New Directions for Reform

Posted on March 24, 2010 by Michael Stocker

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.

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Cleaning Up the Financial Sector

Posted on December 3, 2009 by Michael Stocker

Senator Christopher J. Dodd (D-Conn.), Chairman of the Senate Banking Committee, has proposed a bill that would, if enacted, result in a sweeping overhaul of the U.S. financial system. Dodd unveiled a plan that would, among other things, consolidate bank regulators, create a consumer financial protection agency and impose new restraints on exotic financial instruments and credit rating agencies. In unveiling the bill, Dodd said, "I could have tried to draft something that was, sort of, already a compromise… But I think you make a huge mistake by doing that. You're given very few moments in history to make this kind of difference, and we're trying to do that."

If enacted, Dodd’s legislation would:

  • Create a Consumer Financial Protection Agency which would focus on protecting American consumers from fraud and abuse, and on ensuring that consumers be given clear information on loans and other financial products from credit card companies, mortgage brokers and banks. This proposed agency would consolidate consumer protection responsibilities currently handled by the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, the National Credit Union Administration and the Federal Trade Commission.
  • Create a Financial Institutions Regulatory Administration which would eliminate the alphabet soup of multiple bank regulators, and would ensure that the FDIC and the Federal Reserve do their jobs.
  • Address systemic risks posed by derivatives. Over-the-counter derivatives would be more closely regulated by the SEC and CFTC to close regulatory loopholes. Derivative trading would be required to go through central clearing and exchange trading to encourage transparency and accountability. 
  • Require advisors to hedge funds and other pools of cash worth over $100 million to register with the SEC and to disclose financial data needed to monitor systemic risk and protect investors. 
  • Establish a new Office of Credit Rating Agencies at the SEC which would strengthen regulation of credit rating agencies. This new office would have its own compliance staff and the authority to fine agencies. The bill would also give investors a private right of action against ratings agencies for knowing or reckless misconduct.
  • Create the Agency for Financial Stability, an independent agency responsible for identifying, monitoring, and addressing systemic risks posed by large, complex companies as well as products and activities that can spread risk across firms. The Agency would draft strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.

The Dodd proposal faces some hurdles. Administration officials, House leaders and some Republicans have criticized parts of the plan as untenable. Edward, L. Yingling, President of the American Bankers Association, said the proposal "would tear apart the existing regulatory structure only to create a new one that would produce conflicts among regulators."  However, Treasury Secretary Timothy F. Geithner said that the legislation "moves us one step closer toward comprehensive financial reform."  Dodd has said he plans to move the bill through the banking committee quickly.

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