Dodd-Frank regulators brace for lawsuits after SEC loss in appeals court

Introduction

A federal appeals court ruled last month that the Securities and Exchange Commission didn’t properly weigh the costs and benefits to support an SEC rule making it easier for shareholders to nominate board directors. Now, with one eye on that ruling, regulators are steeling themselves for more court challenges related to Dodd-Frank financial reform regulations.

“I was afraid of this all along,” Commodity Futures Trading Commission commissioner Jill Sommers told Reuters. “The SEC had a rule that was challenged on grounds that I think there are concerns in our rules about, and I feel like we could equally have the same kind of challenges.”

The SEC’s rule in question would have made it easier for shareholders to appoint directors to the corporate board, but other SEC and CFTC rules are also likely candidates for litigation. Plaintiffs may attack regulators for failing to follow federal rule-making procedures, such as not properly considering all public comments on a rule or failing to conduct a proper cost-benefit rule analysis.

Other rules at stake: The SEC’s conflict minerals proposal, which would require company disclosure of the sources of certain ores and metals, and the CFTC’s speculative trading curbs.

Derivatives databases – The Commodity Futures Trading Commission voted (CFTC) is expected to approve a rule for registering information databases central to the $601 trillion swaps market, reports Bloomberg. The rule was initiated by a Dodd-Frank law requirement that companies must make information on their trading volumes and prices available to financial regulators.

The rule would affect big banks such as Goldman Sachs and Morgan Stanley, as well as energy and commodity firms such as Cargill Inc.

Municipal bonds –Wall Street banks that set up municipal bond sales may be required to publically disclose the potential costs and conflicts of interests involved in these deals, under a plan by the Municipal Securities Rulemaking Board.

The board, which oversees banks working in tax-exempt debt markets, on Wednesday asked the Securities and Exchange Commission to approve the proposed rule in order to increase transparency on bond underwriters.

Bloomberg reports that this effort is just one step in reshaping regulation of the $2.9 trillion municipal-securities market after the 2008 financial crisis.

“With this rule regulators — for the first time — will have specific information on the market’s scale and risk,” CFTC Chairman Gary Gensler said in a prepared statement.