President Donald Trump is taking aim at federal rules and regulations that he and his Republican allies claim place undue burdens on business. One of his first acts will be to sign an order to unravel the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. This sweeping law, enacted during the Barack Obama administration, created a consumer protection agency and reined in risky aspects of derivatives and mortgage lending in the wake of the 2008 financial crisis.
In June 2016 the Securities and Exchange Commission finalized an additional bipartisan provision, “Disclosure of Payments by Resource Extraction Issuers,” which required U.S.-traded companies to disclose payments at or above $100,000 made to foreign governments for rights to commercial development of oil, natural gas or minerals. The regulation, requiring compliance by 2018, was approved along with measures for tougher standards for coal mining.
Payments include taxes, royalties, dividends, fees, licenses, infrastructure improvements, and community and social responsibility outlays, on a per-project basis. Oil companies have used many of these payments to distribute bribes to resource-rich, corruption-prone foreign nations and their oligarchs from Africa to Latin America.
At the heart of the debate is transparency. The order to repeal the act, introduced by a Michigan Republican, Representative Bill Huizenga, is being spearheaded in the Senate by Jim Inhofe an Oklahoma Republican.
The order to repeal falls under the Congressional Review Act, which allows Congress to review and revoke rules issued by the executive branch within 60 legislative days of their finalization. Such measures pass with a majority vote in the Senate rather than the typical 60 needed to overcome a filibuster. A “substantially similar” rule cannot be issued unless Congress passes new legislation.
CRA was enacted in 1996, though it has been used successfully just once since then, in 2001. The House, Senate and White House are rarely controlled by the same party, a situation that offers the most favorable conditions for reaching agreement to kill a previous administration’s rules.
Rolling back Dodd-Frank is a mistake on many levels. First, the rule deters bribery and curbs corruption, poverty and instability, by making companies disclose payments to foreign governments. With greater transparency, citizens of these resource-rich and often impoverished countries will be able to track foreign payments and better ensure that funds are reinvested in public works and infrastructure as opposed to being hidden in offshore accounts or siphoned by government officials. The lack of disclosure serves to impede economic development and upsets political stability in regions that are already fragile.
Second, the law is good for shareholders, as it provides clarity and insight into a company’s operations and business practices. After all, the SEC requires all public companies to share material information with shareholders, defined as data that could influence investors’ decisions to buy or sell a stock.
Energy companies argue that having to disclose “commercially sensitive” information gives their non-U.S. competitors an unfair advantage. Yet similar rules have been instated elsewhere. Due in part to American leadership, reporting is already underway in the U.K., France, Norway and Canada, resulting in billions of dollars of payments to governments in over 100 countries. As George Soros pointed out, “the commission will be setting the rules for much of the world.”
The rule affects all traded publicly companies in the U.S., not just U.S.-based companies, meaning Exxon Mobil Corp. and Chevron Corp. would have to report, as would China’s CNOOC and Brazil’s Petrobras.
The argument that the law gives private companies an unfair advantage ignores the fact that going public provides significant access to the capital markets in return for complying with a set of rules and standards — the backbone of our financial system.
As money pours into environmentally sustainable funds, indexes and ETFs, businesses that do not disclose their source of income will not make institutional investors’ list of companies that eventually become positions in their portfolios.
The resolution is tied in with members of the Trump administration. Secretary of State Rex Tillerson, as the former chief executive officer of Exxon Mobil, lobbied against the provision, and now faces questions over his ties to Russia.
The repeal order directs the Treasury secretary to submit recommendations within 120 days for changes to the regulations, and will likely reach Trump’s desk by early spring. Treasury Secretary Steven Mnuchin, who was confirmed this week, said his priority on the regulations was to roll back parts of Dodd-Frank. Mnuchin, a longtime Goldman Sachs banker, said his private-sector experience showed him the law’s flaws.
Even if Trump cannot unravel all of Dodd-Frank, he can chip away at it. If he succeeds, U.S. energy stocks should initially rally, but those gains will be short lived, as frustrated analysts, investors and particularly portfolio managers with a sustainability focus, turn elsewhere or go short.