Full impact of legislation is still unfolding.
One year after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, corporations that were bracing to be hit by wave after wave of regulations are still wondering when the initial impact of the bill will be felt. For all the fear that Dodd-Frank would leave corporations scrambling to make major changes to their existing governance models, most organizations haven’t broken much of a sweat.
The broadly written and extremely vague language in the 2,300-page financial overhaul legislation has most corporate secretaries and governance professionals making just enough adjustments to be in compliance with the law whenever regulators actively begin implementation. Attempts to repeal the legislation’s whistleblower provision and requests for more clarity on other measures have created questions about which companies will be affected most, and to what degree.
But companies in the financial services industry, in industries that strongly rely on financial services industry products (such as derivatives and swaps) and in industries that are particularly vulnerable to fraud and corruption are likely those most concerned about making changes under Dodd-Frank.
The primary objectives of the reform bill are to
prevent another financial system meltdown and to ensure the US government won’t have to bail out
companies and financial markets. The hope is that tighter regulations will increase transparency and reduce systemic risk across industries, so companies that have been practicing good governance all along are seeing the measures as business as usual. ‘While the Dodd-Frank legislation covers a lot of ground, we believe it to have limited impact on our governance structure,’ says Pfizer corporate secretary Matthew Lepore.
Lepore, who is also vice president and chief counsel of Pfizer’s corporate governance department, says adjusting to the recent reforms from the federal government are just a regular part of his ever-changing responsibilities as a corporate officer. ‘We regularly update the board of directors on the governance aspect of Dodd-Frank,’ he says. ‘Even before Dodd-Frank, there was the Shareholder Bill of Rights, and since then we made it our duty to ensure the board was prepared to deal with the impact of this bill.’
Robin Smith, general counsel for the Americas
at toy manufacturer Lego, says the law’s broad
implications are just part of adjusting to the new
regulatory landscape. After all of the financial scandals of recent years, tighter scrutiny was inevitable.
‘The only real difference for us [after Dodd-Frank] is PwC being stricter in its audits of us and our
financials as a privately held company,’ says Smith,
adding that PwC ‘is holding us to public company
standards – which is fine, because we ensure our
company upholds its high standards, anyway.’
Waiting for leadership
In spite of the initial ‘ho-hum’ reaction to Dodd-Frank after one year, experts are expecting a very different reaction once the bill really starts to be implemented. That hasn’t happened yet because the bureaucratic infrastructure for enforcement is still being put into place.
‘A major topic of interest in the business press, cable news and C-Span is the confusion bordering
on chaos relating to the pending implementation of Dodd-Frank,’ says John James, a professor of management and corporate governance at New-York based Lubin School of Business, Pace University. In a recent blog post, he notes that ‘uncertainty abounds over Dodd-Frank.’ He also points out that currently all six of the regulatory agencies have vacancies at the top.
‘The legislation, signed nearly one year ago, specified that the agencies have until January 2012 to conduct studies, seek outside commentary and implement the final regulations. None of the current leaders see this being accomplished,’ says James.
He also notes that Sheila Bair, the head of the Federal Deposit Insurance Corporation, will soon be leaving her post. Bair, known for her expertise in dealing with the banking and mortgage crises, is slated to depart from the organization on June 30 and ‘no replacement has even been nominated,’ says James.
Similarly, the Office of the Comptroller of the Currency is now being led by a temporary assignee with no replacement to take on the position, and ‘Ben Bernanke, the Federal Reserve chairman [is] operating without a vice chairman,’ James adds. ‘This lack of permanent leadership creates a significant handicap at a time when action is being demanded.’
Even when the agencies select new leadership, it will take time for each organization to embrace its new mandate and determine how it is going to gear up for enforcement. This may present other problems.
‘While vacancies in leadership at the agencies may be a contributing factor [to how the bill is enforced], I think most of the relevant agencies are under-resourced to handle many of the obligations set forth under Dodd-Frank with its aggressive timetables,’ says Douglas Chia, assistant general counsel and corporate secretary at Johnson & Johnson.
Because Dodd-Frank is so massive in its scope, the first year since its passage has not only been used to search for the right leadership for the regulatory agencies, but also to clarify certain provisions and allow for hearings challenging other parts of the bill.
Chia does concede, however, that ‘the agencies seem to be doing a wise thing – by taking the time necessary to fully consider the implications of the various provisions of Dodd-Frank that would create new regulatory regimes and making sure that all stakeholders have a chance to comment and provide insight on how these new regimes will work.’
The battle over whistleblowers
One provision of Dodd-Frank that has been receiving a massive amount of attention is the expanded incentive for whistleblowers who help uncover accounting fraud and securities and bribery allegations. In late May a divided SEC voted 3-2 to adopt a new whistleblower program that will pay up to 30 percent of any financial recovery or monetary sanctions of more than $1 million to those who provide high-quality tips that uncover corruption and lead to successful enforcement.
