Category Archives: Data and Transparency

Senator Urges President to Replace SEC Chair

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Senator Elizabeth Warren (D-MA) “strongly urge[d]” President Obama to “immediately designate another SEC Commissioner as Chair of the agency.”

In her letter to the President, Senator Warren explained that “Chair White’s refusal to move forward on a political spending disclosure rule serves the narrow interests of powerful executives who would prefer to hide their expenditures of company money to advance their own personal ideologies.” Senator Warren highlighted Chair Mary Jo White’s “Disclosure Effectiveness Initiative” as part of her “anti-disclosure agenda” and charged that the SEC never has produced data to support Chair White’s presumption that investors experience “information overload.” She further noted that Chair White “has also refused to say how much time and agency resources have been spent on this voluntary initiative,” which Senator Warren had previously requested in a letter to Chair White. Senator Warren continued:

Giant public companies have every right to advocate for less transparency in public markets, whatever the broader economic consequences. But the SEC was not created to work for them. Under a new Chair, the agency can re-direct its limited discretionary resources away from actively undermining the interests of investors and back toward its core purposes.

Senator Warren also pointed out that, “[a]s of October 2016, the SEC has yet to finalize nineteen mandatory rules under the Dodd-Frank Act.”

Lofchie Comment: Senator Warren appears to take the view that financial regulation is but the continuation of politics by other means (paraphrasing Prussian strategist von Clausewitz). The attack on the SEC Chair is not the first shot fired by the Senator. She has launched a number of attacks on regulators and academics who have not aligned their views with hers. 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.

The Senator’s latest missive follows closely upon the D.C. Circuit Court decision that the CFPB structure, which is commonly viewed as the Senator’s creation, is unconstitutional because the Director of the CFPB was immune from dismissal by the President. Yet now, the Senator calls for the SEC Chair to be fired because she has failed to follow “Congressional mandates.” To be consistent, the Senator should acknowledge that the CFPB’s original structure was inherently flawed in that it inappropriately insulated the agency from both Presidential and Congressional control. The President could remove the CFPB Director only “for cause.” Senator Warren seems to be arguing that SEC Chair White’s actions don’t amount to appropriate “cause” for removal, but are sufficient to designate an alternative Commissioner as Chair. Under the CFPB’s structure, that would not be possible, given that there is only one Director.

Senator Warren and her Congressional colleagues should revisit the CFPB’s design in toto, ideally replacing the single-director model with a five-person bipartisan model (i.e., similar to that of the SEC), and provide for Congressional control over the CPFB’s budget. Sauce for the goose (the SEC, the CFTC, and a host of other federal agencies) should be sauce for the gander (the CFPB).

As far as the Senator’s actual request, there is no possibility of it being granted. (Unsurprisingly, the White House indicated support for the SEC Chair.) If the President were to take the action that the Senator calls for, Chair White would resign, which would leave the SEC with only two Commissioners and, thus, the Democrats would lose their majority.

IOSCO Examines Corporate Governance Regulation

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The Corporate Governance Task Force (“CGTF”) of the IOSCO Growth and Emerging Markets (“GEM”) Committee issued a final report in which it analyzed the following “key topics” of corporate governance: (i) board composition, (ii) remuneration and incentive structures, and (iii) risk management and internal controls. The CGTF based its conclusions on a survey of GEM Committee members, and of relevant institutions and market entities in over 30 jurisdictions.

In the report, the CGTF emphasized that “[c]orporate governance is a work in progress,” and stated that its recommendations are intended “to help regulators consider possible ways for improvements in their corporate governance regulatory frameworks” (emphasis in original). The CGTF also stressed the importance of the role of the regulator in incorporating jurisdictional best practices into larger regulatory frameworks:

Capital markets regulators should take a relevant role in ensuring the regulatory frameworks consider the best governance practices within their jurisdictions. Accordingly, their views should be an increasingly important reference on the subject in global debates.

