Compliance professionals may want to keep a sharp eye on Congress this week—House Republicans will be tinkering with regulatory reform legislation. Brace yourselves.
The markup, as these sessions are called, will happen in the House Financial Services Committee starting on Tuesday. Lawmakers will chew over the so-called Financial Choice 2.0 Act (also known by its official name, HR 10), the brainchild of committee chairman Rep. Jeb Hensarling. His goals are to neuter SEC regulatory authority, exempt vast numbers of companies from modern oversight and disclosure standards, and thwart shareholder ability to go toe-to-toe with boards leading companies in ways they don’t like.
Are some of Hensarling’s ideas good? Sure, although the good ones are as rare as a grammatically correct tweet from Donald Trump. And thankfully, cooler heads in the Senate will slow all of his plans, and stop some of them.
Above all, however, Hensarling wants to cripple financial regulators’ power to act. That sounds nice at first, since nobody likes heavy-handed regulatory enforcement attorneys with outrageous document requests; or agency rules that sweep up too many filers with disclosure requests that don’t quite make sense. We see examples of regulators asking too much of a company all the time, so why wouldn’t we want legislation to curb those practices? Sounds great, right?
At the anecdotal level, yes it does. Taken altogether, however, these reforms leave us with regulators that can’t respond well to changing market and economic conditions. If you want a sense of how that regulatory world would feel like, the summer of 2008 would be a good place to start. We had banking regulators unable to handle the bankruptcy of Lehman Brothers, an SEC chairman who constantly looked like a deer caught in the headlights, and lawmakers lurching from one ill-conceived idea to the next.
That’s the world Hensarling wants to revive. That’s what happens when right-wing ideologues, of which Hensarling is one, buy into the belief that “the deep state” is trying to push some secret agenda. We’re left with a weak executive branch that can’t contemplate market risks thoughtfully, and then panics about them hurriedly when those risks blow up.
Compliance, risk, and audit professionals will be the ones left to clean up the debris, assuming your job didn’t get incinerated along the way.
Specific Bad Ideas
Chevron deference repealed. This section would do away with the rule that federal judges generally must defer to agency interpretations of a statute or regulation during litigation. Once Chevron deference goes away, a judge will be able to insert his or her own interpretation of a statute into judicial proceedings, regardless of agency precedents. That will lead to forum-shopping and diversity of judicial rulings; it will lead to lack of certainty. Uncertainty is the enemy of the compliance professional.
Rulemaking authority clipped. Section 312 of the bill requires that for any new rule the SEC or other agencies want to propose, the agency must first produce a cost-benefit analysis explaining why no other idea (such as state regulation or private-sector self-policing) is acceptable. Cost-benefit analyses must include effects of job creation, although jobs created to ensure compliance with the new rule won’t count.
Take Section 312, and similar provisions elsewhere in the bill, with the SEC Regulatory Accountability Act and the Regulatory Accountability Act (yes, two separate bills) that the House passed in January. The goal is to hamstring SEC rulemaking ability out of existence, by cost-benefiting every possible rule to death.
More filers exempted from SOX 404(b). Companies that don’t audit of their internal control over financial reporting experience more fraud and financial restatements; it’s that simple. The Financial Choice Act would raise the current exemption threshold from $75 million in market cap to $500 million—meaning a large majority of filers would no longer need to get outside audits of ICFR. These small companies are exactly the type that get promoted to ill-informed retail investors by Wolf of Wall Street types, and they’ll be easier suckers for fraud.
More filers exempted from XBRL. Section 411 would exempt small filers from the SEC requirement to “tag” financial data using XBRL technology, and it may be the dumbest idea in the whole bill. XBRL allows financial analysts to find, collect, and crunch financial data more easily; the more efficiently analysts can work, the more companies they can follow, and the more attention small filers get. Without XBRL, they’re trapped as thinly traded stocks that asset management funds overlook.
Al filers have been subject to this rule for years already, and the SEC is moving to a next-generation version of the technology that will drive down compliance costs even further. We’ll devote more attention to Section 411 later this week since it’s one of the few areas where even the Republican-led SEC is marching in an opposite direction from where Hensarling and his cronies want to go.
It’s Not All Bad
Some readers will dismiss my complaints as a compliance enthusiast trying to protect his profession’s turf, I know. That’s wrong. Hensarling’s bill does have some good ideas, especially around trying to bring uniformity to enforcement. Too often, regulators do overwhelm companies with duplicative demands for information, and the agencies can’t even get it together enough to ask for data in the same format. People are right to be annoyed with that.
And a considerable part of the Financial Choice Act’s new legislation targets the banking sector specifically: mechanisms to wind down failing banks intelligently, reforms to stress-testing of large financial institutions, the oversight structure for the Consumer Financial Protection Bureau. Many of those proposals are of vital interest to compliance officers in banking, but not terribly interesting to corporate ethics & compliance officers in other industries.
Still, look at the complete picture, and compliance professionals should be alarmed more than pleased. House Republicans, who get to place the first marker in regulatory reform, want to disable the SEC’s ability to be a good, thoughtful partner in risk management.
That’s not something this profession wants to see. You may even want to contact your congressman. As we saw with the implosion of Republican healthcare reform, sometimes they do listen.