Legal & Regulatory

Dodd-Frank: Legislation and Magical Misdirection

And you thought the Dodd-Frank financial reform legislation was about Wall Street financial reform. Think again. It’s about a whole lot more, much of which can touch your organization directly. It’s also likely to create a lot of new business for lawyers.

I’m a fan of magicians. What they do—it’s called magic—has nothing to do with the supernatural. It has to do with science—with physics, chemistry, math, psychology, and, perhaps most of all, with optics. Magicians use confusion and misdirection to accomplish their tricks. They fake you out, running a series of cons, quick moves, and misdirection. While you are watching trick A, surely you have figured out, Dr. Fakir has pulled off two other tricks to boggle your mind.

That’s the way Congress now works when making legislative sausage, a process of now-you-see-it, now-you-don’t. The Dodd-Frank bill, signed into law by President Obama July 21, is one example (as was the Sarbanes-Oxley financial legislation, enacted after the Enron scandal earlier in the century).

Little-noticed provisions in Dodd-Frank affect how businesses deal with employees, contractors, potential hires, corporate executives, and corporate governance. Most bizarre of all, the legislation also imposes new reporting rules for mineral "resource extraction" industries that are publicly traded and includes special provisions on, no kidding, the purchase of "blood diamonds.

Blowing New Whistles

The biggest non-Wall Street portion of the new law gives new protections to corporate whistleblowers, including the possibility of bounties for turning in miscreant companies to the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission, and the newly created Consumer Financial Protection Bureau. A legal analysis by the firm of Freshfields Bruckhaus Deringer US LLP concludes, "Under the new legislation, private individuals such as current or former employees are given significant financial incentives of up to 30 percent of the proceeds of any judgment or settlement to disclose potentially confidential company information to federal regulatory authorities." The firm predicts "an increase in government investigations and enforcement actions brought under the U.S. securities and commodities trading laws."

A Hunton & Williams LLP analysis of the whistleblower provisions notes that the new law amends Sarbanes-Oxley "to now include both publicly-traded companies" and "any subsidiary or affiliate whose financial information is included in consolidated financial statements of such publicly-traded company." Dodd-Frank also expands the time for an individual to bring a Sarbanes-Oxley whistleblower claim from 90 days after a violation to 180 days after the "aggrieved individual learns of the violation."

Czars of Diversity

The new law creates what some call "a new diversity czar" for the three major federal financial regulatory agencies, to be known as the Office of Minority and Women Inclusion (OMWI). These offices will assess the employment practices of the firms they regulate, which, says the firm of Baker & McKenzie, "could significantly alter employment compliance throughout the financial services industry and anyone doing business with it." The law firm adds that the OMWI offices are charged with "assessing the diversity policies and practices of entities regulated by the agency."

The new law, says Baker & McKenzie, adds a "significant administrative burden" not just to contractors for the three financial regulatory agencies but to "those who are the recipients of federal funds or otherwise involved in any program to address the economic recovery." As I read it, if your company has TARP money for something such as a roll-out of smart meters, presumably you are covered.

Clawing Back

In the realm of executive pay and corporate governance, Dodd-Frank provides "clawback" provisions, so companies can recover "excess" compensation from executives found to have engaged in "misconduct" in filing financial statements. The clawback includes stock options as well as actual pay. Dodd-Frank also requires that compensation committees of boards of directors be independent.

The new law also has a provision calling on the SEC to develop rules for publicly traded companies to disclose executive pay that is linked to financial performance of the company and also how the compensation of the CEO of the firm compares to the "median of the annual total compensation of all employees of the company," after subtracting the CEO’s pay package. A review by Day Pitney says, "This means that for every employee, the company would have to calculate his or her salary, bonus, stock awards, option awards, nonequity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings, and all other compensation (e.g., perquisites). This information would undoubtedly be extremely time-consuming to collect and analyze, making it virtually impossible for a company with thousands of employees to comply with this section of the act."

Minerals Management

Then there are what may be the most obscure provisions of Dodd-Frank, those concerning oil, gas, coal, and diamonds. The Canadian-U.S. law firm of Fasken Martineau DuMoulin explains in a paper: "resource extraction issuers that are required to file reports with the US Securities and Exchange Commission will now be required to disclose in their annual reports any payment made by the issuer, its subsidiaries or an entity under the issuer’s control, to any non-US government or to the US federal government for the purpose of the commercial development of oil, natural gas, or minerals."

A brush stroke on minerals concerns so-called "blood diamonds," rough gemstones coming to market from African conflicts and anarchy that are outside the "Kimberly Process." The act states that any "US reporting issuer that uses conflict minerals in its products will now be required to determine whether the minerals originated in the Democratic Republic of Congo or any country bordering the DRC and if so, to file a report with the SEC including, among other things, a description of the due diligence measures taken by the issuer on the source and chain of custody of the minerals." This includes industrial diamonds as well as gem-quality diamonds.

Finally, there is coal, with the act mandating that "each US reporting issuer that is an operator, or that has a subsidiary that is an operator, of a coal or other mine will now be required to disclose information regarding violations of, and other matters relating to, the US Federal Mine Safety and Health Act."

The Fasken Martineau DuMoulin analysis is coyly titled, "So you thought it was all about financial industry reform…" How did all of these seemingly extraneous and irrelevant provisions get into Dodd-Frank? Call it legislative magic, with clever solons and staff using misdirection, slight-of-hand, and illusion to shape what we see, and what we don’t see in the final law.

—Kennedy Maize is MANAGING POWER’s executive editor.

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