David Hirschmann, the President and CEO of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, has been at the forefront of just about every legal issue impacting Wall Street and the regulatory environment that oversees it. Born out of the business community's reaction to earlier regulatory reform, the Center for Capital Markets Competitiveness under Mr. Hirschmann has spent the last decade trying to reshape the regulatory structure of the markets into a system that would be more coherent, efficient and easier for businesses to navigate.
Mr. Hirschmann sat down with Wall Street Lawyer recently to discuss the Center's efforts, its views on the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Securities and Exchange Commission (SEC), its lawsuit that invalidated the SEC's proxy access rules, and what to do if you're confronted with conflicting requirements from 32 different regulators.
Wall Street Lawyer: Briefly, what is the Chamber of Commerce's Center for Capital Markets Competitiveness, and how does it relate to the Chamber?
David Hirschmann: We were created post-Sarbanes-Oxley, mostly because of the way the new rules on the 404 assessment and attesting were implemented. A large number of businesses came to us and said regulators didn't get it right. So we wanted to examine that question a bit, and see what the purpose of the rule was that Congress created and the regulators were implementing, and what should have been done instead.
And that goes to a large degree of what we strive to do--we examine regulations, how they're being implemented and how they could affect the flow of capital that is so essential to the U.S. economy. I mean, we had a regulatory structure that has served us well for the past 75 years, but now we're increasingly seeing there are getting to be too many layers of regulation, too many regulators that don't communicate with each other, a regulatory architecture that is obsolete, and an upgrade of technology and innovation that is missing.
All this negatively impacts the U.S. capital markets, which thrives on the ability to drive capital into the hands that will use it efficiently to create jobs and keep the economy robust. Unfortunately, that ability is being eroded by the out-dated regulatory structure we have in this country.
So, we were created by the Chamber several years ago to study this problem, and we immediately came to see that the U.S. economy is threatened by obsolete and in some cases over-burdensome regulations and by the overlapping agencies that enforce them. We saw directly that there had to be large-scale and systemic changes to this regulatory regime, or it could easily lead the economy into financial crisis.
Within a short time of that realization, the economy did plunge into crisis. I guess we're good at predicting the need to dramatically address the regulatory situation, just not so good on the timing.
Wall Street Lawyer: Of course, the entire blame for the financial crisis of 2007-'08 cannot be placed at the door of the regulators alone. And Congress did act fairly quickly to create legislation--the Dodd-Frank Act--to address some of these problems.
David Hirschmann: It's easy to vilify Wall Street, too. But at the end of the day, what is in everyone's interest is driving capital to the places it is needed, and avoiding having outside forces picking the winners and losers.
When the crisis hit, the legislative answer to it was created in one of the most polarized political climates we've seen--and the final product shows it. We were given more than 3,000 pages of mandated regulations, studies and reports that many thought would address the problems that caused the crisis. Instead we got the worst of both worlds: a situation where, on one hand, a raft of new, overlapping and in some cases needless rules were created; and on the other, where hugely important problems were not addressed at all.
It's a big myth that American businesses want little or no regulation--what they want is coherent regulation. And that not what they got with Dodd-Frank.
WSL: What is coherent regulation?
Hirschmann: Before Dodd-Frank, I was talking recently to a foreign bank executive as his bank was beginning to make investments in the U.S. The bank's management was invited by the Fed to meet with its regulators to ensure the bank understood its obligations under U.S. rules. When the bank managers got there, they were greeted by 31 different regulators across the table. Thirty-one!
But that's not what bothered the executive I spoke to. What he had contacted me to ask about was what to do when one regulator tells them to turn left, and another tells them to turn right.
Think of it this way, every morning I, like millions of Americans, get in my car and drive to work. I know what the speed limit is, and I know that having a speed limit is in my best interest, because it keeps other drivers from flying past me and endangering my daughter, who is a passenger in my car. But as a driver, I need to know that the speed limit will not change from day to day, will not be enforced differently for different drivers, and will not allow each police officer to set their own speed limit. Under that system, it would be hard to navigate and most people would be afraid to leave their driveways.
In fact, if you think of a situation where each police officer gets to determine, but not post, his or her own specific speed limit, then you are very close to the essence of the regulatory system we have in this country. And it's that lack of coherence that prevents cars--or in this case, businesses--from leaving their driveways.