Additionally, the CGTF recommended that regulators:

  • require companies to indicate as concisely as possible the “main risks resulting from the risk identification methodology adopted by the company[ies],” and to describe how those risks “affect the business”;
  • emphasize social and cyber risks, and sustainability, proportionately when regulating risk reporting and management;
  • encourage companies to adopt integrated reporting by interacting with their stakeholders, as well as through other means;
  • encourage periodic self-assessment reports by companies’ boards that address the “efficiency and appropriateness of companies’ systems and controls, including identified deficiencies and the appropriate corrective action to be taken”;
  • compare analyses of internal controls and systems reported by external auditors with companies’ descriptions and their boards’ self-assessment reports;
  • encourage companies to establish specialized subcommittees in order to support board performance; and
  • “consider market conditions and characteristics, segments and scale of companies, so that they do not impose excessive or unnecessary regulatory costs” in mandating specialized risk committee requirements.

Lofchie Comment: One of the more interesting parts of the CGTF’s report is the discussion of “diversity” in corporate boards of directors, since regulators from different countries expressed contrasting views on the meaning and significance of diversity, and the degree to which it should be treated as a governmental goal.

SEC Accountant Addresses Recent Developments in Financial Reporting

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SEC Interim Chief Accountant Wesley R. Bricker outlined ways in which auditors, and others responsible for financial reporting, can “reinforce the reliability and credibility of financial reporting for investors” under the new FASB credit loss standard. In remarks before the AICPA National Conference on Banks & Savings Institutions, Mr. Bricker addressed:

  • the FASB’s recent completion of its multi-year standard setting process for credit losses, which requires earlier recognition of credit losses on many loans, securities and other financial assets;
  • existing SEC rule staff guidance for maintaining books and records for credit losses under current Generally Accepted Accounting Principle requirements, including continued focus on internal control over financial reporting; and
  • the importance of coordination among all stakeholders in the transition and implementation activities relating to the new credit loss standard.

Mr. Bricker emphasized that “the issuance of the new credit loss standard represents a significant enhancement in the quality of financial reporting by providing financial statement users with more decision-useful information about the expected credit losses related to many financial assets.” He highlighted that:

[C]ompanies will be required to immediately recognize expected losses instead of deferring losses until incurred, which should result in more timely reporting of losses to investors. . . .

Mr. Bricker is part of the SEC Office of the Chief Accountant which maintains oversight over the Financial Accounting Standards Board and the Public Company Accounting Oversight Board.

Lofchie Comment: Mr. Bricker’s observations raise a question as to whether “earlier recognition” of losses may bring the SEC into conflict with the banking regulators, who may have their own views as to when a loss should be recognized.

 

GAO Urges Department of Commerce to Fulfill Conflict Mineral Obligations

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The Government Accountability Office (“GAO”) examined (i) company disclosures filed in 2015 in response to the SEC conflict minerals regulations, (ii) challenges to companies’ due diligence efforts concerning the processing facilities in conflict minerals supply chains, and efforts to mitigate those challenges, and (iii) actions by the Department of Commerce (“Commerce”) regarding its conflict minerals-related requirements under the Dodd-Frank Act.

In a report titled: “SEC Conflict Minerals Rule: Companies Face Continuing Challenges in Determining Whether Their Conflict Minerals Benefit Armed Groups,” the GAO determined that:

  • as a result of country-of-origin inquiries, the number of companies that filed specialized disclosure forms (“Forms SD”) with the SEC and reported that they knew or had reason to believe they knew the source of the conflict minerals in their products rose in 2015 by an increase of 19% over the previous year (based on a generalizable GAO-reviewed sample of filings);
  • after an estimated 79 percent of the companies that filed a Form SD performed due diligence, an estimated 67 percent reported they were unable to confirm the source of the conflict minerals in their products, and about 97 percent reported they could not determine whether the conflict minerals financed or benefited armed groups in the Democratic Republic of the Congo (“DRC”) and adjoining countries;
  • facilities that process conflict minerals pose challenges to the disclosure efforts of companies filing Forms SD because (i) these facilities rely generally on documentary evidence about the origin of conflict minerals, which evidence can be susceptible to fraud, and (ii) processing operations involve multiple levels that can introduce the risk of fraud and increase costs associated with disclosures;
  • industry and other stakeholders have developed or are pursuing methods for mitigating these risks, such as chemical “fingerprinting” to verify documentary evidence; and
  • as of July 2016, the Department of Commerce had not submitted a report, as required in January 2013, assessing the accuracy of the Independent Private Sector Audits (“IPSA”) filed by some companies that filed Forms SD, nor had it developed a plan to do so.

