For compliance officers, 2013 was one of those years where nearly every day brought a new regulatory concern. Get ready, because 2014 looks to bring more of the same.
Not only are there plenty of new regulations to expect, notably from the Securities and Exchange Commission, but also a pile of 2013 proposals and final rules that are set to take effect in 2014.
Agencies that were established or empowered by the Dodd-Frank Act—among them the Commodity Futures and Trading Commission and Consumer Financial Protection Bureau—will resume their breakneck pace of rules and enforcement actions. Companies will also have to deal with major components of the Affordable Care Act and privacy and data breach issues that accompany the increasing prominence of “Big Data” and social media.
We took a look at some of the more pressing rules and regulations that lurk on the horizon, many of them from the SEC, and the significant regulatory trends to watch for in 2014.
Compensation Conundrums
Among the lingering pieces of the Dodd-Frank Act awaiting SEC rulemaking in the year ahead are several affecting executive compensation and pay disclosures.
The SEC recently issued a proposed rule requiring companies to disclose CEO pay as a ratio to what the median employee earns. It acknowledged the deceptively simple-sounding idea's complexities. What about foreign employees and payroll systems scattered around the world? How should seasonal and part-time employees be treated? How best to address the complicated components of CEO pay, a mélange of perks, options, and performance bonuses? The SEC will need to provide a lot of answers when the final rule arrives in 2014.
The Commission will also likely finalize other compensation-related rules, such as requiring advisory votes from shareholders on “golden parachutes,” and disclosures about the role of, and potential conflicts involving, compensation consultants. Stock exchanges are also required to add enhanced independence requirements for compensation committees and consultants.
The SEC is also on track for rulemaking to require that exchanges prohibit the listing of securities for companies lacking compensation clawback policies. These policies must indicate how performance-based executive pay can be reclaimed in the event of a financial restatement or fraud. Another forthcoming rule would require companies to elaborate on the link between pay and performance for top executives.
Banking on Tough Regulations
Throughout the year, banks will face new capital and liquidity standards set by domestic bank regulators and the international Basel III accord. The Volcker Rule, finalized in the waning days of 2013, gives banks the added responsibility of drawing a line between proprietary trading and traditional hedging and market-making on behalf of customers. Drawing those distinctions will force banks to develop metrics and expand compliance programs.
“It really takes effect in July 2015, but bigger banks are going to have to start reporting in July 2014, which will be a challenge,” says Oliver Ireland, a partner with law firm Morrison & Foerster. “It is a detailed rule, and for the larger banks it is going to require sophisticated compliance systems and will be a very major burden.”
Risk experts expect large financial firms to spend a great deal of time and energy on the Volcker Rule in 2014. “How you go ahead and implement it is going to be the next big question,” says John Sabatini, a partner at PwC and national leader of its Advanced Risk and Compliance Analytics Services. “What's the reporting going to be like? How are you going to have visibility around whether you are trading appropriately or not?”
Keep an Eye on Them
Pressure on companies to exert control and oversight over third parties, vendors, and all points along the supply chain will continue in the year ahead. That includes implementing requirements of the Dodd-Frank Act's Conflict Minerals Rule.
The SEC finalized the rule in August, requiring companies to disclose the source of minerals they may use in their products—including tantalum, tin, gold, and tungsten—that are mined in the Congo region of Africa and are known to fund militias there. Companies must file the first specialized disclosures on May 31, 2014, for the 2013 calendar year. As companies work to ramp-up conflict minerals compliance, they await resolution of an ongoing legal challenge by the U.S. Chamber of Commerce and National Association of Manufacturers that could delay implementation.
“The Office of the Comptroller of the Currency and New York Fed are taking an active role in defining what they believe an independent consultant should be. The rules are becoming much more structured.”
—John Sabatini,
Partner,
PwC
Banks may not have conflict minerals to worry about, but 2014 will also bring added scrutiny to their third-party consultants. Regulators will more carefully monitor how banks use third parties and consultants and require due diligence to ensure they are independent and qualified.
“One of the big topics we are spending a lot of time getting ready for in 2014 is this whole idea of independent consultants,” Sabatini says. “The Office of the Comptroller of the Currency and New York Fed are taking an active role in defining what they believe an independent consultant should be. The rules are becoming much more structured.”
Working on the JOBS Act
Under pressure from Congress, the SEC is expected to finalize remaining rulemaking required under the Jumpstart Our Business Startups (JOBS) Act.
One of the most anticipated pieces of the legislation, on track for a final rule in 2014, expands the use of crowdfunding as a capital-raising tool for start-ups and small businesses. In October the SEC issued a proposed rule and began gathering public comments on rules for issuers that want to raise up to $1 million a year through crowdfunding and not have to register those publicly offered securities.
