Monday, March 14, 2011

House Financial Services Committee Unveils Four Pieces of Draft Legislation Amending Dodd-Frank

The House Financial Services Committee has issued drafts of four pieces of legislation amending the Dodd-Frank Act, while another draft would raise the offering threshold under SEC Regulation A to $50 million The legislation is part of the Committee’s broad overview of Dodd-Frank to eliminate provisions that overly burden the capital markets.

The Small Business Capital Access and Job Preservation Act would exempt advisers to private equity funds from SEC registration. The Financial Services Committee has received testimony regarding the role private equity firms play in preserving existing jobs and creating new ones by providing capital to struggling and growing companies. The Dodd-Frank Act requires most advisers to private investment funds to register with the SEC, including advisers to private equity funds. The draft legislation is sponsored by Rep. Robert Hurt (R-VA).

Members are concerned with the private equity registration requirement. They do not see private equity firms as a source of systemic risk. Rep. Gary Peters (D-MI) said that private equity firms are not generally liquid and not highly leveraged, and thus do not pose a systemic risk. It makes no sense to treat private equity firms the same as large hedge funds, he posited. Rep. Hurt fears that the over-regulation of private equity firms could lead to less job creation. At recent hearings, he asked if the SEC could postpone the private equity regulations until Congress can take further action.

The Business Risk Mitigation and Price Stabilization Act would codify the end user exemption from derivatives regulation by ensuring businesses that use derivatives to effectively hedge legitimate business risk would not fall under the clearing requirements of Dodd-Frank Title VII. The Dodd-Frank Act requires derivatives transactions to be cleared through a registered clearing house, and exempts swaps and security-based swaps from this clearing requirement if one of the counterparties is not a financial entity. The draft legislation is sponsored by Rep. Michael Grimm (R-NY).

The Burdensome Data Collection Relief Act would repeal a corporate governance provision of Dodd-Frank requiring publicly traded companies to disclose their median annual total compensation of all employees. Under Section 953 of the Dodd-Frank Act, the SEC must adopt rules requiring new disclosures about the relationship between executive compensation and company performance, and the ratio between the median of the annual total compensation of an issuer's employees and the annual total compensation of the issuer's chief executive officer.

The Financial Services Committee received testimony about the enormous burden and complexity this provision poses to public companies, with very little, if any, corresponding benefit to investors. The draft legislation is sponsored by Representative Nan Hayworth (R-NY). At recent hearings, Rep.. Hayworth questioned the usefulness of Section 953 and whether there were any reasonable changes Congress could make to the section to make it less burdensome. Corporation Finance Director Meredith Cross replied that the usefulness of the pay ratio is a call for Congress
to make.

The Director said that Congress could make the pay ratio disclosure more manageable by changing the median of the annual total compensation of an issuer’s employees to the average annual total compensation. She added that it is the SEC’s job to implement the statute in a workable manner. The SEC has yet to propose rules under Section 953 since Dodd-Frank set no deadline for SEC rulemaking. Director Cross allowed that the statute is fairly prescriptive and leaves no leeway for the SEC in the rulemaking process.

Section 939G of Dodd-Frank nullified SEC Rule 436(g), thereby imposing Section 11 liability on rating agencies if their ratings were determined to be inaccurate. In the week preceding the effective date of Section 939G, the major rating agencies issued public statements refusing to allow their ratings to be included in registration statements. SEC Regulation AB, however, requires that a prospectus for an asset-backed offering disclose ratings whenever an issuance or sale is conditioned on the assignment of a rating. Thus, the public asset-backed securitization markets froze on July 22, 2010, forcing the SEC to step in and issue a temporary no-action letter on July 22, 2010. On November 23, 2010, the SEC issued a permanent no-action letter. The Asset-Backed Market Stabilization Act provides certainty to the issuers of asset-backed securities by repealing the liability provision. The Act is sponsored by Rep. Steve Stivers (R-OH).

The Small Company Capital Formation Act encourages small companies to access the capital markets. The legislation increases the offering threshold for companies exempted from SEC registration under SEC Regulation A from $5 million, a threshold set in the early 1990s, to $50 million. The SEC has the authority to raise this threshold but has not done so for almost two decades. The draft legislation is sponsored by Rep. David Schweikert (R-AZ).

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