On July 21, 2010, President Barack Obama signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act. Congress passed Dodd-Frank in response to the financial crisis, but its reach extends into every nook and cranny of the American economy.
While Dodd-Frank spans over 2,300 pages, Congress, amazingly, left much of the hard work up to the regulators. The enormity of this task - 259 mandatory rulemakings and 188 discretionary rulemakings, as compared to 16 rulemakings under Sarbanes-Oxley - is trumped only by the health care legislation passed last year. Recognizing the burdens facing business, the Obama administration issued Executive Order 13563 on January 18, 2011, to put in place an enhanced regulatory review process. However, the Dodd-Frank rulemakings are exempt. Congress has also begun to question the ability of regulators to handle this burden, and observers are speculating that deadlines will begin to slip.
Now to brass tacks.
Proxy Access
Capping a 50-year effort, the SEC, on August 25, 2010, exercised the authority granted under Dodd-Frank and gave qualifying shareholders access to the company proxy if they have had a three percent stake in the company for three years. On September 29, 2010, the U.S. Chamber of Commerce and the Business Roundtable joined forces and sued the SEC to overturn these rules. The theory of the lawsuit is that the SEC acted in an arbitrary and capricious manner by ignoring economic analysis, failed to meet standards to promote market efficiency and capital formation, bypassed the state corporate law system, and forced companies to engage in compelled speech. Several days later, the SEC issued a rare stay of the proxy access rules until the lawsuits' conclusion.
Oral arguments will be heard by the DC Circuit Court of Appeals on April 7, and a decision is expected to be rendered in late spring or early summer.
Whistleblower Provisions
Under one of the more controversial provisions of Dodd-Frank, whistleblowers will be able to receive a bounty of between 10 and 30 percent of a fine or amount that is disgorged by a company through a finding of wrongdoing. The SEC and CFTC have separate, though similar, proposed rules to implement these provisions. In late December, SEC Chairman Mary Schapiro stated that the agency did not have the funding available to create the whistleblower office required under Dodd-Frank. Whistleblower advocates have pushed for the increased bounties to prevent the recurrence of a Bernie Madoff scenario. The ire of the business community has been raised by fears that corporate compliance programs can be circumvented, that the 90-day window is too short and that wrongdoers can profit from their actions.
The lobbying on this issue has been fierce on both sides, and the SEC is expected to issue final rules by the end of March.
Congo Resource Materials
Section 1502 of Dodd-Frank requires the companies to disclose if their products contain particular metals mined in the Congo. Proceeds of conflict minerals have financed human rights violations within the Democratic Republic of Congo. Businesses have taken issue with this disclosure because of the difficulty in tracing materials in the supply chain, as these metals may only be used in trace form. Compliance is difficult, if not impossible, as well as extremely costly.
The SEC extended the comment period to March 2.
Executive Compensation
Several new disclosures under Dodd-Frank related to executive compensation. The SEC must issue rules for issuers to report in proxy solicitation the annual relationship between paid executive compensation and the financial performance of an issuer. Additionally, disclosures will have to be made in the form of a ratio between the compensation paid to the CEO of a company and the median of all compensation paid to all employees worldwide of a company. The SEC has delayed issuing rules on this topic until next summer.
In mid-February, the FDIC released proposed rules on enhanced compensation structure disclosure. These rules seek to increase disclosure and place restrictions and parameters on incentive compensation for top executives and employees who may place firms at a material risk. The comment period is 45 days long.
Say-On-Pay
Dodd-Frank gives shareholders an advisory, non-binding vote on executive compensation, as well as the right to determine, once every six years, if that vote can happen on an annual, biannual or triennial basis. The SEC promulgated final rules on say-on-pay on January 25, 2011.
Loss Contingencies
Last November, the Financial Accounting Standards Board waived the white flag on proposed FAS 5 revisions to disclose potential liability when a company is sued and before there is an adjudication or settlement. Businesses and the legal profession fought these provisions as being prejudicial to the legal defense capabilities of companies. Within days of this development, reports began to surface that the SEC will compel companies to move forward with enhanced disclosures through the filing of 10-Ks. Stay tuned.
Emerging Issues
The number of new issues that will emerge as Dodd-Frank slowly comes on line is unknown. The new Financial Stability Oversight Council, Office of Financial Research, and Bureau of Consumer Financial Protection will have enormous data collection capabilities, as well as overlapping jurisdictions with prudential regulators. It is unclear how these systems will mesh with existing ones, or how the demands will increase for counsels, corporate secretaries or compliance officers.
This is but a snapshot of the Dodd-Frank issues facing the business community. My best advice to counsels is study proposed rules of interest and make your voice heard. Without your input, proposals won't change; with your input, improvements are possible.
Published February 28, 2011.
