On June 17, 2009, the U.S. Department of the Treasury issued a white paper entitled “Financial Regulatory Reform – A New Foundation: Rebuilding Financial Supervision and Regulation” (the “New Foundation White Paper”).(1)  The New Foundation White Paper outlines the Obama administration’s proposals for significant changes in the framework under which financial institutions are regulated by the federal government. The regulatory changes proposed in the New Foundation White Paper map against a few major themes:

  • Centralize regulatory authority and/or harmonize regulation if split between federal agencies
    • The Federal Reserve Board (the “Fed”) would become the macro-prudential systemic risk regulator of all large, interconnected financial firms (including banks and non-banks such as investment banks) deemed “too big to fail”, which are identified as “Tier 1 FHCs” and the Fed would have the authority to subject Tier 1 FHCs (including their parent companies and subsidiaries, whether domestic or foreign), to consolidated supervision and regulation
    • The constraints that the Gramm-Leach-Bliley Act introduced on the Fed’s ability to require reports from, examine or impose higher prudential requirements or more stringent activity restrictions on the depository institution subsidiaries of Financial Holding Companies would be removed
    • The Fed would be given responsibility and authority to conduct oversight of systemically important payment, clearing and settlement systems (including clearance systems such as DTCC) and activities of financial firms
    • A resolution regime, based on the current FDIC resolution regime, is established for bank holding companies and Tier 1 FHCs, under which the Treasury Department would decide whether to have a failing firm taken over, with consultation from the Fed and either the FDIC or the SEC, depending on the type of institution involved
    • A new National Bank Supervisor would be created to supersede the Office of the Comptroller of the Currency (the “OCC”) and the Office of Thrift Supervision (the “OTS”)
    • The U.S. Securities and Exchange Commission (the “SEC”) and the Commodities Futures Trading Commission (the “CFTC”) would be required to seek harmonization of their respective regulation of similar financial products
    • A new Consumer Financial Protection Agency (the “CFPA”) would be charged with protecting consumers from unfair, deceptive and abusive practices in connection with credit, savings, payment, mortgage and other financial products and services, taking over some of the current responsibilities of the Federal Trade Commission (the “FTC”)(e.g., promulgate and interpret regulations under statutes such as the Truth in Lending Act, Real Estate Settlement and Procedures Act and the Fair Debt Collection Practices Act)
    • The CFPA would have the authority to intervene in an enforcement action brought by a state agency
    • The FTC would remain the lead federal consumer protection agency on matters of data security, with privacy protection related to financial issues transferred to the CFPA
    • A Financial Consumer Coordinating Council would be created to enable the CFPA to coordinate activities with the SEC, the FTC and other state and federal regulators
    • The Fed would be advised by a new Financial Services Oversight Council (the “FSOC”), comprised of the Secretary of the Treasury, the Chairman of the Board of Governors of the Fed, the Director of the National Bank Supervisor, the Director of the Consumer Financial Protection Agency, the Chairman of the SEC, the Chairman of the CFTC, the Chairman of the FTC and the Director of the Federal Housing Finance Agency
  • Increase regulation over OTC derivatives and similar exotic securities and over advisors of such products
    • Standardized over-the-counter (OTC) derivatives (including credit default swaps) would be required to be cleared through regulated central counterparties (the “CCPs”) and all derivatives dealers and firms with large OTC exposures would be subject to supervision by the Fed
    • Advisors to certain hedge funds and private equity funds whose assets under management exceed a specified threshold would be required to register with the SEC and be subject to certain record-keeping and reporting standards
    • The SEC would strengthen the regulatory framework around money market mutual funds (the “MMFs”) in order to reduce their credit and liquidity risk profiles
    • The SEC and other agencies would issue regulations enhancing regulation of the securitization markets, stronger regulation of credit agencies, imposing fiduciary duties on broker-dealers providing investment advice about securities to retail investors and requiring that issuers and originators retain a financial interest in securitized loans
  • Centralize and strengthen protection of consumers of financial products and services and investors
    • The SEC would be empowered to require public companies to give shareholders a non-binding vote on a company’s executive pay packages
    • Fair value (mark to market) accounting rules would be reviewed to improve transparency and accuracy of different types of investments held by financial institutions
    • Employee-directed workplace retirement plans, such as 401(k) plans, would be governed by the same principles of transparency and accountability that govern investor protection in the retail marketplace
  • Harmonize and coordinate U.S. efforts with international initiatives where possible
    • The New Foundation White Paper endorses moving toward an enhanced international capital framework, such as the G-20 “Declaration on Strengthening the Financial System”
    • An Office of National Insurance (the “ONI”) would be established within the U.S. Treasury Department to negotiate international insurance agreements (e.g., equivalency with the EU Solvency II initiative) and coordinate policy in the insurance sector.(2) 

An in-depth analysis of the many complex regulatory changes proposed in the New Foundation White Paper is outside the scope of this paper and readers are encouraged to review some of the existing law firm and other analyses that are publicly available.(3) These analyses discuss the Obama administration proposed regulatory changes in detail. Part II of this posting will analyze possible business and IT impacts of the “New Foundation” proposals, if enacted into law.

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  1. See http://www.financialstability.gov/docs/regs/FinalReport_web.pdf.
  2. For further information, see Mark Hoffmann, “Obama Administration to Back Office of National Insurance,” located at http://www.businessinsurance.com/article/20090617/NEWS/906179992 and Dewey & LeBoeuf, “Obama Administration Would Create Office of National Insurance But is Unclear on Federal Chartering” (June 17, 2009), located at http://www.deweyleboeuf.com/en/Ideas/ClientAlerts/2009/06/20090617_ObamaProposalWouldCreateOfficeofNationalInsuranceButisUnclearonFederalCharting.aspx
  3. See, e.g., Davis Polk, “A New Foundation for Financial Regulation” (June 22, 2009), located at http://www.davispolk.com/files/Publication/726890c9-123c-4113-a924-a129bc96fbce/Presentation/PublicationAttachment/d1bbea9e-1369-49a5-838f-c83e8f4fae1b/062209_New_Foundation.pdf; James Hamilton, “The Obama Administration’s Proposal to Reform the U.S. Financial Regulatory System,” Wolter Kluwers Law & Business, located at http://business.cch.com/securitiesLaw/news/06-18-09a.pdf and Latham & Watkins, “Obama Administration Releases Financial Regulatory Reform Proposal”, located at http://www.lw.com/upload/pubContent/_pdf/pub2686_1.pdf .

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JeffJeff Jinnett is Governance, Risk Management & Compliance Industry Market Development Manager, US Financial Services Group., for the Microsoft Corporation.  Mr. Jinnett is a former partner of the international law firm of LeBoeuf, Lamb, Greene & MacRae, LLP (now Dewey & LeBoeuf) and has experience in advising Fortune 500 companies in the financial services industry on the use of technology to support corporate governance, risk management and compliance programs.  Mr. Jinnett has testified as an expert before committees of the US Senate on issues relating to the intersection of law and technology.  He is a member of ARMA (a records and information management professional association) and the Society of Corporate Compliance & Ethics (SSCE).