Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, June 17, 2009

First Look at the Administration's Financial Regulatory Reform

The Administration has released its Download Final financial reform plan061709,  Preliminarily, it confirms what the news reports have stated -- that the Plan is the result of extensive discussions among various constituencies.  As a result, it has something for everyone and is something of a mishmash, with proposals ranging from overarching to mundane.  It is not a radical proposal for restructuring financial regulation, but it is more than a reshuffling of functions.  How it will all play out is anyone's guess at this point. 

I expect there will be many blogs on the Plan in the next few months, but here is a first look at some of the proposals from an investor protection perspective -- warning this is a somewhat idiosyncratic summary, reflecting "my" issues (numbers in parentheses refer to pages in Plan):

All hedge fund advisers should be required to register with the SEC.(12, 37-38)

The SEC should move forward to plans to reduce the susceptibility of money market funds to runs. (12, 38-39)

All OTC derivatives markets, including credit default swaps, should be subject to comprehensive regulation. (13, 46-49)

The CFTC and SEC should work together to harmonize the regulation of futures and securities (14, 49-51), i.e., no merger of the two agencies.  The Plan recommends that the two agencies complete a report by Sept. 30, 2009 identifying all possible conflicts and either explaining why they are necessary or making recommendations to eliminate them.  If the two agencies cannot reach agreement by Sept. 30, their differences would be referred to the new Financial Services Oversight Council to address the differences and report its recommendations to Congress within six months. (50-51)  [good luck with that!]

The creation of a new consumer financial protection agency one of the central reform measures, established to protect consumers in consumer financial products and services, such as credit, savings, and payment products, but not including mutual funds [big victory for the SEC].  The federal agency's rules would be a floor, not a ceiling; states are free to adopt stricter laws.  (14, 55-63)

The creation of a Financial Services Oversight Council with a broad membership of federal and state consumer protection agencies and a permanent role for the SEC's Investor Advisory Committee. (15) This Plan does contemplate a number of new agencies, councils and coordinating committees, which raises the possibility of the very problems the reform was trying to cure -- turf battles, delays because of coordination difficulties, and the very real possibility that important matters can fall between the cracks.

Oversight over credit rating agencies should be tightened.  (18)

With respect to the SEC (70-73), the Plan notes that the agency has already begun to strengthen and steamline its enforcement process.  The Plan urges the adoption of point-of-sale disclosures if the SEC finds it would improve investor understanding of the financial products.  Point-of-sale disclosure has been a contentious issue for years, with significant broker-dealer resistance.

Another hotly debated issue in recent years has been the different regulation and different standards of conduct for broker dealers and investment advisers.  The Plan recommends establishing a fiduciary duty for broker-dealers offering investment advice and harmonization of the regulation of brokers and advisers. (71)

Somewhat buried in the Plan are two proposals relating to arbitration clauses:

The new consumer protection agency should have the power to restrict or ban mandatory arbitration clauses. (62-63)

The SEC should study the use of mandatory arbitration clauses in investor contracts.  "We recommend legislation that would give the SEC clear authority to prohibit mandatory arbitration clauses in broker-dealer and investment advisory accounts with retail customers.  The legislation should also provide that, before using such authority, the SEC would need to conduct a study on the use of mandatory arbitration clauses in the contracts." (72)

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Nice first look. I'm interested to see the different analyses in a few days' time.

Posted by: J Grants | Jun 17, 2009 9:57:56 PM

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