As the one-year anniversary of the passing of the Dodd-Frank Act approaches, regulators are blowing through deadlines for proposing or issuing final drafts on dozens of rules.
Agencies including the Securities and Exchange Commission and the Commodity Futures Trading Commission, among others, have missed deadlines on high-profile rules, including new executive compensation disclosures and final regulations that will provide incentives for whistleblowers.
Regulators missed deadlines for all 26 rulemaking requirements in the second quarter of 2011, bringing up the backlog of missed deadlines to 30, according to a “Dodd-Frank Rulemaking Progress Report” published by the law firm Davis Polk. Many of the requirements were due in April, nine months after Dodd-Frank was enacted in July of 2010. The SEC moved some provisions that were supposed to be finalized by the end of April, including the final whistleblower rules, into a group of regulations it now says will be finalized by July. There are no more deadlines in the second quarter.
The question is: How can companies prepare for what's coming down the pike when they can't predict either when a final rule will be issued or how, if it all, it will deviate from the proposed rule?
“There is some practical impact on companies from the regulatory delay,” says Diane Holt Frankle, a partner at the law firm Kaye Scholer, who points to two stand-out examples of planning issues which may effect a variety of companies. “Some companies would be addressing the composition of their compensation committees if the independence rules were adopted. Maybe more importantly, companies are adopting executive compensation, including incentive compensation, knowing that there will need to be clawback provisions, but they do not have the specific guidance to permit them to craft a new or revised clawback policy.”
Delays by the CFTC on new rules for over-the-counter derivatives are also leaving companies in the lurch. Companies that deal in derivatives are required to set up position-limit monitoring systems, but until they get certainty from the final rules, they can't finish building the systems.
The biggest consequence of delayed regulation is uncertainty, says Mary Mullany, a partner at Ballard Spahr. “Given the tight annual reporting deadlines it is really important for in-house counsel to be able to plan appropriately for next year's disclosure documents,” she says. “From a planning perspective, it would be helpful to know more information on compliance dates and any potential exemptions.”
So why are regulators missing so many deadlines? First, the sweeping financial reform has put a heavy rulemaking burden on federal agencies. Budget cuts certainly aren't helping matters, either. And finally, there are very few consequences for federal agencies that push back deadlines.
If the SEC misses a congressional deadline, Congress is unlikely to intervene and make its own rule, since it doesn't have expertise in securities law, says Robert Jackson, a professor at Columbia Law School. “In short, Congress is unlikely to punish the SEC,” he says. “If the SEC blows through a deadline, all Congress can do is continue to wait, because the SEC has the expertise.”
What's the Rush?
“In short, Congress is unlikely to punish the SEC. If the SEC blows through a deadline, all Congress can do is continue to wait, because the SEC has the expertise.”
—Robert Jackson,
Professor,
Columbia Law School
SEC Commissioner Kathleen Casey addressed the pressures that reform has put on regulators and on the dangers of moving too quickly in her February address to the Practicing Law Institute. “The real threat here is that we are not able to fully consider the rules we are adopting, and that short public comment periods imposed in an effort to comply with Dodd-Frank deadlines may undermine their very function of supporting and strengthening the confidence we have in the likely effects of our rules,” she said. “I think it is hard for people to appreciate the enormity of what Dodd-Frank requires of federal agencies, and, in particular, the SEC. In terms of breadth and scope, Dodd-Frank is arguably the most significant financial legislation in modern history.”
Dodd-Frank is more than 10 times longer than the Sarbanes-Oxley Act and requires more than ten times as many individual rules and studies, Casey said. “The volume of this rulemaking, coupled with the speed at which Congress expects it to occur, poses significant challenges to the agency,” Casey said.
During his April 12 remarks on the thirteenth series of proposed rulemakings under Dodd-Frank, CFTC Commissioner O'Malia said, “I think everyone appreciates that we will not be able to implement all the rules in time to comply with the statutory deadlines. I think we should put an end to artificial and arbitrary deadlines and work to implement a completely transparent final rulemaking and implementation process going forward. We must be thoughtful and deliberate.”
MAKING PROGRESS?
The pie charts below detail how Dodd-Frank rulemaking is progressing for banking regulators, the SEC, the CFTC, and others:
Source: Dodd-Frank Rulemaking Progress Report, May 1, 2011.
Others worry, however, that the delays could allow Congressional opponents of Dodd-Frank to repeal parts of the reform. For example, the Burdensome Data Collection Relief Act, a bill introduced by U.S. Rep. Nan Hayworth(R-N.Y.), which seeks to repeal a Dodd-Frank provision requiring publicly traded companies to collect and disclose certain information about employee compensation, was passed by a House Financial Services Sub-committee on Capital Markets on May 4.
Despite such objections, with 243 unique rule requirements in Dodd-Frank, it's important for companies to make sure that the underlying regulations are implemented intelligently and carefully, says Gabriel Rosenberg, an associate at the law firm Davis Polk & Wardwell. “It's not necessarily a bad thing that deadlines are missed because regulators are giving careful thought to the rules they're going to make, to be sure that they're workable, not only in the abstract, but also with respect to the other hundreds of rules that have to be made under Dodd-Frank, and the thousands of rules that compliance professionals deal with every day as part of existing structures,” he says.
With such a huge task, no one's surprised that deadlines are starting to slip, Rosenberg says. “There's no question that this is a trend that's going to continue. We'll definitely have this conversation about missing Dodd-Frank deadlines again in July when the final deadline is missed. Is it possible that in December of 2011 we'll be having this conversation? Absolutely, it's very much in the realm of possibility."
Once the final rules are passed, the next debate is likely to be over when they should become effective. At their joint roundtable, the SEC and the CFTC solicited market feedback on the issue. They are asking for comment on the right order and timeframe to implement certain Dodd-Frank provisions.
In the absence of final rules, some lawyers suggest that companies prepare for new regulations based on the proposed rules. “We are helping many clients prepare for reforms based on the idea that the proposed rules will probably be quite close to the final rules,” Rosenberg says. “It's rather important that people start preparing, because there's an incredible amount to do.”
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