Tags: White | House | Dodd-Frank | regulations

SEC Chairman White Wows House Committee — Part II

By    |   Thursday, 30 May 2013 02:34 PM

Wednesday's article described the atmospherics of the first appearance by new Securities and Exchange Commission (SEC) Chairman Mary Jo White and set forth the major issues House Financial Services Committee members raised during their lengthy questioning of White.

She was treated with great deference by legislators from both parties, even as they criticized the agency and aggressively pushed the agendas of constituents and clients. The overall impression is that having enacted the Dodd-Frank Act almost three years ago, Congress has encountered predictable resistance from trade associations representing the very financial institutions that caused the 2008 episode of the ongoing financial crisis, and perversely, Congress is taking the side of the industry against the regulators who are supposed to implement Dodd-Frank.

One of the principal reasons the financial crisis has persisted for more than four decades is that whenever the crisis flares up, Congress enacts new laws that grant new powers to the same regulators who failed to take needed action to curb industry excesses.

Then when the clamor dies down, Congress puts aside the laws and regulations and sides with the industry groups that contribute to their campaigns and that represent segments of the industry where the legislators worked before coming to Washington.

In the immediate aftermath of the 2008 episode, the industry found it necessary to offer apologies of varying degrees of sincerity for having brought down the nation's economy.

Somewhere between then and now, industry councils to which I am not privy evidently decided it was safe to change tactics and to present the industry, led by the 'too big to fail' banks that were rescued by government bailouts, as the victim of the scenario and to blame the government for interfering with their work as lenders and job creators.

The signal event in this campaign took place when Jamie Dimon, the notorious still chairman and CEO of JPMorgan Chase who speaks for the industry publicly, demanded that Federal Reserve Chairman Ben Bernanke tell him whether he had "bothered" to consider the "cumulative impact" of the regulations mandated by Dodd-Frank.

Dimon had conveniently decided to ignore the fact that Dodd-Frank and its regulations provided needed cover for the generous bailouts that keep his and the other zombie banks in business as the authorities at the Treasury and regulatory agencies peddled the story that the reason the crisis occurred was that there was no agency such as the Financial Stability Oversight Council (FSOC) to coordinate their efforts, no research arm, such as the Office of Financial Research (OFR), to inform the FSOC and no authority to regulate risky activities of non-banks, which the bankers decided to blame for the crisis, starting with attaching to them the spooky label of "shadow banks."

The remainder of this article will set forth some specific examples of issues raised by embers on behalf of interest groups opposed to the implementation of Dodd-Frank or seeking special treatment under the Act:

1. Credit rating agencies. Several members charged that credit rating agencies (this would be primarily Moody's, Standard & Poor's and, to a lesser extent, Fitch) were major contributors to the 2008 crisis because they gave AAA ratings to mortgage-backed securities (MBS) that turned out to be junk. Actually, they were worse than junk, because junk can be a sound instrument that pays a higher yield, whereas many AAA-rated MBS tranches turned out to be worthless.

Dodd-Frank calls for regulators to eliminate regulatory requirements for ratings to be used, for example, as standards for validating investments. White acknowledged that the SEC itself has not finished this task. Also, Brad Sherman, D-Calif., asked when the SEC would implement a provision calling for the SEC to create rotating panels of rating agencies, so that the agencies cannot be selected by issuers of securities.

White responded that the agency is working on it. (Ironically, if the SEC establishes such a program, it will indirectly end up implicitly putting its imprimatur on the work of rating agencies.)

2. Decimalization. Small public companies have been pressing the SEC to conduct a pilot program to study the feasibility of allowing the companies to set their own tick sizes for trading of their stocks. Theoretically, this would ensure that broker-dealers would be able to receive a spread large enough to provide coverage of the stocks.

White responded that the SEC is waiting for results of a recent roundtable on the issue to come in and be evaluated by the staff. (Ironically, such a program would implicitly validate the research products of broker-dealers that proved so problematic during the dot-bomb bust of the late 1990s. I monitored the roundtable and heard an SEC staff member state that the agency is by no means committed to conduct a pilot study of tick sizes, because of the difficulty of designing such a program and evaluating the results.)

3. Market structure. A couple members asked how the SEC is progressing on the study of the impact of so-called "dark pools" and other issues relating to the conduct of trading. White responded that the agency put out a concept release in 2010 and has been working on the issue ever since.

4. Proxy access. A provision of Dodd-Frank, sponsored by Maxine Waters, D-Calif., that would allow shareholders of companies to use proxies to propose nominees to corporate boards has been subjected to a successful court challenge by industry opponents.

I would observe that the whole corporate governance process is less useful to investors than they might hope, as witnessed in the recent failure to split the CEO and chairman positions at JPMorgan. However, it is another example of the determination of industry opponents to invalidate or gain exemptions from the provisions of Dodd-Frank.

5. Materiality. In addition to the disclosure of political contributions, members questioned whether other aspects of corporate business, like where they procure their coffee, might be subject to disclosure at the behest of shareholders.

White responded that the issue of materiality depends on the facts and circumstances of each case. (This means that even though the amount of spending on an activity may not be material to the financial statements, the activity could be material for other reasons.)

6. Cost/benefit analysis. Committee Republicans are pushing H.R. 1062, a bill that would require the SEC to conduct reviews of the costs and benefits of its regulations at one- and five-year intervals and to retrospectively review its existing regulations.

I would observe that the likelihood of the Senate agreeing to this is very remote, but several Democrats brought this up as an example of the determined opposition by industry groups to the implementation of Dodd-Frank.

White responded that she is troubled by the prospect that if the bill were enacted, it would greatly increase the cost of the agency's rulemaking, including increased litigation cost of defending the rules in court. She also stated repeatedly that she supports guidance issued by former SEC Chairman Mary Schapiro last year and that she supports the "robust" program of economic analysis that the guidance requires, one that has been praised by outside groups, including the Government Accountability Office and the U.S. Chamber of Commerce. (Another irony is that the Chamber is one of the leading sponsors of litigation challenging Dodd-Frank regulations.)

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Wednesday's article described the atmospherics of the first appearance by new Securities and Exchange Commission (SEC) Chairman Mary Jo White and set forth the major issues House Financial Services Committee members raised during their lengthy questioning of White.
Thursday, 30 May 2013 02:34 PM
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