Photo: Wikimedia Commons
Shannon Greene, CFO of a Fort Worth leather supplier, ruefully recalls what happened to her business the last time Washington overhauled financial regulations.To comply with the 2002 Sarbanes-Oxley Act, Greene had to hire outside consultants and spend nearly nine months revamping procedures and controls –- at a total cost of $200,000, or 6 per cent of her company’s earnings in 2004.
“It was very painful, very stressful,” says Greene, whose Tandy Leather Factory has 450 employees and 107 stores worldwide.
“Could we have opened a few more stores with that $200,000? Absolutely.”
Greene didn’t see a single tangible benefit to the expense and hassle of Sarbanes-Oxley, which she believes punished law-abiding companies for the mistakes of a few bad apples.
Now that federal regulators are beginning to write the nearly 400 rules mandated by the Dodd-Frank financial overhaul enacted last year, private-sector companies and their allies in Congress want the experience of Sarbanes-Oxley to stand as a cautionary tale for rules that may impose heavy costs on Corporate America without always demonstrating benefits.
Pushed through by the Obama administration in response to the financial meltdown, recession, and the unscrupulous practices in the housing mortgage and credit card industries, the legislation authored by former Sen. Christopher Dodd, D-Conn., and Rep. Barney Frank, D-Mass., was touted as the most sweeping change to financial regulation since the Great Depression.
Dodd-Frank marked a sea change in the American financial regulatory environment, affecting all banking and Wall Street watchdogs and almost every aspect of the nation’s financial services industry. However, Republican and industry critics warned that the legislation was an overreaction to the financial crisis and would unduly add major costs to operations and discourage business expansion.
Now, critics are turning their attention to the halls of the Securities and Exchange Commission and other regulators charged with implementing Dodd-Frank, hoping to blunt the effect of the pending rule making. A bill proposed by Sen. Richard Shelby, R-Ala., would force regulators to determine the economic impact of proposed rules, including on growth and job creation. Bills introduced in the House would take a similar approach.
“American job creators are under siege from the Dodd-Frank Act,” Shelby said in a recent statement. “Regulators are about to subject those who had nothing to do with the financial crisis to hundreds of new rules and regulations without determining whether the benefits exceed the costs. More American workers will lose their jobs as Washington bureaucrats implement the Democrats’ vision of a federally supervised economy.”
Regulators have already been rebuked for conducting a cursory analysis of a rule’s costs and benefits. The Court of Appeals for the District of Columbia Circuit this summer struck down a SEC rule that would have given shareholders more power to nominate directors to the boards of publicly traded companies, blasting the agency for failing to adequately consider the costs and benefits.
One provision of Dodd-Frank requires companies to disclose whether they use “conflict minerals” — those mined in war-torn countries amid human rights violations. That will cost U.S. manufacturers and their suppliers $9 billion to $16 billion to implement, according to an analysis by the National Association of Manufacturers.
“When writing any regulation, it’s important to understand the impact that regulation will have on the market,” says Scott Talbott, a senior vice president at the Financial Services Roundtable, which represents major global financial institutions. “The goal here is not to kill or stop regulation, the goal is to write the most effective regulation possible.”
But supporters of Dodd-Frank say the emphasis on cost-benefit analysis is a thinly veiled attempt to roll back the reforms that Congress passed in the wake of the biggest financial crisis and economic downturn since the Great Depression.
“Nobody wants to be for an outright repeal of Dodd-Frank because that is politically stupid, but there are quite a few folks who would like to see it die. This is one of many attempts to make that happen,” says David Min, associate director for financial markets policy at the centre for American Progress. “It’s disingenuous. It totally ignores what happened three years ago.”
Moreover, defenders of the law say, it is far from clear how to quantify the benefit to the economy and job creation of a rule that increases financial stability — such as those being written by the new Financial Stability Oversight Council to oversee large hedge funds and other non-bank institutions whose behaviour could threaten the entire financial system. “How do you quantify the trillions of dollars in household wealth lost and trillions of dollars in bailouts and the misallocation of capital? The cost of the bubble-bust cycle and financial instability are huge,” Min says.
The current economic turbulence is a direct result of insufficient regulation — so it makes no sense to curb pending rules that would address the causes of the crisis, says Lisa Donner, executive director of Americans for Financial Reform, a coalition of labour, civil rights, community, and small business groups. “The thought that what we need to get the economy going again is to cut back on regulation is astoundingly backwards,” she says, noting that recent polls suggest businesses are struggling with economic conditions, not over regulation.
Shelby’s bill is unlikely to pass through Congress before the 2012 presidential elections. But it sends a message to the financial sector and voters about the agenda that Republicans will pursue if they regain control of the Senate and White House.
For Tandy’s Greene, Dodd-Frank doesn’t seem to pose the same threat to her bottom line or complication that Sarbanes-Oxley did. But she does have a message for lawmakers and regulators who are working through the specifics of the new law.
“More often than not, regulation comes out and conceptually it sounds good, but they don’t think through the impact to any company,” she says. “If I ruled the world, I would like to suggest that before they knee jerk, which is generally what happens when there’s a crisis, there needs to be a whole lot more effort put forth in finding out what the real impact on companies is.
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