What do last week's election results mean for business regulation, enforcement, and other issues important to the compliance function? For the most part, more of the same, say compliance experts and lawyers.
Indeed, last week's election appeared to be a vote for the status quo; Not only was President Barack Obama re-elected, the composition of Congress stayed the same, with Republican's holding a majority in the House and Democrats maintaining the Senate.
Yet those who expect Obama's second term to look exactly like his first time, in terms of regulatory changes and the enforcement environment, may be surprised, they say.
Obama's re-election is likely to end congressional efforts to repeal or greatly water down the Dodd-Frank Act, which could hasten the efforts of the Securities and Exchange Commission and other regulators to finalize the remaining provisions.
Some are expecting additional business regulations, too. “An overarching theme is that there is going to be the fear of continuing down a path of increased regulation,” says John Gebauer, president of National Regulatory Services, a provider of compliance and registration products for broker-dealers and investment companies. He says Mitt Romney's loss of the White House diminishes prospects for a pull-back. “There was a hope that things like implementation of the Dodd-Frank Act would be rolled back a bit, but any of those hopes were dashed,” he says.
“I think there is going to be hell to pay for the securities industry,” says Andrew Stoltmann, an attorney and investor advocate who specializes on investment fraud. “For those who have been calling for a more aggressive enforcement of federal and state securities laws, I think we are going to see much more persistent regulatory bodies than we've seen in the previous four years. It's the perfect storm for the securities industry.”
The Obama victory, says Micah Green, a partner with the law firm Patton Briggs, means there will not be a “sea change about Dodd-Frank.” Although there will be efforts to legislatively shape it, there will not be an effort to repeal it. “The rulemaking process will continue and, in some areas, with a sense of urgency.”
Green, former president of the Securities Industry and Financial Markets Association, says the new Congress may find some long avoided commonality. For example, there was not much chance that a technical corrections bill for the Dodd-Frank Act would pass, especially not when a Republican candidate was threatening to “repeal and replace” much of it.
“I think you can now expect a potential sense of bipartisanship on truly technical issues,” he says. “Both sides realize that there need to be some technical corrections, even though one person's ‘technical,' can be another's ‘substantial.'”
Among the lingering regulatory priorities for Term Two:
Resolving cross-border issues in derivatives regulations.
Implementation of international capital requirements for banks.
Breaking the impasse over the Volcker Rule's separation of proprietary trading from commercial banks.
The FSOC will make its initial designations of non-bank companies to be considered systemically important financial institutions.
Comprehensive housing finance reform.
Insurance reform, including systemic risk regulation and capital standards.
A fiduciary standard for brokers dealing with retail clients.
The creation of self-regulatory organizations for investment advisors, or the alternative of fee-supported oversight by the SEC.
Greater regulation of Money Market Funds.
Addressing the Fiscal Cliff
Green expects that Obama's re-election will mean “a buckling down” on rulemaking efforts. But that doesn't necessarily mean an immediate onslaught of activity. “We've seen legal challenges to Dodd-Frank that have given every regulator pause—not pause to do their job, but to make sure they have done it right,” he says. “They will be more deliberate going forward.”
“For those who have been calling for a more aggressive enforcement of federal and state securities laws, I think we are going to see much more persistent regulatory bodies than we've seen in the previous four years.”
—Andrew Stoltmann,
Securities Attorney &
Shareholder Advocate
It may take until spring or summer for a more concerted regulatory push. Following a lame duck Congress, there is the immediate threat of the “fiscal cliff,” a conflagration of expiring Bush era tax cuts and the across-the-board spending cuts ready to be triggered as part of “sequestration,” a deficit reduction mandate Congress imposed upon itself. Beyond a needed tax compromise and 2013 budget resolution is another debt ceiling debate brewing for this winter.
“You really have that window of next summer being the time to look for a hotter regulatory environment,” Gebauer says. “And, consider that 2013 is really the window when things get done. The 2014 legislative calendar goes a little quieter again as we start preparing for the mid-terms.”
Fixing Dodd-Frank
Aaron Klein, director of the Financial Regulatory Reform Initiative at the Bipartisan Policy Center, says Congress and regulators need to set aside past divisiveness and work together and conduct a thorough analysis of the Dodd-Frank Act.
“Dodd-Frank had to tackle a wide variety of issues simultaneously, and it did a fantastic job given its breadth,” he says. “On the other hand, with the benefit of a few years of hindsight, it is a good time to take a look at what's working and what isn't, what should be built upon more, and what was missed. Members of both parties after the election are going to be interested in this in light of the broader question of how we can improve our economy.”
Among the matters Klein, who previously served at the Treasury Department and as chief economist of the Senate Banking, Housing, and Urban Affairs Committee, hopes will be revisited are rules pertaining to credit rating agencies, which “were certainly one of the areas Dodd-Frank missed.”