The new policy, which takes effect in July, was mandated last year by Dodd-Frank and applies to all original information the SEC receives after July 22, 2010. ‘These rules allow whistleblowers to receive a reward even if they report internally,’ says David Kovel, a partner at the New York-based firm Kirby McInerney. ‘Whistleblowers can now choose whether to file a complaint with their company or bring the complaint directly to the government. In either case, they can receive a reward and, in my experience, they will usually go internally and then report to the government.’
Kovel says the volume of cases filed over the first year of Dodd-Frank is substantial, and ‘the value of tips presented to the SEC and the Commodity Futures Trading Commission (CFTC) is increasing.’ It is widely believed a whistleblower is behind insider trading allegations against Raj Rajaratnam, co-founder of the now defunct hedge fund management firm Galleon Group. The case is one of the largest insider-trading scandals in US history. The SEC estimates it will receive approximately 30,000 tips, complaints and referral submissions each year.
Dealing with derivatives
Another area of Dodd-Frank that has governance experts and analysts concerned is the increasing use of derivatives and their possible effects on financial markets. In June the SEC announced that it will delay implementation of certain rules that relate to the over-the-counter derivatives market. In reality, under the act, financial service regulators have until July 16 to put forth laws surrounding security-based swaps.
The SEC and the CFTC have both agreed to suspend implementing regulations as they seek comment and feedback, however. ‘While such [security-based] swaps will be subject to provisions addressing fraud and manipulation, the commission intends to provide temporary relief from certain other provisions of the Exchange Act so that the industry will have time to seek, and the commission can consider, what – if any – further guidance or action is required,’ the SEC states.
CFTC commissioner Jill Sommers took a slightly different approach as she initially sought to understand the impact of Congress’ latest financial law on global markets. During a hearing entitled ‘Harmonizing global derivatives reform: impact on US competitiveness and market stability’ in May, Sommers admitted that the enacted bill lacks cross-border clarity: the law applies only to the US or US-related commerce and fails to address foreign entities and transactions.
For example, if regulators in Asia and Europe decide to make some changes in their laws, that would lead to significant regulatory arbitrage opportunities. Sommers says the CFTC will be left with no choice other than to rewrite its rules under Dodd-Frank. ‘In the past, SEC staff members have used their authority to rely on the assistance of foreign regulators for the supervision of entities located abroad, as long as the foreign jurisdiction is found to have a comparable regulatory structure in place,’ she notes.
‘Unfortunately, we have not proposed a mechanism to do this with respect to any of the rules under Dodd-Frank. This has already created regulatory uncertainty for firms with global operations as they attempt to plan for the future.’ Additionally, Sommers warns that there are brewing inconsistencies between US reforms and the regulations in the European Union. Getting global markets on the same page regarding how derivative trading will be handled will take time to orchestrate.
‘The CFTC has been mandated to put in rules with respect to derivatives, and how they will be regulated, but the writing of those rules is a highly complicated process,’ says Kovel, who specializes in antitrust, commodities, securities and corporate governance matters. He suggests one reason for the existence of some of the problems: ‘Certain jurisdictions [such as those outside the US] want to make sure they both continue to encourage the financial trading that is systemically useful and continue to have the ability to regulate a massive market with some level of stability.’
Dodd-Frank reality hits hard
With Dodd-Frank officially a fact of life, companies need to focus on preparing themselves for stepped up enforcement by acquiring the necessary resources to help them come into compliance. ‘Corporate secretaries need to make sure their company’s compliance department is working well,’ observes Kovel. ‘Instead of identifying problems, they need to protect the company from liability. There must be a division of roles, from the corporate counsel, whose job is to protect the company from liability, to the compliance committee.’
Kovel says the Dodd-Frank whistleblower amendment will encourage companies to have more alert compliance departments because they will want to avoid frivolous whistleblower allegations. All of this is expected to lead to better corporate governance in the long run, although it remains to be seen whether that will actually transpire. In the meantime, meeting more governance requirements will be the norm.
Earlier this year the US Treasury Department created a Financial Stability Oversight Council (FSOC) that represents several regulatory agencies and comprises top officials from the SEC, the Treasury, the Federal Reserve and the Comptroller of the Currency’s office. These people, and the regulators they represent, will be requiring more documents that can be used to assess any systemic risks to the economy and banking system.
The FSOC has been tasked with identifying and mitigating risks that threaten the US financial system. The types of firms that will be subject to such supervision, regulation, examination and enforcement will be expanded to include any systemically significant non-bank company that is ‘predominantly engaged’ in financial activities, according to the bill.
Ultimately, this means more hedge funds and private equity firms will have to provide business updates to the government. Companies in the energy and airline industries that rely on derivatives and swaps for hedging their risk will also face additional amounts of paperwork due to calls for increased transparency.
Chia, whose primary responsibilities include providing legal counsel to Johnson & Johnson on matters of governance, securities regulation, public company disclosure and Sarbanes-Oxley Act compliance, believes compliance will become easier as many of the requests for comments are collected and reviewed. ‘But for now it is difficult when the law is not clear in all areas about the practical effects or the underlying intent,’ he says.
