Which Dodd-Frank rules will stay? Which ones will go?

By Gary Larkin, Research Associate, The Conference Board Governance Center

President Barack Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010. (Photo: Lawrence Jackson)

With a flurry of executive orders in his first two weeks in office, President Trump made one thing absolutely clear. The Dodd-Frank Wall Street Reform and Consumer Protection Act passed by Democrats in 2010 will soon be reformed itself by the current Republican majority.

But the big question for boards is which corporate governance–related Dodd-Frank rules will be eliminated and which will stay.

Getting to an answer requires first understanding the process. For starters, since the SEC is an independent agency, simple executive orders cannot repeal its statutory rules. That would take an act of Congress, which how those rules were written in the first place. However, under new leadership the SEC can reconsider the enforcement of rules it has written. With that said, consider what has transpired over the past three weeks:

• Jan. 30, 2017: President Trump issues the first of two executive orders related to the Dodd-Frank Act. It calls on regulatory agencies to eliminate two regulations for each new one issues, and for the cost of planned regulations to be “prudently managed and controlled through a budgeting process.” The White House later clarified that order did not pertain to independent agencies such as the SEC.
• Jan. 31, 2017: Acting SEC Chair Michael Piwowar requeststhe SEC staff to reconsider if the Division of Corporate Finance’s 2014 guidance regarding the conflict minerals disclosure rule is still appropriate and whether or not additional relief is needed. He asks that companies given 45 days to comment on the reconsideration.
• January 2017: The U.S. House of Representatives approves the SEC Regulatory Accountability Act, which would require the commission to perform a cost–benefit analysis on new and existing rules.This comes on the heels of two other bills passed by the House in recent years: the 2016 Midnight Rule Relief Act and the 2015 REINS (Regulations from the Executive in Need of Scrutiny) Act. If signed into law, they would require congressional approval of any new rule costing more than $100 million in compliance spending, and require all federal agencies to carefully scrutinize the purpose, costs, and benefits of new rules.
• Feb. 3. 2017: The President issues the Presidential Executive Order on Core Principles for Regulating the United States Financial System. While light on details, the order spells out seven principles that will guide the Trump Administration on financial regulation — among them, a requirement that regulations be efficient, effective, and appropriately tailored. It also includes a directive to the treasury secretary to meet with the Financial Stability Oversight Council (created in the 2008–2009 financial crisis) to decide which “existing laws, treaties, regulations, guidance, reporting and record-keeping requirements” promote and support the new principles.
• Feb. 6, 2017: Piwowar asks SEC staff to reconsider implementing the CEO pay-ratio rule because he has been informed that some companies are encountering “unanticipated compliance difficulties that may hinder them in meeting the reporting deadline” this year. He has also requested a public comment period of 45 days for companies to report any compliance difficulties.
• Feb. 6, 2017: Jeb Hensarling (R- Texas), chairman of the House Financial Services Committee announces the Financial Choice Act as its alternative to the Dodd-Frank Act. The legislation lays down specifics for repealing key parts of Dodd-Frank. (This legislation had been approved in the last Congressional session, but never made it to President Obama’s desk.)

Against the backdrop of all this activity, consider that the SEC still only has two sitting commissioners. Its previous chair, Mary Jo White, resigned Jan 20. While the President has nominated Sullivan & Cromwell M&A Partner Jay Clayton to replace White, the word is that it will be at least a couple of weeks before the Senate confirms him.

So what does this mean for public company boards in 2017?

According to Doug Chia, executive director of the Governance Center, one thing is clear: the Trump administration will prioritize cost–benefit analysis of any proposed rule, according to our Executive Director Doug Chia.

“We have more and more regulations that create more and more costs on public companies to the point where becoming a public company has become too much of a burden,” Chia told Agenda in its January 30 issue (registration required). “The cost–benefit analysis has tipped in favor of staying private or going public in some markets outside of the U.S.”

Advice for directors

Here is what some law firms that are members of The Conference Board have been advising their clients regarding the Trump administration anti-regulation actions:

• Weil Gotshal & Manges (Feb. 6) expects Congress to take the President’s lead and reform parts of the Dodd-Frank Act:
  “The [Core Principles] executive order directed the Secretary of the Treasury to consult with the heads of key financial regulatory agencies and report to the President on the extent to which existing laws, regulations and policies promote or inhibit Federal regulation of the US financial system in a manner consistent with the Core Principles. While the President’s order did not specifically name the Dodd–Frank Wall Street Reform and Consumer Protection Act and the regulations promulgated thereunder, it is widely assumed that part of the order’s intent is to identify provisions of that Act that are viewed as inconsistent with the Core Principles as the first step of an effort to repeal or modify them.”
• Cleary Gottlieb Steen & Hamilton (Jan. 17) cautioned that companies should be ready to address almost certain regulatory changes:
  “Identify the areas of potential exposure to regulatory change or government actions. It is tempting to start by listing the topics on which political rhetoric has focused, but the list is long (tax reform, trade policy, health insurance, financial regulation, environmental regulation…) — and in most areas it is too soon to predict what specific measures a new administration might take. It might be wise to start instead with the company’s own profile of regulatory and governmental challenges and ask internal specialists to identify the sensitivities, think outside the box about what could happen, and call out areas where change could be sudden.”
• Wachtell Lipton Rosen & Katz (Jan. 7) focused on compensation-related Dodd-Frank rules that could be rolled back:
  “Companies should closely monitor statutory and regulatory developments in the new year. The president-elect and Congressional leaders have articulated an ambitious agenda to reduce business regulations, simplify the tax code and lower tax rates. Any of these changes could have a significant impact on compensation design. Stay tuned…We continue to await final regulations regarding clawbacks, disclosure of pay for performance, disclosure of hedging by employees and directors and financial institution incentive compensation, although the fate of these rules remains uncertain in light of the 2016 election results.”
• Latham & Watkins (Dec. 1) published a memo laying out the disclosure ramifications for executive compensation rules this year, with the caveat the everything could change under Trump:
  “President-Elect Donald Trump previously criticized Dodd-Frank, even suggesting he would consider repealing it. Congressional repeal of Dodd-Frank in part or in whole, or a newly constituted SEC reconsidering any of the SEC’s proposed or final Dodd-Frank rules, could affect some or all of these executive compensation-related rules. Whether (or when) any action will be taken on any of these rules is unclear; we therefore recommend that companies continue monitoring and preparing for these upcoming requirements.”

The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.