Obama's SEC Chair Resurrecting W Era Deregulation Plan

Mary Jo White was nominated by President Obama to head the Securities and Exchange Commission on January 24, 2013.  Her husband, John White, was the SEC Director of Corporate Finance under Jeb!'s brother from 2006 to 2008.  John White spearheaded an effort to relax the disclosure requirements that corporations have to make to their shareholders and the public, but then there was this little thing with Lehman Brothers, et al, and well, the public got all worked up over some minor oversights and accounting flubs at a few banks who needed a bailout (through no fault of their own), White resigned, and the whole project got put on the back burner.   Until Now. 

"This is bullshit," said former SEC Chief Accountant Lynn E. Turner, referring to the agency's latest moves. "This is just absolute bullshit. It reeks."

The deregulation agenda makes subtle changes to obscure rules with potentially dramatic ramifications. By tweaking a few definitions, the SEC could curtail how much information the public receives about the internal operations of corporate conglomerates and their tax-avoidance efforts, while simultaneously shielding big firms from shareholder lawsuits.

That report follows on this one:

At issue is the standard of “materiality,” whether or not information is germane enough to be disclosed in financial statements. The SEC designates responsibility for setting this standard to the Financial Accounting Standards Board (FASB), a private-sector organization created in 1973 to establish and update the nation’s Generally Accepted Accounting Principles (GAAP). Here’s the FASB’s longstanding materiality guideline:

The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.

But a few weeks ago, on September 24, FASB published two drafts for public comment, one to update FASB’s Conceptual Framework, and the other an Accounting Standards Update to clarify it for corporate management. FASB said the updates would “improve the effectiveness of disclosures in notes to financial statements.”

The press release is here. Of particular note is this statement from FASB Chairman Russell G. Golden.

“Stakeholders indicated that the current discussion of materiality in our Conceptual Framework is inconsistent with the legal concept of materiality as established by the U.S. Supreme Court,” stated FASB Chairman Russell G. Golden. “This led to uncertainty about organizations’ abilities to interpret what disclosures are material; and the Board’s ability to identify and evaluate disclosure requirements in accounting standards.

“These proposals are intended to clarify materiality—which will help organizations improve the effectiveness of their disclosures by omitting immaterial information, and focus communication with users on the material, relevant items,” added Golden.

 

What's significant about the reference to the U.S.S.C. is that the Supreme Court has set forth standards of "materiality" as part of the inquiry into when the lack of material disclosure rises to the level of FRAUD.  

As a shareholder or even just a member of the public, don't you think the Rules should encourage a higher level of disclosure, rather than a level that stops just short of fraudulent?  What's at stake?  

Back to the HuffPo:  

Currently, a company has to report all errors it makes in public filings unless the firm's independent auditors conclude the error was "immaterial" to overall operations. The new FASB proposal would reverse the burden of proof, forcing auditors to definitively prove that any error was in fact "material" before requiring firms to disclose them. It's the same standard used for what constitutes a "material" event in securities fraud statutes. Investors, of course, generally want to keep tabs many kinds of company activities -- not just those that are strictly fraudulent.

...

The bigger the company, of course, the harder it is to prove that a financial error is "material." Massive firms have massive balance sheets, where multimillion-dollar slip-ups can have relatively small effects on quarterly earnings. That doesn't mean investors don't want to know about them. And the less information a company discloses, the harder it is to bring lawsuits if executives mislead their shareholders.

...

The new plans also have significant implications for the public's understanding of corporate taxes. Big companies almost never pay the full 35 percent tax rate on profits, but use a variety of complicated tactics to lower their tax burden. Limiting disclosures in tax reporting may make it more difficult for watchdogs to monitor the ways in which corporations exploit loopholes to dodge taxes. emphasis added

 

It certainly looks like this is a classic case of the "revolving door" corruption that is so rampant between Washington and Wall Street, and Mary Jo White is increasingly looking like the fox guarding the henhouse door.  Elizabeth Warren has singled out Mary Jo White before, for slow-walking Dodd-Frank reforms and limiting liability for corporations found to have committed securities violations, among other things.  Again, Zack Carter at HuffPo has a concise account (from a different article):

The conflict concerns a May 21 meeting between Warren and White. The SEC acknowledged to HuffPost that White promised to implement a rule on CEO pay disclosures by "the fall." But Warren was incensed to learn that on the same day the meeting took place, the Office of Management and Budget had published SEC plans that postponed the rule's implementation from the fall of 2015 until April 2016.

