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Schapiro Explains SEC Tardiness on Dodd-Frank

The securities regulator has missed several Dodd-Frank deadlines, giving companies more time to comply with parts of the 2010 law.
Sarah JohnsonApril 17, 2012

As of today, the Securities and Exchange Commission is one year overdue in issuing one of the more controversial rules the agency was mandated to write under the Dodd-Frank Wall Street Reform and Consumer Protection Act. That delay has given corporations more time to comply with certain aspects of the law.

The 2010 law’s conflict-minerals provision directed the SEC to come up with a disclosure rule for companies to track the sources of minerals used in products or components that may come from the Democratic Republic of Congo and could be funding the ongoing violence in the region. In a congressional hearing today, SEC chairwoman Mary Schapiro acknowledged the missed deadline but said that putting together a rule addressing human-rights issues goes beyond the agency’s wheelhouse. “This one is harder, there is no question about it,” she said.

Adding to the delay of the rule and others on its Dodd-Frank docket has been the mounting scrutiny over the SEC’s ability to accurately estimate the costs and benefits of its rules. Last summer the U.S. Court of Appeals in Washington, D.C., threw out an SEC proxy-access rule that would have let shareholders with 3% of a company’s shares nominate directors.

During her testimony before a House oversight subcommittee hearing, Schapiro acknowledged that it’s hard to measure the benefits side of rulemaking and difficult to anticipate the reaction of the SEC’s constituents. “Predicting how people and entities will respond to regulatory changes involves difficult judgments,” she said.

The SEC’s rulemaking process, she added, involves considering the direct and indirect costs of a rule and its effects on investor protection and companies’ ability to raise capital. Although the commission collects feedback during its comment-letter process, many of the cost estimates vary by respondents, their biases, and their unique situations.

However, the commission is trying to improve its economic analysis. The SEC has recently changed its internal guidance for how its rule-writing staff comes up with rules. All pending rules, including the conflict-minerals provision, will be subject to this new practice.

The agency now expects its internal economists to be involved throughout the rulemaking process. And new rules will explain the reason behind a proposal, as well as why costs and benefits can’t be quantified, if that’s the case. The SEC also wants to more than double the number of economists involved in rulemaking. It’s bringing in 20 new economists to add to its current group of 24, and plans to ask for an additional 20 economist positions for its fiscal year 2013 budget.

In the meantime, Dodd-Frank has created an “unprecedented rulemaking burden” on the commission, according to Schapiro, which is also dealing with new deadlines under the recently passed Jumpstart Our Business Startups Act, which rolls back some securities regulations for emerging growth companies. Dodd-Frank gave the SEC nearly 100 rules to write “under impossibly short time frames,” she said. She estimated the commission has proposed or adopted 75% of its Dodd-Frank rules.

At the same hearing, Jacqueline McCabe, executive director for research at the Committee on Capital Markets Regulation, criticized regulators’ current method of analysis. “We are deeply concerned that inadequate cost-benefit analysis . . . expose[s] these rules to judicial challenge, prevent[s] important rules from taking effect, and contribute[s] to uncertainty in our markets over their fate,” she said.

Ever since the SEC issued its first proposal on the conflict-minerals rule in December 2010, industry groups have criticized the price tag the commission put on the regulation. The agency estimated it would affect upward of 5,000 companies and cost them more than $71 million in compliance costs. But the National Association of Manufacturers, for example, estimates that public companies and their suppliers will incur a total of $9 billion to $16 billion in compliance costs, and the U.S. Chamber of Commerce has been a vocal opponent of the SEC’s estimate as well.