Glen Lammi argues that the titular SEC rules have had important and deleterious unintended consequences.
Marc Hodak has a great post on the problem. Go read the whole thing, but here's the gist:
The model I have used for over a decade is quite simple:
A company will choose to be public when the benefits of being a public company exceed its costs, otherwise it will not join, or will exit, the public sphere.
The way it exits is of secondary importance.
So, for example, the fixed cost of being a public company for a $100 million firm (net assets) shortly before SOX was just over $1 million per year. After SOX, that number jumped up to about $3 million per year. ...
After Dodd-Frank, with its voluminous new regulations for public companies, I estimate that few companies under $1 billion in net assets can any longer afford to be public.
All of this, of course, is as I predicted in Corporate Governance and U.S. Capital Market Competitiveness (October 22, 2010): http://ssrn.com/abstract=1696303
Lucian Bebchuk and Robert Jackson are celebrating--as if it were good news--Hillary Clinton's endorsement of their proposed "SEC rulemaking that would require public companies to disclose their political spending to their shareholders." As usual, they fail to acknowledge the highly partisan nature of the proposed rule making, the reasons it is supported exclusively by Democrats (and a tiny handful of Wall Street RINOs), or the way the proposal would drag the SEC further into the cesspool of Washington politics. Why this persistent radio silence?
For a more rebuttal of Bebchuk and Jackson on the political issue, see Jim Copland's "Reply to Bebchuk and Jackson":
Professors Lucian Bebchuk and Robert Jackson argue that the Securities and Exchange Commission (SEC) should engage in rulemaking to consider rules mandating new corporate political-spending disclosures, but their rationale is inconsistent with the agency’s statutory purpose of protecting investors, improv- ing market efficiency, and facilitating capital formation. Corporations’ political expenditures are tiny in relation to corporate budgets and clearly immaterial, in and of themselves, to investors’ financial interests. Bebchuk and Jackson’s argu- ment that corporate political spending is more related to agency costs than to corporate leaders’ legitimate desire to ameliorate the potential adverse impacts of government action on businesses’ earnings, and that such agency costs could helpfully be reduced by further disclosures, is highly speculative. Instead, evi- dence strongly suggests that special-interest groups with viewpoints adverse to corporate interests have attempted to leverage existing disclosures to chill cor- porate political participation. Finally, shareholder proposals involving corpo- rate political spending and political-spending disclosure have been overwhelmingly sponsored by some of these same special-interest groups and universally rejected by shareholders at large, when opposed by boards of directors.
See also Bradley A. Smith and Dickerson, Allen, The Non-Expert Agency: Using the SEC to Regulate Partisan Politics (March 26, 2013). Forthcoming, 3 Harv. Bus. L. Rev. (2013). Available at SSRN: http://ssrn.com/abstract=2239987:
Abstract: Over the past 15 years advocates of campaign finance reform, frustrated by the structure and design of the Federal Election Commission, have attempted to offload the duties of campaign finance regulation to other federal agencies, most notably the Internal Revenue Service but also the Federal Communications Commission and, most recently, the Securities Exchange Commission.
Smith and Dickerson refrain from getting into the "theoretical merits" of the issue, but let's not give Bebchuk and Jackson a free ride on that subject. Instead we turn to Michael Guttentag's On Requiring Public Companies to Disclose Political Spending (May 16, 2014). Columbia Business Law Review No. 3, 593 (2014); Loyola-LA Legal Studies Paper No. 2014-25. Available at SSRN: http://ssrn.com/abstract=2438078:
Abstract: Mandatory disclosure is a central feature of securities regulation in the United States, yet there is little agreement regarding precisely how the Securities and Exchange Commission (“SEC”) should determine what public companies are required to disclose. The current debate about whether the SEC should require the disclosure of political spending by public companies is but one example of this lack of consensus.
Just to drive the point home: "the evidence does not support requiring public companies to disclose political spending."
In sum, this is a highly political rule making proposal that would have profound partisan implications. The people who support it intend to use it to defund the right. If the SEC were to adopt it, the Democrats should add Bebchuk and Jackson to their Hall of Fame.