WSL: What happened to the foreign bank after Dodd-Frank?
Hirschmann: The legislation added two more regulators for it to deal with. Worse yet--and this goes to what I was saying about Dodd-Frank avoiding bigger issues--the Act did nothing to improve communication among all those regulators. They have absolutely no requirement to coordinate or work together to make regulations simpler and more coherent for the entities they regulate. Nothing in the Act mandates that.
In fact, it made it worse. Dodd-Frank came out of the heart of a major financial crisis, and a lot of regulatory agencies took a lot of heat--some rightfully so. But as the legislation was being crafted, so many of these regulatory agencies went into turf-protection mode, and tried to compile and generate reams of data to show they were doing their jobs. Now, we don't object to data and its collections--that's important for transparency--but in that environment, it was just used to preserve an agency's agenda or protect its turf.
But in Dodd-Frank, the Congress seemed to create a list of what it wanted to see and purposefully left the full creation of the new regulations and their implementation to the regulators. Isn't that a better way than issuing all the details from the House floor?
Yes, definitely, legislation should be the blueprint, not the house itself. However, that's a lot different than not tackling the larger issues and providing real structural reform. In a way, we got the worst of both worlds--a score of new regulations, and other major problems left alone.
And that's what makes Dodd-Frank such a lost opportunity. I mean, if this financial crisis didn't teach us that we needed to really make substantial changes to the oversight of the financial markets, what will? Do we need an even bigger crisis?
Your group recently released a report detailing five areas that you think the Dodd-Frank Act missed. Can you tell us about that?
Certainly. Briefly, the five areas that our study showed should have been addressed by the Dodd-Frank Act but were not, include: 1) addressing the regulatory structure itself, that is, real and practical changes to how regulations are approached and regulators function; 2) fixing broken regulators, like the SEC; 3) establishing global rules, in areas like derivatives for example, and leveling the playing field globally; 4) making accountable the scores of self-regulatory organizations--including standard-setters, like Institutional Shareholder Services (ISS)--to provide better transparency; and 5) ensuring that enforcement is not used as a regulatory short-cut.
On that last one, too many times an enforcement action will include, as condition of settlement, promises by the settling entity to establish future "best practices" to better monitor its behavior. Unfortunately, these best practices too often are then put into the mainstream and other entities, especially those structurally similar to the settling party, feel compelled to adopt these best practices also. And that's not the way enforcement was intended to work, it was not to be used as a regulation-making force.
However, you have enforcement agencies like the New York Attorney Generals' office, for example, establishing these best practice settlement requirements all the time, and it becomes a big "gotcha" game for businesses.
You talk a lot about reforming the regulatory structure--in fact, it's the first of your group's five points. In the view of your group and the U.S. Chamber of Commerce as a whole, what would the perfect regulatory structure for the U.S. markets look like?
First, I guess we'd have to say we'd have a lot less regulators than the hundreds we do now. Of course, we can't say we have come up with the right number--is it 50, 15 or one? We don't know. I mean, obviously, you can make a good argument that the U.S. markets need more than a single regulator, so that's not the answer either.
But we know that what we and U.S. businesses don't want is what we have now, hundreds of regulators at many, many agencies issuing overlapping and contradictory guidance, battling over turf and generally making it very difficult for businesses to understand and comply with what is being asked of them.
And this system fails everyone. It makes it hard for the honest business to navigate through the confusion, and it makes it very easy for the dishonest business to exploit the seams in the regulatory environment.
Second, a better system would have much more coordination between its differing agencies and would better eliminate the gaps in oversight that occur now. Even the Financial Stability Oversight Council, which has as sitting members every regulatory chief in the U.S. and was created by Dodd-Frank ostensibly to be a type of financial crisis first-responder, is mandated to focus almost solely on monitoring systemic risk and not on regulatory coordination or better coherence.
You also talk about "broken regulators" and you specifically mention the SEC. What do you see as the problems there?
Within a few weeks, we are planning to release an updated version of our 2009 report that described in detail the fundamental reform we'd like to see at the SEC. (Editor's Note: The updated report from the Center for Capital Markets Competitiveness, entitled U.S. Securities and Exchange Commission: A Roadmap for Transformational Reform, became available just before press time.
