As of late, there has been talk amongst the new Republican Congress and President Trump to repeal and/or amend Dodd-Frank, and this could have a major impact on executive compensation issues. In fact, the Financial CHOICE Act has already been introduced that would repeal and amend portions of Dodd-Frank if passed, such as Pay Ratio, Say on Pay, Incentive Based Compensation and clawbacks.
Mark Bradford, executive compensation attorney with VLP Law Group recently sat down with Inside Counsel to discuss the potential repercussions of repealing or amending Dodd Frank.
Originally, Dodd-Frank was enacted in response to perceived excesses that resulted in the systematic failures we saw during the financial crisis of 2008. Dodd-Frank imposes important restrictions on banking organizations, such as the Volcker Rule that prohibits them from engaging in speculative trading, and imposes minimum capital and liquidity requirements.
On the other hand, according to Bradford, Dodd-Frank was hastily-conceived legislation that contains a grab-bag of both very specific and vague mandates that leave many details and implementation to the various regulators.
“These inherent flaws and heavy lobbying by business interests have delayed full implementation of Dodd-Frank,” he said. “Here we are six-and-a-half years later, and the political winds have shifted.”
Having control of both chambers of Congress and the executive branch has given Republicans a huge opportunity to implement their agenda. “The Republican Congress is generally hostile to regulation from an ideological perspective,” he said. “And has been receptive to lobbying from the financial industry to repeal or amend Dodd-Frank.”
So, how could have an impact on executive compensation issues? According to Bradford, Dodd-Frank has many provisions relating to executive compensation, including independence standards for compensation committee members and their advisors, say-on-pay, the CEO pay ratio disclosure, pay versus performance disclosure, compensation clawbacks, and limits on incentive-based compensation arrangements at financial institutions that encourage excessive risk-taking.
So, a full repeal would eliminate these mandates. Simple executive action could eliminate many mandates that haven’t yet been implemented, like the CEO pay ratio disclosure, pay versus performance disclosure, clawbacks, and limits on incentive-compensation at financial institutions. On the other hand, some requirements, like the say-on-pay vote, have become such an accepted and established practice at many public companies, that stockholder pressure would preserve them in the wake of a full repeal of Dodd-Frank.
The Financial CHOICE Act is the Republican counter-proposal to reform Dodd-Frank, which would weaken the ability of the Consumer Financial Protection Bureau to regulate the financial industry, limit the government’s ability to penalize financial institutions, allow financial institutions to qualify for exemptions from many Dodd-Frank regulations, and repeal the Volcker Rule. Additionally, according to Bradford, it seeks to undermine the ability of the government to regulate by repealing the Chevron deference doctrine that requires courts to defer to a federal agency’s interpretation of a law that it administers.
“Although it’s difficult to discern a consistent policy position through President Trump’s public statements and Twitter feed,” he said. “It is apparent that he and his advisors are hostile to regulation in general.”
President Trump has promised to dismantle regulations that he believes inhibit economic growth and job creation. As chief executive, President Trump can halt new regulation, and postpone, amend or withdraw regulations that are not yet effective. As an initial matter, Bradford says we can expect to see attempts to repeal the Department of Labor’s fiduciary rule for tax-qualified retirement accounts.
Bradford said, “I think that regulation of so-called social issues, such as the required disclosures of the CEO pay ratio, conflict minerals, and climate change, are vulnerable to repeal.”