SEC Commissioner Hester M. Peirce described potential problems with expanding SEC financial disclosures requirements to include “soft issues,” such as environmental, social and governance (“ESG”) information. According to Ms. Peirce, “financial reporting loses its value when it is applied too broadly.”
In remarks before the 2018 Leet Business Law Symposium at Case Western Reserve University School of Law, Ms. Peirce argued that requiring companies to disclose information that does not relate to the long-term financial value of the company may harm shareholders. Ms. Peirce stated that the current federal securities laws have traditionally interpreted “material” disclosure as information that demonstrates the likelihood of a company providing a return on an investment. She pointed out that the more money a company spends on disclosures (which is a costly process), the less is available for shareholders.
Ms. Peirce also explained that the disclosure process was not designed to accommodate many “soft issues.” First, financial disclosures are intended to provide “material” information for the “reasonable” investor. According to Ms. Peirce, requiring companies to disclose information that “responds to interests unrelated to the investment’s profitability” (i.e., ESG issues) would make the term “material” meaningless. Second, Ms. Peirce contended that ESG issues are often not easily definable and the auditing process is not reliable. By way of example, Ms. Peirce pointed to the International Accounting Standards Board’s recently released framework, which focuses on the ill-defined term “stewardship.”
Lofchie Comment: Compare and contrast Commissioner Peirce’s skeptical statement on ESG disclosure with Commissioner Stein’s supportive statement (see also Cabinet commentary here). There are tremendous benefits to this open dialogue and the fact that the two Commissioners have clearly articulated opposing views.
Federal Reserve Board (“FRB”) Vice Chair for Supervision Randal K. Quarles considered proposed changes to the FRB’s large bank stress testing regime that would increase transparency and efficiency.
In a speech at the Brookings Institution, Mr. Quarles said that the FRB is seeking to improve the measurement of trading book-related risks, and that a “single market shock” approach in existing stress testing practice does not adequately capture risks in firms’ trading books. He said that the proposed changes “are not intended to alter materially the overall level of capital in the system or the stringency of the regime.”
Mr. Quarles discussed changes to the Comprehensive Capital Analysis Review (“CCAR”) indicating that the FRB will reconsider whether any part of the regulatory capital rule (the stress capital buffer or “SCB”) proposal will remain for the 2019 CCAR. He said that he intends to request that the FRB exempt firms with less than $250 billion in assets from the 2019 CCAR quantitative assessment and supervisory stress testing in light of the FRB’s recent tailoring proposal. In addition, Mr. Quarles expressed his support for “normaliz[ing] the CCAR qualitative assessment” by (i) removing the public objection tool and (ii) evaluating firms’ stress testing practices through “normal supervision.”
Mr. Quarles stated that elements of the proposal to integrate stress testing with the stress capital buffer will be amended after receiving public comment. As a result, the SCB, which was scheduled for the 2019 stress test cycle, will be delayed. Mr. Quarles said that the first SCB may go into effect after 2020.
The SEC will amend Regulation NMS Rules 600(b) and 606 to increase the transparency of broker-dealers’ “handling and routing of orders in NMS stock.” The amendments (i) will require a broker-dealer, upon request by a customer, to provide such customer with certain standardized disclosures related to the broker-dealer’s routing and execution of the customer’s “not held” orders for the previous six months, and (ii) revise the current quarterly public order-routing report to include additional disclosures regarding the terms of any payment for order flow and any profit-sharing arrangements that may influence a broker-dealer’s order-routing decision.
The amendments will become effective 60 days after their publication in the Federal Register. The compliance date will be 180 days following the date of publication of the amendments in the Federal Register.
Lofchie Comment: This requirement is in line with the SEC’s historical policy of requiring disclosure and then allowing investors to make their own investment and trading decisions based on that disclosure. Questions remain as to whether the disclosures are sufficient for customers to make informed decisions and whether the requirement of making the added disclosures may motivate broker-dealers to improve their execution practices.
The Federal Reserve Board (“FRB”) will implement a new supervisory rating system for large financial institutions.
Effective February 1, 2019, the FRB will enforce a new rating system for large financial institutions (“LFI”). The new system is intended to (i) better reflect current FRB supervisory programs and practices, (ii) enhance the supervisory assessments and communications of supervisory findings and implications and (iii) improve “transparency related to the supervisory consequences of a given rating.” The new LFI rating system will apply to (i) all domestic bank holding companies and non-insurance, non-commercial savings and loan holding companies (“SLHCs”) with $100 billion or more in total consolidated assets and (ii) U.S. intermediate holding companies of foreign banking organizations with $50 billion or more in total consolidated assets.
The existing RFI/C(D) rating system will continue to be applied to community and regional bank holding companies with less than $100 billion in consolidated assets. In addition, the RFI/C(D) rating system will be expanded to apply to certain SLHCs with less than $100 billion in total consolidated assets on February 1, 2019.
Johns Hopkins University professor and CFS special counselor, Steve Hanke wrote a superb piece on understanding money in Forbes.
He writes that “The Fed’s money supply measures are poor quality and misleading. For superior measures, go to the Center for Financial Stability in NYC, and use its Divisia M4 metric.” His piece stretches into important detail and reveals common misconceptions.
From my perspective, our monetary data have been exceedingly helpful at understanding the efficacy of Fed policy and wiggles in the US economy. Money and financial liability data are applicable for investment managers and economists of all stripes… Keynesians, monetarists, etc.
