So concludes Tyler Cowen.
So concludes Tyler Cowen.
Marcia Narine reports that:
Earlier this week the House Financial Services Committee voted to repeal the Dodd-Frank Conflict Minerals Rule, which I last wrote about here and in a law review article criticizing this kind of disclosure regime in general.
Under the proposed Financial Choice Act (with the catchy tagline of "Growth for All, Bailouts for None"), a number of Dodd-Frank provisions would go by the wayside, including conflict minerals because:
Title XV of the Dodd-Frank Act imposes a number of overly burdensome disclosure requirements related to conflict minerals, extractive industries, and mine safety that bear no rational relationship to the SEC’s statutory mission to protect investors, maintain fair, orderly, and efficient markets, and promote capital formation. The Financial CHOICE Act repeals those requirements. There is overwhelming evidence that Dodd-Frank’s conflict minerals disclosure requirement has done far more harm than good to its intended beneficiaries – the citizens of the Democratic Republic of Congo and neighboring Central African countries. SEC Chair Mary Jo White, an Obama appointee, has conceded the Commission is not the appropriate agency to carry out humanitarian policy. The provisions of Title XV of the Dodd-Frank Act are a prime example of the increasing use of the federal securities laws as a cudgel to force public companies to disclose extraneous political, social, and environmental matters in their periodic filings.
The House Financial Services committee has created a very flashy (by government standards) website to promote the bill. The summary of the proposed legislation, by the way, makes clear that they want to make sweeping changes in Dodd-Frank, not just get rid of conflict mineral disclosure.
As readers of my book on Dodd-Frank (Corporate Governance after the Financial Crisis) know, of course, I think there is much in Dodd-Frank that deserves repeal. But conflict minerals has been high on my list for quite a while:
Buried in the gargantuan mess that was the Dodd-Frank act was a requirement which, as the SEC explains: ... directs the Commission to issue rules requiring certain companies to disclose their use of conflict minerals if those mineral...
The WSJ reports that: A federal appeals court, citing free-speech concerns, partly overturned a controversial rule requiring publicly traded U.S. companies to disclose whether their goods contain certain minerals whose sales result in...
The SEC is scheduled to hold a roundtable on conflict minerals disclosures tomorrow. When the roundtable was announced, BNA reported that: The matters to be debated include appropriate reporting approaches for the final rule, the cha...
Buried in the gargantuan mess that was the Dodd-Frank act was a requirement which, as the SEC explains:
... directs the Commission to issue rules requiring certain companies to disclose their use of conflict minerals if those minerals are “necessary to the functionality or production of a product” manufactured by those companies. Under the Act, those minerals include tantalum, tin, gold or tungsten.
Congress enacted Section 1502 of the Act because of concerns that the exploitation and trade of conflict minerals by armed groups is helping to finance conflict in the DRC region and is contributing to an emergency humanitarian crisis.
It was foisted on companies by left-wing activists and liberal Democrat legislators, who presumably felt all warm and fuzzy as they used their various tech toys containing conflict minerals. Some of us predicted that misbegotten wretch of a rule would prove costly and ineffective. According to a new GAO study, we were right:
As a result of country-of-origin inquiries, an estimated 19 percent more companies that filed a specialized disclosure form (Form SD) with the Securities and Exchange Commission (SEC) reported that they knew or had reason to believe they knew the source of the conflict minerals in their products in 2015 than in 2014, based on a generalizable sample of filings GAO reviewed. However, after an estimated 79 percent of the companies that filed a Form SD performed due diligence, an estimated 67 percent of them reported they were unable to confirm the source of the conflict minerals in their products, and about 97 percent of them reported that they could not determine whether the conflict minerals financed or benefited armed groups in the Democratic Republic of the Congo (DRC) and adjoining countries. ...
Sourcing and chain-of-custody complexities, which companies reported to be a challenge, may increase the cost required for disclosure efforts or result in missing information. ...
OECD reported in 2016 that upstream companies and certification initiatives have struggled with the significant cost of conflict minerals traceability programs and voiced their concerns about downstream companies not sharing the burden sufficiently while benefiting from those programs.
A big part of the problem is that the federal government is basically clueless and has failed to implement requirements under the act that might have somewhat alleviated the problem:
[The Department of] Commerce is required under the act to submit, starting in January 2013, an annual report that includes, among other things, an assessment of the accuracy and recommendations for improvement of the IPSA described by the act that are filed by relevant companies with their conflict minerals report. The agency has, so far, not assessed or submitted a report on any IPSAs, despite acknowledging that 29 companies have filed IPSAs with their disclosures between 2014 and 2016. Following repeated GAO inquiries about the status of the IPSA assessments, Commerce officials have yet to estimate when they will assess the IPSAs because, as they stated, Commerce does not yet have the knowledge or skills to conduct IPSA reviews or establish best practices. Without these assessments, Congress lacks needed information on the accuracy of the IPSAs and other due diligence processes used by filing companies. Additionally, these filing companies lack information about best practices for responding to the conflict minerals rule that, according to SEC, was intended by Congress to reduce violence in the region.