Todd J. Zywicki (George Mason University School of Law) has posted The Dodd-Frank Act Five Years Later: Are We More Stable?:
Abstract: This congressional testimony summarizes the effects on consumers and the economy of Dodd-Frank, the Durbin Amendment the Consumer Financial Protection Bureau, and other government regulations (such as the CARD Act of 2009) enacted in the wake of the recent financial crisis. The testimony notes that the combined effect of these laws and regulations has resulted in higher bank fees, a dramatic reduction in access to free checking, an increase in the number of unbanked consumers, a dramatic reduction in access to credit cards for low-income consumers, and continued low access to mortgages, especially among lower-income and higher-risk borrowers. In addition, because of the crushing and disproportionate burden of Dodd-Frank’s regulations on smaller banks, the law has promoted consolidation of the banking industry and forced many smaller banks to exit certain product markets, especially mortgages. This combined effect has reduced choice and competition for consumers. Finally, the lack of democratic accountability over the CFPB has resulted in an agency defined by bureaucratic overreach, resulting in an invasive and reckless data-mining project and assertion over many industries and products that stand outside of the agency’s authorized jurisdiction.
My UCLAW colleagues Steven Bank and George Georgiev have posted a concise and damning appraisal od Dodd-Frank's executive compensation provisions:
This essay argues that regulatory reforms introduced by the Dodd-Frank Act of 2010 in the area of executive compensation have not yet achieved their purpose of linking executive pay with company performance. The rule on shareholder say-on-pay appears to have had limited success over the five proxy seasons since its adoption. The rule on pay ratio disclosure, adopted in August 2015, and the rules on pay-versus-performance disclosure and the clawback of certain incentive compensation, proposed in April 2015 and July 2015, respectively, are also unlikely to succeed. For the most part, the rules are intuitive and well-intentioned, but a closer look reveals that they are easy to manipulate, counterproductive, and often interact with one another, and with other regulatory goals, in unintended ways. As a result, five years after the passage of Dodd-Frank, the decades-old goal of aligning pay with performance remains elusive.
Bank, Steven A. and Georgiev, George S., Paying High for Low Performance (August 7, 2015). 100 Minnesota Law Review Headnotes __ (2016); UCLA School of Law, Law-Econ Research Paper No. 15-11. Available at SSRN: http://ssrn.com/abstract=2641152
My friend Loyola law professor Mike Guttentag recently sent me a reprint of his article On Requiring Public Companies to Disclose Political Spending, 2014 Colum. Bus. L. Rev. 593 (2014), which reminded me that I wanted to flag it for my readers. It is, put simply, the single best thing I've read on corporate political contribution disclosure.
Here's the abstract:
Mandatory disclosure is a central feature of securities regulation in the United States, yet there is little agreement about how to determine precisely what public companies should be required to disclose. This lack of consensus explains much of the disagreement about whether the Securities and Exchange Commission should require public companies to disclose political spending.
To resolve the political spending disclosure debate I therefore begin by considering the more general question of how to evaluate any proposed mandatory disclosure requirement. I show why the presumption should be against adding a new disclosure requirement, and then identify the kinds of evidence that should be sufficient to overcome this presumption. Applying this new analytic framework to the political spending disclosure debate—and basing this analysis in part on previously unpublished empirical findings—shows that public companies should not be required to disclose political spending.
Here's a link to the the law review page from which you can download the article.
The SEC has approved the controversial pay ratio disclosures:
The Securities and Exchange Commission today adopted a final rule that requires a public company to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees. The new rule, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, provides companies with flexibility in calculating this pay ratio, and helps inform shareholders when voting on “say on pay.” ...
The new rule will provide shareholders with information they can use to evaluate a CEO’s compensation, and will require disclosure of the pay ratio in registration statements, proxy and information statements, and annual reports that call for executive compensation disclosure.
The SEC did provide companies with some flexibility and exempted some small companies:
The rule addresses concerns about the costs of compliance by providing companies with flexibility in meeting the rule’s requirements. For example, a company will be permitted to select its methodology for identifying its median employee and that employee’s compensation, including through statistical sampling of its employee population or other reasonable methods. The rule also permits companies to make the median employee determination only once every three years and to choose a determination date within the last three months of a company’s fiscal year. In addition, the rule allows companies to exclude non-U.S. employees from countries in which data privacy laws or regulations make companies unable to comply with the rule and provides a de minimis exemption for non-U.S. employees.
