Compliance Reporter Q&A with Paul Atkins
PA: The Trump Administration agenda and its goals on economic growth and regulatory reform have been clearly laid out since Day 1 and it has been heartening to see much progress being made in the various regulatory agencies. But it has been frustrating to see the ongoing resistance and slow-walking of the Trump Administration agenda by some holdovers from the previous Administration at particular agencies, including the Consumer Financial Protection Bureau.
Moreover, it is baffling that Treasury and Justice lawyers have not yet dropped the litigation of FSOC’s designation of MetLife as “systemically important,” despite losing their case in the U.S. District Court during the Obama Administration (with an excellently reasoned opinion by Federal District Judge Rosemary Collyer).
CR: How has the Trump administration’s approach to regulation fallen in line with what you expected?
PA: The President has been very clear since the election about his chief economic goals – creating more jobs to get Americans back to work.
In particular, President Trump has issued two Executive Orders that will improve the financial regulatory framework in the United States.
His Executive Order on Reducing Regulation and Controlling Regulatory Costs would require regulatory agencies to submit an “Annual Regulatory Cost Submission” to the OMB and require some agencies to eliminate two rules for every new rule promulgated. These policies will help curb the high costs associated with the accumulation of needlessly complex financial regulations.
Likewise, President Trump’s Executive Order on Core Principles for Regulating the Financial System sets out a general “mission statement” for financial services regulators. It advocates for a more rigorous economic analysis of financial rulemakings to restore public accountability within federal financial regulatory agencies and asks agencies to rationalize the federal financial regulatory framework. These strong guiding principles can help regulators put in place policies to restore transparency, economic analysis, predictability, and consistency.
CR: What do you view as the largest issue facing compliance professionals in the current landscape?
PA: Personal liability. Over the past three decades or so we have seen a slow but relentless drive by regulators to characterise compliance and legal personnel as primary actors in the course of their duties.
The Securities Exchange Act and Investment Advisers Act grant the SEC authority to impose sanctions on an employee who has failed reasonably to supervise a person subject to his supervision who commits a violation of the securities laws. Traditionally, the SEC brought failure-to-supervise cases against line supervisors, but that distinction has been under pressure. For example, I was in Chairman Breeden’s office in 1992 when the Commission issued the 21(a) report in the John H. Gutfreund case, the Treasury bond trading scandal involving Salomon Brothers. The SEC did not bring a failure-to-supervise case against Salomon’s General Counsel, but the report documented the General Counsel’s knowledge of the violative conduct and his failure to follow up to see that others were taking appropriate action to stop the conduct, or to blow the whistle on the lack of action.
Fast forward to today, and one can say that the responsibilities of in-house legal and compliance professionals are a bit more uncertain following the odd procedural course of the SEC administrative proceeding regarding Ted Urban, General Counsel of Ferris, Baker Watts, and then the 2015 Blackrock case, both of which demonstrated an increasingly aggressive yet vague enforcement approach regarding legal and compliance professionals. In the Urban case, the Commission deadlocked over the ALJ’s decision after Commissioner Dan Gallagher had to recuse himself from the case, so the ALJ’s ruling against Mr. Urban did not stand. I imagine that with Commissioner Gallagher’s participation, the Commission would have provided more clarity and changed the ALJ’s decision significantly.
I am optimistic that in the years ahead, under Chairman Clayton’s leadership, the SEC will bring needed clarity and consistency to many aspects of SEC rules, perhaps including expectations of compliance professionals.
CR: What are some areas of concern you would like to see regulators evaluate in the near future?
PA: How much time do we have? I could go on for hours. The list is long given that the rule book grew exponentially during the past seven years following Dodd-Frank’s enactment. Topping the list, I’d like to see regulators re-evaluate the Financial Stability Oversight Council and its powers more forcefully.
Certainly, Treasury has published reports in recent weeks that propose changes to regulations facing banks, asset managers, other capital markets participants, and insurance companies, as well as to FSOC’s powers.
Those reports contain many recommendations that will help undo the damage to economic growth brought about by a deluge of costly financial regulations during the past eight years.
However, some of the policy reforms endorsed by Treasury do not go far enough, or are misguided. For example, its recent FSOC report should have taken a stronger position against FSOC’s economically destructive, opaque, and largely unconstrained designation powers, which enable taxpayer bailouts and layer unworkable, economically wasteful banklike regulation on nonbanks. The House of Representatives has spoken clearly on this issue, passing legislation that would eliminate FSOC’s designation powers; given the President’s Executive Orders, I would have thought that Treasury would have taken a stronger position in that regard.
CR: How would you evaluate the early actions by Chair Clayton in his first few months?
PA: Chairman Clayton is the right person in the right job at the right time. He is serious about fostering regulatory simplicity overall and addressing issues regarding our capital markets. In his first speech as Chairman, he outlined eight principles to guide his tenure, including the need for the SEC to write clear rules so that those subject to them can comply and demonstrate their compliance, and the need for federal financial regulators, state agencies, SROs, and others to take a coordinated approach.
