Financial Reform Newsletter
July 17, 2017
CFTC Needs to Protect and Promote the Critical Role of Chief Compliance Officers
Chief Compliance Officers (CCOs) can play an extremely valuable role in overseeing the activities of a company, and financial institutions in particular. They have a unique perspective because they act from within the institution. If they are properly empowered and insulated from direct and indirect influence and bias, they can help prevent illegal conduct from occurring in the first place, limit its duration and scope if it happens, remediate any adverse impacts, and institute corrective measures to prevent future violations. Effective CCOs can be an indispensable private sector oversight mechanism, and are especially important in an age when regulators are underfunded and constantly pressured by many policy makers and industry interest groups to limit their enforcement activities. For these reasons, Better Markets has consistently advocated over the years in support of effective CCOs.
The most recent example is our comment letter to the CFTC. We argued against any potential weakening of their duties and, more importantly, stressed the CFTC’s overarching duty to put the public interest above industry concerns regarding the responsibilities of CCOs. While we supported several of the CFTC’s proposed changes, a number cannot be justified and should be rejected.
For example, several measures enhance the duty and role of the COO, including clarifying that the duty to remediate compliance problems will apply to all issues identified “through any means” by the CCO, not just the discovery methods listed in the current rule. With that said, the rule nonetheless falls short in several respects, diluting a CCO’s duty to resolve conflicts of interest and instead requiring only that “reasonable steps” be taken to resolve the conflict. This is a major change from what is currently on the books and will in fact dilute the CCO’s obligation to address conflicts of interest. There are other shortcomings in the proposed rule that potentially dilute the CCO’s role as well as the role the Board of Directors regarding compliance officer matters.
The CFTC needs to adopt additional measures to strengthen the CCO’s role and ensure its independent relationship with the Board of Directors. Then, but only then, will CCOs be able to be a front-line protector of the firm, its reputation and its customers as envisioned by the law.
Following the Law, DOJ Defends Workers’ and Retirees’ Right to have their Best Interests Put First When Saving for Retirement
Protecting retirees’ best interests as they save for a safe and secure retirement, the Department of Justice filed a brief in the Chamber of Commerce v. Department of Labor lawsuit, arguing that theDOL’s “best interest” fiduciary duty rule should be upheld. 
The rule will put tens of billions of dollars back in the pockets of tens of millions of Americans saving for retirement, dramatically improving their quality of life. Those are exactly the Americans the Justice Department should be siding with and fighting for.
The brief, filed with the Fifth Circuit Court of Appeals, recognized that DOL had followed a thoughtful, thorough, and comprehensive process in finalizing the rule and that it had been consistent with the spirit and letter of the law. Frankly, this should really come as no surprise given that in developing the rule, DOL had engaged in a careful and deliberate process over a span of more than five years. It was one of the most exhaustive, open, and allinclusive rulemakings in history and the Justice Department brief demonstrates that. The only disappointment was the Justice Department’s decision to abandon its prior defense of a provision protecting the right of investors to participate in class action lawsuits when firms systematically violate the rule and cause harm. But even there, the Justice Department fought for “severability” – the principle that the rule as a whole should survive even if one part of it is struck down.
Unfortunately, just as this news broke, the Trump DOL began its renewed assault on the rule, announcing a Request for Information to assess whether or not the rule should be delayed, amended, or rescinded altogether. Better Markets will, of course, continue its leadership defending the rule and fighting to protect American workers and retirees from predatory advisors pocketing their hard-earned money.
Dodd-Frank is Working to Protect Consumers and Investors While Ensuring Stability, Promoting Economic Growth, and Preventing Bailouts
Between the Treasury’s first report on financial protection rules and the House passage of the deregulatory “Choice Act,” the Dodd-Frank Financial Reform and Consumer Protection Act has been a central topic of discussion. Critics of Dodd-Frank like to say the law was not needed and that it hasn’t worked. However, the evidence is indisputable: these claims are wrong.
