(Reuters) - The recent defeat of the U.S. Securities and Exchange Commission’s proxy access rule in a federal appeals court could embolden industry groups to mount similar legal challenges to other rules required by the Dodd-Frank financial oversight law.
Many of the comment letters to federal regulators, as well as congressional testimony, appear to be laying the groundwork for possible lawsuits.
Much of the language used hints at challenges to federal rulemaking procedures, particularly flaws in economic analysis or a failure to properly review all of the public comments.
The following is a list of vulnerable Dodd-Frank rules:
1) Conflict minerals
WHAT: The conflict minerals proposal by the Securities and Exchange Commission would require companies to disclose annually whether they use any “conflict minerals” such as tantalum, tin, gold, or tungsten from the Democratic Republic of the Congo.
LEGAL CONCERNS: The proposal has become so contentious that the SEC had to reopen the comment period and delay the final implementation.
The U.S. Chamber of Commerce, one of the leading business groups willing to sue regulators, has said it plans to keep its legal options open if the SEC does not address concerns about the costs of the proposed rule.
In a comment letter from February, the chamber said the SEC had failed to “show any benefits to investors, increased efficiencies for the marketplace or capital formation.”
Michael Littenberg, a partner at Schulte Roth and Zabel LLP, said of the rule: “Nobody really has their arms around the costs.”
2) Speculative Position Limits
WHAT: The position limit proposal by the Commodity Futures Trading Commission would cap the number of futures and related swaps contracts that any one speculative trader can control.
LEGAL CONCERNS: Commentators, from the U.S. Chamber of Commerce to exchange operator CME Group and the Futures Industry Association (FIA), have a variety of concerns.
There is a basis dispute between the agency and futures users over whether Dodd-Frank requires the CFTC to make a finding that the limits are necessary to reduce price volatility. The CFTC says it does not need to, even though its internal economic studies have found no connection between speculators and volatile prices. That could become a problem, especially if the CFTC does not take its own economists’ findings into account.
A May letter from FIA raised concerns about another procedural matter. It said CFTC staffers in telephone calls had indicated they planned to add a provision into the final rule on aggregated position limits that was not mentioned in the proposal. Failing to request comment on a major change like this could be grounds for a challenge.
“The parts that are the most contentious are the aggregation rules, which don’t seem to have a basis,” said Gary DeWaal, the general counsel for brokerage firm Newedge.
3) Capital and margin for uncleared swaps
WHAT: The CFTC and banking regulators, including the Federal Reserve, have differing proposals out for comment that outline which traders will have to post collateral, or margin, to back up their riskier derivatives trades. The SEC has yet to issue a similar proposal. The plans generally will impose margin on large dealers and major traders, while exempting companies that strictly use derivatives to hedge against business risks like price and interest-rate fluctuations.
LEGAL CONCERNS: These Dodd-Frank rules are going to impose higher costs on a wide swath of financial market players, so the stakes are high.
Concerns about differences in how the banking regulators and the CFTC treat nonfinancial end-user firms, that only use derivatives to hedge risk, have been raised by some trade groups, while others have asked regulators to broaden the exemption to cover more firms that are hedging risk.
In a letter to the CFTC, the Coalition for Derivatives End-Users, which is backed by the U.S. Chamber of Commerce, the Business Roundtable and others, accuses the CFTC of failing to perform an adequate cost-benefit analysis of the rule.
4) Real-time reporting of swap trades
WHAT: The CFTC and SEC have each issued proposals that aim to bolster price transparency in the swaps market by requiring that trades be reported to the public in “real time.”
LEGAL CONCERNS: While the industry has expressed concerns about both proposals, there appears to be greater anxiety around the CFTC’s plan. When it was first proposed, CFTC Commissioner Scott O’Malia raised red flags about a footnote in the plan that he said “admits there is a lack of public information” about the impact on market liquidity.
Since then, major groups including the Chamber of Commerce, Securities Industry and Financial Markets Association and the big banks have raised grave concerns about the proposal, its costs, and its treatment for block trades.
The proposal would implement an “arbitrary and inflexible reporting framework,” Cleary Gottlieb partner Edward Rosen wrote in a letter on behalf of major banks including Bank of America and Credit Suisse.
5) Incentive-based compensation
WHAT: The SEC and federal banking regulators have proposed rules to discourage firms from rewarding employees for risky behavior. It would require disclosure of incentive-based compensation practices and restrict companies from excessively rewarding employees for taking risks that can lead to major financial losses.
LEGAL CONCERNS: The Chamber of Commerce along with other leading trade groups have pointed to flaws in the SEC’s economic analysis on this rule. They claim that the analysis focuses too much on administrative burdens and not enough on the competitive burden on financial institutions. In a similar letter to the Federal Reserve, the chamber decries the complete lack of any cost-benefit analysis.
Reporting by Sarah N. Lynch and Christopher Doering; Editing by Tim Dobbyn