit held that the Consumer Financial Protection Bureau (the “CFPB”) is “unconstitutionally structured” because its authority is vested in a single appointee who can be removed by the President only for cause.  To remedy this constitutional flaw, the Court severed the unconstitutional “for-cause” provision in the legislation (Dodd-Frank) that created the CFPB.  “As a result, the CFPB now will operate as an executive agency.  The President of the United States now has the power to supervise and direct the Director of the CFPB, and may … Read more

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SEC Settlements After Dodd-Frank

On September 23, U.S. District Judge William Pauley refused to approve a settlement between the CFTC and Deutsche Bank covering the bank’s failure to report swaps properly. Instead of rubber-stamping the settlement, the judge asked the parties for additional briefing. With that move, Judge Pauley followed in the footsteps of two of his colleagues in the Southern District of New York, judges Jed Rakoff and Victor Marrero, and several other district court judges around the country.

As I describe in more detail in an essay recently published in the Yale Law Journal Forum, “Securities Settlements in the Shadows,” and available … Read more

Debevoise & Plimpton Discusses SEC Anti-Retaliation Enforcement

Last week, the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) announced its second whistleblower retaliation case since the enactment of Dodd-Frank’s anti-retaliation provisions in 2011. The In the Matter of International Game Technology [1] case is also the first enforcement action to allege retaliation based on whistleblower activity that did not lead to a settlement of a substantive violation of the securities laws. The case is a stark reminder of the importance of implementing robust anti-retaliation policies that are consistently applied to alleged whistleblowers, even in those cases where the claims raised by the whistleblowers turn out … Read more

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Too Big and Unable to Fail

Financial regulation after the Dodd-Frank Act was enacted in 2010 has produced a blizzard of acronyms, many of which revolve around the basic “too big to fail” problem.  OLA, OLF, SPOE, and TLAC are new regulatory tools that seek to build a regime for resolving failures of systemically important financial institutions.  “Resolution” is the financial industry’s favored term for what most people would simply call “bankruptcy” or, more politely, “restructuring.”

The explicit goal of this new “resolution” regime is to enable a large financial institution (or SIFI, to use another favored acronym) to go bankrupt without a government bailout.  Just … Read more

Ropes & Gray discusses SEC Whistleblower Enforcement and Severance Agreements

On August 30, 2016, the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) reaffirmed its commitment to its whistleblower program by issuing the second largest award in its five-year history. While admittedly less dramatic than this $22 million payment, however, the Commission’s recent enforcement activity is similarly compelling evidence of the value that the agency places on its whistleblower program.

Specifically, on August 10 and August 16, 2016, the Commission announced settlements with two companies based on language in employee severance agreements that discouraged employees from reporting possible securities law violations to the SEC, including by restricting the employees’ … Read more

Davis Polk discusses Federal Agencies’ Report on Banks and Nonbank Affiliates

On September 8, the Federal Reserve, OCC and FDIC issued the long-expected report to Congress and the FSOC, as required under section 620 of the Dodd-Frank Act, regarding activities and investments of banks and their nonbank affiliates, which were defined collectively in the report as “banking entities” (the “620 Report”).  In addition to a comprehensive review and discussion of currently-permissible activities and investments of banking entities, that 107-page document includes a discussion by each agency of associated risks, applicable risk mitigation activities and legal limitations, and specific recommendations.  Below are our initial takeaways from the 620 Report.  We will circulate … Read more