Securities Regulation in a Post Dodd-Frank World
September 19, 2015
By Megan Yan
A Brief History – What is securities regulation?
Securities regulation can be traced back to the Wall Street Crash of 1929, which resulted in Congressional hearings on the lack of regulation that led to securities abuses. The Securities Act of 1933 mandated publicly-traded companies to register. The Securities Exchange Act of 1934 was then enacted to regulate stock exchanges and listed companies – and eventually, the over-the-counter market (through amendment in 1964). The 1934 Act also created the Securities and Exchange Commission, the primary body tasked with enforcing securities regulation that now span portions or the entirety of the following legislation: Securities Act, Securities Exchange Act, Investment Company Act of 1940, Investment Advisers Act of 1940, Sarbanes-Oxley Act of 2002, Dodd-Frank and Jumpstart Our Business Startups (JOBS) Act. 
Although it oversees the majority of securities regulation, the SEC is not the only body presiding over the field. The Commodity Futures Trading Commission (CFTC) oversees futures and certain derivatives markets. Similarly, self-regulatory organizations such as the Financial Industry Regulatory Authority (FINRA) are under the SEC’s purview and carry out rules governing broker-dealers among others in the securities industry.
This section is a very brief history on the securities regulation industry, which is unfortunately far too complex and detailed to properly engage in for this post. For more information on these areas and each agency’s jurisdiction, consult the websites of the agencies.
Since the passing of Dodd-Frank which brought great change to the financial industry and radically increased securities regulation, debates about the purpose and effectiveness of government regulation of this industry have risen.
Exhibit A: The Clawback Proposal
Take the Securities and Exchange Commission’s latest proposed rule requiring companies to adopt clawback policies on executive compensation. Rule 10D-1, proposed on July 1, directs national securities exchanges – think NYSE, NASDAQ – to require all public companies to implement policies that would return or “claw back” incentive-based compensation from executive officers in cases where the compensation was erroneous. This can occur in cases where there is an accounting restatement. The new rule would require recovery of compensation received in the past three fiscal years.
This new clawback proposal is the last of the SEC’s required executive compensation rules under Dodd-Frank. And while it may seem intuitive that erroneously received compensation should be returned, this proposal has still generated buzz and controversy. First, the proposal was passed in a 3-2 commission vote along party lines. All five commissioners – including Chair White – released public statements after the open commission meeting. Dissenting commissioners Michael S. Piwowar and Daniel M. Gallagher argued that such a proposal was shifting important Commission resources from more important reform. Commissioner Piwowar’s statement claimed the Commission had “yet again spent significant time and resources on a provision inserted into the Dodd-Frank Act that has nothing to do with the origins of the financial crisis and affects Main Street businesses that are not even part of the financial services sector”.
Commissioners Kara M. Stein and Luis A. Aguilar both supported the proposed rule, arguing that it contributes to the fight to stop public company executives from excessive profiting. Commissioner Stein stated that it “aims to increase accountability and refocus executives on long-term results” as well as “discourage artificially inflated financial statements”.
While increased accountability seems critical in a post-financial crisis world, the differences in ideology arise from the following question: how much regulation accomplishes this? Both dissenting commissioners raised questions of the scope of the proposed rule, which would define “executive officer” to include the company president, principal financial officer, principal accounting officer, as well as any vice-president in charge of a principal business unit. Commissioner Piwowar also raised concerns that such a proposal would “unintentionally…result in a further increase in executive compensation”.
How Regulated is “Too Regulated” – A Post Dodd-Frank SEC
Such controversies on the purpose, scope and need for regulation have become central to policy-makers and agency heads alike. A 2012 article in The Economist warned that “regulation may crush the life out of America’s economy”.  Meanwhile, The Daily Signal reports that Americans are still concerned about “too big to fail” institutions even five years after Dodd-Frank. There are even accusations that these institutions have only gotten larger since 2010.
It’s clear that the regulatory environment surrounding the securities industry has changed drastically since the financial crisis and the passage of Dodd-Frank. Propelled by the requirements under Dodd-Frank, regulatory agencies such as the SEC have been tasked by Congress to propose and adopt numerous new rules. This process has expanded its scope of activities, resulting in the opening of five new offices – Office of the Whistleblower, Office of Credit Ratings, Office of the Investor Advocate, Office of Minority and Women Inclusion and Office of Municipal Securities. As stated on its site, the SEC has “adopted final rules for 61 mandatory rulemaking provisions of the Dodd-Frank Act.” These rules have spanned areas from private funds to security-based swaps to the highly publicized Volcker Rule restricting certain trading by commercial banks.
Having spent a summer at the SEC, I’ve seen first-hand the significant amounts of research and work that goes into rulemaking. The importance of the SEC’s three-pronged mission – protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation – is felt across the organization and certainly cannot be denied.
And yet, as we move forward into an era when big businesses are coming under greater fire and scrutiny for their perceived roles in causing the financial crisis and perpetuating income inequality, the question remains: how do we achieve our ideal financial industry? And more importantly, whose job is it to get us there?
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