In late 2008, the nation’s financial system teetered on the brink of collapse, brought there by the worst financial crisis since the Great Crash of 1929. The economic wreckage that followed will end up costing the country more than $20 trillion in bailouts, lost jobs, foreclosed homes, drained retirement savings, and more. The crisis exposed weaknesses and flaws in nearly every level of the financial system. It further revealed that the regulatory system which to that point had been adequate to oversee the simpler financial system of the twentieth century was incapable of monitoring the more complex and interconnected twenty-first century financial system.
In response, Congress passed and President Obama signed the Dodd-Frank Act on July 21, 2010.
Since Dodd-Frank was passed, the biggest banks have increased their capital to better withstand losses without failing or turning to taxpayers or the Fed for a bailout. They now also have much better liquidity than before to meet demands for cash without having to hold a fire sale of assets to pay creditors. This will help prevent a liquidity crisis from becoming a solvency crisis. Because of the Volcker Rule, SIFIs can no longer make high-risk proprietary bets with taxpayer-backed deposits. Rigorous stress testing ensures SIFIs have the resilience to withstand unforeseen economic shocks. Finally, living wills have forced SIFIs to detail a plan to be wound down in bankruptcy without requiring government bailouts or jeopardizing the financial system.
This is what enabled the US financial system to withstand the financial crisis that swept across Europe last year, threatening European banks, but not one US bank, as we detailed here and as Gary Cohn, the Chairman of Trump’s National Economic Council (then President of Goldman Sachs), agreed. As we more recently discussed here, the Dodd-Frank Act is working as intended, and it will help reduce the likelihood of another financial crisis or lessen its severity. Contrary to the self-serving but baseless sky-is-falling predictions from industry, banks have thrived under the law, and economic growth has risen. Unless the industry and its political allies are successful in rolling back these key protections, we can expect the Dodd-Frank Act to continue to promote the stability and integrity of the financial markets; protect consumers and investors; and support economic growth, employment, and broad-based prosperity.
Reducing Protections for Investors – Which is What “Deregulation” Means — Will Not Solve the Problem of Decreasing IPOs…If There is a Problem At All
New SEC Chair Jay Clayton and others talk about the decrease in IPOs as if it is a crisis. For example, Chair Clayton discussed this in his confirmation hearing and more recently again in his remarks to the SEC’s Investor Advisory Committee, which devoted considerable time to the issue during its most recent meeting.
But there’s one big problem with all this talk: while there is data that shows a decrease in IPOs, there’s no real data or analysis that explains that decrease or, much more importantly, comprehensively reviews the IPO market as part of the much larger ecosystem for funding companies public and private. Today, there are more financing options than ever for companies, but almost no analysis of why companies are choosing one method over another. Using a single data point like the decrease in IPOs and claim that must be due to SEC regulations that must be eliminated or changed seems to be little more than another attempt to legitimize a generic call for deregulation.
For example, a recent white paper by Ernst & Young, Looking behind the declining number of public companies, showed that while the number of IPOs is down, companies going public are raising more money than ever before. It further showed that the growing private capital market now allows emerging companies to access ever greater amounts of capital without going public. Moreover, many companies find significant benefits in staying private other than SEC regulations, which are supposed to protect investors and facilitate capital formation. Sacrificing the former for the latter will definitely reduce regulations, but it won’t fulfill the SEC’s mission, it won’t serve investors and it won’t, ultimately, facilitate capital formation as ripped off investors lose confidence and trust in our public markets.
There no question that IPOs are important, for capital formation and other reasons, but they are only one part of a much larger financial ecosystem for financing for the real economy. Policymakers and regulators need to conduct a robust, data-driven, comprehensive analysis of that ecosystem and how IPOs fit into it to understand what is working or not and how any given aspect can be improved or changed. Regardless of the outcome of such a critical and long overdue analysis, we must never lose sight of the SEC’s fundamental, foremost and singular role in protecting investors, which is the foundation for investor confidence which itself is essential for our deep, broad capital markets and financing of all types.