Kevin LaCroix explores some reasons why we're seeing a decline in the number of public corporations and then looks at some of the consequences. A very good analysis of a very important issue. Recommended.
He observes that:
In the past twenty years [the] U.S. has lost almost 50% of its publicly traded firms [from 6,797 in 1997 to 3,485 in 2013, AT]. This decline has been so dramatic, that the number of firms these days is lower than it has been in the early 1970s, when the real gross domestic product in the U.S. was one third of what it is today. This phenomenon has been a general pattern that has affected over 90% of U.S. industries.
A rather stunning finding from Grullon, Larkin and Michaely.
The total number of firms has dropped far less than the number of publicly traded firms, so in part this is probably due to laws affecting publicly traded firms in particular such as Sarbanes-Oxley. But there has also been a small drop in the total number of firms (depending on year measured) and concentration ratios have increased which suggests that competition might have fallen. (I wish the authors had looked more closely at the entire size distribution). Have international firms risen to offset the decline of publicly-trade firms? The authors discuss but discount the role of globalization. I don’t see, however, how their findings of small effects on output competition are consistent with big labor market effects. Nevertheless the bottom line is that as concentration rates have increased so have profits, as a recent CEA report also argues.
Is this all the after-effects of the Great Recession? I hope so but the decline in the number of publicly traded firms is also consistent with the research on long-run declining dynamism (including my own research on regulation and dynamism) which shows that startup and reallocation rates have been trending down for thirty years.
The drop in publicly held firms reported here is consistent with other reports, so let us take it as given. And I agree with Alex that there are multiple factors at work here:
We all have home field biases, of course, but I tend to think the regulatory aspect has had a crushing effect on public corporations. Firms that were public went dark, while privately held firms decided to remain private or to sell to an acquirer rather than go the IPO route:
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.
Corporate Governance and U.S. Capital Market Competitiveness (October 22, 2010). UCLA School of Law, Law-Econ Research Paper No. 10-13. Available at SSRN: http://ssrn.com/abstract=1696303
Jesse Fried has posted a very interesting and persuasive article on executive compensation clawbacks:
On July 1, 2015, the Securities and Exchange Commission (SEC) proposed an excess-pay clawback rule to implement the provisions of Section 954 of the Dodd-Frank Act. I explain why the SEC’s proposed Dodd-Frank clawback, while reducing executives’ incentives to misreport, is overbroad. The economy and investors would be better served by a more narrowly targeted “smart” excess-pay clawback that focuses on fewer issuers, executives, and compensation arrangements.
Fried, Jesse M., Rationalizing the Dodd-Frank Clawback (April 12, 2016). Available at SSRN: http://ssrn.com/abstract=2764409
It'd be interesting to see his analysis frame applied to the new compensation clawback rule for banks.
Ann Lipton has an interesting analysis of the pros and cons of the proposal to require auditing firms to disclose the names of engagement partners, and other firms, involved in an audit of a public company.
In today's NYTimes, Hillary Clinton lays out her plans to reform Wall Street. As you may have expected, I am not (for the most part) a fan:
Right now, Republicans in Congress are ... attempting to defund the Consumer Financial Protection Bureau.
She says that like it is a bad thing. But the CFPB is seriously flawed, as a summary from the House Financial Services Committee explains:
Established by the Dodd-Frank Act, the CFPB's radical design is unique among financial and consumer regulators, including those responsible for consumer and investor protection. Not only does it evade the traditional system of checks and balances championed by James Madison in Federalist #51, it also lacks the internal controls Congress built into other regulatory agencies.
... the CFPB escapes congressional budgetary oversight, obtaining its funding directly from the Federal Reserve instead of through the regular appropriations process. This end-run around Congress leaves no check to ensure the CFPB director is spending the people’s money effectively to promote consumer protection, much less efficiently in this time of runaway debt and deficits. In fact, we've already begun to see the result of this lack of oversight in the CFPB's egregious headquarters renovation costs.
Unaccountable to Congress, we see that the CFPB eludes even the power of the president. The bureau's director, once appointed and confirmed, can only be removed by the nation's chief executive for cause. And don't count on the president to enforce spending discipline or regulatory restraint at the CFPB; the bureau is neither subject to the Office of Management and Budget nor the Office of Information and Regulatory Affairs.
