Dodd-Frank Rules Slow at SEC After Court Cost-Benefit Challenge

March 7, 2012
Bloomberg News
Jesse Hamilton

Less than halfway through the process of implementing the 2010 Dodd-Frank Act, the pace of rule-writing by the U.S. Securities and Exchange Commission has slowed by about half.

The agency’s five commissioners haven’t met once in the last four months to approve or propose regulations required under Dodd-Frank, designed to curb the kind of risky practices that fueled the 2008 financial crisis.

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SEC Chairman Mary Schapiro told reporters in Washington last month, “It’s easier to propose rules than it is to adopt them.” Photographer: Joshua Roberts/Bloomberg

SEC Chairman Mary Schapiro acknowledged the slowdown, describing it as a “natural lull” after an initial gush of proposals.

“It’s easier to propose rules than it is to adopt them,” Schapiro told reporters in Washington last month, particularly after a court rejected one agency rule over its costs.

The rule-making holdup is extending a period of uncertainty for affected firms -- some welcome the delay of unwelcome regulations, others would prefer clarity.

Tom Quaadman, vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, described the law as imposing “impossible deadlines.”

“They’ve given them a 2,400-page piece of legislation that really directs the regulators to do all the hard work,” Quaadman said.

Among the rules in limbo are the so-called Volcker rule to ban banks’ proprietary trading, restrictions on asset-backed securities deals, and forcing firms to disclose whether manufacturing metals were mined in war-ravaged parts of Africa.

Financial Revamp

Enacted in 2010, Dodd-Frank requires U.S. regulators to write hundreds of new rules to revamp how the financial sector does business, and more of those rules were assigned to the SEC than any other agency.

In the first year after the law’s passage, the agency voted to approve 108 proposals, adoptions and rule concept releases, according to data compiled by Bloomberg, most of them related to Dodd-Frank. That’s an average of nine per month.

Since the law’s one-year anniversary July 21, the register has recorded only 39 rulemaking SEC votes, or about 5.3 a month, the data show.

Much of the recent activity has taken place behind closed doors, adding to the appearance of a slowdown. Since Oct. 26, the agency has adopted only nine rules and did so without holding a single public meeting, conducting the votes by paper ballot.

Schapiro offered several explanations for the SEC’s slower pace, including the complexity and high volume of public comments on recent rules, and the fact that a new commissioner joined the five-person panel last November.

Rule Rejected

The most important factor cited both by Schapiro and agency observers, however, is legal. Last July, the U.S. Court of Appeals rejected an SEC rule that would have made it easier for shareholders to insert board candidates onto public-company ballots, saying the agency failed to adequately assess the costs.

The rejection of the so-called proxy access rule made all future SEC rules vulnerable to a similar challenge, forcing Schapiro and her agency to redouble efforts to study cost- benefit effects.

“We are clearly taking more time on cost-benefit analysis,” Schapiro said.

The court decision was “like sticking a two-by-four in the spokes” of SEC rulemaking, said Lynn E. Turner, a former chief accountant at the agency who is now managing director of Litinomics Inc., an economic and legal consulting firm. “I think it’s going to get worse, not better.”

Congress may exacerbate the problem, he noted: A House committee recently approved a bill that would demand a more rigorous cost-benefit justification for each rule.

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