While the Republican Party captured the U.S. House of Representatives this week, governance observers don't expect to see a significant change in corporate governance.
The Democrats still control the White House and the U.S. Senate, so it's unlikely that any legislation to significantly roll back the Dodd-Frank Act would become law. The SEC still will have a majority of commissioners selected by Democrats, but the agency likely will receive fewer resources but more scrutiny from House Republicans.
Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee, which oversees the SEC, is seeking to become the panel's next chairman, but he faces a challenge from Rep. Edward Royce of California. Last month, Bachus vowed to undertake an "extensive review of all the job-killing provisions in [the Dodd-Frank Act]."
Rep. Jeb Hensarling of Texas and Rep. Scott Garrett of New Jersey also will play leading roles on the committee, according to news reports. One prominent Republican who will not return to the committee is Rep. Mike Castle of Delaware, who gave up his House seat to make an unsuccessful run for Senate. On the Democratic side, Rep. Barney Frank, the outgoing chairman and co-author of the Dodd-Frank legislation, won reelection on Nov. 2 but will play a less influential role on the panel. Rep. Paul Kanjorski of Pennsylvania, who chaired the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, lost his election bid.
Professor James Cox, a securities law professor at Duke University, said the SEC likely will receive substantially less funds than were authorized in Dodd-Frank Act. "This will likely starve the SEC's efforts to step up the size and experience of its staff to carry out inspections, which is frightening, considering the addition of thousands of investment advisers to the inspection mission of the SEC," Cox said.
While the prospects for any investor-friendly or pro-regulatory legislation are now "dead," Cox said, "It is unlikely that the House can push through reversals of any major legislation, including approval for proxy access." However, he said Congress may try to pass legislation to make "technical corrections" to the Dodd-Frank Act, and there may be some provisions that concern investors. Cox said House Republicans may await the outcome of the lawsuit filed by the U.S. Chamber of Commerce and the Business Roundtable before addressing proxy access.
Cox also expects that the SEC will be more cautious about bringing controversial enforcement cases, such as the commission's lawsuit against Goldman Sachs over mortgage-backed securities, to avoid the prospect of having to testify before a Republican-led House subcommittee.
It also appears unlikely that Congress will pass legislation to expand or restrict the rights of investors to bring securities class-action lawsuits. The Dodd-Frank Act directs the SEC to study whether investors should be able to sue secondary actors that aid or abet securities fraud as well as sue foreign companies that engage in transnational securities fraud. Even if the SEC were to conclude that such suits have merit, House Republicans most likely would resist any move that would expose more issuers to litigation. Adam Pritchard, a law professor at the University of Michigan, said Rep. Hensarling may hold hearings on the practices of investors' lawyers, but the Senate is not likely to support legislation to impose new limits on shareholder lawsuits.
So far, House Republicans have focused their attention on other regulatory matters, such as overhauling the U.S. government-sponsored mortgage giants, Fannie Mae and Freddie Mac, and reining in the powers of the new Consumer Financial Protection Bureau. On Nov. 3, Bachus urged the new Financial Stability Oversight Council to refrain from implementing the Dodd-Frank Act's "Volcker rule," which would require banks to spin off their proprietary trading operations.
During state elections this week, several prominent Democrats who oversee activist public pension funds were reelected. Thomas DiNapoli, New York's state comptroller, and Connecticut Treasurer Denise Nappier both won new terms in office. California State Treasurer Bill Lockyer, who serves on the board of administration at the California Public Employees' Retirement System, also won reelection. However, Ohio Attorney General Richard Cordray, who has been active in bringing securities lawsuits against financial firms, was defeated.
In other political-related news this week, Walden Asset Management, Domini Social Investment, and a coalition of religious and ESG investors filed shareholder proposals at Accenture, IBM, Pfizer, and Pepsi that question the companies' membership on the board of the U.S. Chamber of Commerce. The proposals call for a review of the firms' political spending and trade association expenditures. The resolutions contend that the business group's political activities, including its opposition to legislation to address global warming and healthcare, could be harmful to the reputation of the companies.