That speech was important because it laid out a regulatory philosophy that he has brought to life in his first months in the job. Throughout the previous administration, the agency had no articulated regulatory philosophy. Without a north star to guide it, it was pushed by politics and other regulators to address non-core issues and made-up problems (dare I say “fake problems”?), such as FSOC’s misguided attempt to designate asset managers as systemically important, when the SEC should have been focusing on its core mission of investor protection and improving competition in and efficiency of the markets.
CR: If you were still at the commission, what would be some of your priorities?
PA: Well, priority one would be getting the agency back to its core mission and addressing the internal structural, managerial, and cultural issues that have taken root at the SEC over the past two decades.
The SEC should reassess rulemakings of the last eight years that address special interests’ priorities instead of the agency’s core mission. Thanks to the Dodd-Frank Act, the SEC focused on such extraneous matters as constructing CEO-to-average-employee-pay ratios and requiring firms to track supply chains for conflict minerals. The statute required these provisions, but in each case, in politicised 3-2 votes, the Commission chose the most burdensome and costly way to implement the statutory provisions. The Commission did not need to prioritise these politically driven rules – they could have been left to the last. In fact, important provisions regarding swaps reporting still have not been implemented. Yet the ink was not even dry on the Dodd-Frank Act when former Chairman Mary Schapiro pushed through the shareholder access rule (which was not mandated by the Act), and even then, the SEC did a poor job in drafting the rule. The rule went down in flames in the D.C. Circuit Court of Appeals, with Judge Ginsberg memorably and appropriately calling its application to mutual fund families “unutterably mindless.”
On the structural side, I think it is time for the agency to address its well-documented organizational deficiencies, from the recent publicity around cybersecurity to the leasing fiasco under Chairman Schapiro. Dodd-Frank has made the organizational structure of the SEC more complicated, exacerbating the very siloed nature of the divisions.
CR: What do you see as the most likely form the DOL Fiduciary Rule will take when it finally enters enforcement?
PA: I do not have a crystal ball and long ago learned not to make predictions. However, I have been heartened to see the Department of Labor’s decision in late November to delay the full implementation of the fiduciary rule for retirement accounts. Meanwhile, Chairman Clayton has said that his agency is working on a fiduciary rule for brokers and investment advisers and that it is a priority. Most importantly, as Clayton has told the media, the agency will try to produce a rule so that “when investors see it, they are happy with” it.
CR: If a deregulatory agenda is pursued by this administration going forward, what rules would you view as most in need of being taken off the books or scaled back?
PA: In addition to reining in FSOC, I think the Volcker Rule should be addressed, which Federal Reserve staff economists have found saps liquidity from the financial markets because of its chilling effects on banks holding securities to trade.
The FDIC needs to focus on the business of considering bank applications, and its bank examiners should have clearer guidelines, more supervision, and better training.
The Consumer Financial Protection Bureau, which since its inception has just “made it up” as it went along, does not know what the rule of law and due process mean. Compliance costs have exploded for banks of all sizes because of the trickle-down effect even for banks not subject to the CFPB, since other bank regulators pile on with redundant consumer rules. Now that Mick Mulvaney is in place at the CFPB, I’m hopeful we will start to see some improvement there.
Most of all, we need to work on the root cause of the financial crisis: Fannie Mae and Freddie Mac, which drove the explosion of securitized sub-prime mortgages.
CR: What area of regulation and compliance is being overlooked?
PA: I think that during the Obama years, regulators spent too little time assessing the cumulative costs of regulations. The new Administration should explore the market impacts of unintended interactions between the ever-increasing number of rulemakings from various agencies.
CR: Do you think the industry and regulators are correctly prepared for the cybersecurity threat in the wake of the SEC EDGAR hack?
PA: Cybersecurity is critical to investors, market participants, our markets, the SEC, and other government agencies. As Fed Governor Jay Powell appropriately said in his confirmation hearing to be Fed Chairman, cybersecurity is perhaps the foremost risk to the financial system. Unfortunately, the reality is that it is best to think about cyberattacks as a matter of when, not if. That kind of an approach and vigilance, and having contingency and crisis plans in place, is important for all of us – whether private companies or government agencies. The best defenses take into account that determined hackers, like determined burglars, will get through even the best perimeter defenses. You cannot have a Maginot Line mentality. You must think about what happens after penetration – maximize detection and response and minimize the ability of intruders to move freely around a system.
Until recently, the discussion at the SEC has been all about disclosure – when companies should disclose a breach and how. As the SEC breach demonstrates, the SEC must also look at its own cyber defenses.
Finally, it is important to realize that “one-size-fits-all” generally does not work and, as we know, hackers innovate. That is why it is so important that cybersecurity is never considered “done.” It requires full-time monitoring, testing, updating, and improving of systems, policies, and procedures.
Access the original article appeared in Fund Intelligence here (subscription required).