The GAO urged the Secretary of Commerce to submit a plan to the appropriate congressional committees that would outline steps to be taken within associated timeframes. Those steps included the following:

  • assessing the accuracy of IPSAs and other due diligence processes described under Section 13(p) of the Securities Exchange Act;
  • developing recommendations for processes to be used when executing such audits, including ways to improve the accuracy of and establish standards of best practices for such audits; and
  • acquire the necessary knowledge, skills and abilities to carry out these responsibilities.

Lofchie Comment: If ever a rule were designed to fail cost-benefit analysis, the SEC manifesto on conflict minerals is it. When 97% of companies are not sure where the money is going, chances are that the data is useless.

Database of Sovereign Defaults Updated

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David Beers (formerly of the Bank of Canada, now at the Bank of England) and Jamshid Mavalwalla (Bank of Canada) have produced an update (PDF) to a database (Excel) of sovereign defaults. Coverage now extends from 1970 to 2015. The database shows, country by country and for all countries combined, who was in default, by how much, and to what groups (IMF, World Bank, Paris Club countries, foreign currency bond holders, etc.)

Another useful feature of the database is that it has a score showing how reliable the data are, in the authors’ view. It is all too often forgotten in economics, especially when comparing or combining figures across countries, that the underlying data may vary widely in their reliability, sometimes because of outright falsification, but more usually because of difficulties in measurement. Pointing out where data are of lower quality can spur researchers to go out and find better data or more accurate ways of estimation for filling in gaps.

(Thanks to David Beers for bringing the database to my attention.)

Futures Industry Association Examines Treasuries Market Reporting

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The Futures Industry Association Principal Traders Group (“FIA PTG”) argued that the extraordinary volatility in the U.S. Treasuries market on October 15, 2014 “called attention to the market’s changing dynamics” and “highlighted the need to consider changes to address the market’s unusual lack of transparency.” Tracing the regulatory response after that spike in volatility, FIA PTG reviewed subsequent actions that addressed market transparency including a joint staff report in 2015 by multiple regulators, the U.S. Treasury Department’s request for comments on the Treasuries market structure and, importantly, FINRA’s recent proposal that would require two-sided reporting from Treasuries market participants.

FIA PTG argued that FINRA should reconsider its two-sided reporting proposal. According to FIA PTG, the “European Market Infrastructure Regulation requires dual reporting ostensibly to ensure accuracy and quality in data reporting,” but “research published by a dozen associations” found that “‘confirmation execution rates are generally at or above 90%, whereas pairing rates at trade repositories used in dual-sided reporting regimes are around 60%.'” The associations’ research also concluded that two-sided reporting increases the costs and complexity of the market and inflicts additional burdens on market participants. FIA PTG observed that “much of the data from the U.S. Treasury market may already exist at the platform, clearing firm/prime broker or relevant designated contract market, making two-sided reporting also redundant.”

FIA PTG concluded:

FIA PTG remains hopeful that regulators will consider not just the desired outcome of enhanced transparency, but also the efficiency and cost-effectiveness of the means of achieving transparency.

 

Lofchie Comment: Imposing reporting requirements just adds more cost on non-dealers. Regulators should not underestimate the operational difficulty for end users of having to develop procedures and systems in order to comply with new operational requirements. Any individual new requirement may seem trivial to the regulator who imposes it, but the number of regulators is very numerous, and the number of regulations even more so. The cost burdens of so many regulators, rules and requirements challenges small and medium firms to turn a profit and, thus, to survive. The result is an increasing likelihood that only big firms, that are able to spread regulatory costs over a substantial volume of transactions or clients, will remain.

AFL-CIO Sets the Record Straight; Claims SEC Chair Mischaracterized Stance on Disclosure Initiative

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The American Federation of Labor and Congress of Industrial Organizations (“AFL-CIO”) Office of Investment Director Heather Slavkin Corzo complained that SEC Chair Mary Jo White mischaracterized the AFL-CIO’s position on the SEC’s disclosure initiative. Director Corzo took issue with a July 22, 2016 response to questions posed by Senator Elizabeth Warren, in which SEC Chair White suggested that despite the challenges, the AFL-CIO supported the SEC initiative to eliminate or modify disclosure. The SEC Chair had stated:

[T]he AFL-CIO … noted that “redundancy adds volume to an already cumbersome report but provides little value to investors” and that “where possible, duplicative information should be eliminated.” Comments like these have provided insights on the challenges of improving disclosure effectiveness for investors, including by illuminating the complexities in considering eliminating, modifying or adding any disclosures.

