Dodd-Frank Rules Slow at SEC After Court Cost-Benefit Challenge

Less than halfway through the process of implementing the 2010 Dodd-Frank Act, the pace of rule-writing by the U.S. Securities and Exchange Commission has slowed by about half.

The agency’s five commissioners haven’t met once in the last four months to approve or propose regulations required under Dodd-Frank, designed to curb the kind of risky practices that fueled the 2008 financial crisis.
Enlarge image SEC Chairman Mary Schapiro

SEC Chairman Mary Schapiro told reporters in Washington last month, “It’s easier to propose rules than it is to adopt them.” Photographer: Joshua Roberts/Bloomberg

SEC Chairman Mary Schapiro acknowledged the slowdown, describing it as a “natural lull” after an initial gush of proposals.

“It’s easier to propose rules than it is to adopt them,” Schapiro told reporters in Washington last month, particularly after a court rejected one agency rule over its costs.

The rule-making holdup is extending a period of uncertainty for affected firms -- some welcome the delay of unwelcome regulations, others would prefer clarity.

Tom Quaadman, vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, described the law as imposing “impossible deadlines.”

“They’ve given them a 2,400-page piece of legislation that really directs the regulators to do all the hard work,” Quaadman said.

Among the rules in limbo are the so-called Volcker rule to ban banks’ proprietary trading, restrictions on asset-backed securities deals, and forcing firms to disclose whether manufacturing metals were mined in war-ravaged parts of Africa.
Financial Revamp

Enacted in 2010, Dodd-Frank requires U.S. regulators to write hundreds of new rules to revamp how the financial sector does business, and more of those rules were assigned to the SEC than any other agency.

In the first year after the law’s passage, the agency voted to approve 108 proposals, adoptions and rule concept releases, according to data compiled by Bloomberg, most of them related to Dodd-Frank. That’s an average of nine per month.

Since the law’s one-year anniversary July 21, the register has recorded only 39 rulemaking SEC votes, or about 5.3 a month, the data show.

Much of the recent activity has taken place behind closed doors, adding to the appearance of a slowdown. Since Oct. 26, the agency has adopted only nine rules and did so without holding a single public meeting, conducting the votes by paper ballot.

Schapiro offered several explanations for the SEC’s slower pace, including the complexity and high volume of public comments on recent rules, and the fact that a new commissioner joined the five-person panel last November.
Rule Rejected

The most important factor cited both by Schapiro and agency observers, however, is legal. Last July, the U.S. Court of Appeals rejected an SEC rule that would have made it easier for shareholders to insert board candidates onto public-company ballots, saying the agency failed to adequately assess the costs.

The rejection of the so-called proxy access rule made all future SEC rules vulnerable to a similar challenge, forcing Schapiro and her agency to redouble efforts to study cost- benefit effects.

“We are clearly taking more time on cost-benefit analysis,” Schapiro said.

The court decision was “like sticking a two-by-four in the spokes” of SEC rulemaking, said Lynn E. Turner, a former chief accountant at the agency who is now managing director of Litinomics Inc., an economic and legal consulting firm. “I think it’s going to get worse, not better.”

Congress may exacerbate the problem, he noted: A House committee recently approved a bill that would demand a more rigorous cost-benefit justification for each rule.
Two Votes

The SEC -- like other U.S. agencies -- uses a two-step process for writing and approving rules. The first stage is to issue a proposal and then invite public comments; the second stage is to adopt the final version. The commission votes on both stages.

So far the agency has proposed about 75 percent of its Dodd-Frank rules, and completed about 20 percent of them.

“We are currently reviewing thousands of comments from some of the proposals we issued to ensure that we get the final rules right,” said John Nester, an SEC spokesman, in a statement.

Over the same timeframe, another agency working to implement Dodd-Frank, the Commodity Futures Trading Commission, has managed to accelerate its rulemaking. According to the Federal Register, the CFTC proposed or adopted about seven rules a month in the first year after Dodd-Frank and 10.2 per month since then. Though both agencies are focusing on Dodd-Frank work, including some joint rules, the rulemaking isn’t always comparable.
Financial Crisis

Some of the SEC’s delayed rules strike at the roots of the 2008 crisis. One example is a rule that would ban firms from designing asset-backed securities deals that put their interests in conflict with investors. The SEC didn’t propose the rule until September, five months after the law said it should be adopted. The proposal’s comment period was extended twice; the commission has yet to schedule a final vote.

Other rules are being drafted and revised in coordination with other regulators, complicating the process further. Those include the so-called Volcker rule to ban proprietary trading at banks, the risk-retention rule forcing lenders to keep a stake in loans they bundle and several rules defining new swaps market oversight.
Conflict Minerals

Among SEC-only measures delayed by the slowdown is a Dodd- Frank rule requiring companies to trace the origins of metals linked to violence in central Africa.

“It is critically important the SEC quickly finalize the rule,” U.S. Senator Patrick Leahy of Vermont and six other Democratic lawmakers wrote to Schapiro on Feb. 16. With a rule in place, “the smuggling that has emerged will become less economically viable, and the people of central Africa will benefit from further reduced violence and increased economic opportunities.”

The SEC is now almost a year past the congressional statutory deadline for a similar rule to require oil, gas and mining companies to disclose payments to foreign governments for access to resources, said Ian Gary, a senior policy manager at Oxfam America, the humanitarian group’s U.S. arm.

Every year of delay “is another year that people go hungry and have a lack of education and schools because oil and mining revenues aren’t being used properly,” Gary said.

The regulator is also working on assigning broker-dealers a new standard for dealing with retail clients -- a fiduciary duty to parallel the standard that investment advisers work under.

In April, that rule was moved from the agency’s Dodd-Frank working calendar to a catch-all category: “Dates still to be determined.”