House Subcommittee Considers Bill to Shred the SEC’s Tires

The many problems with the Investment Advisers Modernization Act

Shredded tires

While Americans for Financial Reform and our allies are busy campaigning for closing loopholes that are special privileges for private funds, the Majority on the Hill is proposing to do away with even the limited existing reporting requirements to protect investors and increase accountability.

On May 17th, the House Financial Services Subcommittee on Capital Markets held a hearing to discuss a bill called the Investment Advisers Modernization Act of 2016. Far from actually modernizing the industry, the bill rolls the clock back to a time when private fund advisers operated in the shadows, without meaningful oversight. The bill would enable the exploitation of investors and reduce the information available to regulators to address systemic risk by rolling back key reporting requirements, and by interfering with the Securities and Exchange Commission’s ability to investigate fraud at individual firms. (For a full breakdown of the problems with this bill, please see AFR’s opposition letter).

One of the witnesses who testified was Jennifer Taub, a Professor at Vermont Law School and author of Other People’s Houses, a book on the foreclosure crisis. Professor Taub pointed out in her written testimony that the Investment Advisers Modernization Act could not only “undermine investor protection and trust, which could inhibit or drive up the cost of capital,”  but would also “allow certain private equity advisers and other private fund advisers that have been exposed as lacking in recent SEC examinations to hide their tracks.”

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Fresh Evidence of the Political Power of Money

The proverb says that “money talks,” and it is widely assumed that financial companies make campaign contributions and spend money on lobbying in the expectation of exerting influence. But are their expectations fulfilled?

Building on previous studies of the corrupting power of money, a new research paper by Maria M. Correia, an assistant professor of accounting at the London Business School, finds a strong correlation between a financial company’s political expenditures and the frequency of accounting fraud enforcement actions taken against that company by the Securities and Exchange Commission (SEC).

Correia looked at some 4,000 cases in which companies had to correct their financial statements (an event that often triggers an SEC investigation) between 1996 and 2006. Her study showed that politically connected firms, as reflected by their PAC contributions and lobbying expenditures, were significantly less likely to be singled out for enforcement actions, and, when prosecuted, faced lower penalties.

Companies that made a point of contributing to elected officials with potential influence over the SEC (such as the members or, better still, the chairpersons of congressional oversight committees) were even less likely to face an enforcement action or penalty. An extra $1 million spent in PAC contributions over the previous five years correlated with a sharp reduction in the probability of an enforcement action, from 8.58% to 3.43%.

In one of her most remarkable conclusions, Correa found that a $100,000 increase in PAC contributions over a five-year period was associated with an 11% decrease in monetary penalties imposed by the SEC. The average penalty levied by the SEC during the time studied by Correia was slightly more than $20 million. By spending an additional $100,000 in contributions, then, a company could save a few million dollars – a remarkable return on investment.

Judging by their actions, financial firms appear to think political spending is worthwhile. In all, during the current election cycle, Wall Street banks and financial interests have spent more than $800 million on lobbying and campaign contributions, according to a recent AFR analysis. That works out to about $1.5 million a day.

From Correia’s research, we are increasingly confident that the industry’s money does indeed buy it influence, and that its influence can improve the corporate bottom line. We also know, more surely than ever, that the rest of us have a large stake in continuing to push for limits on the role of money in politics, and in keeping close watch over the triangle of relationships involving Congress, the regulators, and the regulated.

 — Alec Lee

See Big Connection Between Campaign Contributions and Lack of SEC Prosecutions

When Is Data Collection Burdensome? When It’s About CEO Pay

There is one good thing to be said for Michigan Representative Bill Huizenga’s bill to spare U.S. companies from disclosing how their CEO pay compares with their median-employee pay. It reminds us that companies were supposed to be doing that.

Crazed compensation tied to short-term profits and stock gains had a lot to do with the cycle of reckless lending, opaque securitizing and systematic offloading of responsibility that gave us the financial meltdown of 2008. In one modest response, the Dodd-Frank Act requires companies to reveal more about their pay practices.

Investors need to know more, both to guard their own pocketbooks against risky bets by self-seeking executives and to evaluate a company’s long-term soundness in light of evidence – backed by common sense – that runaway pay at the top breeds cynicism and opportunism up and down the line. (The law also calls for nonbinding “say on pay” votes by shareholders, and bars compensation arrangements that would reward bankers for excessive risk-taking.)

But it has been easy to forget the pay-disclosure provision, because the Securities and Exchange Commission, charged with writing rules to implement it, has yet to act three years later. That failure, in turn, can probably be attributed to the hue and cry of CEOs and corporate spokespeople.

Not that they have anything to hide, they assure us; their stated concern is with the enormous difficulty, to quote one financial-lobby policy brief, of sorting through “the data from many countries and multiple payroll systems” and adjusting for “account currency fluctuations and the laws of each country with respect to benefits and even confidentiality of employees’ compensation information” – you know, that sort of thing.

Last week, the House Financial Services Committee heard testimony on Huizenga’s bill – the duly named “Burdensome Data Collection Relief Act” – as part of a hearing on “Legislative Proposals to Relieve the Red Tape Burden on Investors and Job Creators.” The committee is expected to approve the measure and forward it to the full chamber in a matter of weeks.