Ms. Corzo suggested that the quote used by Chair White “implied that [the AFL-CIO] disagree[s] with the issues raised by Senator Warren,” and emphasized that “[t]his is not the case.” Ms. Corzo reiterated the position that was taken by the AFL-CIO in a November 20, 2015 letter to the SEC: “We are deeply concerned that this review seems intended to limit investors’ access to information which undermines the [SEC’s] core purposes of investor protection and facilitation of capital formation.” Ms. Corzo also referenced a July 21, 2016 comment letter, in which the AFL-CIO made the following assertion:

[The AFL-CIO does not] believe any investors are worse off for access to too much information. Conversely, [it] believe[s] that additional disclosures tend to provide useful information. The problems with unwieldy corporate reporting lie in the form and style of the disclosure.

 

Lofchie Comment: Inasmuch as Senator Warren and the AFL-CIO are united in their support for a number of disclosure measures that are considered to be either helpful to union members (such as executive pay ratio disclosures) or politically advantageous (such as political contribution disclosures), it is not surprising that the AFL should come to the Senator’s aid in a given dispute with the SEC Chair. The question is this: should the SEC mandate disclosures based on (i) investors’ concerns, (ii) political interests, or (iii) whatever interests motivate any particular Senator?

 

G20 Describes Path to Global Economic Recovery

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The Group of 20 Finance Ministers and Central Bank Governors (“G20”) reviewed efforts to respond to “key economic challenges, as well as the progress . . . made since the beginning of this year.” The meeting was held over two days in Chengdu, China.

In a Communiqué issued at the end of the conference, the G20 members conveyed the following:

  • “The global recovery continues but remains weaker than desirable.” This is due in part to high financial market volatility and geopolitical conflicts, and to fluctuating commodity prices and low inflation, both of which could be prevented by sharing the benefits of growth within and among countries in order to promote inclusiveness.
  • The G20 will use “all policy tools – monetary, fiscal and structural – individually and collectively to achieve . . . strong, sustainable, balanced and inclusive growth.” Achieving that goal will involve making tax policy and public expenditure more “growth-friendly” by prioritizing high-quality investments.
  • Structural issues, such as excess capacity in certain industries, are “exacerbated by a weak global economic recovery and depressed market demand” and have affected trade and workers negatively.
  • Multilateral development banks (“MDBs”) have a “unique role in supporting infrastructure investment.” G20 has asked MDBs to undertake joint actions that support “quality infrastructure development, which aims to ensure economic efficiency in view of life-cycle cost, safety and resilience.”
  • The G20 supports the “continued effort to incorporate enhanced contractual clauses into sovereign bonds.”
  • The G20 prioritizes “building an open and resilient financial system,” by implementing the total-loss-absorbing-capacity standard and effective cross-border resolution regimes. Members will “continue to address systemic risk within the insurance sector,” along with “emerging risks and vulnerabilities in the financial system, including those associated with shadow banking, asset management and other market-based finance.”
  • The G20 recognizes “recent progress made on effective and widespread implementation of the internationally agreed standards on tax transparency.” The G20 recognizes the effectiveness of “tax policy tools in supply-side structural reform for promoting innovation-driven, inclusive growth, as well as the benefits of tax certainty to promote investment and trade.” The G20 will continue working on issues surrounding pro-growth tax policies and tax certainty.
  • G20 countries should participate in a “voluntary peer review of inefficient fossil fuel subsidies that encourage wasteful consumption.” Further, green financing must be increased if environmentally sustainable growth on a global scale is to be supported.

Lofchie Comment: Although the G20 Communiqué has no actual legal effect, the intellectual bent is clear: it supports globalism and government intervention while remaining either indifferent or hostile to private enterprise. The Communiqué begins with a recognition that the global economy is weak. It then pivots toward questions of infrastructure spending which inherently means either government spending or spending through international government agencies and “multilateral development banks.” The G20 seems to view private financing sources with suspicion and perhaps even hostility in its assessment of “vulnerabilities . . . associated with shadow banking, asset management and other market-based finance.”

