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On February 3, 2017 President Trump issued an Executive Order entitled “Core Principles for Regulating the United States Financial System. “ While the Executive Order does not specifically mention the Dodd-Frank Act, it is widely viewed as the first step in a roll back of Dodd-Frank.
The Executive Order lays out Core Principles that are to be used by the Trump Administration to regulate the US financial system. The Core Principles talk about:
- empowering the American consumer;
- making American financial markets supportive of growth;
- preventing tax-payer funded bailouts;
- better enabling American companies to compete in global markets; and
- making regulation efficient and subject to public accountability.
Click on https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-executive-order-core-principles-regulating-united-states to see the full text of the Executive Order.
The Order directs the Secretary of the Treasury to consult the member agencies of the Financial Stability Oversight Council and report back to the President within 120 days, and periodically after that. The agencies are charged with reporting on the ability of existing regulations to promote the Core Principles, reporting on actions taken to promote the Core Principles and identifying any laws and regulations that are inconsistent with the Core Principles.
We expect the regulatory agencies to focus on regulatory oversight of the financial markets. Discussion to date in the business press has focused on issues such as bank capital requirements, the Volcker Rule and the designation of “systemically important financial institutions.” However, implementation of the Core Principles may impact executive compensation. As you know, the Dodd-Frank Act contains a number of regulations related to executive compensation, including Say-on-Pay and pay ratio disclosure, among others.
What do we expect to see? How will the Trump Administration impact executive compensation from a regulatory perspective?
Since the first report by the regulators is due by early May, we don’t expect the roll back to have a direct impact on the 2017 proxy season. By early May, most calendar year companies will have filed proxies and, in many cases, conducted their annual shareholder meetings. We expect that the regulations that have already been implemented, including Say-on-Pay, hedging disclosure, and Compensation Committee independence, will continue in effect for the foreseeable future. Not least because companies have already implemented these regulations and they are relatively benign. One could even argue that Say-on-Pay aligns with a populist agenda.
We do believe that a number of changes will occur over the course of the year. More than likely, we think pay ratio disclosure will be rolled back. It is a good example of regulation that will be costly to implement and serves no clear purpose to benefit investors or American companies. Certainly the business community does not support it. We expect the Trump Administration to roll it back and that would likely occur before the 2018 proxy season, when the new rules are scheduled to go into effect.
Regarding the regulations that have not been finalized, including clawbacks and pay and performance disclosure, we think it is more likely than not that neither will be implemented. Both of these issues are complex. One can argue that they duplicate existing policies and practices at many companies and that it is not necessary to give these rules the weight of law. As an example, shareholders have voted affirmatively to conduct Say-on-Pay votes on a regular basis, generally annually. In addition, our research indicates that most major companies have a clawback policy in effect. Even if these are no longer required under the Act, we expect most companies to continue current practices that support good governance.
We will track these issues over the coming year and keep you informed of new developments as they occur. It will certainly be interesting to watch as the Trump Administration makes its mark on our country’s regulatory framework.