In the fall of 2013, after White took over as SEC chair, the agency said it would have the rule in place by October 2014. The commission reiterated the projection in the spring of 2014.

The SEC missed the self-imposed deadline. In the fall of 2014, the commission said it would implement the rule in October of 2015.

Democratic senators weren't happy. In December 2014, 15 of them sent a letter to White urging her to implement the rule by March 31, 2015. Multiple senators cried foul in April, when the rule remained dormant.

Mind you, it's been over 5 years since Congress passed Dodd-Frank, and the CEO Pay disclosure rule was supposed to be an important piece of the "reform."  Then there's this:  

When an individual is convicted of a felony, they face years of disenfranchisement — from being denied the right to vote in many states, to facing barriers to finding work, felony convictions have real-world consequences for people. But when it comes to banks, regulators and law enforcement work together to ensure collateral consequences don’t occur.

It’s not supposed to be that way. When a bank is charged with a crime, there are certain penalties that automatically kick in. Here is what the banks were facing as a result of their felonies:

1)  Disqualification from managing mutual funds and exchange-traded funds for RBS, JP Morgan, Citigroup and UBS.

2)  New barriers for issuing securities. All the convicted banks are “well-known seasoned issuers,” which is a special status that lets them quickly raise capital without having to get SEC approval first. A criminal conviction automatically disqualifies a bank from this status.

3)  No more immunity for earnings projections. Since you can’t verify the accuracy of the future, the law gives companies a “safe harbor” that allows them to make forward-looking statements anyway — without fear of lawsuits. The felony pleas would disqualify UBS, Barclays and JP Morgan from this immunity, thus subjecting all of their statements to the normal liability standards for fraud.

4)  UBS and Barclays could no longer raise unlimited amounts of money though the sale of private securities.

How many of these consequences do you think the banks actually faced? If you guessed ZERO out of four, you are correct! The Securities and Exchange Commission waived all of the above punishments. And according to Reuters, banks demanded assurance they’d get these waivers before they agreed to plead guilty to the felonies. It’s not enough that the banks are avoiding prison — they needed a guarantee they wouldn’t see the regulatory equivalent of probation, either.

 

According to several articles I find, Mary Jo White frequently votes with the 2 Republicans on the SEC, overruling the 2 Democrats.  So, do you have any doubts about who is behind this push to re-define "materiality," and what the actual intent is behind the re-definition?  David Dayen isn't.

Mary Jo White herself has talked about “reforming” disclosure for years, citing an “information overload” in financial statements. The day after FASB’s proposal, the SEC put out a request for comment to review Regulation S-X, which governs disclosures. And all of White’s top advisors on commission staff come from a business background. “Can you name any person at the SEC motivated by the desire to advocate for investors?” Barbara Roper asked.

Put this together and you have FASB, the Chief Accounting Office, the division of Corporation Finance, CEOs, auditors, lawyers and even the SEC Chair all moving in the same direction – to reduce disclosure. And the materiality threshold represents their opportunity. If this were vetted by people with serious credibility, who had investor protection at the forefront of their efforts, that’s one thing. But for this proposal to bubble up from committees and individuals with clear ties to big business makes it look suspiciously like Mary Jo White and her minions want to undermine the SEC from within.

 

I know this is kind of long, and for any of you who've actually made it this far, thanks, it is appreciated.  I also know that I've probably pushed the "fair use" doctrine a bit, but these are somewhat lengthy articles, and I felt it important to connect all the dots in one diary.  

Couple of concluding thoughts:  

Mary Jo White has recused herself over 50 times due to conflicts of interest in matters before the Commission.  As a practical matter, that means that whatever is before the Commission is essentially dead in the water, split 2-2 between the other Commissioners.  If she has that many conflicts of interest, which prevents the Commission from operating effectively, she needs to be removed.  But that won't happen without a huge public outcry, and my guess is that any attempt would only lead to Obama digging in to defend one of his own.  

It is difficult to conclude that HRC would be any better than Obama has been in this arena, after all, Bill Clinton spearheaded the drive to bring the financial industry into the Democratic Party's fold, and she has been funded in no small part by the industry in both campaigns, as I understand it.  

This is where I can see Bernie having a real effect, if he gets into office.  Appointments and nominations matter, and Bernie's choices would be a lot better for the country.  Further, picking a number of fights with the Republicans in Congress over confirmation votes for candidates has usually been bad for the Republicans and good for Democrats, as the average person tends to support the President's authority to appoint/nominate who s/he wants.  

Talk about synchronicity; compare our approach with Iceland's in gjohnsit's diary.