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Securities Regulation in a Post Dodd-Frank World

September 19, 2015
Securities regulation – historically a hot-button field – has, in recent years, gained even more attention in the aftermath of the 2007-08 financial crisis. Economists, politicians and regulators everywhere questioned who was responsible and more importantly, how to prevent it from happening again. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, the complexity and ubiquity of regulation in the securities industry jumped as well.

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. [1]

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.[2]

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”.[3]

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”.[4]

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.[2] Commissioner Piwowar also raised concerns that such a proposal would “unintentionally…result in a further increase in executive compensation”.[3]

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”. [5] 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.[6]

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.[7]

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?

  [1] http://www.sec.gov/about/whatwedo.shtml

  [2] http://www.sec.gov/news/pressrelease/2015-136.html

  [3] http://www.sec.gov/news/statement/statement-at-open-meeting-on-clawbacks-of-erroneously-awarded-co.html

  [4] http://www.sec.gov/news/statement/statement-on-proposed-rule-and-rule-amendments-on-listing-standa.html

  [5] http://www.economist.com/node/21547789

  [6] http://dailysignal.com/2015/07/22/five-years-after-dodd-frank-worry-of-too-big-to-fail-still-persists/

  [7] http://www.sec.gov/spotlight/dodd-frank.shtml#

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  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
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  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>HUD State of the Cities Data Systems</h3><p><strong><img width="200" height="200" alt="" src="/live/image/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg" class="lw_image lw_image482 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 3x" data-max-w="612" data-max-h="613"/>The SOCDS provides data for individual Metropolitan Areas, Central Cities, and Suburbs.</strong> It is a portal for non-national data made available through a number of outside institutions (e.g. Census, BLS, FBI and others).</p><p> Quick link: <a href="http://www.huduser.org/portal/datasets/socds.html" target="_blank">http://www.huduser.org/portal/datasets/socds.html</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>