This week President Barack Obama unveiled his proposal for the most significant regulatory reform of the banking, investment, and financial industries since the Great Depression. Coming on the heals of a financial meltdown and the near collapse of the banking system even staunch supporters of decades of deregulation and relaxed enforcement have acknowledged that something must be done.The President’s proposal was neither as sweeping as some critics had called for, nor as restrained as some industry leaders had hoped.
As summarized in the Wall Street Journal the plan includes the following key elements:
Regulation of Financial Firms:
Creates Financial Services Oversight Council, to coordinate activities among regulators, replacing the President's Working Group.
Brings financial firms big enough to pose a risk to the financial system the under Federal Reserve (Fed) regulatory umbrella, including regular stress tests.
Gives the Fed oversight over parent companies and all subsidiaries, including unregulated units and those based overseas.
Brings industrial banks, non-bank financial firms and credit-card banks into a more traditional bank holding company structure subject to federal oversight.
Kills the reputedly weak Office of Thrift Supervision (OTS) and redistributes its regulatory duties over “Thrift” institutions, credit unions, and certain insurance company functions.
Kills the Security and Exchange Commission (SEC) program that supervised investment banks.
Registers hedge funds, private-equity funds and venture-capital funds with the SEC, allowing the agency to collect data from the firms.
Levies new requirements on hedge funds in areas such as record keeping, disclosure and reporting.
Regulation of Financial Markets:
Regulates markets for over-the-counter derivatives and asset-backed securities, strengthens regulation of derivatives dealers, and forces trades to be executed through public counterparties, such as exchanges.
Cedes more power to the Fed over the infrastructure that governs these markets, such as payment and settlement systems.
Calls for more conservative capital requirements and tougher rules on counterparty credit exposure.
Tightens laws to protect unsophisticated parties from trading derivatives inappropriately."
Harmonizes the powers and authority of the SEC and Commodity Futures Trading Commission (CFTC) to avoid conflicting rules relating to the same products.
Consumer and Investment protection:
Establishes the Consumer Financial Protection Agency (CFPA), a new agency with broad authority over consumer-oriented financial products, such as mortgages and credit cards which will coordinate with state regulators.
Defines standards for simple plain vanilla products, such as mortgages, which would have to be offered "prominently" by companies offering such products.
Empowers the CFPA to write rules and levy fines based on a wide range of existing statutes.
Calls for new authority for the Federal Trade Commission (FTC) over the banking sector in areas such as data security.
Beefs up the FTC’s power to regulate unfair, deceptive or abusive practices.
Mandates duties of care that will have to be followed by financial intermediaries, such as stock brokers and financial advisers.
Crisis Management:
Provides authoritive means for the government to take over and unwind large, failing financial institutions.
Outlines a process for deciding when to invoke this power, which could be initiated by the Treasury Department, Fed, FDIC or SEC.
Reserves final authority to make decision to the Treasury, with the backing of other regulators.
Authorizes the Treasury to decide how to fix such failing firms through a conservatorship, receivership or some other method.
Makes the Federal Deposit Insurance Corp. (FDIC) the conservator or receiver, except for broker dealers or securities firms, which the SEC would take over.
Requires prior written approval by the Secretary of the Treasury to exercise the Fed's emergency lending powers.
Meanwhile, Congress has been considering its own plans. Senate Banking Committee Chair Christopher Dodd, for instance, instead of beefing up the Fed’s authority has proposed stripping the central bank of all of its regulatory authority and combining those powers with the regulatory duties of the FDIC in a wholly new consolidated bank regulator.
Powerful business interests, including the U.S. Chamber of Commerce announced opposition to key element’s of the administration plan almost immediately.
Some influential financial gurus, most notably Nobel Prize winning New York Times columnist Paul Krugman argue that the President has made a good start, but has still not come to grips with the underlying causes of the recent crisis.
But whatever the final result will be, change—big change—is coming to the financial industry and how it does business. You can rely on a Registered Investment Advisor (RIA) like Oaktree Capital, to not only keep current with those changes, but to assure you that come what may our clients will get the highest standard of service.
Please feel free to contact me at oaktreecapitalgroup@comcast.net if you have any questions or concerns.