The rule does not apply to smaller reporting companies, emerging growth companies, foreign private issuers, MJDS filers, or registered investment companies.
For prior commentary from yours truly:
Dec 3, 2014 ... The pay-ratio rule is an attempt to shame companies and their boards to advance the “social justice” goal of more equitable income distribution.
Nov 30, 2013 ... The company is then required to report the ratio between those two figures as a measure of the ... The possible failure of pay ratio disclosure.
Sep 26, 2013 ... Last Wednesday, a divided Securities and Exchange Commission issued proposed amendments to Item 402 of Regulation S-K. Section 953(b) ...
Aug 13, 2013 ... Section 953(b) of the Dodd-Frank Act required the SEC to develop disclosure rules requiring issuers to disclose the ratio of the “median” total ...
According to a working paper from Dominic P. Parker of the University of Wisconsin and Bryan Vadheim of the London School of Economics, there's strong evidence to suggest that "conflict mineral" regulations in Section 1502 of Dodd-Frank directly led to an increase in looting in affected regions of the Congo. ...
n economics terms, Parker says, conflict mineral regulations converted many of the DRC's militia groups from "stationary" bandits, which extract taxes from people but otherwise do little harm, into what are known as "roving" bandits.
This, it turns out, is much worse for the people on the ground.
"The roving bandit doesn’t have a long-run stake in the economic productivity of a place," Parker says, "so he takes what he can get now with little regard for how his [ransacking and stealing] will affect future productivity."
Meanwhile, stationary bandits have every incentive not to hurt too many people.
Kindly go read the whole thing.
Update: Hans Bader also has a helpful summary analysis of the conflict minerals question.
My colleagues Steven Bank and George S. Georgiev teach executive compensation and corporate governance at the University of California, Los Angeles School of Law and are affiliated with UCLA’s Lowell Milken Institute for Business Law and Policy. They've got an op-ed in The Globe and Mail on how the SEC's new executive compensation rules will affect not just USA but also Canadian corporations:
The primary U.S. market regulator, the Securities and Exchange Commission, served up ... far-reaching rules on bonuses and other incentive-based compensation for all firms listed on U.S. stock exchanges, which include about 300 of Canada’s best-known multinational companies as well as more than 600 other international companies. This was a curious choice since the United States has traditionally allowed non-U.S. companies to follow their home-country rules on executive compensation and corporate governance instead of the SEC’s rules.
Even worse than the geographic overreach, however, is the fact the SEC’s new rules are likely to prove expensive, counterproductive and easy to manipulate. ...
Unlike U.S. companies, Canadian and other international companies have an even easier way out. They can simply choose to delist from U.S. exchanges and rely solely on their home-market listing. In fact, many non-U.S. companies did just that when they were faced with complex new corporate governance rules under the Sarbanes-Oxley Act in the wake of the Enron and WorldCom scandals of the early 2000s. Studies show that a U.S. listing confers advantages on non-U.S. companies, but the burden from the new rules may well outweigh these advantages, especially at a time when international markets are becoming increasingly competitive.
Of course, this is just one more example of the general phenomenon of which I wrote in Corporate Governance and U.S. Capital Market Competitiveness (October 22, 2010). Available at SSRN: http://ssrn.com/abstract=1696303:
During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.
Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.
This essay argues that litigation and regulatory reform remain essential if U.S. capital markets are to retain their leadership position. Unfortunately, the article concludes that federal corporate governance regulation follows a ratchet effect, in which the regulatory scheme becomes more complex with each financial crisis. If so, significant reform may be difficult to achieve.
I like Larry Cunningham's take on the AIG case:
Eight years of official, media-sanctioned cover-up of the U.S. government’s trampling of the rule of law may be coming to an end.
Go read the whole thing.
Jim Hamilton has a list of seven "pieces of legislation amending the Dodd-Frank Act passed the House in the 113th Congress by a bi-partisan vote, sometimes an overwhelming bi-partisan vote, but were never taken up the Senate."
