November 19, 2014

A New Congress Must Perform Major Surgery On Dodd-Frank

Hester Peirce

Former Senior Research Fellow
Summary

Regulators are not looking forward to heightened congressional oversight of their activities, but the new Congress offers them something to offset the pain. Unencumbered by having voted for Dodd-Frank, the incoming Congress can jettison unnecessary statutory mandates so that agencies can get back to their core missions.

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In the four years since the passage of Dodd-Frank, the financial regulators have written a lot of new rules. Throughout the implementation period, at least one of the chambers of Congress has been under the control of the party that passed Dodd-Frank. Agencies therefore have been spared some painful scrutiny of their Dodd-Frank implementation programs. This month's election changed that, and agencies are likely to face a lot more uncomfortable oversight in the upcoming Congress. But the new Congress, not as wedded to Dodd-Frank as its predecessors, could also make life more bearable for regulators by eliminating some of Dodd-Frank's extraneous statutory mandates.

The Securities and Exchange Commission is a prime candidate for mandate trimming. Dodd-Frank assigned the SEC responsibilities that are far from its core mission. For example, Dodd-Frank directed the SEC to require companies to assess and report their use of minerals tied to the violence in and around the Democratic Republic of the Congo. Companies have spent many hours and dollars trying to identify whether they are using minerals that fund the conflict, but the task appears to be futile. The Department of Commerce recently published a list of facilities that process the minerals at issue, but stated that it could not determine "whether a specific facility processes minerals that are used to finance conflict in the Democratic Republic of the Congo or an adjoining country." In other words, the government cannot do what it is asking companies to do.

Another mandate that imposes tremendous burdens on the SEC and companies without proportionate benefit for investors is the so-called pay ratio rule. Under Dodd-Frank, the SEC is working on the rule, which requires companies to disclose the ratio of their median employee compensation to the CEO's pay. Writing such a rule might be a simple task if all companies had no more than ten full-time employees working in a single location, but it is quite a bit more complicated to write such a rule for multinational companies that employ thousands of employees working a mix of full- and part-time schedules.

The conflict mineral and pay ratio mandates do not further the SEC's tripartite mission-protecting investors; facilitating capital formation; and maintaining fair, orderly, and efficient markets. Rather they distract from the considerable work the SEC has to do in these areas. For example, the economy's precarious health depends on the ability of financial markets to direct investable funds to the parts of the economy that need it most. Would-be entrepreneurs and growing small businesses face many obstacles to getting the money they need-obstacles that the SEC could work on removing if it were not so preoccupied with pointless Dodd-Frank mandates.

The Financial Stability Oversight Council is another agency that could use some congressional refocusing. The FSOC, a creation of Dodd-Frank, had the potential to play the important role of bringing regulators together to share information, ideas, and concerns about the financial system. Congress, however, loaded the agency down with the responsibility of identifying companies that are systemically important. This function has absorbed considerable regulatory time and has caused undue angst in the market; designated companies will face substantial regulatory costs and are likely candidates for future taxpayer bailout. If Congress were to eliminate this responsibility, the FSOC could focus on the more important task of bringing regulators together to think holistically about financial system regulation. Eliminating the designation exercise would have the added benefit of preventing the emergence of a new category of too-big-to-fail entities.

Removing the FSOC's power to designate also would free the Federal Reserve of the responsibility of regulating entities like insurance companies about which it has no expertise. Congress could further refocus the Fed on its role as a lender of last resort by quashing the Fed's Dodd-Frank-fueled ambitions of being the regulator of last resort. The Fed will be able to focus on its core central bank functions if Congress shifts its regulatory responsibilities to other bank regulators.

Regulators are not looking forward to heightened congressional oversight of their activities, but the new Congress offers them something to offset the pain. Unencumbered by having voted for Dodd-Frank, the incoming Congress can jettison unnecessary statutory mandates so that agencies can get back to their core missions.