SEC Commissioner Gallagher On Dodd-Frank and Staff Divisions

SEC Commissioner Daniel Gallagher provided something of a score card for activities over the past five years he has served on the agency prior to his impending departure. To the surprise of few he panned the Dodd-Frank and the FSOC while giving the staff divisions mixed reviews. “Dodd-Frank at Five: A Capital Markets Swan Song,” delivered before the U.S. Chamber of Commerce, Washington, D.C. (August 4, 2015)(here).

Commissioner Gallagher’s entire tenure on the Commission has taken place during the five year history of Dodd-Frank. That term represents “the first Five-Year Plan for our national economy,” echoing comments he would make later in the speech about the “Soviet Five-Year Plans. . .” Yet “Dodd-Frank has backfired, strangling our economy, increasing the fragility of the financial system, and politicizing our independent financial regulators” he declared.

Dodd-Frank grew out of the financial crisis of the last decade and was supposed to be an answer to the ills that created it. Commissioner Gallagher saw it as “the Fed, FDIC and OCC . . .busy leveraging the financial crisis to grow their prudential empires . . . [while] the SEC became the implementing tool for the long pent-up dreams of liberal policymakers and special interest groups.”

The statute, passed without bipartisan support, changed the agency the Commissioner declared: “If the SEC seems political nowadays, it is because of Dodd-Frank.” Essentially the Act turned the SEC into a “scrivener” required to implement numerous mandates “stemming from one side of the political spectrum.” This “called into question the very notion of ‘independent’ agencies” and ultimately impaired the work of the SEC.

In the end Dodd-Frank “created the Fed-dominated Financial Stability Oversight Counsel, or FSOC, the Fed-dominated SIFI designation process, the Fed-dominated Title VIII oversight regime for clearance and settlement, the FDIC-dominated Title II resolution process . . .” At the same time capital market regulators were tasked with writing rules to interpret and implement the “ill-formed” mandates of the Act. And, within the FSOC the SEC and CFTC had only two votes – and those were exercised by the Chair of each, not the agency. The result is that the SEC simply “rubber-stamps the work of the prudential regulators and their umbrella organizations FSOC and FSB [Financial Stability Board], we get less vibrant markets, more government backstops, more potential bailouts.”

The real focus has to come from within the agency and what it is prioritizing, Commissioner Gallagher declared as he briefly reviewed the staff divisions. Beginning with the Division of Corporation Finance he noted that over the last several years “despite the best instincts of many key staffers . . . [it has] become a tool for advancing a radical shareholder rights agenda. Executive pay rules, stonewalling on shareholder proposal reform, and now the universal ballot – the Corp Fin agenda has confused protecting investor activism with protecting investors.” Despite some improvements such as Reg A+ many growing companies are avoiding the capital markets.

On the other hand the Division of Investment Management “has made great strides . . . shepherding a nuanced money market fund rule to adoption and announcing a suite of rulemaking initiatives aimed at gathering better and more useful data in the fund space.” At the same time the FSOC and FSB have “shifted their focus” to activities in this area, proposing banking type regulations. It is critical that the Division “stand its ground and defend its purview.”

In his final three points the Commissioner focused on Enforcement, Trading and Markets and then on the Division of Economic and Risk Analysis. As to Enforcement Commissioner Gallagher reiterated his concerns about brining enforcement actions against compliance personnel. In a tip of the hat to his audience, he noted the increasing debate regarding the use of administrative proceedings concluding: “ I am confident the Enforcement Division will heed outside voices calling for introspection, such as the Chamber’s recent report in this area” which proposes a series of changes in the way the Division and the agency make forum selection decisions for enforcement actions.

Turning to the work of Trading and Markets, Commissioner Gallagher noted that in a number of areas its oversight is “woefully outdated and in need of attention.” At the same time the work of the DERA is critical “to analyzing the costs and burdens associated with the Commission’s rulemakings, which all too often have failed to accurately take into account the crippling and cumulative costs being place on issuers and market participants.”

The Commissioner closed by noting that there “appears to be a renewed understanding on the Commission of the critical importance of updating existing programs instead of continuing the Dodd-Frank death march of rulemaking. And some capital markets regulators are finally speaking out about the importance of capital markets to investors and the global economy. . .”

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