Eyes On Wall Street : Executive Compensation Lawyers & Attorneys : Labaton Sucharow Law Firm : Class Action Litigation, Shareholder Rights

Before the ink has even dried on the new healthcare legislation, new progress is being made on an equally bold push for reform of the financial services sector. On March 22 a bill promising sweeping new changes on Wall Street emerged from the Senate Banking Committee and will soon be introduced to the full Senate.

The bill, sponsored by Connecticut Senator Chris Dodd, takes a multi-pronged approach to reform. The bill would revamp governance of public companies, giving shareholders advisory votes on executive pay and the ability to nominate directors through company-issued proxy ballots.

The bill would also substantially expand government oversight of banks, hedge funds and the derivatives market. The Securities and Exchange Commission would gain the authority to regulate parts of the derivatives market, including security-based swaps, and would be empowered to strictly oversee hedge funds. The bill would also give the Commission the right to self-fund, allowing it to set its own budget and collect filing fees from the public companies and investment firms that it supervises.

The legislation would create a nine-member council, led by the Treasury, which would watch for systemic risks and direct the Federal Reserve’s supervision of the nation’s largest and most interconnected financial institutions. The Federal Reserve would be charged with supervising not only banks but any institution that would “pose risks to the financial stability.”

One of the most significant changes proposed by Dodd’s bill is a provision allowing regulators to implement the so-called “Volcker rule,” named for Paul A. Volcker, the former Federal Reserve chairman. The rule would prohibit deposit-taking banks from investing in or owning hedge funds or private equity funds, and engaging in proprietary trading—making trades unrelated to their clients’ interest.

The scope of the bill has already precipitated a frenzy of lobbying from Wall Street and banking industry titans. Investors should pay close attention to the progress of the legislation, as it’s sure to be another wild ride.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Obama administration has renewed a push to toughen regulations on banks that are “too big to fail.” The proposal, dubbed the “Volcker Rule” after the former Federal Reserve Chairman Paul Volcker, would limit the scope and size of banks and other financial institutions by ensuring that no bank will engage in “proprietary trading” -- that is, trading operations unrelated to serving customers.

Proprietary trading places bank capital at risk through speculation. Although such trading is engaged in by only a handful—probably four or five—of American mega-sized commercial banks, the commercial banking sector could take a dangerous hit if these bets go wrong. 

Proponents of the Volcker Rule argue that such a prohibition is essential to ensure the stability of the commercial banking sector and to protect banking customers from undue risk undertaken by corporate management. It would also discourage banks from engaging in insider trading using inside information and data gleaned from their customer relationships.

The proposed Volcker Rule has been met with strong resistance in Congress. Critics argue that the objective of the proposal could be achieved under a provision in the House bill adopted last year which let regulators ban speculative trading by banks if it is deemed too risky. They also contend that it will be hard for regulators to differentiate between transactions that a bank makes for its clients from those made in its own account.

One thing that is clear is that if “too big to fail” banks expect an implicit guarantee of taxpayer support, they should be prepared for much greater regulatory review of the risks they undertake.

• Email This
• Print
• Comments
• Trackbacks
• Share Link