“The legislation didn't do much and the implementation has done even less,” he says.
Another priority, according to Klein, is getting regulators to work cooperatively, breaking free of their self-built silos. “A problem going into the crisis was that we had too many regulators who couldn't reach agreement amongst themselves,” he says. “After Dodd-Frank, we have more regulators, rather than fewer. How you bring them together and what happens if you can't? You want to have a healthy diversity of viewpoints, but there has to be some fundamental mechanism to drive to a unified conclusion.”
Keep an Eye on the CFTC
The Commodity Futures Trading Commission has evolved into one the more important financial regulators in the United States. Its activities in the months ahead will be closely watched due to its tremendous influence over the $62 trillion global derivatives market.
REVOLVING DOOR
A wholesale shuffling of bodies as President Obama's second term begins will be watched closely.
In the 113th Congress, the House Financial Services Committee will lose Chairman Spencer Bachus (R-AL) to term limits and Ranking Member Barney Frank (D-MA), is retiring. Expected to fill those roles are Rep. Jeb Hensarling (R-TX) and Rep. Maxine Waters (D-CA), who recently emerging unscathed from an ethics investigation.
According to Micah Green, a partner with the law firm Patton Briggs, expect housing finance reform to emerge as a priority under Hensarling and Waters. A focus on high frequency trading is also likely to be on the agenda.
On the Senate Banking, Housing, and Urban Affairs Committee, current Chairman Tim Johnson (D-SD) is expected continue in that role. Ranking Member Richard Shelby (R-AL) departs, due to a term limit, and is expected to be succeeded by Sen. Mike Crapo (R-ID). Johnson and Crapo can be expected to explore ground, particularly on a Dodd-Frank Act technical corrections bill and housing finance reform. “This potential collaboration could give the Senate leverage in negotiating deals regarding changes to the Dodd-Frank Act coming out of the Republican-controlled House of Representatives,” a Patton Boggs analysis says.
That committee will also get some new blood through the retirement of two Democrats. Senator-elect Elizabeth Warren (D-MA) is among the names being touted as filling one of them, bringing with her a push on consumer protection issues.
President Obama will also have some leadership posts to fill, all of which could signal a change in culture and priorities.
Mary Schapiro has signaled she may step down as chairman of the Securities and Exchange Commission, ahead of her term expiring in 2014. At the Commodity Futures Trading Commission, Chairman Gary Gensler will continue serving until the end of 2013, even though his term has already expired. It is uncertain whether he will seek another term.
Martin Gruenberg has been acting chairman of the Federal Deposit Insurance Corp. since June 2011. The new administration could finally make that post official, or replace him.
An upcoming appointment that will greatly influence financial markets and financial services regulation is replacing Secretary of the Treasury Timothy Geithner, who is expected to step down. Among the names mentioned in recent media reports as potential replacements are White House Chief of Staff Jack Lew, and Erskine Bowles, former chief of staff for President Clinton and co-chairman of the deficit-cutting Simpson-Bowles commission.
—Joe Mont
The CFTC has proposed 39 rules related to the Dodd-Frank Act, and implementation is still months away for many of them. Among the work ahead is new position limits rulemaking (or an appeal of those struck down recently by a Federal District Court), finalizing rules related to the operation of swap execution facilities, providing guidance on the international application of the new swap regulatory regime, designating swaps subject to mandatory clearing and trade execution, registering swap dealers and major swap participants, and implementing reporting requirements for swap transaction data.
Green says this work could be shaped by Congress through an upcoming reauthorization bill needed to fund it. The most recent CFTC Reauthorization Act was approved in 2008, when Congress overturned a veto by President George Bush. It expires on Sept. 30, 2013.
“It could be a forum for directing the agency on issues it hasn't heard the will of Congress on,” he says. “It is adding to some urgency on the part of Chairman Gary Gensler to get rules done, because any that are not done will be more susceptible to debate during reauthorization, as opposed to final rules.”
The threat of sequestration cuts also looms especially large for the agency. Commissioner Bart Chilton estimates that the commission would suffer a $25 million cut and would need to reduce staffing by 112 employees (710 to 598). “It would be a harsh impact on our ability to oversee markets, including those that actually caused the economic collapse,” he says. “We could not integrate over-the-counter (OTC) market swaps data that we have been asked to bring into regulatory compliance, nor oversee the traders in those markets. We could only monitor some of the key system safeguards and compliance requirements of the most significant exchanges, swaps execution facilities, and swaps data repositories. We could not initiate new examinations on firms and our enforcement case investigations would slow in size and scope significantly.”
Chilton added that the Commission would also not be able to respond to all requests for interpretative guidance on new reform rules, and there would be “significant delays” when it does respond. “As a result, rules might have to be more prescriptive, as staff would not have adequate resources to effectively monitor compliance or operations,” he says.
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