Investor group warns against Dodd-Frank rollback

Apr 27, 2017
<p><span>CII voices concerns about corporate governance implications of Dodd-Frank replacement</span></p>

A large US investor group has voiced its opposition to Republican plans to roll back large chunks of the post-financial crisis regulatory architecture, describing a new bill as ‘akin to removing seatbelts from cars.’

The Republican-led House Financial Services Committee yesterday discussed an updated version of the Financial Choice Act, having passed the original draft of the bill in September. Among other things, the legislation – if approved by Congress – would:

  • Repeal Title II of the Dodd-Frank Act, which is intended to provide a process to quickly and efficiently liquidate a large, complex financial company that is close to failing, and replace it with a new chapter of the bankruptcy code
  • Retroactively repeal the authority of the Financial Stability Oversight Council to designate firms as systematically important financial institutions
  • Impose a requirement that financial regulators conduct a detailed economic analysis of all proposed and final regulations to ensure the costs imposed are outweighed by the benefits
  • Provide an ‘off-ramp’ from the Dodd-Frank supervisory regime and Basel III capital and liquidity standards for ‘banking organizations that choose to maintain high levels of capital.’

The Council of Institutional Investors (CII), whose members manage assets in excess of $20 tn, submitted a letter to the committee ahead of yesterday’s hearing to criticize the bill. ‘The Financial Choice Act would threaten prudent safeguards for oversight of companies and markets, including sensible reforms made in the wake of Enron and the financial crisis to close critical gaps in regulation,’ Ken Bertsch, executive director of CII, writes in the letter. ‘The new legislation is akin to removing seatbelts from cars - it’s just too risky.'

In the corporate governance arena, the bill would require shareholders wishing to put a proposal on a company’s annual meeting ballot to own at least 1 percent of the stock for three years, compared to the existing requirement of holding just $2,000 worth of stock for one year. CII expresses concerns about raising the threshold. It states that, under the bill, filing a shareholder proposal at, say, Apple, Exxon Mobil or Wells Fargo would require investors to own $7.5 bn, $3.4 bn or $2.6 bn in shares, respectively.

The bill would also put a stop to the SEC’s proposed universal proxy rule, which would grant shareholders voting by proxy the same rights as those voting in person. ‘Congress should not block SEC action on this critical mechanism for holding directors accountable to the shareholders they are elected to represent,’ Bertsch says.

The group was writing shortly after the Manhattan Institute for Policy Research found that proxy access is the most common focus of shareholder proposals at annual general meetings so far in 2017.

CII also opposes the bill’s proposed change to Dodd-Frank’s say-on-pay rules. Under the proposed legislation, public companies would only be required to hold votes on executive compensation when there is a ‘material change’ to executive compensation. CII warns that ‘eliminating say-on-pay votes would prompt more investors to vote against corporate directors at companies with troublesome pay practices, because they would have no other mechanism by which to signal their disapproval.’

According to recent research into the S&P 1500 by Willis Towers Watson, 92 percent of say-on-pay votes have been in favor of the proposed executive pay packages so far this year. 

The hearing highlighted the different views on the bill. ‘Good rules require good process,’ said Hester Peirce, senior research fellow at the Mercatus Center at George Mason University, during testimony in front of the committee yesterday morning. ‘The [Financial] Choice Act makes a number of improvements.’ 

Many Democrats oppose the legislation, including Rep Maxine Waters, D-California, who leads the Democrat minority on the committee. She said during the hearing: ‘The Wrong [sic] Choice Act undoes Wall Street reform and takes us back to the practices that encouraged the risky behavior that crashed our economy.’ 

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