A Tale Of Two Laws

Wednesday, October 26, 2011 - 08:37
Katie Mahoney

Thomas Quaadman

Katie Mahoney

In 2009 and 2010, Congress passed two laws – the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and the Patient Protection and Affordable Care Act – that will have major financial and legal ramifications for businesses for years to come. In fact, these laws are already harming business even though they are far from fully implemented. The ramifications that these laws will have on business are only beginning to slowly emerge through the lengthy and flawed regulatory process.

The Dodd-Frank Act contains 259 mandatory rulemakings and 188 discretionary rulemakings as compared to 16 rulemakings mandated by the Sarbanes-Oxley Act in 2002. To date only about 12 percent of the rules have been finalized. The health reform law will create 159 different boards, commissions and other regulatory bodies to implement and administer healthcare.

This article will concentrate on the corporate governance provisions of Dodd-Frank, as well as some of the significant regulatory developments of health care reform.

Dodd-Frank Corporate Governance Provisions

Proxy Access

Following the July, 2011 D.C. Circuit Court of Appeals decision reversing new mandatory proxy access rule (14a-11) in the Business Roundtable & U.S. Chamber of Commerce v. the Securities and Exchange Commission, the Securities and Exchange Commission (“SEC”) in September announced that it would not seek to appeal the decision and lifted the stay on the 14a-8 rules that were not a part of the lawsuit.

The 14a-8 rules allow for shareholder proposals to create a proxy access right by amending a company’s bylaws. These 14a-8 rights are similar to 2009 Delaware clarifying amendments. Time will tell if shareholders will use 14a-8 provisions to push proxy access.

While the D.C. Circuit Court of Appeals vacated the 14a-11 rule, the Dodd-Frank Act permissive authority language remains in effect. The SEC at its discretion may revisit the rule for the fourth time in a decade if it wishes; however, the press of other complicated rulemakings, such as the Volcker Rule and Derivatives, will probably occupy the Commission’s time and make it difficult to revisit proxy access in the near term.

Conflict Minerals

If a company uses coltan, cassiterite, gold, wolframite or their derivatives in its manufacturing processes, Section 1502 of the Dodd-Frank Act requires corporate disclosure regarding the origination of those minerals. The intent of Section 1502 is to insure that products are free of minerals that originate from certain conflict areas of the Congo and neighboring countries. The mining and sale of those minerals in the Congo has helped to finance violence and human rights abuses.

Last year the SEC proposed rules to implement the Conflict Minerals provisions. The comment period generated thousands of letters, many of them form letters by activists. However, the business community also weighed in with a large number of letters and meetings with SEC staff and Commissioners. While everyone agrees with the goals to end human rights abuses, many have questioned the utility of using the corporate disclosure regime as a means to that end. In particular, the business community weighed in with concerns surrounding the inability to trace materials that have gone through a smelting process and the high cost of compliance. Accordingly, proposals were made for working groups, roundtables, de minimus exceptions and safe harbors to deal with these complexities.

In proposing the rule, the SEC estimated compliance costs at $71 million, affecting between 1,200 and 5,500 companies. This sharply contrasted with industry estimates of compliance costs of $9-16 billion, affecting tens of thousands of private companies that also would be forced to comply as manufacturers imposed compliance requirements within their supply chain.

Shortly after the oral arguments in the proxy access case, the SEC announced that it would not meet the April, 2011 statutory deadline for implementing the regulations but would do so by the end of this year. Because of the complexities of the issue, on October 18, 2011, the SEC held a roundtable with businesses and NGOs to explore the inherent difficulties in the proposed rule and to seek solutions. With a roundtable being held so late in the year, it would seem hard for the SEC to meet its self-imposed deadline of completing the rule before 2012.  

The controversy surrounding the Conflict Minerals provisions has given pause to activists in the use of the corporate disclosure system to solve societal ills. Rep. Carolyn Maloney (D-NY) had recently introduced a bill, H.R. 2759, to require corporate disclosures on human trafficking. The proposal has recently been amended to remove the SEC disclosures and provide for a means of voluntary disclosures to the State Department. It is unclear if this bill will pass both the House and the Senate.  

Independent Compensation Committee

The Dodd-Frank Act establishes independence standards for compensation committees, similar to those established for audit committees under the Sarbanes-Oxley Act. The SEC released proposed rules for these standards on April 6, 2011, and the comment period closed on May 19, 2011. To date the rule has not yet been finalized.

Pay for Performance and Pay Ratio

Compensation disclosures – creating both a linkage between CEO compensation and the financial performance of a company and a ratio between the CEO compensation and the average compensation of company employees – were also mandated by the Dodd-Frank Act. The SEC has not proposed rules implementing these provisions.

Nevertheless, the pay ratio has come under bi-partisan fire because of the differences of ratios between industries and the lack of useful information that such a ratio would provide to investors. Rep. Nan Hayworth (R-NY) introduced H.R. 1062, the Burdensome Data Collection Act, to repeal the pay ratio provisions. H.R. 1062 was approved by the House Financial Services Committee, and floor action is expected before the end of the year.   


The SEC and CFTC rules on the Whistleblower provisions of the Dodd-Frank Act went into effect earlier this year, and they do not require internal reporting, which could seriously undermine corporate compliance programs. Rep. Michael Grimm (R-NY) has introduced a bill, H.R. 2483, the Whistleblower Improvement Act, to require whistleblowers to simultaneously report through company internal compliance procedures. The House Financial Services Committee is expected to mark up the bill before the end of the year, but further action is unknown.