The most glaring difference between the CFPB and other regulators in the chart above, however, is the bureau's shocking lack of judicial oversight. Section 1022 of the Dodd-Frank Act provides that where the bureau disagrees with any other agency about the meaning of a provision of a federal consumer financial law, a reviewing court must give deference to the bureau’s view under the Chevron Doctrine.
... the CFPB is unaccountable even to itself since there is fundamentally no ‘it,’ no ‘they’ – only a he. Be he our credit czar, national nanny or benevolent financial product dictator, the CFPB director's authority is unilateral, unbridled and unparalleled. Without the check of a bipartisan commission, the director can declare virtually any financial product or service as ‘unfair’ or ‘abusive,’ at which point Americans will be denied that product or service even if they need it, understand it and want it.
Finally, the CFPB lacks a dedicated inspector general (IG) to root out waste, fraud and abuse at the bureau. Given the findings by the Housing and Urban Development IG we highlighted last month, taxpayers should be outraged by this complete lack of accountability, oversight and transparency in the way the CFPB spends the people's money.
We have seen the mischief Obama appointees can get up to on agencies with bipartisan commissions (e.g., SEC and NLRB). The lack of constraints on the CFPB is thus truly appalling.
Back to Hillary:
My plan proposes legislation that would impose a new risk fee on dozens of the biggest banks — those with more than $50 billion in assets — and other systemically important financial institutions to discourage the kind of hazardous behavior that could induce another crisis.
This is basically a tax on bigness. I'm not entirely opposed to limiting the size of banks as a prophylactic means of preventing government bailouts, although I'd prefer a ban on bailouts. But I don't see how this fee would target specific risky behavior.
I would also ensure that the federal government has — and is prepared to use — the authority and tools necessary to reorganize, downsize and ultimately break up any financial institution that is too large and risky to be managed effectively. No bank or financial firm should be too big to manage.
Why would we think federal bureaucrats are well positioned to decide which banks as "too big to manage"? Or that they would be able to "reorganize, downsize and ultimately break up" a bank in an equitable and efficient way.
My plan would strengthen the Volcker Rule by closing the loopholes that still allow banks to make speculative gambles with taxpayer-backed deposits.
There's never been any evidence that the Volcker rule--even in most extreme form--would have prevented any of the conduct that resulted in the financial crisis. On top of which, drafting the Volcker Rule proved to be a nightmare. It is simply not possible to develop a version of the rule that is simultaneously fair, effective, and administrable.
Hillary then turns to "the 'shadow banking' sector, including certain activities of hedge funds, investment banks and other non-bank institutions":
My plan would strengthen oversight of these activities, too — increasing leverage and liquidity requirements for broker-dealers and imposing strict margin requirements on the kinds of short-term borrowing that also played a major role in spurring the financial crisis.
I'm actually okay with some of this. But what I'd really like--limiting hedge fund shareholder activism--is unlikely to come from Hillary.
Second, I would appoint tough, independent regulators and ensure that both the Securities and Exchange Commission and the Commodity Futures Trading Commission are independently funded — as other critical regulators are now — so that they can do their jobs without political interference.
See the discussion of the CFPB above. The concern here is that insulating agencies from political interference insulates them from accountability.
I would seek to impose a tax on harmful high-frequency trading, which makes markets less stable and less fair.
I'm not intrinsically opposed to clamping down on high frequency trading. It's the "how high is too high" that is the problem. How do you come up with an administrable tax that is not purely arbitrary in the cut-off between taxable and non-taxable levels of trading. And how did you make sure that you aren't cutting too deep, so as to ensure you don't reduce market liquidity. In addition, of course, given the global nature of markets, it won't do much good if the effect of the text is to simply move high frequency trading off shore.
And we need to reform stock market rules to ensure equal access to information, increase transparency and minimize conflicts of interest.
Equal access? Really? You will never achieve equal access and it would be a bad idea to try.
Finally, executives need to be held more accountable. ... And it shouldn’t just be shareholders and taxpayers who feel the pain when banks make bad decisions; executives should have skin in the game. When a firm pays a fine, I would make sure that the penalty cuts into executives’ bonuses, too.
I'm good with half of that. In fact, I have been advocating individual rather than enterprise liability for a long time. My complaint is that retaining enterprise liability is a bad idea.
And I would fight to close the carried interest loophole that gives some fund managers billions of dollars in tax breaks: They should be taxed like every other citizen.
Fine by me.
The proper role of Wall Street is to help Main Street grow and prosper.
The trouble is that Clinton hasn't made one proposal -- not one -- to encourage capital formation. Likewise, she hasn't made one proposal -- not one -- to reform the regulatory burdens that currently discourage capital formation.
If you like 2% annual growth as the ceiling of our economic potential, you'll probably be okay with Hillary. But if you think 2% is tepid, you've got to vote for somebody who will care about capital formation more than red tape.
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 ...