I found this to be a very interesting paper:
This paper supports the objective of the proposed revision of the Shareholder Rights Directive (Directive 2007/36/EC), that is, to contribute to the long-term sustainability of EU companies. However, it expresses concern that the measures being considered will not achieve their intended purpose, and worse, that they may have unintended negative consequences. The fundamental issue is that shareholder empowerment will not, on its own, improve corporate governance or contribute to sustainable growth in the EU.
Short-termism was one of the root causes of the financial crisis. It has not been adequately addressed to promote sustainable European growth over the long-term. Despite the Commission’s well-intentioned efforts, the proposed revision falls far short of addressing the underlying causes of short-termism so as to prevent future crises.
The current proposal relies exclusively on shareholders to drive the shift to a longer-term perspective. Especially after the financial crisis, there is no clear reason for this exclusive reliance on shareholders. Although shareholders have and should have specific rights in corporate governance, shareholders do not own companies. Their relationship with the company is a contractual one, just like that of creditors and employees. Moreover, shareholders differ considerably in their time frames and approaches. Some shareholders are committed to holding for the long-term, whilst others only hold for the short-term. It is important that the former group become more engaged; however, there is a danger that the proposed revision will further empower shareholders with a short-term orientation. For this reason, there is a need for further measures to complement the proposed revision and achieve the goal of a longer-term approach to corporate governance. The paper suggests minor changes to the proposal and canvasses some more far-reaching changes.
Walter Olson has the details. Here's the key point:
According to [WaPo] reporter Sudarsan Raghavan, these provisions “set off a chain of events that has propelled millions of [African] miners and their families deeper into poverty.” As they have lost access to their regular incomes, some of these miners have even enlisted with the warlord militias that were the law’s targets.
But go read the whole thing.
As I explained in my book The Complete Guide to Sarbanes-Oxley:
SOX § 203 requires registered public accounting firms to rotate (1) the partner having primary responsibility for the audit and (2) the partner responsible for reviewing the audit every five years. The audit committee must ensure that the requisite rotation actually takes place.
There now appears to be evidence that rotating audit partners does contibute to improved disclosure:
The main purpose of audit partner rotation is to bring a "fresh look" to the audit engagement while maintaining firm continuity and overall audit quality. Despite mandatory audit partner rotation being required in the U.S. for over 35 years, to-date there has been limited empirical evidence speaking to the effectiveness of U.S. auditor partner rotations given that audit partner information is not disclosed in U.S. audit reports. Using SEC comment letter correspondences to identify U.S. audit partner rotations, we provide initial evidence among publicly-listed companies suggesting that audit partner rotation in the U.S. supports a "fresh look" at the audit engagement. Specifically, we find that audit partner rotation results in substantial increases in material restatements (129 to 135 percent) and write-downs of impaired assets (one percent of market value). Overall, these findings suggest that audit partner rotation supports auditor independence and is an important component of quality control for U.S. accounting firms.
Citation: Laurion, Henry and Lawrence, Alastair and Ryans, James, U.S. Audit Partner Rotations (October 27, 2014). Available at SSRN: http://ssrn.com/abstract=2515586
Note that this result does not support audit firm rotation. As I also noted in my book Complete Guide to Sarbanes-Oxley: Understanding How Sarbanes-Oxley Affects Your Business, as a matter of good practice, a company ought to consider rotating audit firms periodically so as to get the benefit of a fresh set of eyes. Some corporate governance experts recommend doing so at least every ten years. In addition, governance experts recommend rotating audit firms if a substantial number of former company employees have gone to work for the audit firm or vice-versa.
But should good practice be made mandatory?
My concern is that consolidation of the accounting profession has made auditor rotation extremely difficult. As I explained in my book Complete Guide to Sarbanes-Oxley: Understanding How Sarbanes-Oxley Affects Your Business, SOX prohibits a public corporation from obtaining a wide range of non-audit accounting and consulting services from the accounting firm that performs their audit. Many public corporations get a wide array of such non-audit services from all 3 of the other Big 4 accounting firms. Rotating the auditing firm thus will be pretty complicated, as firms have to reshuffle their non-audit services. It'll be even more complicated if the firms are subject to some sort of cooling off period between when they provide audit services and can begin providing non-audit services (and vice-versa).
One key reform of the accounting profession thus ought to be promoting smaller accounting firms as viable alternatives to the Big 4.