Lou Rohman, Vice President, XBRL Services, Merrill Corporation | February 22, 2017
SEC in transition - Dodd-Frank Act hangs in the balance
The SEC is in transition as a new White House administration takes place. How will the SEC’s focus change under new leadership?
After the financial crisis in 2008, the SEC took an activist approach under Chair Mary Jo White. They attempted to balance implementing the requirements of the gargantuan Dodd-Frank Act, which Congress passed to prevent similar issues, with its core three-part mission: protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.
That was eight years ago. Enter 2017 and the fate of the Dodd-Frank implementation is hanging in the balance. The Trump administration released an Executive order which aims to “dismantle” many aspects of Dodd-Frank which they believe to be onerous. The extent of this dismantling is to be determined, but specific changes happening now within the SEC will have a significant impact. What are some of these changes?
SEC Chair Jay Clayton nominated
Jay Clayton has been nominated to be the next SEC Chair. Mr. Clayton is an experienced attorney with the firm of Sullivan and Cromwell focused on IPOs, including Alibaba. The type of regulation he will favor isn’t clear since Clayton doesn’t have a significant public record. But he has stated “We will carefully monitor our financial sector, as we set policy that encourages American companies to do what they do best: create jobs.” Congress has not scheduled hearings to vote on Jay Clayton’s nomination yet.
New Commissioners and interim actions
Typically, the SEC has five voting members: two Republican commissioners, two Democratic commissioners and the chair. Two commissioners resigned in 2016 and, with the departure of Chair White in January 2017, the only remaining Commissioners are Kara Stein and Michael Piwowar. To approve a new rule, the SEC must have a quorum of Commissioners. If Stein and Piwowar agree with each other, they may constitute a quorum of two and approve a rule 200.41 Quorum of the Commission.
While Commissioners Piwowar and Stein could authorize a new rule together, it is doubtful that the SEC will be very active until the new, full Commission is in place. In the interim, Michael Piwowar serves as the Acting Chair. Mr. Piwowar is a Republican with a record supporting moderate regulation but voting against what he perceives to be overly burdensome disclosure.
Congressional and SEC action – Conflict Minerals, Resource Extraction, Pay Ratio
However, rulemaking is not required to begin the reversal of specific Dodd-Frank requirements. Dodd-Frank mandated many specific disclosures that have been criticized as politically motivated and not key information for investors, including Conflict Minerals, Resource Extraction and Pay Ratio reporting.
Mr. Piwowar directed SEC staff to reconsider the guidance for the existing Conflict Minerals disclosure mandate on January 31, 2017. Since the rule was implemented in 2014, he questions if the situation in and around the Congo has changed and argues that the rule penalizes both companies and legitimate miners.
Recently, he continued this focus requesting public comment on the Pay Ratio rule implementation. Advocates view the rule as a critical measure to publicize and rein in excessive executive compensation. Critics contend the rule costs too much to implement. In both cases, the SEC may provide more relief for filers or postpone disclosure until the new SEC or Congress can reverse the rules.
Congress added their support to eliminating these aspects of Dodd-Frank by passing a joint resolution disapproving the Resource Extraction rule. They claim that U.S. oil and gas companies may lose business if they are forced to disclose their exploration projects publicly, in addition to the high cost.
While the SEC’s core mission remains the same, politically contentious Dodd-Frank disclosures may be eliminated with little fanfare or effort.
Impact to XBRL
Does any of this impact the SEC’s structured data initiative? In a 2015 speech, Commissioner Piwowar stated his clear support for Inline XBRL which allows filers to submit tagged financial data within the HTML file itself. Mr. Piwowar stated: “the benefits of accurate and high quality financial reporting are incalculable.” Commissioner Stein has been a proponent of XBRL reporting, frequently advocating for updating the SEC’s rules for digital reporting. Also, Paul Atkins, SEC Commissioner from 2002-2009, has been President Trump’s key advisor on Financial Regulation. In a 2006 speech, he strongly supported the launch of XBRL and advocates structured, interactive data.
These actions indicate that, throughout the SEC transition, XBRL digital reporting will be recognized as a progressive initiative that brings greater efficiency to the financial markets. Especially with the continued growth of XBRL as an international standard, it seems very likely the SEC will continue the movement to reporting with structured data.
No doubt, the SEC transition has started. I’ll be watching it closely to determine its impact.