The full piece is available at … https://www.forbes.com/sites/stevehanke/2018/10/29/the-feds-misleading-money-supply-measures/
Registration for the upcoming CFTC Conference: “FinTech Forward 2018: Innovation, Regulation and Education” is now open. The conference, which is scheduled to take place from October 2, 2018 to October 4, 2018, will feature CFTC Chair Christopher J. Giancarlo and U.S. Representative Austin Scott (R-GA), among others.
The conference will focus on significant tech-driven developments in the financial markets. Participants will discuss (i) the impact that new technologies may have on markets and customers, and (ii) what regulators ought to do to help identify emerging opportunities, challenges and risks, as well as to better educate market participants.
Senator Elizabeth A. Warren unveiled a wide-ranging bill that seeks to “eliminate the influence of money in our federal government.”
The Anti-Corruption and Public Integrity Act would, among other things:
- ban “Members of Congress, cabinet secretaries, federal judges, and other senior government officials from owning and trading individual stocks”;
- institute a lifetime ban on former Member of Congress, Presidents and agency heads from lobbying;
- require conflicts of interest disclosures in rulemaking comments and studies;
- prevent certain individuals from the private sector from taking certain government positions, including, in some cases, running for office;
- livestream audio of federal appellate courts and promote diversity on the federal bench;
- create a new, independent anti-corruption agency to enforce federal ethics laws; and
- increase financial and tax information disclosures for elected officials and candidates for federal office.
Lofchie Comment: One effect of Senator Warren’s proposed prohibitions is that the government would be peopled by career government employees or academics. The unspoken theory behind this is that work for a private enterprise is corrupt, yet work for the government itself or in academics is not. This is a false premise. It is commonplace that those in government seek to use their power to bolster their ambitions of running for higher office. Their political or personal ambition does not disqualify them from office, nor should it disqualify them from having a voice. Likewise, those with experience working in private industry often have a good deal to contribute to the government, perhaps more in some cases than those who have worked only in government or academics.
Senator Warren’s bill would ban any individual who had worked for a company that had received any contract from a government agency for working for that agency for the next four years. She would also ban any senior officer of a company that has been the subject of any enforcement action (without regard to its severity) from serving in Congress (shouldn’t voters in each State get to decide whom they wish to elect?) or working in the Executive branch.
These and her other legislative proposals are, of course, political positioning ahead of a possible run for higher office. But they add to her record of discouraging the private sector from commenting on rules that concern them and discouraging those with industry experience from joining the government. See, e.g., Senator Warren Asks CFTC to Withdraw EEMAC Report on Position Limits; Senator Warren Questions ”Good Intentions” behind Study Challenging DOL’s Fiduciary Proposal; Senator Warren’s Study Finds “Dangerous Problem” with Non-Cash Compensations in Annuity Sales.
Several international regulatory agencies collaborated in the creation of the “Global Financial Innovation Network” (“GFIN”). The new network will focus on regulatory issues related to emerging technologies. There are 11 regulatory agencies in the new network including the Consumer Financial Protection Bureau and the UK’s Financial Conduct Authority.
In a draft consultation document, the agencies explained three major functions of the initiative: (i) information- and knowledge-sharing among regulators, (ii) collaboration in exploring major policy questions and (iii) “cross-border trials” instituted to aid companies as they deal with multi-jurisdictional regulatory challenges. The network is intended to serve as a resource for FinTech companies navigating the complicated web of international regulation. The regulators anticipate that GFIN will increase the speed at which innovative products are able to reach international markets. They also argue that the GFIN will promote transparency and investor protection.
The GFIN proposed the following as its organizational mission statement:
“The GFIN is a collaborative policy and knowledge-sharing initiative aimed at advancing areas including financial integrity, consumer wellbeing and protection, financial inclusion, competition and financial stability through innovation in financial services, by sharing experiences, working jointly on emerging policy issues and facilitating responsible cross-border experimentation of new ideas.”
The GFIN is requesting feedback on its proposed objectives, functions and structure. Comments must be submitted by October 14, 2018.
Kurt Schuler (CFS senior fellow in financial history) and students of Steve Hanke (CFS special counselor) converted the Fed’s weekly balance sheet from its beginning into spreadsheet form.
The data should prove useful for anyone concerned with the quantitative study of monetary policy in the United States over the last 100+ years.
Our joint Johns Hopkins / CFS working paper, “The Federal Reserve System’s Weekly Balance Sheet since 1914,” is available here.
Similarly, Bank of England’s Ryland Thomas informs of an improved balance sheet dataset for the Bank and new paper “The Bank of England as lender of last resort: new historical evidence from daily transactional data.”
With several current or former undergraduate students of CFS Special Counselor Steve Hanke, I have converted the Fed’s weekly balance sheet from its beginning into spreadsheet form. The data should prove useful for anyone concerned with the quantitative study of monetary policy in the United States over the last 100+ years. Our working paper, “The Federal Reserve System’s Weekly Balance Sheet since 1914,” is available here.
The working paper is based on three earlier papers that I have previously written about; all are available at the link above:
“Insights from the Federal Reserve’s Weekly Balance Sheet, 1914-1941” by Justin Chen and Andrew Gibson,” January 2017 (post)
“Insights from the Federal Reserve’s Weekly Balance Sheet, 1942-1975” by Cecilia Bao and Emma Paine, May 2018 (post)
“Insights from the Federal Reserve’s Weekly Balance Sheet, 1976-2017” by Nicholas Fries, July 2018 (post)