The G20 stance on energy is that “green financing must be increased,” presumably, through additional government financing. At the same time, the G20 advocates for the reduction of “fossil fuel subsidies that encourage wasteful consumption.” It is difficult to understand the policy implications of these statements. Wouldn’t governmental subsidies of green financing also encourage wasteful energy consumption? If, for example, you wanted to reduce energy consumption, wouldn’t you have to raise the cost of energy, instead of subsidizing its production?

According to the G20, tax collection must be improved while “pro-growth tax policies” are implemented. Again, it is difficult to understand what is being advocated here. Is this an argument for reduced taxes? The G20 says that it favors the use of “tax policy tools in supply-side structural reform for promoting innovation-driven, inclusive growth, as well as the benefits of tax certainty to promote investment and trade.” What does this mean? Who possibly could be against “innovation-driven, inclusive growth”? Or better yet, how about this incomprehensible line: “We launch the Global Infrastructure Connectivity Alliance to enhance the synergy and cooperation among various infrastructure connectivity programs in a holistic way.”

In a passage from the Communiqué that seems particularly problematic, the G20 observes that “fluctuating commodity prices and low inflation . . . could be prevented by sharing benefits of growth within and among countries to promote inclusiveness.” Perhaps this is true, but since the Democratic and Republican parties both seem to oppose further trade agreements, and likely are in favor of reevaluating established ones, it is unclear what part or political faction of the U.S. government would endorse the G20’s position.

Why CFS Divisia Money Matters, Now!

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My remarks at the Society for Economic Measurement illustrate how the world may have been different had CFS Divisia money been on the Fed’s dashboard.

Even today, CFS Divisia M4 suggests that growth may be better than expected.

Takeaways for investors and officials from our experience producing monetary aggregates and measuring money in the U.S. since 2012 include: 1) private sector versus state money, 2) deflation and inflation scares, 3) a damaged monetary transmission mechanism, 4) collapse in shadow banking, 5) shortage of financial market liquidity, and 6) ideas for the future.

Whether you are a Keynesian, Monetarist, or simply agnostic, monetary and financial measurement and its integration into policy is essential for the future.

For full remarks:
http://centerforfinancialstability.org/research/why_cfs_divisia_071316.pdf

SEC Chair White Outlines SEC Disclosure Developments

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SEC Chair Mary Jo White reviewed the development of SEC disclosure in corporate governance. She focused on board diversity, non-Generally Accepted Accounting Principles and sustainability reporting.

Chair White reported that the SEC staff is preparing recommendations to the Commission to amend the rule requiring companies’ proxy statements to include “more meaningful board diversity disclosures on their board members and nominees where that information is voluntarily self-reported by directors.” She emphasized that the SEC’s “lens on board diversity disclosure needs to be refocused in order to better serve and inform investors.”

Chair White discussed the reporting of non-GAAP financial measures, voicing “significant concern” over companies that take the flexibility of non-GAAP information “far and beyond what is intended and allowed.” She cautioned that “the non-GAAP information, which is meant to supplement the GAAP information, has become the key message to investors, crowding out and effectively supplanting the GAAP presentation.” Chair White urged companies to review SEC guidance on non-GAAP disclosures carefully.

Chair White reported that the SEC is addressing disclosure of sustainability information through a “materiality-based approach to disclosure, guidance on certain issues,” and through “shareholder engagement on a range of sustainability topics.” She noted that the disclosure of sustainability matters has increased, but affirmed that the SEC is taking a “more focused look at such disclosures, particularly [those that are] related to climate change, in [its] annual filings reviews.”

Chair White delivered her remarks at the International Corporate Governance Network Annual Conference in San Francisco, California.

Lofchie Comment: How much of the SEC’s focus on “disclosure” is driven by the interests of investors? Is it really true that corporations would better serve their investors if their disclosures spotlighted the risks of climate change, or does that proposed requirement reflect a political preference? If it is the latter, wouldn’t most investors be more concerned about the risks that might arise from Brexit, Zika and other pandemics, governmental defaults on both national and municipal levels, aging populations, regulatory burdens, and so on? How can the need for disclosure on global warming possibly take precedence over disclosure concerning other kinds of risks?