Health Care Reform

Following the March 23, 2010 enactment of the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (“PPACA”), the Departments of Health and Human Services (HHS), Labor and Treasury began issuing regulatory materials less than one month after the law’s enactment and releasing interim final rules with effective dates falling before agencies would possibly consider public comments on the regulations. The three departments involved have also issued extensive sub-regulatory guidance in the form of technical releases, notices, frequently asked questions and model notice language samples. The challenge of tracking and reviewing the regulations and filing comments to meet the imposed deadlines pales in comparison to the difficulties businesses are facing in creating restructuring plans and in educating employees to comply with the new requirements imposed through the regulatory process.

The regulations that have been issued to implement the health reform law have been problematic for substantive and procedural reasons. First, the regulations are significantly more prescriptive than the statutory language and, in many instances, run contrary to congressional intent. Second, the regulations have been issued pursuant to a very unusual process, which leaves businesses little time to implement changes or to comply with new requirements. The most blatant examples of the substantive and procedural flaws in the regulatory process implementing the health reform law involve the promulgation of the grandfathered plan status rules.

Substantive Problems

To fully appreciate the extent of the substantive overreaching of these regulations, it is critical to understand the legislative history of the health reform law. During the legislative process, a number of health reform proposals were under consideration by members of the House and Senate. The House legislation was significantly more prescriptive than other proposals. In the end, the less prescriptive bill (the Senate Finance bill) was more palatable to the majority of Congress. However, the regulations implementing the broader, less prescriptive law are now tightening the law’s provisions, effectively changing the law that passed into the more prescriptive bill that Congress could not pass.

This point is exemplified in the post-enactment “revision” of the grandfathered plan status provisions through the regulatory process. The law contains a very simple grandfathered plan rule essentially legislating the administration’s promise: “[n]othing in the Act shall be construed to require that an individual terminate coverage…in which such individual was enrolled on the date of enactment.” The provision specifies that the majority of the new health insurance requirements shall not apply to grandfathered plans, and it allows new family members and new employees to enroll in grandfathered plans. Neither Section 1251 nor any other provision of the health reform law discusses the loss of grandfathered plan status.

Other health reform legislation considered by Congress included far more prescriptive grandfathering provisions, which limited the duration of grandfathered plan status to a definitive period of time. Section 202 (a) of the House bill specifically stated that a plan could only retain grandfathered plan status under two conditions: first, if there were no changes to “any terms or conditions, including benefits and cost-sharing, from those in effect as of the day before the first day of Y1” and, second, if the issuer does not “vary the percentage increase in the premium for a risk group of enrollees in specific grandfathered health insurance coverage without changing the premium for all enrollees in the same risk group at the same rate, as specified by the Commissioner.”[1]

Although this legislative approach was specifically rejected by Congress, it is now being incorporated into the law, after enactment, through the promulgation of regulations that have bypassed the traditional notice and comment process. These regulations took effect five weeks after the comment period ended and may remain binding without any subsequent final regulatory action addressing issues raised by public comments.

Procedural Problems

Following the enactment of the PPACA, the departments issued seven Interim Final Rules in June and July of 2010, three months after the law’s enactment, some of which became effective less than two weeks after comments were due. The choice against following a more traditional informal rulemaking process resulted in very problematic and flawed IFRs, issued without any opportunity for meaningful stakeholder input before mandated compliance. In order to improve the flawed regulations and incorporate valuable stakeholder input, the departments had to issue sub-regulatory guidance after compliance with the faulty regulations was required, only further complicating the process for business.   

Modifications made to the IFR, through the issuance of an Amended IFR, created more challenges, uncertainty and unfairness. Because of the interim final rule issued by the departments in June 2010, many employers were forced to weigh the costs of losing grandfathered plan status and purchasing a non-grandfathered plan – which would include costly new insurance requirements – against the cost of staying with the same issuer and retaining grandfathered plan status. Many of our members, due to the initial IFR, were essentially forced to forego the opportunity to contract with another carrier (something that would have permitted them to control premium increase) in order to retain grandfathered plan status, a choice that cost them significantly. Additionally, many employers (unable to afford the increase in premiums demanded by their current carrier) were forced to lose their grandfathered plan status.


This is just a brief overview of some of the issues facing corporate counsels during the implementation phase of Dodd-Frank Act and health care reform. This implementation phase will stretch on for years and face potential legal challenges as witnessed by the Proxy Access rule. As these provisions and regulations slowly come on line, businesses will have a new rule book to live by. Therefore, it behooves businesses not only to pay attention to the rulemaking processes but also to get involved and give regulators the benefit of their everyday experiences. Those discussions will provide regulators with real-life examples and a better understanding of the limits of benefits and the burdens of costs. You can make a difference and should be a part of the solution.

[1] See Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, H.R. 3962, 111th Cong. §202(a)(1)–(3) (2010). As passed by the House of Representatives, H.R. 3962 designated that grandfathered plan status would be lost for insured arrangements if: new enrollees (other than dependents of existing enrollees) entered the plan; or if plan provisions “including benefits and cost-sharing” changed. Employment based plans could only be grandfathered for a five year “grace period.” After five years, grandfathered plans would then be required to “meet the same requirements as apply to a qualified health benefits plan under section 201, including the essential benefit package requirement under section 221.”

Tom Quaadman is Vice President, U.S. Chamber Center for Capital Markets Competitiveness, and Katie Mahoney is Executive Director, Health Policy, U.S. Chamber of Commerce.

Please email the authors at tquaadman@uschamber.com or kmahoney@uschamber.com with questions about this article.