WSJ Summary:
President Barack Obama on Wednesday described his proposals as a “sweeping overhaul of the financial regulatory system” on a scale not seen since the Great Depression. The official White House document, titled “A New Foundation: Rebuilding Financial Supervision and Regulation,” runs 89 pages in length. Washington Wire condensed the full proposal to a more manageable series of bullet points.
For the regulation of financial firms, the proposal:
* Creates Financial Services Oversight Council, which would coordinate activities among regulators, replacing the President’s Working Group.
* Ensures that any financial firm big enough to pose a risk to the financial system would be heavily regulated by the Federal Reserve, including regular stress tests.
* Says the Fed will have to “fundamentally adjust” its current supervision to more closely watch for systemic risks.
* Allows the Fed to collect reports from all U.S. financial firms that meet “certain minimum size thresholds.”
* Gives the Fed oversight over parent companies and all subsidiaries, including unregulated units and those based overseas.
* Says the Treasury will re-examine capital standards for banks and bank-holding companies.
* Tells regulators to issue guidelines on executive compensation, with the goal of aligning pay with long-term shareholder value, including a re-examination of the utility of golden parachutes.
* Creates a new bank agency, the National Bank Supervisor, and kills the Office of Thrift Supervision. The new agency will look over national banks, including federal branches and agencies of foreign banks.
* Forces industrial banks, non-bank financial firms and credit-card banks to become more traditional bank holding companies subject to federal oversight.
* Kills the SEC program that supervised Wall Street investment banks.
* Requires hedge funds, private-equity funds and venture-capital funds to register with the SEC, allowing the agency to collect data from the firms.
* Subjects hedge funds to new requirements in areas such as record keeping, disclosure and reporting. The oversight would include assets under management, borrowings, off-balance sheet exposures.
* Urges the SEC to give directors of money-market mutual funds the power to suspend redemptions, and take other action to strengthen regulation of money-market mutual funds to prevent runs.
* Beefs up oversight of insurance by creating an office within the Treasury to coordinate information and policy.
* Kicks off a process by which the Treasury and the Department of Housing and Urban Development will figure out the future of mortgage giants Fannie Mae, Freddie Mac and the federal home-loan banks, which could include winding them down, returning them to the private sector or refashioning them as public utilities.
For the regulation of financial markets, the proposal:
* Brings the markets for over-the-counter derivatives and asset-backed securities into a regulatory framework, strengthens regulation of derivatives dealers and forces trades to be executed through public counterparties, such as exchanges
* Toughens the regulatory regime, including more conservative capital requirements and tougher rules on counterparty credit exposure.
* Strengthens laws designed to protect “unsophisticated parties” from trading derivatives “inappropriately.”
* Gives the Fed more power over the infrastructure that governs these markets, such as payment and settlement systems.
* Harmonizes the powers and authority of the SEC and CFTC to avoid conflicting rules relating to the same products or time-wasting turf battles over who should regulate what.
* Tells the SEC and the CFTC to deliver a progress report by September.
* Requires that originators, for example, mortgage brokers, should retain some economic interest in securitized products.
* Directs regulators to “align” participants’ compensation with the long-term performance of underlying loans.
* Urges the SEC to continue its efforts to improve the transparency and standardization of securitization markets and recommends the SEC have clear authority to require reporting from issuers of asset-back securities.
* Urges the SEC to strengthen its regulation of credit-rating firms, including disclosing conflicts of interest, better differentiating between structured and unstructured debt and more clearly stating the risks of financial products.
* Tells regulators to reduce their reliance on credit-rating firms.
For regulations protecting consumers and investors, the proposal:
* Creates a new agency, the Consumer Financial Protection Agency, with broad authority over consumer-oriented financial products, such as mortgages and credit cards. The new agency would work with state regulators.
* Gives the new agency power to write rules and levy fines based on a wide range of existing statutes.
* Proposes new authority for the Federal Trade Commission over the banking sector, in areas such as data security.
* Creates an outside advisory panel to keep an eye on emerging industry practices.
* Says the new agency should play “a leading role” in educating consumers about finance.
* Gives the new agency authority to ban or restrict mandatory arbitration clauses.
* Improves transparency of consumer products and services disclosures.
* Says the new regulator should have authority to define standards for simple “plain vanilla” products, such as mortgages, which would have to be offered “prominently” by companies.
* Proposes the government “do more” to promote these simple products.
* Beefs up the agency’s power to regulate unfair, deceptive or abusive practices.
* Imposes “duties of care” that will have to be followed by financial intermediaries, such as stock brokers and financial advisers.
* Regulates overdraft protection plans, treating them more like credit credit-card cash advances.
* Promotes access to credit in line with community investment objectives.
* Strengthens SEC’s framework for investor protection by expanding the agency’s powers to beef up disclosures to investors, establish a fiduciary duty for broker-dealers who offer advice and expand protection for whistleblowers, including a fund that would pay for certain information.
* Requires non-binding shareholder votes on executive compensation packages.
* Requires certain employers to offer an “automatic IRA plan” for employee retirement, with investment choices prescribed by regulation or statute.
* Urges exploration of ways to improve participation in 401(k) retirement plans
To give the government more tools to manage crises, the proposal:
* Creates a mechanism that allows the government to take over and unwind large, failing financial institutions.
* Creates a formal process for deciding when to invoke this power, which could be initiated by the Treasury, Fed, FDIC or SEC.
* Gives authority to make the final decision to the Treasury, with the backing of other regulators.
* Gives the Treasury the authority to decide how to fix such a failing firm, whether through a conservatorship, receivership or some other method.
* Taps the FDIC to act as conservator or receiver, except in the case of broker dealers or securities firms, in which case the SEC would take over.
* Amends the Fed’s emergency lending powers to require prior written approval by the Treasury Secretary.
In the international sphere, the proposal:
* Recommends international regulators strengthen their definition of regulatory capital to improve the quality, quantity, and international consistency of capital.
* Recommends that various international bodies implement the Group of 20 recommendations, including requiring banks to hold more capital in good times to protect against downturns.
* Urges that national authorities standardize oversight of credit derivatives and markets.
* Recommends national authorities improve cooperation on supervision of globally interconnected financial firms.
* Recommends regulators improve the way firms are unwound when they straddle borders.
* Recommends strengthening the Financial Stability Board.
* Urges other countries to follow the U.S. lead and: subject systemically significant companies to stricter oversight; expand regulation of hedge funds; review compensation practices; tighten rules governing credit-rating firms. |
