Commissioner Paredes Discusses The SEC Regulatory Agenda

Change, the future and the Commission’s regulatory agenda were the subject of SEC Commissioner Troy Paredes remarks to before the Society of Corporate Secretaries & Governance Professionals, 66th National Conference on “The Shape of Things to Come.” (July 13, 2012). In his remarks, Commissioner Paredes reviewed key topics from the SEC’s regulatory agenda to discuss the overall direction of regulation.

First, the Commissioner focused on the Dodd-Frank Wall Street Reform Act. The Act represents what Commissioner Paredes termed a “historic expansion of the federal government’s power over the economy.” While the Commission has enacted regulations under portions of the Act, there are more to come.

The key question coming out of the recent financial crisis is not whether to have regulation, but “How much” as the Commissioner put it. In raising this question Commissioner Paredes expressed concern that the “present wave of regulation will prove to be excessive, unduly burdening and restricting our financial system . . .” This may well come from “the cumulative impact of the aggregation of rules . . .” all of which may make it more difficult for an enterprise to raise capital and manage its risks. Thus a great deal of the future will depend on how regulators craft new rules.

Second, the Commission’s regulatory agenda is broader that Dodd-Frank. In addressing this agenda it is critical that the SEC “carefully evaluate whether the intended goals of our actions will be achieved; and that we need to identify and give due regard to the possible undesirable effects and unintended consequences of our choices. In other words, the SEC must engage in rigorous cost-benefit analysis – rooted in economics and the available data – when fashioning the securities law regime.” In this regard the Commissioner’s remarks echoed the congressional testimony of Chairman Schapiro earlier this year which discussed the increased prominence of economic analysis in Commission rule making. The comment also reflects the holding of a D.C. Circuit Court ruling earlier this year which remanded a Commission rule for inadequate analysis.

Third, Commissioner Paderes discussed two items on the pending Commission rule making agenda. Once focuses on executive pay while the other deals with clawbacks.

Executive pay is a high profile issue which can influence the manner in which the executive behaves, according to Commissioner Padres. A mix of Dodd-Frank provisions focus on this question. New provisions will require that there be disclosure of comparisons of executive pay to the firm’s financial performance, the ratio of median annual total compensation of the issuer’s employees to the CEO’s annual total compensation and employee and director hedging of the value of the issuer’s stock.

In developing these regulations it is critical that they be “workable in practice.” This means in the first instance that the Commission needs to consider the practical difficulties and costs of obtaining and assembling the data. It also means that the SEC should anticipate the consequences of the new regulation as a safeguard against undesirable effects.

Clawbacks under Section 954 of Dodd-Frank is also on the Commission’s regulatory agenda. Some commentators have stated that section imposes no fault liability the Commissioner noted. Thus “an executive who has worked diligently and honestly . . . may nonetheless have to pay back a considerable portion of his or her compensation if the company has to restate because of an accounting error. I can understand why many might find this troubling,” according to the Commissioner. He went on to state that this could have “unintended consequences.” Commissioner Paredes did not mention the SOX clawback Section the Commission is currently utilizing in its enforcement program which imposes strict liability and requires the repayment of certain incentive based CEO and CFO compensation if there is a restatement as a result of misconduct.

The Commissioner concluded his remarks by focusing on the importance of good decision making by corporate directors. Quoting Peter Drucker, he stated that “Decisions of the kind the executive has to make are not made well by acclamation. They are made well only if based on the clash of conflicting views, the dialogue between different points of view . . .” He cautioned however that the deliberations should not give way to hostility, but focus on good dialogue.

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