However, despite some small progress on reform and enhancements, many of the problems we described in the 2009 report still remain. To give some examples: 1) the SEC is still heavily siloed; 2) there are far too many direct-reports to the SEC Chairman--more than 30 by last count; and 3) the technology upgrades that are desperately needed at the SEC either are not being done or are not being handled very well.
All of these examples contribute to an environment in which far too often the communication between divisions or between parts of the same division isn't there, there is a top-heavy hierarchy that confuses and overburdens managers, and the technological and financial expertise that is desperately needed isn't utilized in the best way.
But there seems to be a Catch-22 with certain members of Congress in that they want the SEC to perform better, but they also want to starve the agency of funding. What's the solution there?
Look, I would agree that the SEC needs more resources, but they would have to be tied to performance and progress on reform. The assessment that Boston Consulting Group did for the SEC in March was a good start, but it didn't complete the full job. Boston Consulting did an analysis of some of the SEC's current shortcomings but did not produce a comprehensive list of recommendations for transforming the agency into a modern regulator.
Let's touch on another subject the Chamber has been directly involved with--proxy access. Your group was party to the suit Business Roundtable and U.S. Chamber of Commerce v. SEC, which in July saw the U.S. Court of Appeals for the District of Columbia Circuit invalidate the SEC's adopted proxy access rules, stating the SEC "neglected its statutory responsibility to determine the likely economic consequences" of its rules. Do you consider that a victory?
I would consider it a victory over the SEC's check-the-box approach to rule-making, which has resulted in problems and confusion for the business community over the years. The SEC often would decide the outcome it wanted, then try to find the data that supported it. That is not how responsible rule-making is done, and I think the judge agreed on that, and ruled that determining a cost/benefit analysis was necessary to the process.
Now, that might mean the SEC has to hire more economists or find a decent procedure for determining the costs and the benefits of any rule proposal, but if they build it into the rule-making process from the beginning instead of adding it as an after-thought, it won't be a problem. In fact, it will make the entire process more efficient. Most importantly--and what the judge acknowledged--is that from the outset you have to start by asking a simple question: What is this rule supposed to do?
Then, you conduct the rule-making process, including a cost/benefit analysis, forward from there.
Of course, the end-result of the D.C. Circuit's invalidation of the SEC's proxy access rules is that companies are now left with "private ordering"--a process in which proxy access can be implemented by shareholders on a company-by-company basis rather than through a market-wide mandate. Is that a better solution?
The Chamber is comfortable with that. What we didn't want to see is the shareholder or group of shareholders with a special interest getting a free pass to the front of the line ahead of all other shareholders to nominate their agenda or slate of candidates. I think private ordering to a degree mitigates that and allows shareholders at each company to decide how they want to approach the proxy access issue.
I guess another theoretical question this process does leave open, however, and one we're seeing increasingly as social issues--the so-called ESG issues [Environmental, Social, and Governance issues]--are moved to the forefront, is that: Do we think the corporate boardroom is the best place to solve all these social problems?
Finally, what do you see for the regulatory environment in 2012 and beyond?
I think the main story on this front is going to continue to be Dodd-Frank implementation, especially a discussion on what the Act got wrong and how it can be fixed; and secondly, whether we're going to have a real discussion on genuine SEC reform.
As we look forward, it is going to become more and more clear that 1) Dodd-Frank did get some things right; and 2) Dodd-Frank did get some things wrong, and those things are going to need a regulatory fix. In some cases, I think Congress may have to re-insert itself into the process to make a legislative change. The area of derivatives is one example--how can we protect the ability of institutions to continue to use derivatives to reduce their risk while avoiding the problems with derivatives seen in the crisis?
Overall, however, I think we're going to see that we are not done on regulatory reform, even with the raft of rules embodied in Dodd-Frank. And that is simply because a financial crisis is never the right time to propose future regulations--there becomes a pressure for speed over substance.
I mean, I don't fault the desire for regulatory reform coming out of the crisis, but as I said, the Dodd-Frank Act gave us the worst of both worlds--a mass of sometimes confusing and overlapping regulations, and at the same time, big holes in the regulatory structure that the Act didn't even bother to address.