Inconveniently for Huizenga and his proposal, however, it comes at a time of surging executive pay, which stands in “startling contrast” to the state of the overall economy, as USA Today noted recently. CEO compensation at a sample of S&P 500 companies grew by 8 percent between 2011 and 2012, swelling the typical package to nearly $10 million a year. And though we still don’t have the company-specific numbers mandated by the law, the top-to-median ratio has plainly been rising for decades. S&P 500 CEOs, on average, made 354 times as much as rank-and-file workers last year, according to an AFL-CIO analysis of corporate filings and Bureau of Labor Statistics data. In 1982, the multiple was 42 to 1.

We know more about corporate compensation and more about the process of calculating it thanks to Bloomberg News, which decided to do its own company-by-company tally last month, using publicly available executive pay figures and the BLS’s industry-by-industry median pay figures. This exercise produced a CEO-to-typical-worker multiple of 204-to-1 for the 250 biggest companies in the S&P 500, and 495 to 1 for the companies with the 100 highest-paid executives.

But the corporate reaction was every bit as revealing as the data. As a pre-publication courtesy, Bloomberg invited each company to respond, which a number of them turned out to be eager to do. For example, the Ohio-based Fifth Third Bancorp, with 21,000 employees, wasted no time in informing Bloomberg that CEO Kevin Kabat’s pay, including every possible dollar and perk, was only 176 times, not 186 times, that of the company’s median worker.

So it turns out not to be such a daunting task for banks and other companies to come up with figures for CEO and median-employee pay. (Fifth Third’s press people, as Sam Pizzigati noted in his weekly inequality newsletter, had evidently failed to “read the memo” on the onerousness of the task.)

In recent decades, the pay of CEOs and top executives has shot up relative to just about every measure of business or national prosperity. Twenty years ago, roughly five percent of the profits of the biggest companies went into executive compensation; now it’s ten percent. While the companies with the most extreme ratios tend to be in retail or fast food, which depend on vast numbers of minimum-wage workers, the Bloomberg tally nevertheless showed financial firms with the highest overall ratio – above 300 to 1 – of any major industry.

Huizenga’s bill will likely pass in the House and be ignored in the Senate. Then again, enactment was not the point of this proposal. It is best understood as just another volley in the barrage of corporate efforts to intimidate the rule-makers at the SEC – efforts that, helped along by far too many members of Congress, appear to have had an effect.

“I’m shell-shocked,” Vanguard mutual fund founder John Bogle said in reaction to last year’s CEO pay gains. “I can’t believe this can go on. I can’t believe owners of these companies can’t take a bigger stand.”

Maybe they will if the SEC can finally manage to act on a requirement that still is and, let us hope, will remain the law of the land.

— Jim Lardner

(Originally published on

Backroom Maneuvering on the JOBS Act

When does normal regulatory procedure become scandalous? When a federal agency fails to expedite the implementation of an influential congressman’s pet idea.

The congressman is Patrick McHenry (R-N.C.), and the idea is the mass marketing of private stock offerings, as authorized by the Jumpstart our Business Startups (or JOBS Act). In a November 30 letter, McHenry took outgoing SEC chairman Mary Schapiro to task for declining to institute a rule immediately and deciding to give the public a chance to comment first. McHenry’s complaint was soon picked up by the media, most notably by the Wall Street Journal, which, in a feverish editorial embracing all of McHenry’s talking points, accused Schapiro of having “blocked a rule” due to the influence of a “well-placed lobbyist” representing a “special-interest group.”

What’s wrong with this indictment? Every point in it. First, there’s the inconvenient fact that Schapiro, far from blocking a rule, was following customary rule-making procedure. Second, the “well-placed lobbyist” in question, Barbara Roper of the Consumer Federation of America, was actually one of scores of interested parties – including consumer and investor groups, state securities law regulators, and even a few hedge fund and private equity fund representatives – making the same general argument. Third and perhaps most important, the “special interest” that Schapiro was faulted for looking after – the community of investors – is the interest that her agency was created to protect.

And investors will need the SEC’s protection, for this is a case in which a carelessly drafted rule could open the door to all manner of flimflam. “Let the scams begin” is how Public Citizen summed up the danger. To compound matters, the Commission’s draft rule lumps hedge funds and private equity funds in with the conventional business startups that were the law’s intended beneficiaries. A Bloomberg editorial imagined the likely result: “Underperformers will flog their funds on the airwaves, on websites and in the pages of the financial press, aiming at unsophisticated investors eager to get the same fabulous returns as the Wall Street elite.”

Our coalition, like the CFA, strongly opposed the JOBS Act. It was rushed through Congress on the dubious premise that rolling back long-standing investor protections would promote job growth, and with disregard for the time-tested truth that, in Bloomberg’s words, “Markets benefit when smart oversight enhances transparency and promotes integrity.”

Yet it is important to note that neither Roper nor the law’s other critics now question the duty of the SEC, as the law directs, to lift the long-standing ban on the general solicitation of private offerings. AFR acknowledged as much in our October 5 comment letter, jointly submitted with the AFL-CIO. As we went on to note, however, the SEC “retains both the authority and the responsibility to craft a rule to implement that requirement that incorporates appropriate safeguards to protect investors and promote market integrity.”

That’s what we have been advocating – openly, not furtively – since the JOBS Act was enacted. The only undue influence brought to bear here was that of Representative McHenry and other legislators seeking to prod the SEC into ill-considered action. If these “well-placed lobbyists” could muster a bit of patience, the Commission could go about the task of crafting a balanced rule that follows the intent of the law while seeing to it that vulnerable investors aren’t hurt.