Predicting what financial sector policies a future President Donald Trump might pursue regarding stocks, bonds, corporate governance, and other matters before federal agencies like the Securities and Exchange Commission is fraught with uncertainty. It’s as uncertain as whether there will even be a future Trump presidency in an election year that has so far confounded the pundits and defied conventional wisdom.
Whether Donald Trump would appoint liberal or conservative commissioners to the SEC who would pursue an aggressively reformist course, or a studiously status quo one, is anyone’s guess. The signals he has been sending about an eventual Trump Administration agenda have been mixed.
While some on Wall Street view Trump as an economic populist and “traitor to his class,” the tax proposals he has been willing to share publicly on his campaign website and elsewhere are largely compatible with conventional, conservative economic doctrine.
So, while Trump’s ideologically eclectic economic positions defy easy categorization, some educated guesses about the directions Trump might take on financial sector policy are possible based on his past statements and business record.
The five-member (currently at three with two vacancies) SEC has adopted, or is in the process of adopting, a number of new rules and regulations required by the Dodd-Frank Act and other federal statutes. These have often been decided on split 3-to-2 votes, with the SEC’s two Republican commissioners in dissent. It is therefore not unthinkable that the rules might go the other way should Trump, or another Republican, gain control of the commission next year.
Trump often boasts that if elected he would surround himself with the best minds and the best business people. Therefore, recent steps by Congress to rein in what critics call runaway CEO compensation (now 350 times earnings for average workers) provide a provocative test case where Trump’s widely circulated personal views on executive pay may be in tension with his stated goal to take the wraps off American business so it can grow.
Quid Pro Quo?
Trump has been very vocal on the topic of CEO compensation, calling it a “joke” and a “disgrace” that chief executives are able to negotiate generous pay packages with boards that lack the necessary independence to protect shareholder interests or those of the company. CEOs are overpaid, says Trump, because they install their friends on the board who then give the executives “whatever they want because the friends love sitting on the boards.”
“It’s disgraceful,” Trump told CBS’s Face the Nation. “Sometimes the boards rule but I would probably say it’s less than 10 percent, and you see these guys making enormous amounts of money. It’s a total and complete joke.”
Ever since Dodd-Frank passed in 2010, the SEC has been struggling to promulgate a number of new rules governing various aspects of executive compensation — on clawbacks, pay-versus-performance, hedging policy, and pay ratio. Despite his harsh rhetoric on pay, it is not inconceivable that Trump would appoint commissioners more sympathetic to business interests on these issues who say these provisions have a high cost of compliance and are of limited value to the public.
Late last year, the SEC adopted a long-anticipated new rule requiring publicly traded companies to identify and disclose the compensation gap between what the company pays its CEO and what it compensates its “median worker.” The information is intended to assist shareholders’ vote on non-binding resolutions relating to the compensation package a company gives its C-suite executives, the so-called “Say on Pay” provision.
Critics say the pay ratio provision is both expensive and nearly impossible to implement for large international corporations that operate multiple businesses in a host of countries with their own rules and regulations. It is, these critics say, designed to “shame” CEOs rather than provide investors with meaningful information.
The rule does not take effect until after the completion of 2017, so depending on where Trump comes down on the issue there is plenty of time for things to change.
In July, the SEC issued a proposed rule requiring executives to give back bonuses or other “incentive-based compensation” if the stock performance or earnings upon which those bonuses were calculated were inflated in financial statements that later had to be corrected.
The new rule covers all publicly traded companies that list on the U.S. stock exchanges. It also applies to all senior executives with policy-making responsibilities and looks back three years to include former officers. Many companies today do have their own clawback provisions but they are usually discretionary and limited to deliberate misreporting of financial data.
Under the new rule, the recovery of executive compensation would be triggered whenever a company had to correct previously filed financial statements. Executives would then receive incentive-based compensation based on the corrected information the company reports.
Critics say this provision, like the pay ratio reporting requirement, is costly and difficult to implement. Given that this rule is still in the proposed stage, Trump could imprint his policies before it becomes effective.
The “conflict minerals” rule, enacted in 2012 under Dodd-Frank, is another one that faces significant pushback from business interests and Republicans. Under the rule, companies that use certain “conflict minerals” (such as gold, tantalum, tin, and tungsten) in their manufacturing process that are mined or produced in the war-ravaged Democratic Republic of the Congo and surrounding countries must document where they obtained such materials.
The D.C. Circuit Court of Appeals has already struck down a portion of the required disclosure in companies’ “Conflict Minerals Report,” but the SEC still requires companies to conduct a due diligence investigation into the origin of these materials.
Business groups such as the U.S. Chamber of Commerce, Business Roundtable, and National Association of Manufacturers threatened further legal action to strike down the entire rule, which the Republican members on the SEC contend is “profoundly counterproductive” and creates what amounts to an “effective embargo” on all minerals from the region, while not providing investors with information relevant to their investment decisions. Given some of Trump’s isolationist views and pro-America rhetoric, it’s conceivable he may jump on the bandwagon to overturn the conflict mineral disclosure rules.
As Trump has indicated with his corporate-friendly tax plan, capital formation by American companies is one of his priorities. Therefore, it’s likely Trump would look with disfavor on the halting progress the SEC has made drafting new rules to allow mostly smaller businesses to use “crowdfunding” over the internet to raise funds from individual investors.
Crowdfunding occurs when people pool their money over the Internet to support worthwhile causes, such as disaster relief, political campaigns and business startups. The U.S. JOBS Act created an exemption to permit securities-based crowdfunding for domestic private companies, subject to SEC rule-making.
There was a $1 million limit on the amount a company would be able to raise this way, and individual investors were also capped on how much they could spend depending on their yearly income.
The goal was to open up a new source of funding for small businesses and to make it less cumbersome to raise capital from smaller investors. But critics of the SEC say the restrictions and reporting requirements of the long-overdue rule adopted in 2013 and finally effective in May 2016 made it unnecessarily complicated to raise funds this way.
If Donald Trump aims to get more capital into the hands of businesses, it’s possible he might want his appointments to the SEC to revisit crowdfunding and other rules viewed as overly protective and impactful to the fund-raising alternatives available to small businesses.
Finally, as an example of alleged SEC over-reach, Trump might point to the insider trading case the SEC brought against Mark Cuban, owner of the Dallas Mavericks of the National Basketball Association.
In 2013, a jury cleared Cuban of five-year old charges that he dumped shares of Mamma.com to avoid $750,000 in loses. The SEC alleged that Cuban was tipped off by Mamma’s chief executive that it was planning a private stock offering that would have diluted the value of Cuban’s holdings.
Trump might direct his appointees on the SEC to draw the lines more narrowly and direct the enforcement division to take a closer look at how the rules are policed and the types of cases the division brings.
While it’s impossible to know what new directions some future President Trump would take regarding the development and enforcement of U.S. securities laws, one thing seems certain: Once he decides what direction to take, he will make his views clear — and those that oppose him may be in for a rough ride.
Howard E. Berkenblit is a partner and leader of the Capital Markets Group of Boston-based law firm Sullivan & Worcester LLP.