On Dec. 18, the SEC issued a proposed rule for Regulation A+ exemptions. The little-used Regulation A exemption from registration for small offerings, with a $5 million threshold, would be supplemented with an alternative that raises the allowance to $50 million and bypasses state blue sky laws in favor of audited financial statements and ongoing SEC reporting requirements.
This year may also see Congress act on what's been dubbed JOBS Act 2.0. Among the ideas floated on Capitol Hill: changing the minimum trading increment or “tick size” for smaller companies, and authorizing the creation of new exchanges that, once registered with the SEC, could list and trade the securities of smaller companies.
Other matters on the SEC's rulemaking plate in 2014:
Harmonizing fiduciary standards between retail brokers and investment advisers, making the former abide by standards to put customers' interests ahead of their own.
Following up on a recent roundtable (and Petition for Rulemaking by Nasdaq) to possibly require greater transparency and disclosures of potential conflicts of interest by proxy advisory firms.
Prohibitions against fraud, manipulation, and deception in connection with security-based swaps.
Conduct standards for security-based swap dealers.
Final rulemaking for Regulation Systems Compliance and Integrity, a slate of technology-related initiatives intended to ensure financial market stability.
Greater regulation of proxy advisory firms and more transparency on their operations.
Consumer Protection
Beginning on Jan. 10, 2014, new CFPB rules will start hitting the mortgage industry. By that date, nearly all mortgages will be evaluated on the borrower's ability to repay that loan. A borrower also must have a total monthly debt-to-income ratio including mortgage payments of 43 percent or less. Lenders cannot initiate a foreclosure until a borrower is more than 120 days delinquent and can no longer start proceedings while working with a homeowner who has submitted a complete application for assistance, called a “loss mitigation application.”
WHAT'S IN STORE FOR 2014?
The following, submitted by the Securities and Exchange Commission to the White House's Office of Budget Management, details some of its likely rulemaking agenda for the coming months.
Proposed Rule Stage
Compensation Clawback
Pay for Performance
Rules Governing the Offer and Sale of Securities Through Crowdfunding
Implementation of Title I of the Jumpstart Our Business Startups Act
Registration of Security-Based Swaps
Disclosure of Hedging by Employees, Officers and Directors
Enhanced Disclosure for Separate Accounts Registered as Unit
Investment Trusts and Offering Variable Annuities
Form N-SAR and Portfolio Holdings Reporting Reform
Guidance Regarding Definitions of Mortgage Related Security and
Small Business Related Security
Reporting and Recordkeeping Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants
Final Rule Stage
Amendments to Regulation D, Form D and Rule 156 under the Securities Act
Pay Ratio Disclosure
Investment Company Advertising: Target Date Retirement Fund Name and Marketing
Money Market Fund Reform; Amendments to Form PF
References to Credit Ratings in Investment Company Act Rules and Forms
Ownership Limitations and Governance Requirements for Security-Based Swap Clearing Agencies, Security-Based Swap Execution Facilities, and National Exchanges
Prohibition Against Fraud, Manipulation, and Deception in Connection With Security-Based Swaps
Security-Based Swap Data Repository Registration, Duties, and Core Principles
Registration and Regulation of Securities-Based Swap Execution Facilities
Removal of Certain References to Credit Ratings Under the Securities Exchange Act
Rules for Nationally Recognized Statistical Rating Organizations
Regulation of Cross-Border Security-Based Swap Activities
Regulation Systems Compliance and Integrity
Source: SEC.
The CFPB may also address the forced arbitration clauses found in many financial product agreements this coming year, including those of credit and debit cards. Many contracts for consumer financial services products require disputes to be settled through arbitration, rather than the court system. The CFPB recently concluded a study on these practices and a second round of questions will go out in the New Year. Those findings, once reviewed by Congress, could lead to new policies or rules.
The CFPB will also continue its focus on debt collection firms in 2014. It is already collecting information on the accuracy of information used by debt collectors and the communication tactics used to recover debts. In the year ahead, the Bureau will also take a look at new rules pertaining to debt buyers who purchase bundles of past-due accounts from credit cards companies and other financial firms, and the practice of mass-filing lawsuits to collect on them. Critics say their lawsuits are often rife with bad information and mistaken identities. Proposed regulations could create direct liability for credit originators who sell their delinquent debt and have banks bear direct responsibility for the actions of those who purchase their debts.
Disclosure Relief
While 2014 will see plenty of newly proposed rules and several rules already finalized will take effect, the year could also see the start of a movement for disclosure relief. SEC Chairman, Mary Jo White used a late-year speech to set the stage for rethinking what information is required from public companies. She raised the topic of “information overload” and said a review of disclosure requirements, required by the JOBS Act, could trigger reforms that streamline requirements and eliminate duplication.
It would certainly be a tall order, and past efforts have failed, but many companies would welcome some streamlining of reporting requirements. Don't bank on it, however. With plenty of Dodd-Frank Act rules still to be proposed or finalized and several others taking effect, the SEC will be heaping more on the plates of compliance executives in 2014, not less.
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