It's been just over a year since the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law.The implications for corporate counsel and other corporate officers are still emerging and evolving.
Ely Razin, Head of Business Law & Governance and Scott McCleskey, Global Head of Financial Services Regulation, both with Thomson Reuters Governance, Risk & Compliance, recently sat down and tackled a few key questions about the law.
Editor: What has been the impact of Dodd-Frank?
Ely Razin: While the press will talk about it as banking reform, in fact, a big piece of Dodd-Frank is reforming many elements of the way companies govern themselves and handle disclosures - everything from executive compensation levels to individual events that need to be disclosed: anything from certain types of oil royalties and mining safety to a wide variety of other issues.Really, when you look at Dodd-Frank, it impacts all companies and therefore their GCs, who need to provide the best advice and the best disclosure.
Editor: Will Dodd-Frank result in robust ethics programs across corporations?
Scott McCleskey: Remember that when a company does disclose some wrongdoing, it doesn't mean they're granted immunity, so to speak.There will still be a cost, and you're seeing these fines go into the hundreds of million dollars. So I think we'll see more emphasis on preventing these things from happening in the first place.
Ely Razin: Because of Dodd-Frank's new whistleblower rules, companies have already begun working harder to uncover issues. So in addition to the mandates, we're seeing an indirect result of companies putting into place the procedures and processes to better manage their internal issues as well as handle the disclosure of these issues.
Editor: Dodd-Frank has received quite a bit of negative feedback; do you think Congress will try to rescind or significantly amend the Act?
Scott McCleskey: Well, there are certainly elements within Congress that would like to, but the reality is that they can't right now.I think their sights are on 2013 following the 2012 election. In the meantime, they're going to try to play slowball, and try to choke off the budgets for the agencies that are supposed to be implementing these rules.
Ely Razin: Right, the SEC and CFTC have announced the need to delay rule formation around the core issue of derivatives. They were handed a very big pile of regulations to form in a rather short period, and resource constraints don't make that process any easier.And if rules are poorly drafted or poorly implemented, there's likely to be a lot more litigation because at some point someone's going to turn around and tell a company, "You didn't do that right and I'm going to sue you."
Editor: Does Dodd-Frank prevent companies from making decisions based on what is best for the company's profitability and maximizing shareholder value?
Scott McCleskey: Some of the things that were happening before the financial crisis may have been giving companies the revenue equivalent of a sugar rush and that turned out to be bad loans.I think the point of Dodd-Frank is not about the situation inside a particular company but across the financial system.For instance, this whole notion of coming up with subprime loans that you normally wouldn't grant, but you did because you were able to package and sell them into the market and just keep passing the hot potato around.People were confusing the elimination of risk at the bank level with the fact that it was just getting passed around. So the point of Dodd-Frank with respect to profitability is to make sure that firms aren't engaging in practices for their own profitability that endanger the market.
Editor: Do you believe Dodd-Frank forces companies to resolve misconduct and other issues externally rather than internally, and what effect does this have?
Ely Razin: I think that there's been a lot of confusion around what is required under Dodd-Frank with regard to whistleblowing. I think it leads companies to make the decision that they need to resolve misconduct, and they're going to try and do it internally. But in addition, they have to put the correct procedures and board level oversight in place so that these things don't repeat themselves. And so there's resolving past misconduct and there's also the better management of the overall operation so that, frankly, there's less misconduct to worry about in the future. Therefore, I think that, if anything, this encourages better internal management. It's not about externalizing; it's about running your shop better internally.
Published September 1, 2011.
